## Monday, 31 December 2018

### IEA Christmas special 2018: a year in review

Welcome to our Christmas special - 2018: A Year in Review.

Joining our Associate Director Kate Andrews today is IEA Director General Mark Littlewood, Research Director Dr Jamie Whyte and Director of the IEA’s FREER initiative Rebecca Lowe.

The four talk through the biggest stories of the year, ranging from the ongoing Brexit negotiations, to the state of British political parties and ideologies, to other important happenings around the world.

You’ll also get to hear who Mark, Jamie, and Rebecca have chosen as their person of the year, event of the year, and best of all, their top prediction for 2019.

### Thomas Sowell on the myths of economic inequality

Peter Robinson at Uncommon Knowledge of the Hoover Institution interviews Thomas Sowell about the myths of economic inequality.
Thomas Sowell discusses economic inequality, racial inequality, and the myths that have continued to falsely describe the system of poverty among different racial and economic classes. He explains the economic theories behind these pervasive myths and proposes fact-based solutions for seemingly intractable situations.

Sowell discusses his early life as a high school dropout and his first full-time job as a Western Union messenger delivering telegrams. He admits to flirting with Marxism in his early twenties as he first tried to grapple with the housing inequality he saw across the neighborhoods of New York City. Marxism, he says, was the only explanation he could find at the time. He went on to serve in the Marine Corps before continuing his education in economics at Harvard and earning a master’s at Columbia and a PhD at the University of Chicago.

Sowell’s first job after his receiving his PhD in economics was working for the Department of Labor, and he says it was there that he realized Marxism was not the answer. He argues that the government has its own institutional interests in inequality that cannot be explained through Marxism. He began to be discouraged by Marxism and the government in general and began searching for better economic ideas and solutions (the free market).

Robinson and Sowell discuss Sowell’s written works, his ideas of racial and economic inequality, the state of the United States today, and much more.

### How legalizing marijuana is securing the border

From the Cato Insitute comes this Cato Daily Podcast in which Caleb O. Brown interviews David Bier on the question of How effective would a border wall be against drug smugglers? The answer can tell us a lot about how effective it would be against illegal migrants.

## Wednesday, 26 December 2018

### A millenium of history: Steve Davies from the Norman Conquest to the world wars

From History Twins Podcast comes this interview with Dr. Stephen Davies of the IEA involving topics from the Norman Conquest all the way through to the World Wars. Find out what's wrong with Rousseau, who started the First World War, and what we're missing about the Industrial Revolution.

## Tuesday, 25 December 2018

### Latest Blogwatch column

My Blogwatch column from the latest issue (Issue 62, August 2018) of the NZAE magazine Asymmetric Information.

## Friday, 14 December 2018

### Annotation in the JEL 2

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. 4 December 2018 it annotated one of the two greatest books ever written:

So now go and buy, many many copies!

## Thursday, 13 December 2018

### 25% off the two greatest books ever written

Up to December 31st Routledge is having a sale which gives a 20% discount if you buy one book and a 25% discount if you buy two.

So you can get the two greatest books ever written for 25% less!

 The Theory of the Firm: An Overview of the Economic Mainstream A Brief Prehistory of the Theory of the Firm

### Why are firms with more managerial ownership worth less?

An interesting, if somewhat counterintuitive, question. One could expect that a firm with more managerial ownership would be worth more since the incentives of the managers will be better aligned with those of the owners.

Why are Firms with More Managerial Ownership Worth Less?
Kornelia Fabisik, Rüdiger Fahlenbrach, René M. Stulz, Jérôme P. Taillard
NBER Working Paper No. 25352
Issued in December 2018
NBER Program(s):Corporate Finance
Using more than 50,000 firm-years from 1988 to 2015, we show that the empirical relation between a firm’s Tobin’s q and managerial ownership is systematically negative. When we restrict our sample to larger firms as in the prior literature, our findings are consistent with the literature, showing that there is an increasing and concave relation between q and managerial ownership. We show that these seemingly contradictory results are explained by cumulative past performance and liquidity. Better performing firms have more liquid equity, which enables insiders to more easily sell shares after the IPO, and they also have a higher Tobin’s q.

### The human freedom index 2018

The Cato Institute Human Freedom Index is out for 2018.
The Human Freedom Index presents the state of human freedom in the world based on a broad measure that encompasses personal, civil, and economic freedom. Human freedom is a social concept that recognizes the dignity of individuals and is defined here as negative liberty or the absence of coercive constraint. Because freedom is inherently valuable and plays a role in human progress, it is worth measuring carefully. The Human Freedom Index is a resource that can help to more objectively observe relationships between freedom and other social and economic phenomena, as well as the ways in which the various dimensions of freedom interact with one another.
The areas of freedom considered.

