Austrian School of Political Economy

From the The Vienna Circle comes a series of brief interviews with Chris Coyne, Associate Professor of Economics at George Mason University on Austrian Economics. The discussion is about that analytic framework developed by economists associated with the Austrian school of economics and its relevance for past and present research in political economy.

Austrian School of Political Economy I: Value, Prices, & Economic Calculation


Austrian School of Political Economy II: Knowledge & Institutions


Austrian School of Political Economy III: The Continuing Relevance of Austrian Economics

Privatisation and information

Over at the Offsetting Behaviour blog Eric Crampton quotes from the conclusion to my recent NZEP paper on the theory of privatisation. Eric highlights the problems that the ex ante restrictions that governments often place on privatisation schemes can cause.

From Walker's conclusion

...there is an implicit assumption in the literature discussed above that economic efficiency is a major objective of privatisation but the, ex ante, conditions sometimes imposed by governments on the sale of assets often serve political rather than economic ends. Examples of such conditions are things like the New Zealand government’s restrictions on foreign ownership and the desire to sell to ‘Mums and Dads’, both of which restrict the number of possible bidders. Such conditions also result in fragmented ownership, making it difficult for owners to coordinate their efforts to effect the firm’s behaviour. In addition, given that each ‘Mum or Dad’ will own only a very small share of any of the firms, they have little incentive to become informed on the firm’s activities since they will only capture a very small amount of any improvement in performance they could bring about. These factors suggest that, in practice, little will change in terms of the behaviour of the SOEs: they will remain, for all intents and purposes, government-controlled entities. This contradicts the very reason for privatising SOEs in the first place.

While I completely agree with myself, let me add that ex ante restrictions are not the only cause of problems with privatisation programs. Badly designed ex post rules can also result in bad outcomes from privatisation:

...an important driver of several of the results presented above is the degree to which politicians can interfere, ex post, with the operations of the firm. The lower the cost of interference, the greater the likelihood of firms being induced to serve political rather than economic ends. This highlights the importance of post-privatisation regulation, and competition, to the outcome of an asset sales programme.

The easier and (politically) cheaper it is for politicians to interfere with firms after they have been privatised the more likely it is that the results of a privatisation program will be poor. A strong ex post framework which emphasises competition and raises as high as possible the costs to political interference with the privatiased firm the better the outcomes to privatisation are likely to be.

Other comments on rent control

A couple of comments by other economists on rent controls:

• Tyler Cowen asks How bad is rent control when housing supply is artificially restricted by law?
• David Henderson on Misallocation under Rent Control

Some stupid just never dies

Conor Dougherty writes in the New York Times that,

After years of punishing rent increases, activists across Silicon Valley and the San Francisco Bay Area are pushing a spate of rent control proposals, driven by outrage over soaring housing prices and fears that the growing income gap is turning middle-class families into an endangered species. Those campaigns, if successful, would lead to the largest expansion of tenant laws since the 1970s.

Rent controls are just a big amount of stupid. As Swedish economist Assar Lindbeck once quipped

"next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities"

Dougherty continues,

Nevertheless, a group called the Mountain View Tenants Coalition is collecting signatures for a voter initiative in hopes of putting rent control on the November ballot. One of the group’s leaders and its chief spokesman, Evan Ortiz, is a 29-year-old Google employee who works in ad sales.

But

Thomas K. Bannon, chief executive of the California Apartment Association, a landlords’ group, said his members were mobilizing a statewide response and planning to spend millions of dollars — he would not estimate exactly how many millions — to beat back the initiatives one city at a time. The members’ message: Don’t blame landlords. Blame cities for making it so hard to build new housing. (Emphasis added.)

The highlighted sentence is the important one, as anyone in places like Auckland should be able to tell you.

Dougherty adds, inline with Lindbeck's view, that,

Economists have an almost universally dim view of rent control because it does nothing to attack the underlying problem here, which is that more people want to live in the Bay Area and Silicon Valley than there are housing units to put them in.

Increasing rents are just a sign that there is a problem on the supply side of the market. The question to ask is Why? And the people to ask the question of are, usually, the local government.

Why Beauty Matters

An interesting video by the English philosopher Roger Scruton on "Why Beauty Matters".

You know the economy is in trouble when .......

This report is from Reuters.

Venezuela is putting neighborhood committees linked to the ruling Socialist Party in charge of distributing basic foods amid increasingly violent unrest over chronic shortages that have battered the socialist government's popularity.

President Nicolas Maduro's government wants state agencies to buy some 70 percent of food produced in local plants and distribute much of it to the population, which is suffering under a severe recession and triple-digit inflation.

