Friday, 21 September 2018

F. A. Hayek: Economics, Political Economy and Social Philosophy

From the Cato Institute comes this audio of an interview of Peter J. Boettke by Caleb O. Brown about Boettke's new book on F. A. Hayek.
The project of F. A. Hayek had its historical context, and it’s worth exploring. Peter J. Boettke is author of F.A. Hayek: Economics, Political Economy and Social Philosophy.

Wednesday, 19 September 2018

Series of Unsurprising Results in Economics (SURE)

If you, or your students, are looking for somewhere to publish your unsurprising results think about the new journal Series of Unsurprising Results in Economics (SURE).

SURE is an e-journal of high-quality research with “unsurprising”/confirmatory results and as such aims to mitigate the publication bias towards provocative and statistically significant findings.
Aim and Scope
The Series of Unsurprising Results in Economics (SURE) is an e-journal of high-quality research with “unsurprising” findings.

We publish scientifically important and carefully-executed studies with statistically insignificant or otherwise unsurprising results. Studies from all fields of Economics will be considered. SURE is an open-access journal and there are no submission charges.

SURE benefits readers by:
  • Mitigating the publication bias and thus complementing other journals in an effort to provide a complete account of the state of affairs;
  • Serving as a repository of potential (and tentative) “dead ends” in Economics research.
SURE benefits writers by:
  • Providing an outlet for interesting, high-quality, but “risky” (in terms of uncertain results) research projects;
  • Decreasing incentives to data-mine, change theories and hypotheses ex post or exclusively focus on provocative topics.
The editor is Dr Andrea K. Menclova, Department of Economics and Finance, University of Canterbury

To learn more, please visit:

Tuesday, 18 September 2018

The employment effects of minimum wages

There is a new NBER working paper out on The Econometrics and Economics of the Employment Effects of Minimum Wages: Getting from Known Unknowns to Known Knowns by David Neumark.

The abstract reads:
I discuss the econometrics and the economics of past research on the effects of minimum wages on employment in the United States. My intent is to try to identify key questions raised in the recent literature, and some from the earlier literature, that I think hold the most promise for understanding the conflicting evidence and arriving at a more definitive answer about the employment effects of minimum wages. My secondary goal is to discuss how we can narrow the range of uncertainty about the likely effects of the large minimum wage increases becoming more prevalent in the United States. I discuss some insights from both theory and past evidence that may be informative about the effects of high minimum wages, although one might argue that we first need to do more to settle the question of the effects of past, smaller increases on which we have more evidence (hence my first goal). But I also try to emphasize what research can be done now and in the near future to provide useful evidence to policymakers on the results of the coming high minimum wage experiment, whether in the United States or in other countries.

Discriminating firms suffer

A new working paper looks at the effects of the forced removal of Jewish managers affected the performance of firms in Nazi Germany. The is "Discrimination, Managers, and Firm Performance: Evidence from “Aryanizations” in Nazi Germany" and is by Kilian Huber (University of Chicago), Volker Lindenthal (University of Freiburg) and Fabian Waldinger (London School of Economics).

The paper shows, what you may expect, in that firms which discriminated against Jewish managers, suffered significant loses in performance.
We study whether antisemitic discrimination in Nazi Germany had economic effects. Specifically, we investigate how the forced removal of Jewish managers affected large German firms. We collect new data from historical sources on the characteristics of senior managers, stock prices, dividends, and returns on assets for firms listed on the Berlin Stock Exchange. After the removal of the Jewish managers, the senior managers at affected firms had fewer university degrees, less experience, and fewer connections to other firms. The loss of Jewish managers significantly and persistently reduced the stock prices of affected firms for at least 10 years after the Nazis came to power. We find particularly strong reductions for firms where the removal of the Jewish managers led to large decreases in managerial connections to other frms and in the number of university-educated managers. Dividend payments and returns on assets also declined. A back-of-the-envelope calculation suggests that the aggregate market valuation of firms listed in Berlin fell by 1.78 percent of German GNP. These findings imply that discrimination can lead to significant economic losses and that individual managers can be key to the success of firms.
So a non-discriminating firm (assuming there were some) would have a competitive advantage.

Monday, 17 September 2018

Pierre Lemieux on Peter Navarro's conversion

In the latest issue of Regulation, Pierre Lemieux writes on Peter Navarro's Conversion.
Navarro is an economist and director of the Office of Trade and Manufacturing Policy (OTMP), a White House agency created by President Trump. He is one of the rare economists to occupy a high-level advisory role in the White House. A Harvard University Ph.D., he is a stiff protectionist, which is rare among economists
Rare is something of an understatement!

Lemieux writes that
Navarro makes five distinct arguments against open trade with China and other countries. They can be summarized as follows:
  • The impossible-competition argument: We cannot compete against a dirigiste and even totalitarian country like China. Trying to do so generates negative externalities.
  • The fairness argument: “Unfair” trade is not free trade and is destroying the American economy.
  • The trade deficit argument: The U.S. trade deficit is a serious problem that reduces gross domestic product and indicates unfair trade.
  • The retaliation argument: Retaliatory protectionist measures are justified against protectionist countries; such retaliators are the real free-traders.
  • The national security argument: Protectionism is required for reasons of national security.
Lemieux then examines each of these arguments and show what is wrong with them.

Lemieux concludes by saying,
Writing for Foreign Policy in March 2017, journalist Melissa Chan depicts Navarro as motivated by his love of media attention and his longing for political fame. He ran for public office several times, always unsuccessfully, and “morphed from registered Republican, to Independent, to Democrat, and back to Republican.” According to Chan, he is derided by well-regarded China analysts. Disregarding psychological and political speculations, one thing is sure: his arguments are not based on economic analysis.

To summarize my arguments, economics strongly suggests that the best trade policy is not to have one, to leave citizens alone to import or export as they wish. That’s true whether the country’s trading partners are free-traders or dirigistes like China. Free enterprise and economic freedom are not only efficient, they are what fairness is or should be about. There is no reason to be concerned with the trade deficit, except to the extent that it is caused by federal profligacy, in which case the solution is to solve the root cause of the problem. Retaliation only compounds other countries’ protectionism. National security is an easy protectionist excuse. Building a war economy in peace time is not acceptable in a free society.

The maintenance of economic freedom at home—which includes the freedom to import what one wants if one finds the terms agreeable—is the only individualist, coherent, and realistic policy. The young Peter Navarro seemed to understand that. Sadly, today’s Navarro does not.
Trump's trade policies have done the almost impossible, they have united economists across the entire political spectrum Unfortunately for Trump, they are united against him and the policies that Navarro has been advocating.

Things are not going well in Venezuela

Joshua Curzon at the Adam Smith Institute blog writes,
Hyperinflation in Venezuela has reached astonishing levels, making life extraordinarily difficult for ordinary people and causing immense economic damage. Inflation is currently running at some 200,000 per cent and is projected by the IMF to reach 1 million percent by the end of the year.
and he adds,
Using the salary of a full college professor as a benchmark, in the 1980s it took around 15 minutes of earnings to pay for one kilo of beef. In July 2017, this professor needed to work for 18 hours to pay for the same quantity. In mid-2018 he must work longer still, in the unlikely event beef can be found.

Prices are increasing at an ever faster rate. A large coffee with milk cost at least Bs.S.80 (Bs. 8,000,000) in Caracas on the 11th of September 2018, 78% more than the price of week before, and double what it cost 15 days ago and 220% more than five weeks ago.
As in all hyperinflations, the problems is that the government is printing too much money. Way too much!!
Venezuela’s monetary base – the amount of money printed by the government – increased by an extraordinary 30% in one week alone at the end of August. The move by the regime to remove 5 zeros from the currency and place greater emphasis on its Petro cryptocurrency (since revealed by a Reuters investigation to be largely imaginary) seems to have been a smokescreen for even greater money-printing.