And again New Zealand is number one.

And the bottom three will not surprise too many people.

## Thursday, 22 November 2018

### John Nye on revisionist economic history and having too many hobbies

From Conversations with Tyler comes this audio in which Tyler Cowen interviews economic historian Professor John Nye.
Is John Nye the finest polymath in the George Mason economics department?

Raised in the Philippines and taught to be a well-rounded Catholic gentleman, John Nye learned the importance of a rigorous education from a young age. Indeed, according to Tyler he may very well be the best educated among his colleagues, having studied physics and literature as an undergraduate before earning a master’s and PhD in economics. And his education continues, as he’s now hard at work mastering his fourth language.

On this episode of Conversations with Tyler, Nye explains why it took longer for the French to urbanize than the British, the origins of the myth of free-trade Britain, why Vertigo is one of the greatest movies of all time, why John Stuart Mill is overrated, raising kids in a bilingual household, and much more.

## Friday, 16 November 2018

### Revised version: Being neoclassical before it was cool to be neoclassical: the case of the theory of the firm

This essay looks at the contribution made by pre-1870 writers to what would later become the neoclassical theory of the ﬁrm. In particular it brieﬂy considers the work of Dionysius Lardner, Johann von Thunen, John Stuart Mill, Charles Ellet, Jr. and Antoine Augustin Cournot. The neoclassical theory of the ﬁrm should, in many ways, be more properly called the proto-neoclassical theory of the ﬁrm

### Scott Lincicome: in defense of free trade

From Conversations with Bill Kristol comes this interview with Scott Lincicome on a defense of free trade.
Scott Lincicome is a leading international trade attorney, adjunct scholar at the Cato Institute, and senior visiting lecturer at Duke University. In this Conversation, Lincicome explains the system of free trade agreements and alliances that the U.S. has built over many decades and how the system contributes to peace and prosperity for America. Lincicome also shares his perspective on the renegotiation of NAFTA, the decision not to participate in the Trans-Pacific Partnership (TPP), and other trade agreements. Finally, Kristol and Lincicome consider where Republicans and Democrats stand on trade today—and where the parties are likely to go in the future.

### Don Boudreaux on free trade, protectionism, and the China shock

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Don Boudreaux on Free Trade, Protectionism, and the China Shock.
Don Boudreaux is a professor of economics at George Mason University as well as the co-director of the Program on the American Economy and Globalization at the Mercatus Center. He joins the show today to talk about the future of trade and globalization. David and Don also discuss the history of protectionism in the US, President Trump’s trade policies, and why the China Shock thesis may signal bad economics.

## Thursday, 15 November 2018

### Broken market or Broken policy? The unintended Consequences of restrictive planning

Is the title of an article by Paul Cheshire in the National Institute Economic Review, Volume 245, No. 1, August 2018.

This paper summarises the evidence from recent research relating to the British Planning system’s impact on the supply of development. Planning serves important economic and social purposes but it is essential to distinguish between restricting development relative to demand in particular places to provide public goods and mitigate market failure in other ways, including ensuring the future ability of cities to expand and maintain a supply of public goods and infrastructure; and an absolute restriction on supply, raising prices of housing and other urban development generally. Evidence is presented that there are at least four separate mechanisms, inbuilt into the British system, which result in a systematic undersupply of land and space for both residential and commercial purposes and that these have had important effects on both our housing market and the wider economy and on welfare more widely defined.
The article's conclusion reads,
The evidence shows, then, that our planning system is restrictive in terms of the overall supply of land and housing space in the aggregate. It is not just locally restrictive in order to preserve land of significant environmental quality which in its unbuilt state generates amenity or has recreational value. Such purely local restrictions are likely to have positive welfare effects although the costs they impose also need to be taken into account. Overall restrictiveness of supply relative to demand, in the absence of such environmental gains, does not increase welfare but does increase the price of housing relative to incomes, so reduces welfare, and has, as we have seen, unintended adverse consequences; for example on the length of commuting.