Officials say the system will cut down on smuggling of state-subsidized food by limiting the role of private food distributors, who Maduro accuses of hoarding goods and raising prices as part of an "economic war" against him.

The first question you have to ask is, What determines the prices the state agencies will buy at? If they force prices down firms will not produce or will produce and sell on the black market rather than sell to the state. The answer to shortages isn't more state control but a return to a market economy. It seems likely that the only "economic war" being waged here is that by the government against the people in Venezuela.

But the country's opposition is slamming the plan as a discriminatory rationing system that will worsen hunger and could give Socialist Party sympathizers the power to withhold food from government critics.

They say the committees, known by their Spanish acronym CLAP, violate basic freedoms and do not address the underlying causes of shortages, which include an unproductive economy and artificially low caps on food prices that stimulate smuggling.

and

In the working class community of Araguaney on the outskirts of Caracas, residents on Wednesday lined up to buy bags of groceries that included a chicken, pasta and corn flour for 2,300 bolivars, equivalent to around $2.30 on the black market exchange rate.

"It wasn't very much, but we have to accept it, because right now there's nothing," said Flor Gaviria, 36, who quit working at a pharmacy last year because standing in supermarket lines to buy food was too time-consuming to hold down a job.

There clearly is something very wrong with an economy when you have to give up your job so you can stand in line to buy food.

An obvious part of the problem is that

Local firms have little interest in producing because price controls often require them to sell below cost.

Residents are increasingly turning to black markets where product such as milk or sugar often fetch 10 times the regulated prices, creating a lucrative smuggling business.

With prices below cost, firms either stop producing or produce and sell in the black market or smuggle their goods into neighbouring countries where prices are not controlled. These are very predictable responses to price controls.

Why are big cities becoming expensive places to live?

Arnold Kling argues that the reason may be upward sloping demand curves:

But one possibility I want to throw out there is that people want affluent neighbors. If I want an affluent neighbor, and an affluent neighbor is going to live in a neighborhood with high prices, then in some sense I want to live in a neighborhood with high prices. In the extreme, this makes my demand for neighborhoods upward-sloping. Higher prices make me want to live there.

and

Back to cities. Suppose that an important “urban amenity” is having a lot of affluent people around. Young singles may wish to meet potential marriage partners who are affluent. People who have acquired affluent tastes (sushi, yoga, wine) may want to be around people with similar tastes.

Given the cost of housing, you would have to have very strong preferences for the "urban amenity". I can't help thinking there must be cheaper way to take advantage of the amenity.

Wife swapping: it's hard to make binding contracts for repugnant transactions

The following comes from Al Roth's Market Design blog:

Yannai Gonczarowski writes:

"A week ago, the following question was asked on a popular Israeli web forum that discusses legal questions: The author says that he and his wife agreed with their neighbor and his wife that they will exchange partners for a day: the neighbor will be with the author's wife for one day, and after the neighbor's wife returns from her current trip abroad, she will be with the author for a day. As you can already imagine, the author writes that the first part happened, but when the neighbor's wife returned from abroad, the neighbor and his wife denied any such agreement and ignored the author's messages. The author says that he has text messages on his phone to prove the agreement and that he spent a considerable amount of money on beverages for the intended day with the neighbor's wife, and asks the readers of the web forum whether he has a cause for legal action against the neighbor and his wife for violating the agreement.

A link to the question on the web forum (the actual Hebrew text is somewhat more colorful/offensive): http://www.lawforums.co.il/SingleMessage.aspx?MessageID=1186029

There is sometimes is a real difference between sequential and simultaneous move games.

Latest New Zealand Economics Papers

There are actually a few interesting looking papers in the latest issue of NZEP:

Does stadium construction create jobs and boost incomes? The realised economic impacts of sports facilities in New Zealand

by Samuel A. Richardson

Government involvement in facility construction is typically justified on the basis of ex-ante predictions of economic impact resulting from events hosted at the new or upgraded facility. This paper examines the impact of facility construction on construction sector employment and real GDP across 15 New Zealand cities between 1997 and 2009. Results from static and dynamic models indicate that certain types of facilities had short-term (during construction) positive impacts on construction sector employment growth, although only stadium projects generated positive post-construction employment impacts. There is also little in the way of empirical evidence to suggest that new or upgraded facilities had any significant impact on local area real GDP either during or post-construction.