In fact, it seems that physically printing money is beyond the means of the regime. As Venezuela’s banknotes are printed abroad, they have to be imported at significant cost to the government, which has led to severe shortages of physical cash. Since 2014, the number of active ATMS has plummeted to around 9,000, while card readers have multiplied.
But why print this amount of money, given you know what will happen?
The regime is printing money because it has little other means of staying afloat. It has largely destroyed the private sector through nationalisation and price control. Oil output is at its lowest level in more than 50 years and foreign reserves are at the same level as 1974 and plummeting downwards.
Hyperinflation is just another sign, if you needed one, that the regime's economic policies are just not working. You have to wonder just how long this can go on. Hopefully not too long.

Thursday, 13 September 2018

Stalin: Waiting for Hitler, 1929-1941

Stephen Kotkin talks about his new book Stalin: Waiting for Hitler, 1929-1941.
In 1941, history’s largest, most horrific war ever broke out, between the Soviet Union and Nazi Germany. Some 55 million people were killed worldwide in WWII, half in the Soviet Union. Who was Joseph Stalin? Who was Adolf Hitler? Why did they clash? This lecture, based upon a book of the same name, uses a vast array of once secret documents to trace the rise of Soviet Communism and its deadly rivalry with Nazism. It analyzes why Great Powers go to war against each other, delivering lessons for today.

Saturday, 8 September 2018

Problems with the "Living Standards Framework"

In the latest issue of Insights from the New Zealand Initiative Matt Burgess writes on the problems he's been having with the "new Living Standards Framework upgrade for Siri, based on work by the experts in the New Zealand Treasury". He writes,
In fact, the new Siri was quite limited. Throughout its years of development, managers had asked that the geniuses writing the code include some way to understand trade-offs between the five living standards objectives. In the end it was decided that “opportunity cost” was simply an intellectual concept, had no practical use, and attempting to include it could break the whole application.

And anyway, hardly anybody in the building had even heard of opportunity cost – how important could it be? – and so the application shipped without it.
This gets at one of the two basic questions about Treasury's "Living Standards Framework" I've had for some time now. Just how do they plan to trade-off one dimension in the framework against another? The second question is, Given that all the dimensions seem positively correlated with economic growth, what the point? Why not just concentrate on economic growth?

Maybe future upgrades to Siri will come with answers to these questions. We can hope.

Annotation in the JEL

The Journal of Economic Literature, a journal of the American Economic Association, sets out to fulfil the following policy:
Our policy is to annotate all English-language books on economics and related subjects that are sent to us. A very small number of foreign-language books are called to our attention and annotated by our consulting editors or others. Our staff does not monitor and order books published; therefore, if an annotation of a book does not appear six months after the publication date, please write to us or the publisher concerning the book.
In Vol. 56 No. 3 September 2018 it annotated one of the two greatest books ever written:

Now go and buy a copy, many copies!!

Monday, 3 September 2018

You know your country is in trouble when .............

When people abandon a country in droves, it is rarely a sign of a healthy economy. 2.3 million Venezuelans (7% of the population) have fled poverty and economic despair, and another 2 million are predicted to leave over the next year and a half. For scale, imagine if half of London’s population left the UK, and the other half were about to leave. And we may be underestimating the crisis, since the situation is rapidly becoming nightmarish.

Hyperinflation has risen above 61,000% and is predicted by the IMF to reach 1,000,000% by the end of the year. When inflation runs this high, the lag between tax assessments and payments means that inflation wipes out the real value of taxes. This forces the government to print yet more money in a hyperinflationary death spiral. The recent botched operation to remove five zeros from banknotes has only caused further panic and confusion among the population.
This is from Jamie Nugent and Joshua Curzon at the Adam Smith Institute blog in a posting on Venezuela Campaign: A Country in a Death Spiral.

The only real question is how long will be until Venezuela hits rock bottom and just how bad will things be for the people when it does? Recovery will be long and hard.

Monica de Bolle on the economic challenges facing Argentina and Venezuela

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Monica de Bolle on Argentina and Venezuela.

Monica de Bolle is a senior fellow at the Peterson Institute for International Economics and an associate professor at Johns Hopkins University. Monica is published widely on the subject of Latin American economies, and she joins the show today to explain some of the recent financial and economic developments in Argentina and Venezuela. David and Monica also analyze the political atmosphere and policy environment that led to Argentina’s current economic hardships and discuss where the country might be if they had not pursued such policies.

Friday, 24 August 2018

Alt right and right wing collectivism (Jeffrey Tucker pt. 2)

Dave Rubin interviews Jeffrey Tucker (Editorial Director for the American Institute for Economic Research) in two parts. Part 2 here covers the Alt Right and Right Wing Collectivism.

Can liberalism be saved? (Jeffrey Tucker pt. 1)

Dave Rubin interviews Jeffrey Tucker (Editorial Director for the American Institute for Economic Research) in two parts. Part 1 here covers the history and meaning of liberalism.

The ownership of firms

Who owns a firm and why? Investor-owned firms are the most common form of ownership for large-scale enterprises in most of the world, but in a market economy there are a number of other forms of ownership which are commonly utilised. We see, in many sectors of the economy, producer cooperative, customer cooperatives, nonprofit firms and mutual enterprises. Why? What determines who owns a firm?

This is a question addressed by Hansmann (1988, 1996, 2013). To understand Hansmann's theory of firm ownership we first need two definitions. Hansmann defines a firm's owners to be those persons who have two formal rights: the right to control the firm and the right to appropriate the firm's profits. That is, owners have control and income rights over the firm(1). Compare this to the property rights approach to the firm which see a firm's owners as those who have just control rights over the firm. Note also that this definition means some firms do not have owners. In nonprofit firms the control rights are separated from the income rights, no one can receive the residual earnings, meaning such firms are ownerless. A second useful definition is that of a firm's "patrons". Patrons are those persons who transact with the firm either as purchases of the firm's outputs or as suppliers of factors of production to the firm.

Significantly nearly all large firms are owned by persons who are also patrons.
"In principle, a firm could be owned by someone who is not a patron. Such a firm's capital needs would be met entirely by borrowing; its other factors of production would likewise be purchased on the market, and its products would be sold on the market. The owner(s) would simply have the right to control the firm and to appropriate its (positive or negative) residual earnings. Such firms are rare, however" (Hansmann 1988: 272).
"[i]f a firm were entirely owned by persons who were not among the firm's patrons, then all the firm's transactions involving inputs and outputs would take the form of market contracting. Although feasible in principle, in practice this is likely to be quite inefficient. Market contracting can be costly, especially in the presence of one or more of those conditions loosely termed ``market failure"-for example, where there is an absence of effective competition, or where one of the parties is at a substantial informational disadvantage. [\dots] For the present we need simply note that, where these costs are high, they can often be reduced by having the purchaser own the seller or vice versa. When both the purchaser and the seller are under common ownership, the incentive for one party to exploit the other by taking advantage of market imperfections is reduced or eliminated. Assigning ownership of a firm to one or another class of the firm's patrons can thus often reduce the costs of transacting with those patrons-costs that would otherwise be borne by the firm or its patrons. To assign ownership to someone who is not among the firm's patrons would waste the opportunity to use ownership to reduce these costs" (Hansmann 1996: 20).
There are two basic types of relationship between firms and patrons, a "market contract" or "ownership". Under a market contract the patron interacts with the firm only through a contract and is not an owner. Under ownership the patron is also an owner of the firm.

This raises an obvious question of what are the costs of contracting and of ownership? We will briefly survey the most significant types of costs that arise with market contracting and ownership.

The costs of contracting include market power, "lock-in", asymmetric information and the risks of long-term contracting.

In some situations a firm can have market power with respect to some of its patrons. The affected group of patrons have an incentive to own the firm to avoid price exploitation. For example, if the firm has monopoly power with respect to its customers, the customers could takeover and reorganise the firm as a consumer cooperative. Or if the firm has monopsony power with regard to its suppliers, the suppliers could create a producer cooperative as a way to avoid receiving the monopsony price (Hansmann 1996: 24-5).

