Venezuela's inflation rate

An interesting graph from Steve Hanke showing Venezuela's rate of inflation. Not a pretty sight.

Trump the worst president?

A question asked by Jason Brennan at the Bleeding Heart Libertarians blog.

Trump is the worst president ever?

So say an important subset of political scientists:

That was the finding of the 2018 Presidents & Executive Politics Presidential Greatness Survey, released Monday by professors Brandon Rottinghaus of the University of Houston and Justin S. Vaughn of Boise State University. The survey results, ranking American presidents from best to worst, were based on responses from 170 current and recent members of the Presidents and Executive Politics section of the American Political Science Association.

Brennan hoped that the political scientists involved could put aside their current partisan resentment and answer this question somewhat objectively, but it appears not. Brennan writes,

Sure, I despise Trump too. But the worst president ever?

Worse than McKinley and Teddy Roosevelt, who oversaw the straightforwardly evil US-Phillipine war, which left 200,000 civilians dead? Worse than Hoover, who greatly exacerbated the Great Depression with stupid interventions? Worse than Wilson, who put Americans needlessly into the unjustifiable Great War and then so screwed up post-war negotiations that World War II became close to inevitable? Worse than the long string of presidents who oversaw the extermination, forced relocation, and genocide of Native Americans? Worse than FDR, who put Japanese Americans in concentration camps? Worse than Nixon, who had to resign because of his corruption? Worse than Bill Clinton, whose sanctions of Iraq may have killed around 500,000 Iraqi children? (Note, that this number is controversial. HT: Dan Bier) Worse than Ulysses Grant, whose administration had a cartoonish degree of corruption? Worse than Polk, who unjustly seized massive amounts of land from Mexico?

Thus we do have to ask if a more objective ranking would put Trump at the bottom. Or at least they should be a lot clearer as to the criteria used to determine "worst".

On the link between US pay and productivity

From VoxEU.org comes a column by Anna Stansbury and Lawrence Summers on the relationship between pay and productivity in the US.

Since 1973, there has been divergence between labour productivity and the typical worker’s pay in the US as productivity has continued to grow strongly and growth in average compensation has slowed substantially. This column explores the causes and implications of this trend. Productivity growth appears to have continued to push workers’ wages up, with other factors to blame for the divergence. The evidence casts doubt on the idea that rapid technological progress is the primary driver here, suggesting rather that institutional and structural factors are to blame.

Stansbury and Summers writes,

Our contribution to these debates is, we believe, to demonstrate that productivity growth still matters substantially for middle income Americans. If productivity accelerates for reasons relating to technology or to policy, the likely impact will be increased pay growth for the typical worker.

We can use our estimates to calculate a rough counterfactual. If the ratio of the mean to median worker's hourly compensation in 2016 had been the same as it was in 1973, and mean compensation remained at its 2016 level, the median worker's pay would have been around 33% higher. If the ratio of labour productivity to mean compensation in 2016 had been the same as it was in 1973 (i.e. the labour share had not fallen), the average and median worker would both have had 4-8% more hourly compensation all else constant. Assuming our estimated relationship between compensation and productivity holds, if productivity growth had been as fast over 1973-2016 as it was over 1949-1973, median and mean compensation would have been around 41% higher in 2016, holding other factors constant.

This suggests that the potential effect of raising productivity growth on the average American’s pay may be as great as the effect of policies to reverse trends in income inequality – and that a continued productivity slowdown should be a major concern for those hoping for increases in real compensation for middle income workers.

This does not mean that policy should ignore questions of redistribution or labour market intervention – the evidence of the past four decades demonstrates that productivity growth alone is not necessarily enough to raise real incomes substantially, particularly in the face of strong downward pressures on pay. However it does mean that policy should not focus on these issues to the exclusion of productivity growth – strategies that focus both on productivity growth and on policies to promote inclusion are likely to have the greatest impact on the living standards of middle-income Americans.

So productivity still matters for pay with increases in productivity increases resulting in pay increases.

Economic costs of hosting the Olympics and World Cup

In this audio economist Andrew Zimbalist, a professor of economics at Smith College and the author of Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup (Brookings Institution Press, 2015), reveals the real economic costs and benefits of hosting mega-sporting events and discusses the prospects of FIFA following the corruption scandal.

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

you get paid in eggs!

A Wall Street Journal report on the situation in Venezuela tells us

One U.S. dollar now fetches around 236,000 bolivars on the street, around 80 times what it bought at the start of last year. Five years ago, that could buy a small apartment; now it barely covers an appetizer at lunch.

“The authorities have lost control, they can’t stop creating bolivars even if they wanted to,” said Omar Zambrano, a former economist for the Inter-American Development Bank. “This ends in two ways: Either we adopt the dollar or we go back to bartering.”

That’s what Marina Fernandez, a professor of architecture at a Caracas university, has done, finding out that some people will take, yes, the humble egg. When she didn’t have enough cash to pay for parking, she handed over two eggs. Her university department, short of cash, paid a computer programmer with a carton of eggs.

Ms. Fernandez said onions or bananas, for some reason, just won’t do. “If you’re going to receive food as payment, the people want it to at least be a protein,” she said. “The egg is perfect.”

Barter is really, really inefficient but sometimes its the best you can do. Hyperinflation means money is worthless so people go back to barter. Or they start to use a new medium of exchange. But eggs seem a bit too breakable to be a totally satisfactory replacement for money.

Such is the crazy, sad world of Venezuela today.

Islam and economic performance: historical and contemporary links

An interesting looking article by Timur Kuran forthcoming in the Journal of  Economic Literature goes sunder the above title.