Our planning system imposes this overall restrictiveness by means of at least four separate mechanisms. Its decision making is systemically restrictive because results of applications and conditions imposed for ‘affordable’ housing are unpredictable, so development risk is increased; it imposes quantitative restrictions on the supply of space (where it is most valued) by its imposition of Green Belts and height controls; its mechanism for deciding how much land to allocate for housing ignores the most important determinant of demand, so systematically undersupplies land; and there is substantial variation in local restrictiveness measuredby the proportion of applications refused.

Since all have the effect of reducing the supply of housing and other development relative to demand this drives up prices in real terms. Not only has this made housing increasingly unaffordable but it has had very regressive distributional effects, especially redistributing assets to older home owners. There are other unintended effectsof more restrictive planning. A more restrictive pattern of local decisions on housing proposals causes a substantial increase over time in the proportion of local homes that are empty. Not only that but greater local restrictivenesssignificantly increases the average length of commutes for those working locally. There is also evidence consistent with Green Belts increasing commuting distances as workers leap frog out to buy less expensive housing space. This increases the spatial extent of cities even if it reduces the footprint of urbanisation.

The extent of the price distortions induced by restrictions on the supply of land and housing mean that there is a misallocation of resources. Even in the US, where overall restrictiveness has historically been considerably less than in Britain, it has been estimated (Hseih and Moretti, 2017) that GDP would have been some 13.5 per cent higher had not restrictions on building slowed the flowof labour to the highest productivity locations over the period 1964 and 2009. No similar estimates have been done for other countries. Cheshire et al. (2015), however, did estimate that the loss of total factor productivity in the supermarket sector in England, as a result of forcing them to locate on particular sites in ‘town centres’, was 32 per cent just between 1996 and 2008. Cheshire and Hilber (2008) estimated that the restriction on the supply of office space in British cities reached the equivalent of a tax on construction costs of 800 per cent in London’s West End and even in less prosperous cities, such as Birmingham, averaged 250 per cent: there is certainly evidence that the economic effects of planning which is generically restrictive, can be large.

To sum up, there seem to be many reasons for concluding that our policies determining housing supply are broken but no obvious reason to conclude that the housing crisis results from a ‘broken housing market’.
So the answer to the question in the title seems to be broken policy. This raises the interesting and important question of, if you did a similar study for New Zealand would you get similar results? I'm very afraid you would. But just how broken are New Zealand's housing policies? And how costly are these blunders?

### Housing and the economy

Two minutes on the topic of "Housing and the Economy" from Jagjit Chadha, Director of the National Institute of Economic and Social Research in the UK. The sorts of issues he talks about apply in New Zealand as well as in the UK.

## Thursday, 1 November 2018

### Being neoclassical before it was cool to be neoclassical: the case of the theory of the firm

This essay looks at the contribution made by pre-1870 writers to what would later become the neoclassical theory of the ﬁrm. In particular it brieﬂy considers the work of Dionysius Lardner, Johann von Thunen, John Stuart Mill, Charles Ellet, Jr. and Antoine Augustin Cournot. The neoclassical theory of the ﬁrm should, in many ways, be more properly called the proto-neoclassical theory of the ﬁrm

## Monday, 22 October 2018

### JS Mill and the firm

Another, possible, proto-neoclassical, who wrote on the economics of the firm, if not strictly on the theory of the firm, was John Stuart Mill. While Mill is most often thought of as a classical economist, Ekelund and Hebert (2002: 198) argue he can be considered as a proto-neoclassical economist.

According to Schumpeter (1954: 556), Mill introduced the concept of the entrepreneur to the English speaking economics literature. The influence of J. B. Say helped Mill go beyond just analysing the role of the owner of the factors of production and begin focusing on the role of the entrepreneur and on the internal organization of the firm (Zouboulakis 2015: ???).

For Mill, the number of collective organisations, including firms - both investor controlled and co-operatives, would increase as wealth increases,
"[a]s wealth increases and business capacity improves, we may look forward to a great extension of establishments, both for industrial and other purposes, formed by the collective contributions of large numbers ; establishments like those called by the technical name of joint-stock companies, or the associations less formally constituted, which are so numerous in England, to raise funds for public or philanthropic objects, or, lastly, those associations of workpeople either for production, or to buy goods for their common consumption, which are now specially known by the name of co-operative societies" (Mill 1848: 699).
Mill gave the first discussion of joint production and of the importance of the scale of production. With regard to joint production, George Stigler writes,
"Mill clearly formulated the problem of joint production, i.e., production of two or more products in fixed proportions. He gave the complete and correct solution: the sum of the prices of the products must equal their joint cost, and the price of each product is determined by the equality in equilibrium of quantity supplied and quantity demanded" (Stigler 1955: 297).
As to the significance of the scale of production Stigler adds that,
"Mill's chapter (Bk. I, c. IX), " Of production on a large, and production on small, scale", is the first systematic discussion of the economies of scale of the firm to be found in a general economic treatise. It would take us afield to analyse this chapter in detail, but we may point out that Mill was the first economist to notice that one can deduce information on the costs of firms of different sizes from their varying fortunes through time" (Stigler 1955: 298).
Zouboulakis (2015: ???) writes that "[a]mong the advantages of production on a large scale, he [Mill] mentions the more advanced division of labour, the less than proportionate increase of "the expenses of a business”, the greater possibility of investment to "expensive machinery" and the saving in the labour of the capitalists themselves" (1848, 132-6)".