Monopolistic exploitation can occur after a person has been dealing with the firm for sometime, even if at the beginning of the relationship there was competition for which firm the patron would contract with. Such ``lock-in" can occur if the patron has to make transaction-specific investments, which have little or no value outside of the relationship, and the contract between the firm and the patron is incomplete so that not all important aspects of future transactions can be specified in an ex-ante contract. This leaves the patron open to ex-post exploitation by the firm. Assigning ownership to the effected patrons mitigates the effects of such lock-in. This can be, for example, one reason for worker ownership of firms where firm-specific investment is required by the workers (Hansmann 1996: 25-6).

Asymmetric information can increase contracting costs via both moral hazard and adverse selection. If, for example, a firm knows more about the quality of its products than consumers know, then the firm may offer lower quality products than it says it will. This is the "lemons" problem (adverse selection) made famous by Akerlof (1970). In such situations consumer ownership has the advantage that it reduces the incentive for the firm to exploit its informational advantage. Consumers will not exploit themselves. Another example would be where workers know more about their effort levels than the firm knows. This gives rise to moral hazard issues. Worker ownership could act to reduce the incentive for workers to act opportunistically, since as owners the workers suffer more if effort levels are low. They also are likely to be better at monitoring each others level of effort. Asymmetric information can also give rise to strategic bargaining. A firm's management has private information about the firm and the firm's patrons have private information about their preferences and opportunities. If the patrons do not own the firm then each group has little incentive to reveal their information. Each group can use their private information strategically when bargaining with the other and thus increase the costs of negotiation. Patrons ownership reduces strategic behaviour since it decreases the incentive to hide information or to take advantage of information the other party lacks (Hansmann 1996: 27-9).

When patrons can not credibly communicate their preferences the costs associated with contracting increase. Not knowing patrons true preferences the firm's management may not be able to determine the least-cost combination of contractual terms that satisfies the firm's patrons. In addition patrons have an incentive to misrepresent their preferences to their strategic advantage. Ownership by patrons reduces the conflict of interest between patrons and owners and thus makes communication easier (Hansmann 1996: 30).

It is often the case that firms have to treat all patrons in a given class the same even when individual patrons in that class have different preferences. In such a case market contracting may result in an inefficient compromise being made among the patrons' differing preferences. This is because market contracting satisfies the preferences of the marginal patron whereas efficiency generally requires the choosing of conditions that satisfy the preferences of the average patron(2), and the marginal and average preferences can be very different. When patrons own the firms and a voting rule - in particular the majority rule - is used to make decisions then the results tends to favour the median patron rather than the marginal. The median will not in general be the average, but it will likely be closer than the marginal. Thus patron ownership has an advantage in decision making when patrons preferences differ (Hansmann 1996: 30-1).

Long-term contracting comes with its own problems. One such issue is that transaction-specific investment can leave one of the parties exposed to opportunistic behaviour by the other. Another is how can the parties allocate specific risks between them. Yet another issue is how can the parties mitigate the problems of adverse selection that occur in insurance and related markets (Hansmann 1996: 27).

Next Hansmann considers the costs of ownership, which involve risk bearing, principal agent problems and collective decision making.

One group of patrons may be able to better bear the risks associated with owning the firm than others. They may, for example, be better able to diversify their investments. Assigning ownership to this group can bring important economies. This is a common argument for having investors as the owners of a firm. However, Hansmann argues that investors are not the only low-cost risk bearers and that the evidence suggests that the importance of risk bearing as a reason for investor-ownership is overstated (Hansmann 1996: 44-5).

Hansmann (1996: 35-8) divides agency costs onto two board groups, costs of monitoring the firm's managers and the cost of opportunism by the managers given they can not be perfectly monitored. For effective monitoring of the managers, patrons must: 1. inform themselves about the operations of the firm and 2. communicate among themselves to exchange information and made decisions and enforce those decisions upon the managers. Each of these activities is costly but the costs will vary among the different groups of patrons. Patrons who transact with the firm frequency, for important transactions, over a long period of time will, most likely, be better informed about the firm. The ease of organising patrons for collective action will also affect the costs of monitoring. Thus patrons who are physically closer to one another and the firm will have lower costs. The size of the group of patrons will also affect monitoring costs. Given the public good nature of monitoring the larger is the group, the smaller is any individual's share of potential gains from monitoring, and thus the smaller is the incentive to monitor. Therefore when the group of patrons is large it can be prohibitively expensive for the owners to undertake effective monitoring.
"In itself, this [costly monitoring] argues for smallest group of owners possible--preferably a single owner. The fact that, despite this, a large firm often has a very large class of owners therefore suggests that either or both of two things must be true. First, the costs of market contracting would be much higher under any alternative assignment of ownership. Second, the costs of managerial opportunism are modest even though the firm's owners cannot actively supervise the managers" (Hansmann 1996: 36-7).
Managerial opportunism can be thought of as being divided into two groups: self-dealing ("putting their hand in the till") and deliberate managerial inefficiency. There are a number of sanction on self-dealing that do not require collective action by the firm's owners. There are moral, contractual, tort and criminal actions that can be taken against a transgressing manager which, for the most part, limit self-dealing activities. While self-dealing may be limited, this does not mean that managers always work hard and make the best commercial decisions. Managers may not always be acting in the best interests of the owners. But Hansmann argues that for the types of people who win the winner-takes-all management type contest and make it to the top of the management hierarchy pride and moral suasion provides important motivation. Also the need for the firm to prosper so that a manager's career can be enhanced provides additional incentive for effort. But Hansmann, more controversially, argues that the potential gains from better monitoring are often exaggerated. There is one area in which Hansmann does think managers may be able to act against the interests of owners, excessive retention of earnings. Retentions provide managers with a buffer against adverse times, enhance the survival of the firm and increase the size of the firm the manager controls. But retentions are costly to owners if the rate of return on retentions is lower than that on outside investments or if retentions can not be recovered by the current owners. This is seen in some mutuals and cooperatives.

Hansmann explains that in most firms collective decision making is enacted via some form of voting scheme. But when the interests of owners are diverse such schemes involve costs. Such costs fall into two general groups: costs from inefficient decisions and costs of the decision making process, see Hansmann (1996: 39-44).

As has already been noted majority voting leads to the outcome which is preferred by the median voter while efficiency requires the outcome preferred by the average voter. Where these two preferences differ it can lead to inefficient decisions. Also the decision making process can become dominated by the majority even when the costs of the agreed outcome are greater than the benefits. Hansmann gives the example of a broken lift in a hypothetical four-story cooperative apartment building. If residents on the first two floor don't use the lift and outnumber those on the top two floors then a vote would result in the cheapest method of repair being chosen rather than the quickest, despite the fact that any money saved could be less than the pecuniary and nonpecuniary costs borne by the top floor residents. Alternatively the decision process could be dominated by a motivated, better informed, if unrepresentative minority resulting, again, in an inefficient outcome. All that is needed for a costly outcome is for the dominant decision makers' self interest to be given greater weight than the interests of others.

The process of collective choice can be costly in and of itself. Time and resources must be invested to obtain information about the firm and other patron's preferences as well as in attending meetings and carrying out other activities required to reach and enforce decisions. The possibility of voting cycles increase as differences in preferences among patrons increase. This can be costly if it results in continued alterations to a firm's policies. Such cycles also give power to whomever gets to set the voting agenda. Setting the agenda strategically can help the setter get the outcome they want. Strategic behaviour by owners will also increase costs via the costs of hiding or finding information or making and breaking coalitions.

But the costs of collective decision making need not be large even when the owners of the firm have heterogeneous interests as long as there is a simple criteria for harmonising those interests. If there is not then reaching agreement can be long and costly. Think of a worker owned firm where the workers differ in the work they do. Reaching agreement on the division of earnings may be straightforward as long as it is easy to account for the net benefits to the firm of each owner's efforts. If, on the other hand, it is difficult to measure every owner's net benefits then agreement may be difficult to reach.

