Competition policy, again (updated)

In the latest Insights newsletter at the New Zealand Initiative Oliver Hartwich discusses the recent decision by the government not to criminalise cartel behaviour. Hartwich writes,

On Tuesday, Minister of Commerce Paul Goldsmith decided not to proceed with the long debated criminalisation of cartel behaviour.

The Minister’s explanation was telling: “In weighing up the benefits of criminalising cartel activity, the government had to consider the significant risk that cartel criminalisation would have a chilling effect on pro-competitive behaviour between companies.”

As Hartwich notes it may sound strange that pro-competitive behaviour of companies could ever be confused with anti-competitive behaviour. Hartwich writes,

The problem lies in the nature of competition law. It is an area of law which is prone to arbitrariness. Practically everything is a matter of interpretation.

William Landes summaries the point in the following quote on why Coase gave up antitrust,

Ronald [Coase] said he had gotten tired of antitrust because when the prices went up the judges said it was monopoly, when the prices went down they said it was predatory pricing, and when they stayed the same they said it was tacit collusion. (William Landes, “The Fire of Truth: A Remembrance of Law and Econ at Chicago”, Journal of Law and Economics (1981) p. 193.)

If everything is illegal what is a firm to do?

Hartwich continues,

Similarly, the benchmark of “competition” is vague. For what should it mean? Is it the theoretical but unrealistic state of so-called “perfect competition” taught in many economics textbooks? Or is it the process of companies actually competing with each another? And if so, how do you measure that?

Then there is the difficulty in finding proper definitions. To quote the late economist Murray Rothbard, “there is nothing anticompetitive per se about a cartel, for there is conceptually no difference between a cartel, a merger, and the formation of a corporation: all consist of the voluntary pooling of assets in one firm to serve the consumers efficiently.” Indeed. Yet somehow the formation of a corporation is fine whereas a merger or a cartel might be illegal.

Rothbard's point about cartels being illegal while mergers which can achieve the same result being legal is comment on a relatively recent change in thinking on competition policy. If you go back to, say, the 1950s integration was looked at with just as much suspicion as cartels are today. Recently I came across an interesting comment on the old view on integration and antitrust policy by Joseph J. Spengler

RECENT decisions suggest that the United States Supreme Court is beginning to look upon integration as illegal per se, under the antitrust laws. It may be presumed, in so far as this inference is valid, that the Court believes that integration necessarily reduces competition "unreasonably." No sharp distinction is made by the Court between vertical and horizontal integration. (Joseph J. Spengler, "Vertical Integration and Antitrust Policy", Journal of Political Economy, Vol. 58, No. 4 (Aug., 1950), pp. 347-352.)

This was written in 1950 and things have changed since it is now accepted that there are often efficiencies that result from integration and now the US Antitrust Division typically requires a showing of market power before it considers whether a such arrangement poses serious competitive concerns.

At least part of the reason for the change in view is due to the work of Oliver Williamson, Williamson was sceptical of the conventional wisdom of the time (1960s), which presumed that the purpose and effect of many integration practices was the enhancement of market power and the erection of entry barriers. Contrary to this view, which was widely adopted by antitrust lawyers and courts in the 1960s, Williamson could see rationales for various integration practices that were based instead on economic efficiency.

If we accept that integration can have efficiency justifications then why not cartels? At least we should ask what the reasons for the formation of the cartel are and not just assume that cartels are evil per se. The government's decision can be seen as a small step in this direction.

Update: Donal Curtin at the Economics New Zealand blog takes a more traditional (and anti) view of the government's decision when he argues "Hard core" cartelists are criminals.

Do we need competition policy?

On twitter Vanilla Thrilla asked,

NZ - the weakest competition law regime in the developed world? https://t.co/t2H2NOGBj5

— Vanilla Thrilla (@Vanilla_Thrilla) December 8, 2015

I replied,

@Vanilla_Thrilla no competition policy the best policy?

— Paul Walker (@psw1937) December 8, 2015

then Vanilla Thrilla said,

@psw1937 interesting question. pretty sure self-licensing professional guilds, labour unions and large corporates would all say yes

— Vanilla Thrilla (@Vanilla_Thrilla) December 8, 2015

and then I said,

@Vanilla_Thrilla Companies can use competition law to protect their position and harm competitors

— Paul Walker (@psw1937) December 8, 2015

Let me expand a bit on my general point with an argument from a previous post on this topic.

Many people seems to think that a body such as the Commerce Commission is needed and that it should be a powerful player in its role as competition regulator. I ask why? May be the commission does more harm than good. Would it be better to do away with it?

The idea behind competition law in New Zealand is, according to the Act, “to promote competition in markets for the long-term benefit of consumers”. This is to say, it is believed, by the Act's supporters, that markets left to themselves, without any oversight from regulators, without any regulation of prices, quantities, or structure, would be harmful to consumers. Such a view rests on the notion that there is a large danger of monopoly power being used to harm consumers and, therefore, competition is a state of affairs which must be regulated and managed by the authorities because undesirable situations of monopoly can emerge all the time.

Frederic Sautet, ex-economist at NZ Treasury and the Commerce Commission, makes the point that this thinking is wrong headed:

At the end of the day, the problem assumed by competition law is only exacerbated by regulation, while economics shows that the entrepreneurial process solves it. So while there may be situations where competition law may seem warranted, in fact there is no crime at the crime scene. While competition law aims to protect consumers, the danger is that it may affect the self-correcting properties of the market system — an outcome worse than the disease it tries to cure.

Much of the problem is due to the fact that competition law was established on an misunderstanding of the nature of competition. The law in New Zealand aims to achieve "workable competition" but the practice of competition law relies on the view of competition as a static (equilibrium) state of affairs - derived from the idea of perfect competition. However, actual competition is a rivalrous entrepreneurial process by which the knowledge enabling a better coordination of individual plans is discovered over time. Again, as Frederic Sautet points it

[...] it must be understood that the competitive process takes place within a set of institutions that guarantee the functioning of entrepreneurial discovery and the exploitation of business opportunities over time. These institutions and regulation must guarantee entry into any market to anyone desiring to compete.

Sautet goes on to make the important point that

Under the disguise of consumer protection, competition law has in fact protected some producers from the greater efficiency of their potential competitors. Indeed, competition can be difficult for some incumbents who run the risk of being outcompeted. However, this process is necessary if the ultimate goal is to let consumers (indirectly) dictate the allocation of resources according to their preferences. The danger with competition law is that it interferes with the entrepreneurial process — a cure worse than the disease.

Thus the danger of the Commerce Commission is that it may so damage or restrict the true competitive process that it harms the very people it set out to help, consumers, but helps the people it wished to control, producers. The law of unintended consequences strikes again.