Mill also scrutinised the advantages and disadvantages of the joint stock company. "On the one hand, only such a company can afford the amount of capital necessary to build important projects such as a railway, and to guarantee the continuity of such costly and risky business operations such as banking and insurance. On the other hand, he recognizes that "joint stock or associated management" has some disadvantages over individual management"" (Zouboulakis 2015: ???). Mill, like Smith, saw the potential for, what today we would call, principal-agent problems in the relationship between the owners and the managers of joint stock companies. The interests of the managers may not be aligned with the interests of the owners. When discussing methods to the alleviate such problems Mill makes the observation that
"[i]n the case of the managers of joint stock companies, and of the superintending and controlling officers in many private establishments, it is a common enough practice to connect their pecuniary interest with the interest of their employers, by giving them part of their remuneration in the form of a percentage on the profits. The personal interest thus given to hired servants is not comparable in intensity to that of the owner of the capital ; but it is sufficient to be a very material stimulus to zeal and carefulness, and, when added to the advantage of superior intelligence, often raises the quality of the service much above that which the generality of masters are capable of rendering to themselves" (Mill 1848: 141).
Interestingly, such observations give Mill more of a proto-modern feel than a proto-neoclassical feel. But, again, like Smith, Mill did not develop his insights into a full-blown theory of the firm.

Refs.:
• Mill, J.S. (1848). Principles of Political Economy with some of their Applications to Social Philosophy, 7 th edition 1873, re-edited by William J. Ashley 1909, New York: A. Kelley reprint, 1973.
• Schumpeter, J.A. (1954). History of Economic Analysis, London: Allen & Unwin.
• Zouboulakis, Michel S. (2015). 'Elements of a Theory of the Firm in Adam Smith and John Stuart Mill'. In George C. Bitros and Nicholas C. Kyriazis (eds.), Essays in Contemporary Economics: A Festschrift in Memory of A. D. Karayiannis (pp. 45-52), Heidelberg: Springer Cham.

## Sunday, 21 October 2018

### Johnann von Thunen and the (proto)neoclassical theory of the firm

Johnann Theunen has been described as a proto-neoclassical. One reason for this is the, before his time, contribution he made to the theory of the firm. While Dionysius Lardner analysed the firm's output market, Thunen looked at the firm's input markets. He argued that the firm should use inputs up to the point where the value of the marginal product of the input equals the price of that input. His treatment of the issue has become known as the marginal productivity theory of distribution. To illustrate Thunen's argument we will look at the simplest possible model.

We will assume a central marketplace which is surrounded by agricultural land, all of which is of equal fertility. There will be one good, which we call wheat. The landowners hire a single input to production, labour. L units of labour produces W(L) units of wheat. The price of wheat in the marketplace is p while the costs of transporting the wheat to the market is \$t per mile per ton. Thus the earnings generated from wheat grown m miles away from the marketplace is p-t.m per ton. Total revenue from the wheat will be W(L).(p-t.m). Assume that the landowner pays workers a wage of w resulting in a total wage bill of w.L. This means that the landowner's profit from producing wheat m miles from the marketplace will be W(L).(p-t. m)-w.L.

Further, assume that the landowner selects L to maximise profits. This results in a problem we can represent mathematically as
max_L W(L).(p-t.m)-w.L
Maximising this objective function with respect to L gives the first order condition,
(dW(L*)/dL).(p-t.m)-w=0
this implies
(dW(L*)/dL).(p-t.m)=w
where dW(L*)/dL is the marginal product of labour and (dW(L*)/dL).(p-t.m) is the value of the marginal product of labour. Equation \ref{thunen} tells the firm it wants to select the level of labour such that the value of the marginal product of labour equals the marginal cost of labour, the wage rate.