The process of collective decision making may bring benefits to participants as well as costs. Hansmann identifies three such benefits. First, individuals may enjoy the experience of participating in decision making as a social activity in and of itself. Second, it can be argued with regard to worker ownership that workers gain psychological satisfaction from being in control, that is, from participating directly in decision making. Third, again with regard to worker ownership, participation in the firm's decision making process is useful training for participation in the democratic processes of society in general. Hansmann does note however that while such benefits are real the evidence suggests that they do not outweigh the costs of collective decision making.

The takeaway message from Hansmann is that
"[t]he preceding survey points to several reasons for the dominance of investor-owned firms in market economies. One is that contracting costs for capital are often relatively high as compared with contracting costs for other inputs--including labor--and for most products. A second reason is that, however poorly situated investors may be to exercise effective control, there is seldom any other group of patrons who are in a better position to assert control. Where either of these conditions fails, other forms of ownership arise. Thus, when there are serious imperfections in the firm's product or factor markets, the firm is often organized as a consumer or producer cooperative or as a nonprofit. Similarly, when some group of patrons other than suppliers of capital is in a good position to exercise collective control, consumer or producer cooperatives often arise even when the patrons in question are faced with only modest problems of market failure. This suggests either that the effectiveness of the oversight exercised by shareholders--even with the assistance of the market for corporate control--is distinctly limited or that other factors may be more important in constraining managerial opportunism.

In determining whether the costs of ownership are manageable for a given class of patrons, homogeneity of interest appears to be an especially important consideration. In particular, it is evidently a significant factor in the widespread success of the modern investor-owned business corporation, and it may be among the best explanations for the relative paucity of worker­ owned firms, which otherwise have some significant efficiency advantages" (Hansmann 1988: 301-2).
  1. While having both sets of right controlled by the same people is not necessary it is the most common form of allocation. For efficiency reason you would expect that both sets of rights would be held together. Put simply control rights give you the ability to do things while income rights give you the incentive to do things. Having them controlled by the same people lowers the cost of achieving an efficient outcome.
  2. In a footnote Hansmann makes reference to Spence (1975) as an explanation for this result. See Krouse (1990: section 6.1) for a simple exposition of Spence's result. There is a result from public choice theory that says for a public good the Pareto efficient quantity of the good is the same as the medians' voters demand only if the median voter is also the average voter. So when the median and average differ the result is inefficient.

  • Akerlof, George A. (1970). 'The Market for 'Lemons': Quality Uncertainty and the Market Mechanism', Quarterly Journal of Economics 84(3) August: 488-500.
  • Hansmann, Henry (1988). 'Ownership of the Firm', Journal of Law, Economics, & Organization, 4(2) Autumn: 267-304.
  • Hansmann, Henry (1996). The Ownership of Enterprise, Cambridge, Mass: Harvard University Press.
  • Hansmann, Henry (2013) 'Ownership and Organizational Form'. In Robert Gibbons and John Roberts (eds.), The Handbook of Organizational Economics (pp. 891-917), Princeton: Princeton University Press.

Joseph Stalin: Waiting For Hitler

Peter Robinson at Uncommon Knowledge of the Hoover Institution interviews Stephen Kotkin about his book Joseph Stalin: Waiting For Hitler.

“If you're interested in power, [if] you're interested in how power is accumulated and exercised, and what the consequences are, the subject of Stalin is just unbelievably deep, it's bottomless.” – Stephen Kotkin

In part two, Stephen Kotkin, author of Stalin: Waiting for Hitler, 1929–1941, discusses the relationship between Joseph Stalin and Adolf Hitler leading up to and throughout World War II. Kotkin describes what motivated Stalin to make the Molotov-Ribbentrop Pact with Hitler and the consequences of his decision.

Kotkin dives into the history of the USSR and its relationship with Germany during WWII, analyzing the two leaders' decisions, strategies, and thought processes. He explains Stalin's and Hitler’s motivations to enter into the Molotov-Ribbentrop Pact even without the support of their respective regimes. Stalin’s goal was to defeat the West and he saw the pact as an opportunity to do so by driving a wedge between Germany and the capitalist West. Kotkin analyzes Stalin’s decisions leading up to the Nazi invasion of the Soviet Union and the disinformation Germany was feeding soviet spies to prevent Stalin from moving against Hitler first.

Thursday, 23 August 2018

Why does Joseph Stalin matter?

Peter Robinson at Uncommon Knowledge of the Hoover Institution interviews Stephen Kotkin about Joseph Stalin and collectivisation and the great terror.

“Joseph Stalin, Soviet dictator, creator of great power, and destroyer of tens of millions of lives …” Thus begins this episode of Uncommon Knowledge, which dives into the biography of Joseph Stalin. This episode’s guest, Stephen Kotkin, author of "Stalin: Waiting for Hitler, 1929-1941", examines the political career of Joseph Stalin in the years leading up to World War II, his domination over the Soviet Union, and the terror he inspired by the Great Purge from 1936–38.

“Why does Joseph Stalin matter?” is a key question for Kotkin, as he explains the history of the Soviet Union and Stalin's enduring impact on his country and the world. Kotkin argues that Stalin is the “gold standard for dictatorships” in regard to the amount of power he managed to obtain and wield throughout his lifetime. Stalin stands out because not only was he able to build a massive amount of military power, he managed to stay in power for three decades, much longer than any comparable dictator.

Kotkin and Robinson discuss collectivization and communism and how Stalin’s regime believed it had to eradicate capitalism within the USSR even in regions where capitalism was bringing economic success to the peasants, with the potential of destabilizing the regime. This led to the Great Purge, a campaign of political repression that resulted in the exile and execution of millions of people.

Monday, 20 August 2018

Competition and firm productivity

Using data on Portuguese firms this new working paper looks at the relationship between competition and firm productivity. And, not too surprisingly, finds a positive relationship between competition and both total factor productivity and labour productivity.

Competition and Firm Productivity: Evidence from Portugal

Pedro Carvalho
This paper presents empirical evidence on the impact of competition on firm productivity for the Portuguese economy. To that effect, firm-level panel data comprising information between 2010 and 2015 gathered from the Integrated Business Accounts System (Portuguese acronym: SCIE) is used. The database enables the construction of economic and financial indicators, which allow for isolating the impact of competition on firm-level productivity. We find a positive relationship between competition and both total factor productivity and labor productivity. This relationship is found to be robust to different specifications and in accordance with the results in the literature obtained for other countries.

Saturday, 18 August 2018

Henry Hansmann on codetermination

Codetermination is the practice of workers of a firm being able to vote for representatives on the board of directors in an enterprise. It has been getting a bit of press lately, in the US at least, thanks to a new bill from Senator Elizabeth Warren. When thinking about whether codetermination is a good thing or not it's useful to ask who should own a company and why. In his article 'Ownership of the Firm' Henry Hansmann makes a simple but important point about a firm's owners,
"In determining whether the costs of ownership are manageable for a given class of patrons, homogeneity of interest appears to be an especially important consideration. In particular, it is evidently a significant factor in the widespread success of the modern investor-owned business corporation, and it may be among the best explanations for the relative paucity of worker­owned firms, which otherwise have some significant efficiency advantages" (Hansmann 1988: 301-2).
Heterogeneity of interests can increase the firm's costs of decision making substantially. Codetermination seems to be the very opposite of 'homogeneity of interest' in that it deliberately sets out to increase the 'heterogeneity of interest'.