As far as empirical evidence goes it tends to suggest that competition policy does not improve consumer welfare by much. Robert W. Crandall and Clifford Winston look at the effects of antitrust enforcement in the US and ask Does Antitrust Policy Improve Consumer Welfare? And the short answer is, not much. Crandall and Winston write,

In this paper, we argue that the current empirical record of antitrust enforcement is weak.

and they add

We then synthesize the available research regarding the economic effects of three major areas of antitrust policy and enforcement: changing the structure or behavior of monopolies; prosecuting firms that engage in anticompetitive practices, namely, price fixing and other forms of collusion; and reviewing proposed mergers. We find little empirical evidence that past interventions have provided much direct benefit to consumers or significantly deterred anticompetitive behavior.

Overall I'm not sure that we really do want a strong interventionist Commerce Commission.

At the very lest we should start a discussion about the nature of the Commerce Act and the role of the Commerce Commission by asking questions about what form of competition policy we really want.

References:

The Sautet paper, which is well worth reading, is "The Shaky Foundations of Competition Law", New Zealand Law Journal, pp. 186-190, June 2007.

The Robert W. Crandall and Clifford Winston paper is "Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence", Journal of Economic Perspectives, 17(4) Fall 2003.

Worstall on Davies on Coase on housing

In a previous post I commented on the idea of Steve Davies to apply Coaseian thinking to solving the British (and other countries) housing problem. In part Davies wrote

For Coase the solution was to assign a property right to one of the two sides and then allow a process of bargaining to take place. If the first group have the right then those who do not want development would have to pay them not to do it. If the second, then the developers (and ultimately the buyers) have to pay for the right to develop. Crucially it does not matter which of these two we go for: in either case we will end up with the outcome that maximises total welfare so long as the bargaining process itself is not too costly.

Now at the Adam Smith Institutes's blog Tim Worstall comments on this idea. He writes

We have no doubt this would work and that should be good enough as a solution. However, while it would work we’re really not convinced that it is the correct solution. For what it is saying is that those who wish to prevent building upon land that they do not own have some form of right to say or insist so. That’s why they might be due some compensation from those who do build. And we rather reject that basic contention.

Property ownership does mean that one should be able to dispose of the property as one wishes. Consistent with this is that other people do not have the right to impose their views upon you of how you should dispose of that property. Thus we’re uncomfortable with the idea of creating a right which can then be subject to such Coasean bargaining.

Tim has a point, sorting out who has what rights to object to a housing development could raise the transaction costs of Coaseian type bargaining to such a degree that it would become impractical. And if multiple people or groups claim said rights negotiating with each of them could be expensive and time consuming. However if it is clear who the parties involved are and there are only a few of them, ie transactions costs really are low, then the Coaseian solution could be an improvement over the current situation.

EconTalk this week

If you have 250 million tons of food to give away every year to local food banks how should you do it? Canice Prendergast of the University of Chicago's Booth School of Business talks with EconTalk host Russ Roberts about how he and a team of economists created an artificial currency and a daily auction for the national food bank Feeding America so that local food banks could bid on the types of food that were the most valuable to them. Prendergast explains the results of the new system and the cultural and practical challenges of bringing prices, even artificial ones, to a world accustomed to giving things away.

A direct link to the audio is available here.

Efficiency of female leaders in family and non-family firms

There has been recent discussion of the idea that economic research shows that companies that have a balanced representation of women and men on their boards perform better, a claim made by the Treasury Secretary Gabriel Makhlouf . Eric Crampton at the Offsetting Behaviour blog has pointed to research that shows this is not the case.

Today I came across this working paper - Efficiency of Female Leaders in Family and Non-Family Firms by Per-Olof Bjuggren, Louise Nordström and Johanna Palmberg - that draws a distinction between family-owned and non-family owned firms when looking at the performance effects of female leadership. In their conclusion the authors write,

Our study shows that female leadership is more common in family than non-family corporations. This female leadership has also a strong positive impact on performance in family firms while the performance impact is surprisingly strongly negative in non-family firms.

Insofar as Makhlouf's comments were about non-family owned firms, and most large firms are of this form, then the above comment doesn't offer much support for his claim. When considering family-owned firms however, he may be on stronger ground.

The paper's abstract reads:

Female leadership is an expanding area of research. It is a popular topic discussed frequently in both academia and in the popular press. Despite this, comparative studies of the impact of female leadership on firm level performance between family and non-family firms are rare. The present study has the ambition to fill this gap. This paper investigates female leadership in family firms and how it affects firm profitability. A unique database of ownership and leadership in private Swedish firms makes it possible to analyze difference in firm performance due to female leadership in family and non-family firms. Even though much has been written regarding the role of women in family firms we do not know so much about how female leadership in family firms affect the profitability of the firm. The analysis indicates that female leadership makes much more of a positive difference for performance in family firms. The effect is negative in non-family firms.

This leaves open the question as to what drives the difference in leadership performance between the two types of firms.

AFA Lecture: Andrei Shleifer

"The Transformation of Finance" an address to The American Finance Association by Andrei Shleifer, January 2011.

The 20 most influential books in history

From the World Economic Forum comes a list of The 20 most influential books in history. The top ten are,

Davies on Coase on housing

At the LSE's British Politics and Policy blog Steve Dacies writes that low house-building levels and the unaffordability of existing homes are problems that have been plaguing Britain for decades. And this is true not just in the UK but most other countries, like New Zealand, as well.

Davies writes,

There is now something of a consensus among academics and commentators that the shortage of housing (and buildings of all kinds) is one of our most pressing problems. Many others such as welfare costs and low productivity are at least partly caused by the lack of house building and the consequent high price of housing. However, this has not as yet led to any political action. The problem of course is the conflict of interest between people who want to build, buy or rent new houses on the one hand, and people who do not want new development on greenfield sites on the other. The second group have so far been able to block any action and this does not seem likely to change.

But the work of Coase shows that this deadlock is quite simply unnecessary and avoidable if we only think about it in the right way, as Mark Pennington explains. Current policy on development is shaped by conventional welfare economics, where two people engaging in a transaction can impose costs on bystanders. So a developer and a house buyer can impose costs on existing home owners and people who wish to preserve the rural environment. This is dealt with by regulations through planning laws.

As Pennington explains, Coase rejects this model. For him the costs are reciprocal – there are two sides each of whom is potentially imposing costs on the other. One wants to build houses, the other to preserve space. To the extent that one side gets its way the other suffers a loss. What we actually have is not an externality or pollution but a conflict over how to use land.

For Coase the solution was to assign a property right to one of the two sides and then allow a process of bargaining to take place. If the first group have the right then those who do not want development would have to pay them not to do it. If the second, then the developers (and ultimately the buyers) have to pay for the right to develop. Crucially it does not matter which of these two we go for: in either case we will end up with the outcome that maximises total welfare so long as the bargaining process itself is not too costly.

Fortunately, in the case of land use the cost of negotiation is low. If we applied this model instead of a complex and costly planning procedure we would simply have a default right, either to build or not, which would have to be bought out. We could make one default apply in some parts of the country and the other in the rest (although this should not matter, it might be politically astute). There would then be a process of bargaining and through this we would actually find out how much people really valued one alternative or the other (as opposed to their asserting it – words are cheap).