Put more generally, a profit maximising firm will choose the level of an input so that the value of the marginal product of the input equals the price of that input. Therefore, from the point of view of a firm, the theory indicates how many units of a factor it should demand.

Blaug (1985: 17-8) sums up Thunen's analysis by saying,
[h]is analysis culminates in the perfectly modern statement that net revenue is maximized when each factor is employed to the point at which its marginal value product (Wert des Mehrertrags) is equalized to its marginal factor cost (Mehranfwand). Although the discussion proceeds in verbal terms, illustrated by numerical examples, Thunen correctly points out that the marginal product of a factor is a partial differential coefficient of a multivariable production function. Moreover, apart from clearly recognizing the distinction between fixed and variable factors, and between the average and the marginal returns of a factor, he took great care to define the inputs of capital, labor, and land in strictly homogeneous units, observing that this condition was rarely obtained in practice--this too was literally more than sixty years ahead of his time.
Refs.:
• Blaug, Mark (1985). 'The Economics of Johann Von Thunen', Research in the History of Economic Thought and Methodology, 3: 1-25.
• Thunen, Johann H. (1826; 1850; 1863). Der isolierte Staat in Beziehung auf Landwirtschaft und Nationalokonomie. Pt. I: Untersuchungen uber den Einfluss, den die Getreidepreise, der Reichtum des Bodens und die Abgaben auf den Ackerbau ausuben. Hamburg: Perthes; Pt. II: Der naturgemasse Arbeitslohn und dessen Verhaltniss zum Zinfuss und zur Landrente. Rostock: Leopold; Pt. III: Grundsatze zur Bestimmung der Bodenrente, der vorteilhaftesten Umtriebszeit und des Werts der Holzbestande von verschiedenem Alter fur Kieferwaldungen. Rostock: Leopold. English translation, The Isolated State, Volume 1. Carla Wartenberg, trans. Oxford: Pergamon Press, 1966; Volume 2 in The Frontier Wage. B. W. Dempsey, trans. Chicago: Loyola University Press, 1960.

## Thursday, 11 October 2018

### Latest Blogwatch column

My Blogwatch column from the latest issue (Issue 61, April 2018) of the NZAE magazine Asymmetric Information.

## Wednesday, 10 October 2018

### Sam Hammond on co-determination, corporate governance, and the accountable capitalism act

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Sam Hammond on Co-Determination, Corporate Governance, and the Accountable Capitalism Act.

Sam Hammond is a policy analyst and covers topics in poverty and welfare for the Niskanen Center. Sam is a previous guest on Macro Musings, and he joins the show today to talk about his new article in National Review which addresses Senator Elizabeth Warren’s new proposal, the Accountable Capitalism Act, and its potentially negative effects. David and Sam also discuss the problematic stereotypes surrounding ‘corporate bigness’, the positive and negative features of co-determination, and why we need universal safety nets.

## Tuesday, 9 October 2018

### Dionysius Lardner and the theory of the firm

The classical economists did not leave us much in terms of a theory of the firm. But one person who did make a contribution during the later classical era, albeit a contribution largely forgotten now, was Dionysius Lardner. Lardner is part of a group of pre-1870 writers that Ekelund and Hebert (2002) has referred to as "Proto-Neoclassicals". They summarise Lardner's contribution made in his 1850 book Railway Economy as he "[a]nalyzed railroad pricing structures; developed simple and discriminating monopoly analysis; analyzed monopoly firm in terms of total cost and total revenue, both mathematically and graphically (with an implicit demand curve)" (Ekelund and Hebert 2002: Table 1, p. 199).

One important contribution Lardner did make was to foreshadow aspects of the neoclassical theory of the firm. Lardner modelled a profit maximising firm and analysed its choice of price (and thus implicitly quantity) using revenue and cost curves, and implicitly a demand curve. He effectively showed that a profit maximum would occur when "marginal revenue" equals "marginal cost".

To understand Lardner's reasoning consider Figure 1

Figure 1

Source: Lardner (1850: 288).