When discussing the German experience with codetermination in his book "The Ownership of Enterprise" Hansmann writes,
"[...] the worker representatives on the board represent constituencies with diverse interests. The legally mandated system for selecting worker representatives reinforces this, because it requires that there be at least one representative from each of three classes of workers: wage earners, salaried employees, and managerial employees" (Hansmann 1996: 111)
Hansmann goes on the say
"From all that has been said above, one would not expect that this system of representation would be highly viable as a means of governing the firm. Given the apparent difficulty of making collective self-governance workable for employees alone when the labor force is heterogeneous, it would be surprising if a firm's electoral mechanisms, including voting for and within the board of directors, could effectively be employed not only to resolve conflicts among different groups of employees but also to deal with the more serious conflicts of interest between labor and capital" (Hansmann 1996: 111)
Hansmann then notes
"The German expereince does not clearly belie that expectation" (Hansmann 1996: 111).
Hansmann then raises an important point about codetermination,
"[...] codetermination has been imposed upon German firms by force of law; no similar system seems to have been adopted by any significant number of firms either inside or outside of Germany in the absence of compulsion" (Hansmann 1996: 111).
You have to ask, if codetermination is so good for the firm why isn't it adopted voluntarily?

  • Hansmann, Henry (1988). 'Ownership of the Firm', Journal of Law, Economics, and Organization, 4(2) Autumn: 267-304.
  • Hansmann, Henry (1996). The Ownership of Enterprise, Cambridge, Mass: Harvard University Press.

An interview of Ross Emmett

From the Smith and Marx Walk into a Bar: A History of Economics Podcast comes this interview of Ross Emmett by Scott Scheall.

In this wide-ranging episode, co-host Scott Scheall interviews Ross Emmett, Professor of Political Economy and Director of the Center for the Study of Economic Liberty at Arizona State University. Discussion topics include Ross's work on Frank Knight and the circle of economists around Knight at the University of Chicago, Robert Malthus's contributions to economics, and Ross's friendship with the influential historian of economic thought Warren Samuels.

Friday, 17 August 2018

Horizontal integration can be good for you

It has long been recognised that vertical integration can enhance efficiency. It can deal with hold-up problems etc. But horizontal integration has been looked at with much more suspicion.
The conventional view is that anticompetitive mergers increase industry concentration and hence increase market power, harm competition ex post, and therefore need to be carefully reviewed and possibly restricted by regulators. Hence, regulators, such as the Antitrust Division of the Department of Justice or the Federal Trade Commission, have the mandate to prevent situations that “excessively” transfer welfare from consumers to firms via buildups of dominant positions or firms with disproportionate market power, including mergers perceived to be anticompetitive.

Are these policies effective or desirable? We take a dynamic approach and find the answer to be No in both cases.
This quote is from a posting at the Pro-Market blog by Dirk Hackbarth and Bart Taub in which they ask Can Horizontal Mergers Actually Boost Competition?
To reach these conclusions we built a dynamic, noisy collusion model that captures firms’ optimal output strategies prior to a merger. [...] We thus focus only on the desire of firms to collude prior to merging or potentially to merge if collusion fails.
The conventional view fails to account for dynamics. Firms in our dynamic model are forward-looking, aware that they are in a dynamic cartel-like situation, but are unable to directly observe the actions of the rival firm, which would enable them to enforce the cartel. The inability of each firm to observe the other firm’s output reflects the real world: regulators punish firms that directly track and coordinate with each other’s actions for market power purposes.
Hackbarth and Taub go on to explain,
The conventional view fails to account for dynamics. Firms in our dynamic model are forward-looking, aware that they are in a dynamic cartel-like situation, but are unable to directly observe the actions of the rival firm, which would enable them to enforce the cartel. The inability of each firm to observe the other firm’s output reflects the real world: regulators punish firms that directly track and coordinate with each other’s actions for market power purposes.

Because they are blocked from observing each other directly, firms are unable to punish their rival for directly perceived deviations from collusion–that is, for producing too much in order to realize temporarily higher profits at the expense of the other firm. The inability to directly observe and punish deviations therefore requires a tacit collusion arrangement, in which firms attempt to observe each other indirectly–via prices. This indirect observation is imperfect, however, because prices are affected by random influences, in addition to the effects of the firms’ output choices.

Because of the random influences a firm can mistakenly appear to produce too much output. Under the tacit collusion arrangement this triggers a punishment in which the rival firm increases output, thus driving down prices and so harming the deviating firm: there is a price war, resulting in low profits for both firms. It is the fear of this price war that sustains the tacit collusion arrangement in the long run.

The potential to merge weakens those punishments, because it prematurely terminates them under terms that are an improvement over the price war for the firm that is being punished. Instead of the price war, the deviating firm gets a share in the monopoly that the firms form when they merge. Because the potential for punishment is concomitantly reduced, the trepidation about aggressively producing output in contravention of the interests of the cartel arrangement is reduced: there is more competition, resulting in more output and lower prices. Our conclusion is thus the exact opposite of the conventional view that mergers are harmful for society: making mergers more difficult (i.e., costlier for the firms) is actually harmful to society, because it strengthens the ability of firms to punish each other and enforce the cartel.

In addition to this fundamental result, we also show that pre-merger collusion is dynamically stable: episodes of collusion are long-lasting, and price wars are unusual and brief. Because mergers occur in the face of an incipient price war, mergers are therefore rare–pre-merger collusion is the normal state of the firms.
Although the monopoly gains stemming from merging harm consumers in the long run, the enhancement of pre-merger competition benefits consumers in the short-run and those benefits dominate the losses to consumers from the later formation of the post-merger monopoly. This is because discounted expected losses from post-merger increases in market power are small if mergers are rare [empirically they are] and hence the contemporaneously pro-competitive effect of the potential for mergers exceeds those losses if firms spend most of their time in pre-merger competition. This gives further impetus to a regulatory policy that is therefore a bit counterintuitive: reduce barriers and costs of merging in order to harness the pro-competitive effects of mergers.
In short, Hackbarth and Taub show, somewhat counter-intuitively, that regulators can increase consumer welfare by facilitating mergers by lowering frictions, such as barriers, costs, and expenses formally or informally placed by merger regulation such as merger guidelines of the Commerce Commission, the US Department of Justice or the European Commission.

Now just wait for the sound of heads exploding at the Commerce Commission!

Thursday, 9 August 2018

An interview with Vernon Smith

From the IEA comes this interview of Professor Vernon Smith by Kate Andrews.
Professor Smith gives his analysis of current economic trends in the US and throughout Europe, including his take on Donald Trump's tariffs and obstacles to free trade.

Tuesday, 31 July 2018

Bruce Caldwell on F.A. Hayek, economic history, and his life's work

From the Hayek Program Podcast comes this audio in which Peter Boettke interviews Bruce Caldwell on the life and work of F.A. Hayek.
On this episode of the Hayek Program Podcast, Hayek Program Director Peter Boettke speaks with Professor Bruce Caldwell about his current projects, including an exciting new biography of F.A. Hayek himself. Caldwell talks of his experience and inspirations in directing the Center for the History of Political Economy at Duke University, the significance of his chosen life's work, and the history of the ideas found within it.

Friday, 27 July 2018

The latest Big Mac Index

From The Economist magazine comes their latest iteration of the Big Mac Index:

On the raw data version, shown above, the New Zealand dollar is 23.2 per cent under-valved.

If we adjust the index to account for GDP per person we see that the New Zealand dollar is 9.9 per cent under-valved.

Friday, 20 July 2018

Unemployment and domestic violence

Dan Anderberg spends a couple of mintues talking about his research on the link between unemployment and domestic violence.

Thursday, 12 July 2018

Talk on Adam Smith by Jesse Norman

At a time when economics and politics are both increasingly polarized between left and right, this book, Adam Smith: What He Thought, and Why it Matters, which Jesse Norman will discuss at this event, returns to intellectual first principles to recreate the lost centre of public debate. It offers a Smithian analysis of contemporary markets, predatory capitalism and the 2008 financial crash; it addresses crucial issues of inequality, human dignity and exploitation; and it provides a compelling explanation of why Smith is central to any attempt to defend and renew the market system.