The result would be development in some areas but not in others and this would reflect the actual value that people collectively placed on the two competing uses and the associated moral values. This would be different in different places (unlike the inflexible present system). As Pennington points out this would also be an ethically superior outcome because it would reflect ethical and value pluralism rather than having one group’s values imposed on the rest through the political process which is what we have now.

For Coase the world of positive transaction costs is the world we should consider when thinking about policy. High transactions costs can prevent otherwise efficient trades from taking place. But if we can structure things so that transaction costs are low then bargaining between parties will lead us to efficient outcomes. Thus as Davies notes if we assign property rights to either developers or to those who wish to prevent new development and let them bargain the two groups can work the problem out for themselves. Bureaucrats not needed.

Such an approach to housing really would be RMA change!

Do people maximise their well-being?

As a followup to the last posting on Coase v. Becker on utility theory I came across this new working paper by Marc Fleurbaey and Hannes Schwandt which asks Do People Seek to Maximize Their Subjective Well-Being?

The abstract reads,

In a new survey we ask respondents, after a standard Subjective Well-Being (SWB) question, if they can think of changes in their lives that would improve their SWB score. If the SWB score is just one argument among others in the respondents’ goals in life, they should easily find ways to improve it, at the expense of other dimensions they care about. Our results suggest that close to 90% of the respondents actually seek to maximize their SWB. The life satisfaction question appears the best contender as the “maximand” in the contest, before the ladder-of-life question and felt happiness. Among the other goals that people pursue and for which they are willing to sacrifice some of their SWB, the prominent appear to be about their relatives and about their future self.

So 90% of us seem to want to maximise our subjective well-being. One interesting question is what does this tell us about assuming utility maximisation as a starting point for modelling consumer behaviour?

Coase v. Becker on utility theory

An interesting, and all too short, exchange between Ronald Coase and Gary Becker on utility theory. Coase was not much of a believer in the usefulness of utility theory whereas Becker was.


The video comes from freetochoose.tv.

Why politics and business should not mix

In a new column at VoxEU.org Jiangtao Fu, Daichi Shimamoto and Yasuyuki Todo discuss Politically connected lending and economic development.

A long held view of many economists is that firms with good political connections obtain loans with more relaxed terms than those who are not politically connected. The Fu, Shimamoto and Todo column presents evidence from Indonesia that firms whose owners or directors have a personal relationship with a politician are more likely to have their loans approved by state-owned banks, and are more likely to receive the full amount applied for. However, the labour productivity of such firms is on average lower. This suggests that in some cases, politically connected lending may distort the efficiency of resource allocation and be detrimental to economic development.

Fu, Shimamoto and Todo write,

The Indonesian government implements policies to facilitate credits to SMEs with growth potential. However, our results suggest that such public credits are most likely to be given to unproductive but politically connected firms. The distorted allocation of resources may harm the economic growth of Indonesia and lead the economy into a middle-income trap. Possible solutions to this problem include reducing the political influence in state-owned banks (e.g. their privatisation), building SMEs’ credit information sharing system, and strengthening the ability of financial institutions to evaluate loan applications.

These results highlight, if such highlighting is really needed, why politics and business should never mix. Some countries are better at separating business from politics but all countries need to be aware of the dangers of the mixing of the two. Those dangers include reducing much needed economic growth. The column also points to one advantage of privatisation, in this case of state-owned banks, it helps depoliticise business decisions.

EconTalk this week

Are we on the verge of driverless cars and other forms of autonomous robots and artificial intelligence? David Mindell of MIT and the author of Our Robots, Ourselves talks with EconTalk host Russ Roberts about the robotic revolution. Mindell argues that much of the optimism for autonomous robots ignores decades of experience with semi-autonomous robots in deep-sea operation, space, air, and the military. In all of these areas, the role of human supervision remains at a high level with little full autonomy. Mindell traces some of the history of the human interaction with robots and artificial intelligence and speculates on what the future might hold.

A direct link to the audio is available here.

Incentives and thinking

"The main point is that having commercial economic incentives in place causes us to perceive new information in more positive-sum terms than otherwise would be the case, or at least that is how I interpret his results" or so writes Tyler Cowen about a new working paper An Offer You Can’t Refuse? Incentives Change How We Think by Sandro Ambuehl.

An interesting idea worth thinking about, especially when you find on page 4 of the paper the sentence "In the first experiment I use cash to induce subjects to eat whole insects, including silkworm pupae, mealworms, and various species of crickets." What's not to love?

The paper's absract reads:

Around the world there are laws that severely restrict incentives for many transactions, such as living kidney donation, even though altruistic participation is applauded. Proponents of such legislation fear that undue inducements would be coercive; opponents maintain that it merely prevents mutually beneficial transactions. Despite the substantial economic consequences of such laws, empirical evidence on the proponents’ argument is scarce. I present a simple model of costly information acquisition in which incentives skew information demand and thus expectations about the consequences of participation. In a laboratory experiment, I test whether monetary incentives can alter subjects’ expectations about a highly visceral aversive experience (eating whole insects). Indeed, higher incentives make subjects more willing to participate in this experience at any price. A second experiment explicitly shows in a more stylized setting that incentives cause subjects to perceive the same information differently. They make subjects systematically more optimistic about the consequences of the transaction in a way that is inconsistent with Bayesian rationality. Broadly, I show that important concerns by proponents of the current legislation can be understood using the toolkit of economics, and thus can be included in cost-benefit analysis. My work helps bridge a gap between economists on the one hand, and policy makers and ethicists on the other.

Munger on North

The great economic historian Douglass North died a few days ago and today while reading a book chapter on "Coase and the 'sharing economy' " by Michael Munger I came across the following comment. Munger is talking about two related questions: Why if markets are so great are there firms? and Why if firms are so great is there more than one firm? Munger writes,

My own introduction to Coase's answer was memorable, though rather painful. When I was in graduate school at Washington University, Douglass North was on my dissertation committee. At my defence, he asked a question. It seemed like a complicated question, and I went to the board and wrote some equations. Finally (and mercifully), Doug interrupted me. Waving his hand slowly, addressing a not-very-bright child, he said, 'Michael, the answer is two words ... transaction costs!'

And I should have known. For North, it didn't really matter what the question was, the answer, or at least the start of the answer, had to do with transaction costs. He had fully appreciated the Coasian insight that economic (and many political and social) institutions had as their primary function the optimisation of transaction costs.

And North went on to develop that insight in ways that hugely enhanced our understanding of both economic history and the new institutional economics.

Of course in some cases institutions develop to minimise transactions costs, firms, for example, occur when they can carryout an activity at a lower cost than the market but in other cases institutions develop to increase transaction costs. Take as an example the secret ballot which makes it impossible to tell if someone has voted in the way he was bribed to vote or not. Such an increase in the transaction costs of voting makes vote buying that much harder.

Now this is just crazy

From stuff.co.nz comes this bit of crazy news.