The effects of home heating on asthma: evidence from New Zealand

by Andrea Kutinova Menclova and Rachel Susan Webb

New Zealand, along with the USA and Australia, has one of the highest asthma rates among developed countries and previous analyses attribute this partly to insufficient home heating in certain neighbourhoods. International public health and medical studies corroborate this link but strong evidence of causality is lacking. In this paper, we empirically investigate the effect of home heating on hospital asthma admissions using panel data techniques and controlling for endogeneity. The hypothesis that higher electricity prices (via less adequate heating) increase hospital asthma admissions is tested and receives strong empirical support across a number of model specifications and datasets used.

and, of course, the truly magnificent - he says with all modesty

From complete to incomplete (contracts): A survey of the mainstream approach to the theory of privatisation

by Paul Walker

Privatisation is a common, yet controversial, policy in many countries around the world, including New Zealand. In this essay, we survey the literature on the theory of privatisation to see what insights it provides to the privatisation debate. We divide the literature into two periods defined by their relationship to the theory of the firm. In the period up to 1990, the literature followed the theory of the firm in using a complete or comprehensive contracting modelling framework. By the end of the 1980s, the ownership neutrality theorems highlighted a major weakness with this approach. The contemporary (post-1990) literature took advantage of incomplete contracting models to explain the difference in the behaviour of state and privately owned firms.

Stalin: Inside the Terror

An interesting documentary on the life of Stalin and his many excesses. The comment on the video reads:

This is a BBC2 documentary from 2003 and probably one of the best on Stalin. The archive footage is very good and it draws upon some excellent evidence from close witnesses, including Stalin' own family.

Interesting blog bits

1. Tom Clougherty on Cato Journal: Revisiting Three Intellectual Pillars of Monetary Wisdom.

   It is argued that conventional thinking on monetary policy rests on three faulty assumptions.

2. Timothy Taylor on the Allocation of Scarce Elevators

   One of the great economic problems of out times!

3. Robert Grundke and Christoph Moser on Evidence of hidden protectionism in the US in the Great Recession

   When the Great Recession hit the world economy, fears of protectionism led to close monitoring of non-tariff barriers to trade. The increase in US import protection appeared rather modest for all those trade policy measures that do not need to be notified to the WTO. However, stricter enforcement of given product standards does not require any notification. This column argues that the US has increasingly relied on this less transparent and trade-reducing policy instrument during the recent economic crisis.

4. Ed Dolan asks What Does the Unemployment Rate Measure? Labor Market Slack or the Social Stress of Joblessness? Why Does it Matter?
   

   Written in a US context but the issues raised apply to other countries as well.

5. Eric Crampton on Tobacco excise: running the numbers
   

   He looks at the likely effects of the tobacco tax hikes.

6. Branko Milanovic on Why “Make America Denmark Again” will not happen
   

   Milanovic looks at the seemly counter-intuitive idea that the rise of US inequality coincides with the decline of large companies that used to employ hundreds of thousands or even millions of workers and by their substitution by much smaller companies.

7. Chad P. Bown and Meredith Crowley on Today’s trade policy and trade research
   

   Free trade is under fire in nations across the world. This column surveys evidence on the importance of trade barriers. There is substantial variation in applied trade policy across countries, industries, and their trading partners, both cross-sectionally and over time. The variation found in these newly available and increasingly detailed databases offer researchers the opportunity to analyse and better understand firm-level trade, aggregate trade, and the shock to the world economy precipitated by China’s phenomenal export growth.

8. John Taylor on Rules Are Green and Discretion Is Red in the Monetary Game

   Taylor discusses a call for reform of the international monetary system.

9. Tim Worstall on Organic food is worse for the environment

   Organic food is not better than other produce in Britain because food standards are already so high.

10. Winton Bates asks What is the "bourgeois deal" and why should you care?

    The basic idea being that it is ethical and rhetorical change that has enabled most humans today to be much better off than their forebears. The bourgeois deal refers to societal acceptance of innovations that compete with and displace old ways of doing things in exchange for widespread improvements in living standards.

Happy birthday Adam Smith .... or not

Yesterday (5th June) many people wished Adam Smith happy birthday assuming that he has just turned 293, but has he? His gravestone gives June 5 as this date of birth,

But there are a couple of problems with celebrating Smith's birthday on June 5th. First we don't actually know Smith's date of birth, no matter what his gravestone says. June 5 is the date of his baptism.