Monday, 9 July 2018

A brief note for @LewSOS

This note is a brief explanation for comments I made in an interesting twitter exchange with @LewSOS.

To start lets us define a socialist economy. I will follow those, on both sides, involved in the socialist calculation debate and define socialism as the state ownership of the means of production. Nothing strange in this.

This raises the question of what is ownership? Here I follow Grossman and Hart (1986) in defining ownership in terms of control rights. You "own" an asset insofar as you have control rights over that asset. As Grossman and Hart put it
We define a firm to consist of those assets that it owns or over which it has control; we do not distinguish between ownership and control and virtually define ownership as the power to exercise control.
This terminology seems consistent with standard usage. For example, Oliver Wendell Homes (1881) writes,
But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits of policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one but him.
Clearly, in fact by definition, under socialism the state has residual control rights. Who then had control rights under the Nazi government? In particular, did private individuals have control rights over "their" assets? Adam Tooze in his book “The Wages of Destruction: The Making and Breaking of the Nazi Economy” (well worth reading, all 800 pages of it!!) makes a number of comments with regard to state involvement in the economy and control over business: to take a few examples,
Now capitalism's deepest crisis left German business powerless to resist a state interventionism that came not from the left but the right
The first years of Hitler's regime saw the imposition of a series of controls on German business that were unprecedented in peacetime history.
As we have already seen, the New Plan, which effectively regulated the access of each and every German firm to foreign raw materials, created a substantial new bureaucracy, which controlled the vital functions of a large slice of German industry.
Managing this burdensome system of controls was the primary function of a new framework of compulsory business organizations imposed by Schacht between the autumn of 1934 and the spring of 1935. In each sector, the existing multiplicity of voluntary associations was fused together into a hierarchy of Reich Groups (for industry, banking, insurance, and so on), Business Groups (Wirtschaftsgruppen, for mining, steel, engineering and so on) and Branch Groups (Fachgruppen, for anthracite as opposed to lignite mining, and so on). Every German firm was required to enrol. Each subdivision in each Business Group was headed by its own Fuehrer. These men were nominated by the existing associations, vetted by the Reich Group and appointed by Schacht. The primary role of the Business Groups was to act as a channel between individual firms and the Reich Ministry of Economic Affairs. Decrees came down from the Ministry via the Business group. Complaints, suggestions and information travelled upwards from the firms, via the Business Groups to Berlin. The organization was tireless in the production of publications, guidelines and recommendations for the best practice. On the basis of emergency decrees first issued during the latter stages of World War I, the Business Groups were also empowered to collect compulsory reports from their members, establishing an unprecedented system of industrial statistics. After 1936 they were authorized to penetrate even further into the internal workings of their members, with the introduction of standardized book-keeping systems.
So far-reaching were the regime's interventions in the German economy - starting with exchange controls and ending with the rationing of all key raw materials and the forced conscription of civilian workers in peacetime - that one is tempted to make comparisons with Stalin's Soviet Union.
[...] though there clearly was a dramatic assertion of state power over business after 1933, naked coercion was applied selectively [...]
What this points to is a high level of state control over business. While control over business was widespread, ownership was not taken over by the state in the manner of the Soviet Union. In Germany “ownership” formally remained in the hands of private individuals. But while it is true that "formal" ownership remained with private individuals, a question has to be asked as to what happened to "real" ownership. As Aghion and Tirole (1997) point out for the case of organisations, there is a difference between formal authority (the right to decide) and real authority (the effective control over decisions). Formal authority need not confer real authority.

A similar situation can occur with ownership when the state regulates business activity. Formal ownership (the right to decide) may not confer real ownership (the effective control over decisions) in so much as many of the control rights normally associated with ownership are not in the hands of the formal owners. Formal owners may be left with only residual income rights and a limited range of control rights. Given the level of regulation of the Nazi economy, many of the rights usually thought of as making up (real) ownership had been effectively usurped by the state. Avraham Barkai writes in his book "Nazi Economics: Ideology, Theory, and Policy", Oxford: Berg Publishers Ltd., 1990.
In an off-the-record talk with a newspaper editor in 1931, Hitler defined the basic principle of his economic project: "What matters is to emphasize the fundamental idea in my party's economic program clearly-the idea of authority. I want the authority; I want everyone to keep the property he has acquired for himself according to the principle: benefit to the community precedes benefit to the individual ["Gemeinnutz geht vor Eigennutz"]. But the state should retain supervision and each property owner should consider himself appointed by the state. It is his duty not to use his property against the interests of others among his people. This is the crucial matter. The Third Reich will always retain its right to control the owners of property.
So while formal ownership remained with the private sector, this was little more than just an empty shell since real ownership had been (mis)appropriated by the state.

At the Fraser Institute economics professor Steven Horwitz has a brief essay on Fascism. On the topic of the economics of fascism, Horwitz writes,
What emerged as the fascist economic system then was a combination of the socialist rejection of capitalism and the nationalist rejection of internationalist socialism. It’s not coincidental that “Nazi” was short for National Socialist German Workers Party. The very name suggests that the fascists started from a socialist premise (including the emphasis on being a “workers” party), but added the “nationalist” (and specifically “German”) twist.

Rather than have full-blown socialism as we saw in the early years of the Soviet Union, the fascists generally preferred hybrid forms that often maintained the appearance of elements of capitalism but with a much larger role for the state in allocating resources. A look at the Nazi Party platform of 1920 shows the very strong influence of socialism in the economic planks, including objections to the earning of interest, the desire to nationalize industries, the confiscation of profits, and land reform. Not all of these were put into place when Hitler gained power, but the Nazis’ antipathy toward capitalism is quite clear, even as they often co-opted big business into their power structure in during their reign. The trappings of private ownership were often preserved, but the Nazis used the power of the state to try to ensure that private ownership was used as a means toward the national ends that they defined.

The Italian model was similar in its broad outlines, though different in its execution. The Italians were more clear than the Germans about the way in which market competition was destructive of national goals. They didn’t see Russian socialism as a solution for the reasons noted above. Instead, they argued for industry-level partnerships among labor, capital, and the political class. The idea was that by working collectively, these cartel-like organizations could resolve questions of what to produce, what price to charge, what wage to pay, and the like all without the need for cut-throat competition among firms or workers, or the use of strike threats between workers and capitalists. By putting national interests first, these collectives could plan out production industry by industry and ensure a cooperative peace among Italians. So, once again, the system kept some of the trappings of capitalism, such as nominally private ownership, but set them in a system where collective planning of a limited, and nationalistic, sort was the overarching structure.

Both of these systems are probably most accurately called “corporatism.” In such a system, we get these sorts of private-public collaborations in which private ownership is combined with state control and privileges for labor, and where all are expected to serve some larger national goal. It looks like private ownership, which is often the source of the claim that fascism is a form of capitalism, but the degree of distrust of the unplanned order of free markets and the de facto power that falls into the hands of the state to set goals both point to it as being more accurately a form of socialism or planning.
In short, I would argue that you can reasonably see the Nazi economy as being socialist.


  • Aghion, Philippe and Jean Tirole (1997). ‘Formal and real authority in organizations’, “Journal of Political Economy”, 105(1): 1-29.
  • Grossman, Sanford J. and Oliver D. Hart (1986). ‘The costs and benefits of ownership: a theory of vertical and lateral integration’, “Journal of Political Economy, 94(4): 691-719.
  • Holmes, Oliver Wendell (1881). “The Common Law”, Reprint. Boston: Little, Brown, 1946.

Thursday, 5 July 2018

Can governments pick winners?

The short answer is, most likely, no. Two minutes on this question from Dave Donaldson.
Examples of geographical clustering in industries, such as Silicon Valley, suggest that firms have potentially positive external effects on other firms' productivities. Dave Donaldson discusses his research on the extent to which this is taking place, the strength of these economies of scale - for firms, workers, and consumers - and the role the government can play to foster this.