Prediction website iPredict is to be closed down, with the Government deciding it represents a money laundering risk.

The site, run by Victoria University of Wellington, issued a statement to its website on Thursday and on Twitter.

According to the iPredict statement, Associate Justice Minister Simon Bridges refused to grant it an exemption from the Anti-Money Laundering and Countering Financing of Terrorism Act, declaring that it was a "a legitimate money laundering risk" because of the lack of customer due diligence.

The website added that Bridges "formed these views without any discussions with us".

Bridges office could not immediately comment on iPredict's statement.

As well as economic forecasting, iPredict allows traders to place bets on political events. Currently, for example, Simon Bridges is rated as having only a 4 per cent chance of becoming the next leader of the National Party.

Although iPredict said that most of its transactions were small, three traders hold portfolios on the website worth in excess of $10,000. The wbesite claims to have more than 9000 traders including more than 4000 who have deposited $20 or more, although most are understood to be inactive accounts.

One of the site's higher profile traders, Kiwiblog author David Farrar said the decision was hard to fathom.

"Their turnover is teeny. You could only money launder a few hundred [dollars], maybe a thousand, because their's just not enough people," Farrar said, adding that the requirement to give bank accounts or credit card details meant the money should be traceable.

"You could money launder many times larger amounts and much more effectively by going to gaming machines," Farrar added.

What is really going on here? As David Farrar points out the amount of money you could launder is so small that I find it very hard to believe that this is the real reason for the closing down of iPredict. The average trader has a net worth of $41. So what is Bridge's real agenda here?

Given the amount of interesting data that iPredict generates keeping makes sense. It would be nice if the markets were a bit thicker perhaps but on the other hand a thin market, as Farrar notes, does limit the amount of money laundering that could be done via the site.

Seven years of fun and information ends due to stupid government actions.

The statement from iPredict is available here.

EconTalk this week

Michael Munger of Duke University makes his 29th appearance on the 500th episode of EconTalk alongside EconTalk host Russ Roberts. He talks about his personal intellectual journey, his interest in public choice, and Unicorn economics. Other topics include the origins of EconTalk, Roberts's intellectual roots, and the EconTalk theme music. The conversation closes with a brief reprise of a few highlights from past Munger appearances on EconTalk.

A direct link to the audio is available here.

International Business Lecture: Standing on the Shoulders of Midgets: Dominant Firms and Innovation Incentives

International Business Lecture:
Standing on the Shoulders of Midgets: Dominant Firms and Innovation Incentives

Presenter:
Luís Cabral
Paganelli-Bull Professor of Economics and International Business, Stern School of Business, New York University

When: Thursday 17 December 2015, 5:15pm – 7:15pm
Where: Laws 108 Lecture Theatre, Business and Law Building 
(Google map link)

The Department of Economics and Finance warmly invites you to hear Luís Cabral, Paganelli-Bull Professor of Economics and International Business at New York University’s Stern School of Business. Professor Cabral’s research focuses on the dynamics of firm competition, from both antitrust and strategic perspectives. In this lecture he discusses his innovation model featuring asymmetry between large and small firms, technology transfer by acquisition, and the process of gradual innovation.

Join us for refreshments at 5:15pm, followed by the lecture at 6pm.

RSVP by 11 December 2015 to: meredith.henderson@canterbury.ac.nz

Abstract

I develop a dynamic innovation model with three important features: (a) asymmetry between large and small firms ("giants" and "midgets"); (b) technology transfer by acquisition; and (c) the distinction between gradual innovation (i.e. within a certain "paradigm") and disruptive innovation (i.e. that which induces a new paradigm). I provide conditions such that (a) greater asymmetry between giant and midget decreases incremental innovation but increases disruptive innovation; and (b) allowing for technology transfer increases incremental innovation but decreases disruptive innovation.

About the presenter

A native of Portugal, Luís Cabral is a graduate of Stanford University (PhD, Economics, 1989). He taught at the London Business School, Berkeley, Yale, NYU and IESE. He is currently the Paganelli-Bull Professor of Economics and International Business at NYU's Stern School of Business. Cabral's research is focused on the dynamics of firm competition, both from the antitrust and from the strategy perspectives. His research topics include reputation, learning, network effects, sunk costs, innovation, strategic risk choice. In addition to numerous journal articles, he is the author of Introduction to Industrial Organization, a textbook translated and adopted by universities in dozens of countries worldwide. Professor Cabral consulted with a variety of organisations (firms, universities, governments, tax and law enforcement agencies, even sports teams) on a variety of economics issues. He was a leading expert witness in the Airbus-Boeing WTO disputes. From 2004-2009, he was a member of European Commission President Barroso's Group of Economic Policy Analysis (a group of 12 members). Other than economics, Professor Cabral's interests include painting (his art work has been exhibited on both sides of the Atlantic) and saxophone playing (performed with the NYU Stern Faculty All Stars and other equally reputed bands).

Stigliz on Coase

In his book Whither Socialism? Joseph Stigliz writes,

Coase went wrong in assuming that there are no transaction costs and no information costs. But the central contention of this book is that information costs (what can be viewed as a special form of transaction costs) are pervasive. Assuming away information costs in an analysis of economic behavior and organization is like leaving Hamlet out of the play.

But as is obvious to anyone who as read Coase the last thing he did was to ignore transactions costs. In fact the opposite is true, Coase's whole framework is based on the very notion of positive transaction costs. To quote Coase,

The world of zero transaction costs has often been described as a Coaseian world. Nothing could be further from the truth.It is the world of modern economic theory, one which I was hoping to persuade economists to leave.

For example, within a Coaseian framework the firm only makes sense in a positive transaction cost setting, if transactions costs are zero then production can take place via market transactions, with no firms needed. As Nicolai Foss has noted,

With perfect and costless contracting [due to zero transaction costs], it is hard to see room for anything resembling firms (even one-person firms), since consumers could contract directly with owners of factor services and wouldn't need the services of the intermediaries known as firms.

When thinking about the law and the actions of the courts Coase made the point that when the courts assign rights and liabilities in a context of zero transaction costs their decision does not matter. If an inefficient allocation of rights is made then the parties can bargain to an efficient one. But if transaction costs as are positive, as Coase stressed they are, then there is no inherent tendency for a welfare-maximising result to emerge, since the existence of these costs may block potentially mutually beneficial exchanges between the parties. In such a case the court's decision does matter.

When it comes to a Coaseian approach to policy Mark Pennington has noted,

[ ... ] the purpose of Coase’s analysis was to highlight the policy implications that flow from recognising the significance of transaction costs. Imperfections or frictions in markets may result in less than optimal outcomes – but these imperfections or frictions exist under any institutional alternative which involves direct government intervention. Deciding whether to rely on one mechanism or another requires a comparative institutions approach which considers the extent of the likely transaction costs under different types of ‘solution’.

So again positive transaction costs are central to the argument.

Stiglits's view show a profound misunderstanding of Coase's work. But it is a misunderstanding that is all too common.

