Monday, 20 February 2017

Some thoughts on the role of firms and government interference in the market

This is from the third instalment in (oddly named - seems more pro-state than anything) ProMarket's new interview series on the economic theory of the firm. In this instalment, they ask Chicago Booth’s Steven Kaplan how the existing theory should be modified. Kaplan is the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business.
Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big an omission do you think this is?

I am a bit confused. Hasn’t the idea of regulatory capture and, implicitly, political engagement, been a subject of economic study since George Stigler’s “Theory of Economic Regulation” in 1971? In other words, it would be a big omission if, in fact, it were omitted. In reality, economists have paid attention to political engagement for a long time.

Q: To what extent is political engagement by corporations responsible for the current populist discontent?

Very little. The biggest source of populist discontent is the dislocation caused by technological change and globalization. That dislocation has made the global economy much better off overall. The global poverty rate has declined substantially. Billions of people now earn a living rather than starving. It is a huge success. As Nobel Prize winner Angus Deaton wrote, “Life is better now than at almost any time in history. More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die.” At the same time, this success has challenged the less skilled in developed countries—particularly the U.S. and Western Europe.

The second biggest source of discontent comes from the policies implemented in those countries that make it more expensive to hire less skilled workers. Raising the minimum wage, licensing rules, and other employment mandates increase the costs of hiring less skilled workers. At the same time, technology and globalization reduce the costs of substitutes. The net effect is fewer jobs. France is the best example. Germany is one of the few countries that moved in the opposite direction and has had less of an employment problem. Immigration policies also have fueled discontent.

Political engagement by corporations would be far down the list of important forces.
The basic issue being discussed is that the standard (economic) theory of the firm is silent on the role firms can play in shaping the rules of the game under which they operate. It is argued that in reality, many firms lobby politicians and try to capture regulators in order to modify the rules of the game in their favour.

What I do find strange is 1) Its not clear what exactly they mean by the "standard economic theory of the firm". At times they seem to talk about the neoclassical theory of the firm as if it is in fact a theory of the firm but has Coase pointed out many years ago it's not. If they are not talking about the neoclassical model then what are they talking about? As I have written,
While the post-1970 theory of the firm literature has began the task of developing a genuine understanding of the firm, and closely related issues, it has yet to coalesce around one model or even one group of models. Even within the contemporary mainstream there are a number of competing models, to say nothing of those we could add into the mix if we were to consider the heterodox literature.
2) I’m not sure what they are talking about is a problem with the theory of the firm, they seem to be talking more about a theory of government or regulation or pressure groups or some such thing. Yes firms can influence government policies but so can churches, trade unions, environmental groups etc as well. So I’m not sure their issue is one to do with the theory of the firm as such. 3) As Kaplan points out economists have been thinking about these issues for a long time, even if not as part of the theory of the firm. But as I say in 2) its not clear to me that it is part of the theory of the firm. It's a wider issue than to do with just firms.

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