Wednesday, 4 July 2018

It really does exist!!

I was beginning to wonder.

Now go out and buy it! All of you!!

Race and economic opportunity in the United States

The sources of racial disparities in income have been debated for decades. This column uses data on 20 million children and their parents to show how racial disparities persist across generations in the US. For instance, black men have much lower chances of climbing the income ladder than white men even if they grow up on the same block. In contrast, black and white women have similar rates of mobility. The column discusses how such findings can be used to reduce racial disparities going forward.
This comes from a posting at on Race and economic opportunity in the United States by Raj Chetty, Nathaniel Hendren, Maggie R. Jones and Sonya R. Porter. The findings of the study are:
Finding #1: Hispanic Americans are moving up in the income distribution across generations, while Black Americans and American Indians are not.

Finding #2: The black–white income gap is entirely driven by differences in men’s, not women’s, outcomes.

Finding #3: Differences in family characteristics – parental marriage rates, education, wealth – and differences in ability explain very little of the black–white gap.

Finding #4: In 99% of neighbourhoods in the United States, black boys earn less in adulthood than white boys who grow up in families with comparable income.

Finding #5: Both black and white boys have better outcomes in low-poverty areas, but black-white gaps are bigger in such neighbourhoods.

Finding #6: Within low-poverty areas, black–white gaps are smallest in places with low levels of racial bias among whites and high rates of father presence among blacks.

Finding #7: The black–white gap is not immutable: black boys who move to better neighbourhoods as children have significantly better outcomes.
The implications of the study are given as:
Differences in rates of mobility out of and into poverty are a central driver of racial disparities in the US today. Reducing the black–white gap will require efforts that increase upward mobility for black Americans, especially black men.

Our results show that the black–white gap in upward mobility is driven primarily by environmental factors that can be changed. But, the findings also highlight the challenges one faces in addressing these environmental disparities. Black and white boys have very different outcomes even if they grow up in two-parent families with comparable incomes, education, and wealth, live on the same city block, and attend the same school. This finding suggests that many widely discussed proposals may be insufficient to narrow the black–white gap themselves, and suggest potentially new directions to consider.

For instance, policies focused on improving the economic outcomes of a single generation – such as temporary cash transfers, minimum wage increases, or universal basic income programs – can help narrow racial gaps at a given point in time. However, they are less likely to narrow racial disparities in the long run, unless they also change rates of upward mobility across generations. Policies that reduce residential segregation or enable black and white children to attend the same schools without achieving racial integration within neighbourhoods and schools would also likely leave much of the gap in place.

Initiatives whose impacts cross neighbourhood and class lines and increase upward mobility specifically for black men hold the greatest promise of narrowing the black-white gap.There are many promising examples of such efforts: mentoring programmes for black boys, efforts to reduce racial bias among whites, interventions to reduce discrimination in criminal justice, and efforts to facilitate greater interaction across racial groups. We view the development and evaluation of such efforts as a valuable path forward to reducing racial gaps in upward mobility.

When it comes to entrepreneurs, youth isn't everything

While it is a widely held belief that youth and entrepreneurship go hand in hand, research finds that more successful entrepreneurs launch their enterprises in their 40s than in their 20s.

This is from the July 2018 issue of the NBER Digest. Alex Verkhivker gives a summary of the NBER working paper Age and High-Growth Entrepreneurship (NBER Working Paper No. 24489) by Pierre Azoulay, Benjamin Jones, J. Daniel Kim, and Javier Miranda.
Star innovators such as Bill Gates, who was 19 when he started Microsoft, Steve Jobs, 21 when he started Apple, and Mark Zuckerberg, 19 when he launched Facebook, have reinforced the longstanding impression that young people are the wellspring of entrepreneurship. Systematic data on firm founders, however, suggest that this impression is false.

In Age and High-Growth Entrepreneurship (NBER Working Paper No. 24489), Pierre Azoulay, Benjamin Jones, J. Daniel Kim, and Javier Miranda provide evidence that, on average, successful entrepreneurs are middle-aged. They analyzed administrative data from the U.S. Census Bureau on more than 2.7 million business founders whose companies subsequently hired at least one employee. The mean age of founders was 42. When looking at the highest-growth startups in the economy, the mean age at founding rose still higher — to 45.

The study explores not just the age of founders, but the factors that are correlated with firm success. Founders with prior work experience closer to the specific industry of the startup, and founders with longer experience in that industry, have substantially greater success rates. "For the 1 in 1,000 highest-growth firms, founders with three or more years of experience in the 2-digit industry see upper tail success at twice the rate" of founders with no experience in the 2-digit industry, the researchers report.

The study takes two approaches to examining growth-oriented startups. The first considers technology orientation, which can suggest the potential for high growth. The second considers the actual outcome for the firm, based on the three-, five-, or seven-year time window after founding.

Using third-party venture capital databases, the researchers determine whether a given company has received venture capital financing. They argue that such funding is suggestive of substantial growth potential. They also use employment growth and sales growth as defining characteristics of a high-growth new venture.

"...[C]omputing-oriented ventures as well as wireless telecom ventures appear to have the youngest founders," they write. "Yet even here the mean founder ages range from 38.5 to 40.8..."

The study also explores geographical heterogeneity, and separately considers California, Massachusetts, and New York. These three states account for the majority of high-growth startup activity in the U.S. Even in these states, successful entrepreneurs are still middle-aged. The youngest entrepreneurs in this part of the analysis, whose mean age was 38.7, were founders of venture capital-supported companies in New York.

When the set of 2.7 million founders was reduced to the 1,900 associated with companies that were both located in entrepreneurial hubs and received venture backing, the mean age of founders was 39.5.

The researchers conclude with a comment about current practices in the venture financing industry. "To the extent that venture capital targets younger founders, early-stage finance appears biased against the founders with the highest likelihood of successful exits or top 1 in 1,000 growth outcomes."

Friday, 29 June 2018

Two minutes on the minimum wage

Professor David Neumark a very quick summary of the research into the effects of minimum wage policy.

To read Professor Neumark's 2018 Adam Smith Lecture on “How policymakers should think about the minimum wage” see here. Well worth the read.

Tuesday, 26 June 2018

The gender earnings gap in the gig economy

A new NBER working paper on the gender wage gap.

The Gender Earnings Gap in the Gig Economy: Evidence from over a Million Rideshare Drivers
by Cody Cook, Rebecca Diamond, Jonathan Hall, John A. List, Paul Oyer

The growth of the "gig" economy generates worker flexibility that, some have speculated, will favor women. We explore this by examining labor supply choices and earnings among more than a million rideshare drivers on Uber in the U.S. We document a roughly 7% gender earnings gap amongst drivers. We completely explain this gap and show that it can be entirely attributed to three factors: experience on the platform (learning-by-doing), preferences over where to work (driven largely by where drivers live and, to a lesser extent, safety), and preferences for driving speed. We do not find that men and women are differentially affected by a taste for specific hours, a return to within-week work intensity, or customer discrimination. Our results suggest that there is no reason to expect the "gig" economy to close gender differences. Even in the absence of discrimination and in flexible labor markets, women's relatively high opportunity cost of non-paid-work time and gender-based differences in preferences and constraints can sustain a gender pay gap.

Saturday, 26 May 2018

Mike Munger interview about the sharing economy

From Free Thoughts comes this audio of an interview with Mike Munger about Tomorrow 3.0: Uberizing The Economy.

Mike Munger joins Aaron Owell and Trevor Burrus to discuss his new book Tomorrow 3.0: Transaction Costs and the Sharing Economy. They discuss the future of the sharing economy, the role of the middle man, and the fundamental economic concept of transaction costsc.

Monday, 21 May 2018

Firm boundaries and delegation

Interesting new NBER working paper on the relationship between the boundaries of the firm and delegation within the firm.