Make or buy decisions over upstream and downstream inputs

One of the big questions in the theory of the firm is about determining the boundaries of the firm. This is normally thought about as a "make or buy" decision. That is, firms can vertically integrate, or outsource, upstream and downstream functions. The more functions you do in house, "make", the larger is the firm and the more functions you outsource, "buy", the smaller is the firm. This is true whether or not the firm outsources to firms in their own country or to firms overseas. In fact trade in intermediate inputs now accounts for as much as two-thirds of international trade. Firms must decide which segments of their production processes to own and which to outsource.

A new column, Make or buy decisions over upstream and downstream inputs: An investigation of firm boundaries along value chains by Laura Alfaro, Pol Antràs, Davin Chor and Paola Conconi, at VoxEU.org looks at firms’ organisational choices along value chains. Using global plant-level data, this column empirically examines the organisational choices that firms make along the value chains. Decisions to integrate or outsource upstream and downstream functions are found to depend on demand elasticity relative to the substitutability of inputs. These results provide strong evidence that integration decisions are driven by contractual frictions.

Alfaro, Antràs, Chor and Conconi start by developing a theoretical framework of firm behaviour that is amenable to estimation using firm-level data. They "describe an incomplete-contracts model in which the manufacturing of final goods entails a large number of production stages that need to be performed in a predetermined order. Suppliers provide the different stages by undertaking relationship-specific investments to make their components compatible with those of other suppliers in the value chain". They also "allow for heterogeneity in the importance of inputs for production, as well as in the marginal cost of production faced by suppliers at different points along the value chain".

As to the empirical bits,

To bring the model to the data, we use WorldBase, a comprehensive plant-level dataset that provides information on the activities of firms located in many countries and territories. Plants belonging to the same firm can be linked via information on domestic and global parents using a unique identification number. Our main sample consists of more than 300,000 manufacturing firms in 116 countries. For each plant, WorldBase provides information about its primary production activity and secondary activities. To distinguish between integrated and non-integrated inputs, we combine this information with Input-Output tables [...]. We also use Input-Output tables to construct a new measure of the position of different industries along the value chain. This measure is industry-pair specific and captures the ‘upstreamness’ of each input i in the production of output in sector j. Figure 1 provides an illustration of the variation contained in this measure, when focusing on one particular input industry, Tires and Inner Tubes (SIC 3011). Notice that the upstreamness measure is smaller for industries that use tires almost exclusively as a direct input, such as Mobile Homes (2451), Lawn and Garden Equipment (3524), Industrial Trucks and Tractors (3537), Motorcycles, Bicycles, and Parts (3751), and Transportation Equipment (3799). This new measure is distinct and more informative than the one developed in Antràs et al (2012), which restricted attention to the distance of an input relative to final demand (see the horizontal line in Figure 1 for the case of Tires).

Figure 1. Upstreamness of tires (SIC 3011) in the production of all other manufacturing industries

The richness of our data allows us to exploit variation in the organisation of different firms, as well as within firms across their manufacturing stages. In line with the key prediction of our theoretical model, we find that a firm's propensity to integrate upstream (as opposed to downstream) inputs depends crucially on the relative size of the elasticity of demand for the firm's final good and the elasticity of substitution across its production stages. The higher the demand elasticity faced by the firm relative to the substitutability of its inputs, the more likely it is that the firm will outsource upstream suppliers rather than downstream ones. The intuition for this result is that, when the demand is elastic or inputs are not particularly substitutable, input investments are sequential complements; that is, the marginal incentive of a supplier to undertake relationship-specific investments is higher, the larger are the investments by upstream suppliers. In this case, the firm finds it optimal to contract at arm’s length with upstream suppliers in order to incentivise their investment effort, while integrating the most downstream stages to capture surplus. When demand is inelastic or inputs are sufficiently substitutable, input investments are instead sequential substitutes; that is, investments by upstream suppliers lower the investment incentives of downstream suppliers. When this is the case, the firm chooses to integrate relatively upstream stages, while engaging in outsourcing with downstream suppliers.

Alfaro, Antràs, Chor and Conconi contiue,

We also construct a measure of input contractibility for each SIC industry (following Nunn 2007) and examine how firms' ownership decisions are shaped by the degree of contractibility of upstream versus downstream inputs. We find that a greater degree of contractibility of upstream inputs increases the likelihood that a firm integrates upstream inputs, when the firm faces a high elasticity of demand (both in absolute terms, as well as relative to our proxy for input substitutability). This result is also in line with the predictions of our theoretical model, according to which greater upstream contractibility reduces a firm's need to rely on organisational decisions and arrangements to elicit the right incentives from suppliers positioned at early stages in the value chain.

The firm-level empirical patterns that we uncover in our analysis provide strong evidence that considerations driven by contractual frictions are critical in shaping the integration choices of firms along their value chains.

Jonah Lomu RIP

No Kiwi will ever tire of watching this.

Ceremonial science: the state of Russian economics

A question worth asking is what damage did the Soviet era do to economics in Russian. Well now we may have, at least part of, the answer.

A paper by Alexander Libman and Joachim Zweynert in Economic Systems (Volume 38, Issue 3, Pages 289-468, September 2014) looks at Ceremonial science: The state of Russian economics seen through the lens of the work of ‘Doctor of Science’ candidates.

The highlights of the paper are:

• We perform an empirical analysis of a dataset of extended abstracts of 552 Russian Doctor of Science theses.
• The scientific work of Russian ‘Doctor of Science’ candidates is marked by a ‘ceremonial’ way of quoting scientific authorities and using simple mathematics and quantitative criteria.
• Adam Smith, John Maynard Keynes and Karl Marx are the most quoted authors; there are almost no references to authors from the REPEC list.
• Russian Dr. Sc. theses are more theoretically oriented than Russian journal articles, but the vast majority deals with applied economics; modern economic theory and econometrics are practically absent.

Still quoting Marx may not be a good sign. RePec standards for Research Papers in Economics.

A troubling comment from the paper is,

A number of papers have investigated the state of economics in Russia.2 In particular, Lokshin (2009) analyzed 250 papers on issues of poverty published in leading Russian journals between 1992 and 2006. He found that 60% of these papers did not have a clearly defined research question and half of the papers contained no references. There were no papers containing a formal theoretical model or a formal statistical test.

The paper's conclusion reads:

The aim of this paper was to learn more about the economic research and, indirectly, the teaching at average Russian universities and research units. We argue that this examination might affect the ‘economic culture of decision-makers’. This culture, in turn, may influence the quality of decision making in politics, administration, and business, and it may affect the understanding and acceptance of the market mechanism among broader strata of the population. Our paper augments the existing literature by introducing and analyzing a new dataset of Russian Dr.Sc. theses, which serve as criteria for career advancement and selection in most Russian universities.