In this Figure, the solid bell-shaped curve is what we would refer to today as a total revenue curve, but where the curve is graphed in revenue/output-price space rather than the standard revenue/quantity space, that is, the horizontal axis measures the price of output. At low prices revenue is also low, but as demand is inelastic revenue increases as price increases. It reaches a maximum, point P in Figure 1, and then as demand becomes more elastic, revenue falls as price continues to increase. While Lardner did not argue explicitly in terms of decreases elasticity, he did come close,
"[n]ow, if a less value still be assigned to the tariff, such as Om", the receipts will be augmented, because the influence of the increased number of objects booked, and the increased distances to which they are carried, owing to the diminution of the tariff, will have a greater effect in increasing the gross receipts than the reduction of the tariff has in diminishing them. By thus gradually diminishing the tariff, the traffic will increase both in quantity and distance, and the gross receipts will be placed under the operation of two contrary causes, one tending to increase, and the other to diminish them. So long as the influence of the former predominates, the gross receipts will increase ; but when the effect of the reduction of the tariff counterpoises exactly the effect of the increase of traffic in quantity and distance, then the increase of the gross receipts will cease. After that, the influence of the reduction of the tariff in diminishing the receipts will predominate over the influence of the increased traffic in augmenting them, and the consequence will be their diminution" (Lardner: 287-8).

The negatively sloped dashed line, Yy, is the total cost curve, again where the curve is graphed in cost/output-price space rather than cost/quantity space. This explains why the curve is negatively sloped. As the price of output increases the quantity demanded falls, i.e., implicitly Lardner is using a demand curve here, and as quantity falls the variable costs of production fall. Fixed costs, the vertical distance Xy, still needed to be paid. Lardner's cost curve shows total costs, fixed plus variable, declining due to the reduction in variable costs.

Lardner notes that the profit maximising point is to be found somewhere between P and s' in Figure 1, at a point where the vertical height of the revenue and cost curves decrease at the same rate. Fortunately, he then clarifies this by stating,
"[t]his may be geometrically expressed by stating it to be the point at which the two curves become parallel to each other" (Lardner 1850: 292).
This observation would be expressed today by saying that "marginal revenue" equals "marginal cost". Note however that for Lardner both "marginal revenue" and "marginal cost" would be defined in terms of the derivative with respect to output-price rather than quantity.

Lardner's explanation also shows that the profit maximising price is greater than the revenue maximising price, point P, that is, the profit maximising quantity is less than the revenue maximising quantity.

Lardner also hints at the advantages of price discrimination, insofar as he sees an advantage to having a lower tariff [price per mile per ton] on longer distances [think, larger quantities of "railway services"]. For example he writes,
"[i]t is clear, therefore, that every reduction which can be made on the tariff affecting the larger class of distances, will have the effect of increasing the area over which the producer can carry on a profitable business, and will proportionally increase the available traffic of the railway. For lesser distances, the reduction of the tariff will only have the effect of augmenting the quantity of the articles transmitted, and this can only be effected in the proportion in which the reduction of the tariff can effect a diminution of price in the market.

A due consideration of these circumstances will easily demonstrate the advantage which must result to the railways from such a graduated tariff as would favour transport to greater distances, [ \dots ]" (Lardner 1850: 299)
and he also said,
"[i]t follows, therefore, that for traffic generally, but more especially for every description of merchandise and of live stock, a tariff graduated upon the principle of diminishing as the distance transported increases, must be the source of largely augmented profits, [ \dots ]" (Lardner 1850: 301)
All this explains why Mark Blaug can write that Railway Economy is "a book containing the first exposition in English of what approximates to the modern [neoclassical] theory of the firm" (Blaug 1997: 293).

Refs.
• Blaug, Mark (1997). Economic theory in retrospect, 5th ed., Cambridge: Cambridge University Press.
• Ekelund, Robert B. Jr. and Robert F. Hebert (2002). 'Retrospectives: The Origins of Neoclassical Microeconomics', Journal of Economic Perspectives, 16(3) Summer: 197-215.
• Lardner, Dionysius (1850). Railway Economy; A Treatise on the New Art of Transport, its Management, Prospects, and Relations, Commerical, Financial, and Social, with an Exposition of the Practical Results of the Railways in Operation in the United Kingdom, on the Continent, and in America, London: Taylor, Walton, and Maberly.

## Friday, 5 October 2018

### The development of agriculture

From the History of the World podcast comes these two podcasts on the development and spread of farming.

## 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

## 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.

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.
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.

## Saturday, 15 September 2018

### Peter Boettke talks about Hayek

Professor Peter Boettke has been talking to a number of people about his new book, F. A. Hayek: Economics, Political Economy and Social Philosophy.

The Economic Rockstar

The Economics Detective

The Remnant with Jonah Goldberg

## 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).
But
"[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).
Footnotes:
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.

References:
• 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
Abstract:
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?

Refs.:
• 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.
and
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!