Come Together: Firm Boundaries and Delegation
Laura Alfaro, Nicholas Bloom, Paola Conconi, Harald Fadinger, Patrick Legros, Andrew Newman, Raffaella Sadun, John Van Reenen
NBER Working Paper No. 24603
Little is known theoretically, and even less empirically, about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which firms choose which suppliers to integrate and whether to delegate decisions to integrated suppliers. We test the predictions of the model using a novel dataset that combines measures of vertical integration and delegation for a large set of firms from many countries and industries. In line with the model's predictions, we obtain three main results: (i) integration and delegation co-vary positively; (ii) producers are more likely to integrate suppliers in input sectors with greater productivity variation (as the option value of integration is greater); and (iii) producers are more likely to integrate suppliers of more important inputs and to delegate decisions to them.

The world really has gone mad!!

Where is Richard Dawkins when you need him?!!
"Darwin's Plagiarisms: The Greatest Fraud in History: Introduction to the Inheritance Model of Creation and the New Evolution Theory"

DEIRDRE ROSE, The Ministry of Second Timothy, Inc.

This is a comparative study which evaluates two theories: The theory of evolution and the theory of creation. The purpose of the study is to facilitate the development of a new branch of science. The status of these two theories are as such: evolution is treated as fact, and creation is not considered science. This paper turns everything on its head. Evolution and creation are handled in a completely new and different way. The human life cycle is redefined, and the order of life processes rearranged. Evolution is now defined as the end of the biological process, not the beginning; and there is a place for creation in this new model using a conceptual metaphor taken from a software engineering paradigm known as object-oriented design. In the process of comparing these two theories, the author unveils the greatest fraud in history -- great because it has gone undetected for two centuries and is still being perpetuated today.
I wonder what biology journal will publish this?

Saturday, 12 May 2018

George Schultz interview

From the Jamie Weinstein Show comes this interview with economist and former Secretary of State George P. Schultz.
Episode 58: George P. Schultz

In the latest episode of The Jamie Weinstein Show, from the Hoover Institution at Stanford University, the 97-year-old former Secretary of State George Schultz opens up on the prospects for peace on the Korean Peninsula, what made President Ronald Reagan a great leader, his career, and much more.

46 copies sold last year.

Today I received a note from my publisher telling me that The Theory of the Firm: An overview of the economic mainstream sold a total of 33 hardback copies and 13 e-book copies in 2017.

Not yet a millionaire, but we are getting there.

Many thanks to the 46 of you out there.

As for the rest of you ...... shame! Shame!!

Friday, 11 May 2018

"A Brief Prehistory of the Theory of the Firm" has been published .......

I think!

I say "I think" because its not like my publisher bothered to tell me the book has been published or anything, but because I just noticed that on their website they are giving May 8, 2018, as the publication date.

So I want you all to start buying!

I've said it before, and I'll say it again,  its a great book, well worth buying for wives, husbands, girlfriends, boyfriends, mistresses, mothers-in-law, toy-boys, family, friends, pets, total strangers you meet in the street or any combinations of the above. Its great for Christmas, holiday reading, birthdays, Mother's day, Father's day, any day.

Honestly, I don't really care why you buy it, what's important is that you do buy it, preferably multiple copies, often!

You can buy here, here, here, here and here.

Tuesday, 8 May 2018

"The Value of Rationally Reconstructing Buchanan's Work" with Richard Wagner

On this episode of the Hayek Program Podcast, Jayme Lemke interviews Richard Wagner on James Buchanan's life and legacy, his experience studying with James Buchanan, and future directions in Virginia political economy.

Saturday, 5 May 2018

Cover design for "A brief prehistory of the theory of the firm"

With a bit of luck it will be out in June, the Routledge webpage is now saying 15 May, but it can be pre-ordered from the publisher right now. Also available for pre-order here and here.

Thomas Sowell on his new book "Discrimination and Disparities"

Peter Robinson at Uncommon Knowledge of the Hoover Institution interviews Thomas Sowell about his new book Discrimination and Disparities.
Rich or poor, most people agree that wealth disparities exist. Thomas Sowell discusses the origins and impacts of those wealth disparities in his new book, Discrimination and Disparities in this episode of Uncommon Knowledge.

Sowell explains his issues with the relatively new legal standard of “disparate impact” and how it disregards the American legal principle of “burden of proof.” Sowell and Robinson discuss how economic outcomes vary greatly across individuals and groups and that concepts like “disparate impact” fail to take into account these variations.

They chat about the impact of nuclear families on the IQs of individuals, as studies have not only shown that children raised by two parents tend to have higher levels of intelligence but also that first-born and single children have even higher intelligence levels than those of younger siblings, indicating that the time and attention given by parents to their children greatly impacts the child’s future more than factors like race, environment, or genetics. Sowell talks about his book in which he wrote extensively about National Merit Scholarship finalists who more often than not were the first-born or only child in a family.

Sowell and Robinson go on to discuss historical instances of discrimination and how those instances affected economic and social issues within families, including discrimination created by housing laws in the Bay Area. They discuss unemployment rates, violence, the welfare state in regards to African American communities, and more.

Friday, 4 May 2018

Adam Smith's discovery of trade gravity

From the latest (Vol. 32 No. 2 Spring 2018) issue of the Journal of Economic Perspectives.

Retrospectives: Adam Smith's Discovery of Trade Gravity
Bruce Elmslie
The gravity equation is a current workhorse of empirical trade theory. It is generally acknowledged that this theory, which relates the extent of trade between countries to their respective sizes, distances, and relative trade barriers, was first developed by Jan Tinbergen in 1962. Acceptance of the gravity model as part of the discipline's core was limited by its scant theoretical foundation for the first 40 years of its existence. This paper finds that a theory of trade gravity was first developed by Adam Smith in The Wealth of Nations. Moreover, it is shown that Smith's statement of a proportional relation between economic size and distance came about as an application of his general theory of differential capital productivity in different economic sectors, and his elaboration of a theory of the gains from trade originated by David Hume. It is further shown that Smith had an explanation of the size of border affects in trade volumes, and a gravity theory of trade restrictions.
Something else for which Smith was ahead of his time.

Sunday, 29 April 2018

Does fractional reserve banking endanger the economy? A debate

On April 16, 2018, two free market economists debated a topic that has long divided libertarians. Fractional reserve banking refers to banks' standard practice of keeping only a portion of their depositors' money on hand and loaning out the rest.

In The Mystery of Banking (1983), the anarcho-capitalist economist Murray Rothbard called fractional reserve banking "a shell game, a Ponzi scheme, a fraud in which fake warehouse receipts are issued and circulate as equivalent to the cash supposedly represented by the receipts." Other libertarian economists, such as Larry White and Steve Horwitz, have argued that the practice is perfectly defensible.

At The Soho Forum, a debate series in New York City that is sponsored by the Reason Foundation, Robert Murphy debated George Selgin over the following resolution: "Fractional Reserve banking poses a threat to the stability of market economies."

Murphy, a research assistant professor with the Free Market Institute at Texas Tech University, argued for the affirmative. He has a Ph.D. in economics from NYU has addiliations with the Institute for Energy Research, the Mises Institute, the Fraser Institute, and the Independent Institute. He has authored hundreds of articles and several books explaining economics to the layperson, including Choice: Cooperation, Enterprise, and Human Action.

Selgin, who opposed the resolution, is a senior fellow and director of the Center for Monetary and Financial Alternatives at the Cato Institute and professor emeritus of economics at the University of Georgia. His research covers a broad range of topics within the field of monetary economics, including monetary history, macroeconomic theory, and the history of monetary thought. He is the author of The Theory of Free Banking, Bank Deregulation and Monetary Order, Less Than Zero: The Case for a Falling Price Level in a Growing Economy, and most recently Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage.

The Soho Forum runs Oxford-style debates, in which the audience votes on the resolution at the beginning and end of the event. The side that gains more ground is victorious. ​In this case, Selgin won by convincing 14 percent of the audience to switch over to his side.