Our analysis provides the following overall picture of Russian Dr.Sc. candidates in economics. Most of them concentrate on empirical research on particular regions or industries. Furthermore, they claim that their research has a high practical relevance. At the same time, few of them use econometrics or formal models. Many theses contain quantitative criteria merely as guidelines for possible decisions. The actual value added of these criteria as opposed to verbal exposition is often questionable. The typical Dr.Sc. candidate does not publish internationally and does not follow current developments in economics. References to international authors are usually to classic authors or to Nobel Prize winners, not to current leading scientists. This overall picture shows that the old Soviet patterns maintain an impact on the practice of today’s average Russian economists.

Furthermore, our results suggest a predominantly ‘ceremonial’ attitude toward research in economics in Russia. Various elements (practical relevance, simple quantitative methods, and quotes of classical economists) are combined without taking into account how they fit with each other or whether they are helpful for producing the desired research objective. The research conducted in the capital cities, at the MSU, SPSU, and at the RAS (especially in Moscow and St. Petersburg institutes), seems to be less ‘ceremonial’ and shows a higher level of adherence to international standards. However, even these research establishments demonstrate multiple problems. Finally, we do not find a single scholarly community in Russia that successfully demonstrates acceptance of international standards. Rather, we observe that some elements of these standards are accepted by some communities without taking the others into account.

So Russian economics may have a way to go to catch up with the West. One wonders what the state of other subjects is in Russian universities.

A plea regarding ‘Liberal'

Professor Daniel Klein pleads with conservatives and libertarians to not call progressives and left-oriented people ‘liberals.’

The lecture is based on the article "A Plea Regarding 'Liberal'" published by the Intercollegiate Studies Institute. You can read the responses by John Zmirak and Charles C.W. Cooke. You can also read Klein’s final response to his interlocutors here.

The lecture was given at the Public Choice Center, George Mason University, September 9, 2015.


Liberalism Unrelinquished.

EconTalk this week

Brian Nosek of the University of Virginia and the Center for Open Science talks with EconTalk host Russ Roberts about the Reproducibility Project--an effort to reproduce the findings of 100 articles in three top psychology journals. Nosek talks about the findings and the implications for academic publishing and the reliability of published results.

A direct link to the audio is available here.

IEA panel discussion on the work of Ronald Coase

From the IEA in London.

The Influence of Coase on Economic Policy – The Next 50 Years

The late Professor Ronald Coase made huge contributions to the development of economics over 75 years. From his paper on the theory of the firm, which was published in 1937 (and cited when he won the Nobel Prize), to his IEA book How China Became Capitalist (published when he was 101), his many insights have had a profound effect on our understanding of a number of different areas of policy. How we deal with environmental problems, land-use planning, broadcasting, telecommunications and transport privatisation are just five areas of current policy that have benefited from or could benefit from the application of Professor Coase’s ideas.

In this panel discussion we are asking our panellists to describe briefly the importance of one or more of Prof Coase’s insights and explain the relevance of his insights to government policy for the future generation.

Speakers: Rupert Darwall, Author and Expert at The Centre for Policy Studies; Prof. Mark Pennington, Department of Political Economy, King’s College London; Prof Martin Ricketts, Professor of Economic Organisation, University of Buckingham; Dr. Cento Veljanovski, Case Associates and Dr. Richard Wellings, Deputy Editorial Director, Institute of Economic Affairs

Cheung on Alchian and Demsetz

An argument made by Alchian and Demsetz (1972) in their discussion of the reasons for the formation of a firm is that in situations where the effort levels of individual members of a team are difficult to observe, moral hazard can become a problem. And a firm can arise to deal with such issues.

If total output is all that can be observed, due to high monitoring costs, and the proceeds of the team effort must be divided among the whole team then this can will give rise to a moral hazard problem. Any gains from higher individual effort will be shared with the entire team and, conversely, the losses from poor effort will be felt only partially by the shirker. No team member has an incentive to monitor any other member because of the costs involved and the low reward from doing so. Alchian and Demsetz's answer to this problem is to use a residual claimant to observe effort, hire and fire members of the team, direct activities and act as the single contractual agent. This central agent can deal with the moral hazard problem by careful monitoring of the team members and has an incentive to do so efficiently since he is the residual claimant.

But there are problems with this answer. Why, for example, can the central agent not be hired by the team members rather than the other way round. McManus (1975) gives a nice story to illustrate this idea:

Anecdote told by Steve Cheung: On the Yangtze River in China, there is a section of fast water over which boats are pulled upstream by a team of coolies prodded by an overseer using a whip. On one such passage an American lady, horrified at the sight of the overseer whipping the men as they strained at their harness, demanded that something be done about the brutality. She was quickly informed by the Captain that nothing could be done: 'Those men own the right to draw boats over this stretch of water and they have hired the overseer and given him his duties' (McManus 1975: footnote 3, page 341).

Ref.:

• Alchian, A.A. and H. Demsetz (1972). 'Production, Information Costs, and Economic Organization', American Economic Review 62(5) December: 777-95.
• McManus, John C. (1975). 'The Costs of Alternative Economic Organizations', The Canadian Journal of Economics 8(3) August: 334-50

Forever Contemporary - The Economics of Ronald Coase

is the title of a new book edited by Cento Veljanovksi from the IEA in London. It provides an introduction to the ideas of Ronald Coase.

A quick summary of the book is

• R. H. Coase (1910–2013), a leading modern figure in the classical liberal tradition, was awarded the Nobel Prize in Economics in 1991 for his analysis of the significance of transaction costs and property rights for the functioning of the economy.
• Before Coase’s work in the 1930s, there was no real understanding of the relation between the theory of the firm and the theory of markets. Coase showed that the size and structure of firms, and the location of the border between internal exchange within the firm and external exchange through markets, are systematically related to the costs of transactions.
• These transaction costs, which Coase termed ‘costs of using the price mechanism’, include search and information costs (those involved in finding business partners, rather than having to produce your own inputs), bargaining costs (which rise sharply with the number of contractual partners) and enforcement costs (which, in the absence of a strong and effective legal framework, depend largely on trust in partners). When these costs alter dramatically, for example, as a result of introducing innovative technology, we can expect substantial alterations in firm and market structures.
• Coase was a pioneer in the modern analysis of environmental issues. He showed that, with clear property rights and low transactions costs, private solutions to many environmental problems can be achieved without government regulation. Such solutions were logically independent of the initial distribution of property rights. This is highly relevant to a number of modern economic problems which the government currently handles badly, such as land-use planning.
• His work has had a profound effect on later generations of economists, several of whom themselves won Nobel Prizes. His work on environmental issues, for example, influenced another Nobel Prizewinner in Elinor Ostrom, whose work focused on how common pool resources could be used effectively with minimal government intervention. This is especially relevant to debates about environmental and ecological degradation in forestry, fishing and game animal resources – perhaps particularly in developing economies.
• Similarly his work on the firm led to the development of the ‘New Industrial Economics’, now associated with Oliver Williamson, which has changed our understanding of issues of economic governance. This is relevant to current concerns over corporate social responsibility.
• Coase’s editorship of the Journal of Law and Economics over many years did much to stimulate economic analysis of legal institutions, an innovation which has had a major influence on public policy, particularly in the US. It has fed, for instance, into recommendations for accident compensation.
• Coase’s insights have challenged economists’ assumptions about the nature of public goods, which he demonstrated could often be provided more effectively by various forms of private initiative. He also illuminated such varied topics as the allocation of spectrum bandwith, the regulation of financial institutions and water resource management.
• Methodologically, Coase was opposed to ‘blackboard economics’ which relied on theory or econometric analysis at the expense of more practical investigation. He favoured careful examination of case studies and the history of industries when analysing economic policy issues.
• His work retains considerable significance in the twenty-first century. Coase’s analysis of China’s economic advance, published shortly before his death, sheds light on its future prospects, while his transaction cost approach can be argued to explain the new phenomenon of the ‘sharing’ economy which is reshaping businesses and employment. Furthermore his work should continue to be at the forefront of debates surrounding regulation, broadcasting and the environment. If policymakers and the economists who advise them ignore Coase, they are in danger of perpetuating policies which may work ‘in theory’ but do not work effectively in practice.