Ian Simpson Ross writes in his book "The Life of Adam Smith",

The Fife seaport of Kirkcaldy, ten miles across the Firth of Forth from Edinburgh, was the scene of Adam Smith's baptism on 5 June 1723, in the Old Parish Kirk of St Brisse (Bryce). Possibly this was his birth-date, though there is no annotation on the 'Register of Baptismes in the Kirk of Kirkcalsie' (Bonar, 1932: 208), stating 'born this day', as there is in the case of Smith's great friend David Hume (Mossner, 1980: 6). It is reported, however, that as an infant Smith was 'infirm and sickly' (Stewart I.2), and understandable anxieties of the time about infant mortality and salvation may have hastened baptism (Flinn, 1977: 284). (Emphasis added)

while Gavin Kennedy writes in his "Adam Smith: A Moral Philosopher and His Political Economy",

His son, the world-famous Adam Smith, was baptised on 5 June (his birth date is unknown; old calendar; Bonar, [1894] 1966, 208).

It is possible that Smith was baptised on the day of his birth, but it is also possible he was not.

There is a second problem with celebrating June 5th. The date 5 June is the date from the Julian calendar. Scotland continued to use the Julian Calendar until 1752. It was only then that the Gregorian calendar was commonly used. Using the Gregorian calendar, as we do today, Smith's date of birth, assuming June 5th to be correct, would be June 16.

Using big data

From VoxEU.org comes this video in which Christian Hansen (University of Chicago Booth School of Economics) is interviewed by Soumaya Keynes (The Economist) about econometrics and his work on the best methods to use to understand Big Data.

Big data is changing economics and the way causal relationships are studied. In this video, Christian Hansen and Soumaya Keynes discuss the importance of big data for econometrics. Big data offers a lot of information and it is easier to draw policy lessons. It also gives more flexibility without forcing researchers to impose control variables, allowing more reliable conclusions to be obtained. This video was recorded in March 2016 during the Royal Economic Society’s Annual Conference held at the University of Sussex.

Corporate power? (updated)

In the past I have written,

Many commentators, even today, argue that the economy and the nation are controlled by powerful, large, very long lived corporations. John Kenneth Galbraith is perhaps the most (in)famous economist who argued along these lines. He argued that in the industrial sectors of the economy, which are composed of the largest corporations - think S&P 500 companies, the principal function of market relations is, not to constrain the power of the corporate behemoths, but to serve as an instrument for the implementation of their power. Moreover, the power of these corporations extends into commercial culture and politics, allowing them to exercise considerable influence upon popular social attitudes and value judgements. That this power is exercised in the shortsighted interest of expanding commodity production and the status of the few - the 1% - is, in Galbraith's view, both inconsistent with democracy and a barrier to achieving the quality of life that the "new industrial state" with its affluence could provide to the many. Galbraith argued that we find ourselves living in a structured state controlled by these large and all powerful corporations. Control over demand and consumers is exercised via the use of advertising which creates a never ending consumer "need" for products, where no such "need" had existed before. In addition, as Princeton University Press said in its advertising for a new edition of Galbraith's "The New Industrial State",

The goal of these companies is not the betterment of society, but immortality through an uninterrupted stream of earnings.

I have always thought that an implication of these ideas is that large firms, e.g. those in the S&P 500, would be very long lived. After all given the amount of control that these firms apparently have over their markets and the economy at large its hard to see how they could ever go bankrupt or be taken over. They are, after all, able to ensure "immortality through an uninterrupted stream of earnings." Thus these firms would have a long life.

Part of the idea here is that large corporations have power over markets and their consumers. When "corporate power" get mentioned I sure people think of companies like Microsoft, Google, Coca-Cola, Pepsi, and McDonald’s etc and the control these firms are said to have over their sectors of the economy. One aspect of this power is the control these corporations are claimed to have over their consumers, but if these "powerful" firms produce spectacular failures, then perhaps consumers are not as docile as some would suggest and we overestimate the extent of said corporate "power".

At this blog Ordinary Business Art Carden looks at the power of corporations by asking, Do they produce spectacular failures?

Carden writes,

I suspect you’re not reading this on your Zune.

Why not? Because the Zune failed. That the Zune failed in spite of backing by one of the world’s most powerful companies should give us pause when we think about “corporate power.” Products succeed and fail, ultimately, because consumers vote for them or against them with their hard-earned dollars. The Zune is just one of many products consumers have voted out of the marketplace over the objections of corporate boards of directors.

Consider what happened with soft drinks in the 1980s and 1990s. In the 1980s, Coca-Cola introduced New Coke, which they had reformulated based on extensive market research. It was one of the greatest marketing disasters in American business history, and the company corrected its mistake by reintroducing the old formula as Coca-Cola Classic.

In the 1980s, Pepsi introduced Crystal Pepsi. I was sort of captivated by it: a clear cola that totally wasn’t like Slice or Sprite or now Sierra Mist? Mind-blowing. Now all that remains of Crystal Pepsi is a suite of memories set to the tune of Van Halen’s “Right Now.”

There’s a McDonald’s song that starts “Big Mac, McDLT, a Quarter Pounder with some Cheese…” McDLT? Come again? If you remember getting one of these, they came in a two-sided container with the lettuce and tomato—the “LT”—on their own side, presumably for freshness. Now again all that remains of the McDLT is a memory and jingle—and probably some vintage containers and toys you can get on eBay.

Also the older of you may remember the infamous Ford Edsel. Not a glowing recommendation for corporate power.

If we really do live in the Galbraithian world of the all-powerful corporation how can failures such as these occur. The corporation with power overs its markets and consumers surely can get consumers to buy their products no matter what. Isn't this the very definition and purpose of market power?

And yet we see many examples of product failures, situations where consumers determined the markets outcome rather than the corporation. Perhaps, therefore, we need to be more skeptical of those who tell us that corporations have overwhelming corporate "power".

Update: Tim Worstall adds Microsoft's dismal record with Nokia to the list of failure for supposedly all powerful companies.

Price dispersion and the internet

One advantage one should see resulting from the advent of online shopping is a reduction in price dispersion. After all it is cheap and easy to checkout the price of any goods we want on the web pages of many different sellers. And there are now websites that will do the checking for you. So you would expect to see the prices of a given good converging.

But does this happen?

As an example I checked out the pre-order price of my forthcoming book.

The publisher lists the book at 95 pounds, around NZ$199. A British bookseller lists it at NZ$180. A US booksellers has the book at US$160 or around NZ$230 . An Australian website will sell you the book for AUS$251 or approximately NZ$266. So a wide range of prices on offer.

But the strangest set of prices come from two New Zealand based retailers, one of whom lists the book at NZ$355 and the other at NZ$184!

Now I'm not sure the book is worth any of those prices but clearly it pays to shop around.

The question all this raises with me is why such a range of prices? Low search costs should result in a much lower price range. Do retailers know something economists don't? Do they know that there are transactions costs to search that means people do a lot less of it than economists assume? If so, what are those costs? If search costs are low then why the price dispersion? It could be a thin market problem. The market for economics books on the theory of the firm could so small that price competition doesn't occur. Or it could be that those few people who want such a book have a high willingness to pay and a high opportunity cost of search time so the first seller they come to is the one they go with. Seems unlikely to me.

Macro Musings podcast: George Selgin

From David Beckworth’s new podcast series, Macro Musings comes this audio of an interview with George Selgin.

My latest Macro Musings podcast is with George Selgin, director of the Cato Institute's Center for Monetary and Financial Alternatives. We discuss in depth Selgin's call for a a Productivity Norm, a nominal income target for central banks that would result in inflation moving inversely with expected productivity growth. That is, he would have central banks stabilize aggregate demand growth but allow more price level flexibility based on technological advances. Along the way we cover the difference between benign and malign deflation and look, examine some of the historical cases of deflation, and discuss the recent productivity surge of the late 1990s and early 2000s.

It was a great conversation with George. Those listeners wanting more information on his Productivity Norm target for central banks should check out the links below.

A more complete but readable discussion of the productivity norm idea is given in IEA's book "Less than Zero: the Case for a Falling Price Level in a Growing Economy" (pdf) by George Selgin

Do witchcraft beliefs halt economic progress?

An interesting, but not often asked question. And the answer may be yes.

Believing in witchcraft is a salient feature of daily life in many parts of the world. In worst-case scenarios, such beliefs lead to murder, and they may also cause destruction of property or societal ostracism of the accused witches. The first large-scale economics study to explore beliefs in witchcraft, broadly defined as the use of supernatural techniques to harm others or acquire wealth, links such beliefs to the erosion of social capital.

Where witchcraft beliefs are widespread, American University Economics Professor Boris Gershman found high levels of mistrust exist among people. Gershman also found a negative relationship between witchcraft beliefs and other metrics of social capital relied upon for a functioning society, including religious participation and charitable giving.

It's long been argued that witchcraft beliefs impede economic progress and disrupt social relations, and Gershman's statistical analysis supports that theory.

and

"Witchcraft beliefs are likely to erode trust and cooperation due to fears of witchcraft attacks and accusations. The evil eye leads to underinvestment and other forms of unproductive behavior due to the fear of destructive envy, where envy is likely to manifest in destruction and vandalism involving those who own wealth," Gershman said.

The research behind this is Boris Gershman, Witchcraft beliefs and the erosion of social capital: Evidence from Sub-Saharan Africa and beyond, Journal of Development Economics (2016).

A summary of the paper is available here.