The table of contents reads:

1 Introduction   1
     Cento Veljanovski
     A short biography    1
     Coase’s approach    3
     What of the future?    6
     Contributions   8
2 The economics of Ronald Coase    14
     Cento Veljanovski
     What Coase did    14
     Coase’s impact    23
     New Institutional Economics (NIE)    24
     Economic analysis of law    28
     Economics   31
     Regulation   37
     Antitrust   39
     Spectrum: from wireless to mobile phones    42
     Coase’s legacy    44
3 Ownership, governance and the Coasian firm   46
      Martin Ricketts
      The nature of the frm    46
      ‘ownership’ in the Coasian theory of the frm    49
      The hazards of transacting    52
      Competition and the selection of governance structures   57
      Public policy towards the governance of enterprise    64
      Conclusion   68
4 Coase’s contributions to the theory of industrial organisation and regulation    70
      Alex Robson
      Introduction   70
      The nature of the firm: implications for the theory of industrial organisation    73
      Regulating utilities: the Coasean critique of marginal cost pricing    77
      The hold-up problem: implications for regulation    80
      Regulation and industrial organisation of the communications industry    83
      The development of the radio broadcasting industry in Britain    85
      The allocation of radio frequency spectrum in the United States    86
      Conclusion   89
5 Coase on property rights and the political economy of environmental protection    92
       Mark Pennington
       Introduction   92
       Coase on the problem of social cost    94
       Coasian analysis and the scope for environmental markets   100
       Ethical objections to the extension of environmental markets   108
       Conclusion   116
6 Coase and water    118
       Nicola Tynan
       Introduction   118
       Clearly defned property rights    120
       Integrated water resources management    124
       Conclusion   136
7 The Coase research agenda: public goods, transaction costs and the role of collective action   137
       Stephen Davies
       Introduction   137
       Was the lighthouse a public good?    138
       Conditions for private provision    140
       Coase’s research agenda    141
       Bundling private with public goods    147
       Coase’s way    159
8 Stock exchanges as lighthouses    160
        Philip Booth
        Lighthouses – what does not work ‘in theory’ works in practice   162
        Financial regulation – what does not work ‘in theory’ works in practice    163
        Private regulation and stock exchanges    166
       ‘Big bang’ and ‘deregulation’    172
        The further development of statutory regulation    175
        Could bank regulation be provided by market institutions?   178
        Conclusion   182
        Coda   185
9 Coase and the ‘sharing economy’    187
        Michael Munger
        Introduction   187
        Tomorrow 3.0: rent or own?    189
        The power drill trope: it’s about time    191
        Entrepreneurs can sell reductions in transactions costs   195
        Middlemen as brokers and sellers of connections    197
        Why sell products when you can sell reductions in transactions costs?    200
        Coase’s insight    204
Publications by Ronald H. Coase in chronological order    209

Interestingly in the book Coase is seen as "a leading modern figure in the classical liberal tradition", but this is not how everybody sees him. Bylund (2014), for example, sees Coase's paper "The Nature of the Firm" as a defense of socialist economic planning!!!

And not many people have ever called Ronald Coase a socialist!

For me the "The Nature of the Firm" is one of the - if not the - greatest papers in economics in the 20th century. It is this paper that introduced the idea of transaction costs and lead to the modern theory of the firm. Coase asked the big three questions about the firm: questions about the existence of the firm, the boundaries of the firm and the internal organisation of the firm. It is these questions that have largely driven the contemporary theory of the firm.

Ref.:
Bylund, Per (2014). 'Ronald Coase's "Nature of The Firm" and the Argument for Economic Planning', Journal of the History of Economic Thought, 36(3) September: 305-29.

EconTalk this week

Should women get routine mammograms? Should men get regular PSA exams? Robert Aronowitz of the University of Pennsylvania and the author of Risky Medicine talks with EconTalk host Russ Roberts about the increasing focus on risk reduction rather than health itself as a goal. Aronowitz discusses the social and political forces that push us toward more preventive testing even when those tests have not been shown to be effective. Aronowitz's perspective is a provocative look at the opportunity cost of risk-reduction.

 A direct link to the audio is available here.

EconTalk this week

Michael Matheson Miller of the Acton Institute and the Director of the documentary Poverty, Inc., talks with EconTalk host Russ Roberts about his award-winning documentary on the barriers facing the poor around the world. Topics discussed include the incentives facing poverty-fighting NGOs and their staff, the importance of secure and well-defined property rights, and the costs and benefits of agricultural aid.

A direct link to the audio is available here.

Condliffe Lecture 2015

Dr Terry L. Anderson

Condliffe Lecture 2015

Environmental Markets:
Lessons from and for Fisheries Management

The Department of Economics and Finance is pleased to invite you to the 2015 Condliffe Lecture.

Dr Terry Anderson will discuss Free Market Environmentalism and the approach of using property rights and markets to address environmental problems, focusing on lessons from and for fisheries management in New Zealand.

Day:	Tuesday 17 November 2015
Time:	6pm –7pm
Venue:	LAWS 108 Lecture Theatre (Google map link)
RSVP:	By 5pm, Wednesday 11 November to meredith.henderson@canterbury.ac.nz

Abstract

Increased demand for environmental amenities and competition for scarce natural resources require rethinking how we manage our natural environment. The dominant management institutions have focused on top-down command-and-control regulations. Though some of these regulations have been successful in picking low hanging environmental fruit – especially in reducing air and water emissions – they have not harnessed private initiative by using property rights and markets. This approach under the banner of “free market environmentalism” shows remarkable promise for dealing with a variety of environmental problems. Fisheries management in New Zealand illustrates the potential for this approach if the necessary market institutions can be buttressed and improved. In short, environmental markets offer a promising alternative for the next generation of environmentalism.

About the speaker

Terry L. Anderson is the William A. Dunn Distinguished Senior Fellow at PERC—the Property and Environment Research Center, in Bozeman, Montana, and the John and Jean DeNault Senior Fellow at the Hoover Institution, Stanford University. He is the author or editor of 38 books, including most recently, Free Market Environmentalism for the Next Generation (2015 with Donald Leal) andEnvironmental Markets: A Property Rights Approach (2014 with Gary Libecap). He has published widely in professional journals and the popular press, including frequent editorials in the Wall Street Journal.

Dr Anderson has been a visiting scholar at Oxford University, Basel University, Clemson University, and Cornell as well as a Fulbright Fellow at the University of Canterbury.

In March 2011, he received the Liberalni Institute’s (Prague, CZ) Annual Award for his ideas promoting freedom and prosperity. Previous recipients of this award include Nobel laureates Milton Friedman, Gary Becker, and Vernon Smith. In 2015, Anderson received the “Gary Walton Award for Excellence in Economic Education” from the Foundation for Teaching Economics.

Dr Anderson received his BS degree from the University of Montana in 1968 and his MA and PhD degrees in economics from the University of Washington in 1972, after which he began his 25-year teaching career at Montana State University. There he has won several teaching awards and is now Professor Emeritus.

Terry is an avid outdoorsman who enjoys fly fishing, hiking, skiing, horseback riding, and archery hunting.

Venue and Car Parking

The lecture venue is LAWS 108 lecture theatre on main campus (Google map link) and there is no charge for parking after 5:00pm. The available car parking areas are the Science car park, Law car park or Clyde car park.

For more information

Department of Economics and Finance

Phone: +64 3 364 2631

Email: meredith.henderson@canterbury.ac.nz

EconTalk this week

Cesar Hidalgo of MIT and the author of Why Information Grows talks with EconTalk host Russ Roberts about the growth of knowledge and know-how in the modern economy. Hidalgo emphasizes the importance of networks among innovators and creators and the role of trust in sustaining those networks.

A direct link to the audio is available here.

TEC Lectureship on Europe and the World 2015

Here are two lectures given by Joel Mokyr, the Robert H. Strotz Professor of Arts and Sciences and Professor of Economics and History at Northwestern University.

The first is "Culture of Gowth: Origins of the Modern Economy"


The second is "Long-Term Economic Change in China and Europe: The Needham Paradox Revisited"

EconTalk last week

Yuval Harari of Hebrew University and author of Sapiens talks with EconTalk host Russ Roberts about the history of humanity. Topics discussed include the move from hunting and gathering to agriculture, the role of fiction in sustaining imagination, the nature of money, the impact of empires and the synergies between empires and science.

A direct link to the audio is available here.

Catching cheating students

There is a new NBER working paper out on Catching Cheating Students by Steven D. Levitt and Ming-Jen Lin. The abstract reads,

We develop a simple algorithm for detecting exam cheating between students who copy off one another’s exam. When this algorithm is applied to exams in a general science course at a top university, we find strong evidence of cheating by at least 10 percent of the students. Students studying together cannot explain our findings. Matching incorrect answers prove to be a stronger indicator of cheating than matching correct answers. When seating locations are randomly assigned, and monitoring is increased, cheating virtually disappears.

Econ exams at Canterbury, at least, are well monitored with random seat allocation, and have been so for a number of years. I wonder what the amount of cheating is.

EconTalk for three weeks

When Lewis and Clark crossed through Montana, they encountered an extraordinary cornucopia of wildlife. Most of that ecosystem and the animals that once thrived there are gone. But a non-profit wants to bring it all back. Pete Geddes, Managing Director of the American Prairie Reserve talks with EconTalk host Russ Roberts about creating the Serengeti of the Americas--a 3.3 million acre prairie that would allow bison, pronghorn antelope, prairie dogs and their friends to inhabit a Wildlife Reserve in Montana, the size of Connecticut. Geddes discusses the goals of the American Prairie Reserve and how they're using a for-profit company, Wild Sky Beef, to gather support and help from local ranchers for the project.

A direct link to the audio is available here.

Tim O'Reilly of O'Reilly Media talks with EconTalk host Russ Roberts about his career in technology and media and the challenges facing low-wage workers as technology advances. Topics include the early days of the Internet, the efficacy of regulation to protect workers, and the poetry of Elizabeth Bishop.

A direct link to the audio is available here.

Pete Boettke of George Mason University talks with EconTalk host Russ Roberts about the political and economic lessons he has learned as program director of research in the aftermath of Hurricane Katrina. In this wide-ranging conversation, Boettke discusses the role of civil society, the barriers to recovery that have hampered New Orleans and what worked well as people and institutions responded to tragedy and devastation.

A direct link to the audio is available here.

2015 Nobel Prize in economics

The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2015 to

Angus Deaton
Princeton University, NJ, USA

"for his analysis of consumption, poverty, and welfare".
Angus Deaton, UK and US citizen. Born 1945 in Edinburgh, UK. Ph.D. 1974 from University of Cambridge, UK. Professor of Economics and International Affairs, Princeton University, NJ, USA, since 1983.

The work for which Deaton is now being honoured revolves around three central questions:

How do consumers distribute their spending among different goods? Answering this question is not only necessary for explaining and forecasting actual consumption patterns, but also crucial in evaluating how policy reforms, like changes in consumption taxes, affect the welfare of different groups. In his early work around 1980, Deaton developed the Almost Ideal Demand System – a flexible, yet simple, way of estimating how the demand for each good depends on the prices of all goods and on individual incomes. His approach and its later modifications are now standard tools, both in academia and in practical policy evaluation.

How much of society's income is spent and how much is saved? To explain capital formation and the magnitudes of business cycles, it is necessary to understand the interplay between income and consumption over time. In a few papers around 1990, Deaton showed that the prevailing consumption theory could not explain the actual relationships if the starting point was aggregate income and consumption. Instead, one should sum up how individuals adapt their own consumption to their individual income, which fluctuates in a very different way to aggregate income. This research clearly demonstrated why the analysis of individual data is key to untangling the patterns we see in aggregate data, an approach that has since become widely adopted in modern macroeconomics.

How do we best measure and analyse welfare and poverty? In his more recent research, Deaton highlights how reliable measures of individual household consumption levels can be used to discern mechanisms behind economic development. His research has uncovered important pitfalls when comparing the extent of poverty across time and place. It has also exemplified how the clever use of household data may shed light on such issues as the relationships between income and calorie intake, and the extent of gender discrimination within the family. Deaton's focus on household surveys has helped transform development economics from a theoretical field based on aggregate data to an empirical field based on detailed individual data.

Press Release

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EconTalk this week

There is only one country in the world where a person can sell a kidney to another citizen who buys it. That country is Iran. Tina Rosenberg of The New York Times talks with EconTalk host Russ Roberts about the Iranian kidney market--how it works, its strengths and weaknesses, and whether its lessons apply to the United States or elsewhere.

There is a direct link to the audio available here.