The abstract reads,

This essay critically evaluates the analytic literature concerned with causal connections between Islam and economic performance. It focuses on works since 1997, when this literature was last surveyed. Among the findings are the following: Ramadan fasting by pregnant women harms prenatal development; Islamic charities mainly benefit the middle class; Islam affects educational outcomes less through Islamic schooling than through structural factors that handicap learning as a whole; Islamic finance hardly affects Muslim financial behavior; and low generalized trust depresses Muslim trade. The last feature reflects the Muslim world’s delay in transitioning from personal to impersonal exchange. The delay resulted from the persistent simplicity of the private enterprises formed under Islamic law. Weak property rights reinforced the private sector’s stagnation by driving capital out of commerce and into rigid waqfs. Waqfs limited economic development through their inflexibility and democratization by restraining the development of civil society. Parts of the Muslim world conquered by Arab armies are especially undemocratic, which suggests that early Islamic institutions, including slave-based armies, were particularly critical to the persistence of authoritarian patterns of governance. States have contributed themselves to the persistence of authoritarianism by treating Islam as an instrument of governance. As the world started to industrialize, non-Muslim subjects of Muslim-governed states pulled ahead of their Muslim neighbors by exercising the choice of law they enjoyed under Islamic law in favor of a Western legal system.

In short, institutions matter. They help explain why around 1000 years ago the Islamic world was the most advanced area of the world but slowly they lost that advantage as Western countries developed more growth friendly institutions.

The case for 'touting'

From the IEA comes this audio on scalping and the value of it.

The resale of tickets has been around for as long as humans have charged entry to events. Evidence of ticket 'touting' goes all the way back to Ancient Rome.

In the 21st century though, it's becoming an increasingly controversial practice.

Companies like Viagogo, Seatwave and Stubhub now offer tickets to otherwise hard-to-reach events - but, often, at a hefty price.

Today on our podcast, IEA News Editor Kate Andrews interviews Dr Steve Davies, the IEA's Head of Education and author of new report 'Digital Resellers: The case for Secondary Ticket Markets'.

Steve believes that ticket resale is simply one aspect of the 'Sharing Economy' which enables voluntary transactions to take place between willing buyers and sellers. Those who aim to resell tickets for a profit, Steve argues, are themselves taking on considerable risk.

We examine the economics, and the morality, of ticket resale, and take a look at the way artists like Ed Sheeran, Taylor Swift and Madonna use market mechanisms to sell their products.

The discussion by Steve Davies is based on a new paper he has written for the IEA entitled Digital Resellers: The Case for Secondary Ticket Markets. A summary of the report is:

• The reselling of tickets for events has a long history, dating back at least to Roman times.
• Such secondary markets in tickets are no different from other kinds of secondary market, and serve the same purpose: to correct flaws in the initial primary market.
• In recent years, new technology has led to the appearance of many new players in this market. Most of these are facilitating platforms rather than being directly involved as buyers or sellers of tickets.
• This market is fragmented with no firm having more than a very small part of the total secondary ticket market. That market itself is still small compared to the general market for tickets but is growing rapidly.
• This has led to many calls for limitations on ticket resale and, in particular, for what are effectively price caps.
• These arguments are wrongheaded and would disrupt an effective market. The more fundamental or underlying objections to secondary ticket markets are simply rejections of the principles of trade and a refusal to accept the reality of scarcity.
• It is the primary market for tickets that is dysfunctional. The secondary market is correcting its defects, so that tickets get into the hands of those who value them most. We are probably moving towards a new kind of market in tickets.

Zingales on Hart

At the 2018 ASSA meeting Luigi Zingales delivered a lecture honouring Oliver Hart, co-winner of the 2016 Nobel Prize for economics.

In part Zingales said,

In the 1970s, this question [the make-or-buy decision] started to receive attention in the so-called transaction-cost literature. The key contributions during that period were Alchian and Demsetz (1972), Williamson (1971 and 1975) and Klein, Crawford, and Alchian (1978). Alchian and Demsetz identified the unique nature of the firm in the team production and the associated cost of metering individual contributions to the collective output. This is the line of research the other Nobelist we are celebrating today, Bengt Holmstrhom, pursued. By contrast, Williamson and Klein, Crawford, and Alchian focused on the role of the firm in mitigating the cost of opportunism. Imagine a printing press owned and operated by someone different from the publisher. If alternative users have much lower valuations for the services of the printing press than the current user, there exists an appropriable quasi rent. Klein, Crawford, and Alchian conclude that “if an asset has a substantial portion of quasi rent which is strongly dependent upon some other particular asset, both assets will tend to be owned by one party.” They are quick to add that “this advantage of joint specialized assets … must of course be weighed against the cost of administering a broader range of assets within the firm.”

In these few lines there are all the key insights of the pre-Hart literature, but also all its limitations, among them:

1. If integration has to do with joint specialized physical assets, to what extent does an employee “belong” to a firm? What makes an employee different from an independent contractor? Are Alchian and Demsetz right in claiming that “I can fire my grocer by stopping purchases from him”? (Not just a theoretical discussion, think about Uber.)
2. What aspect of integration produces all these benefits? Why can’t they be achieved through long-term contracting?
3. Can you have too much integration? Are the limits of the firm determined only by “administrative or bureaucratic costs” or can integration also be detrimental? Does communism not work only because of bureaucracy?

It is these limitations that Hart along with Sandy Grossman and John Moore sort to deal with.

The main source of these limitations is the lack of a formal model, the lack of a language to express clearly the driving forces. The work by Grossman and Hart and Hart and Moore answers all these questions.

1. First of all, the emphasis moves from the specialization of physical assets to that of human capital. In this way, they are able to explain how a firm has “power” over its employees. When my colleague “fires” United Airlines, he does not deprive United employees of any asset they have specialized to. When the CEO of United fires a pilot, he does deprive her of assets (physical and organizational) she specialized to. A pilot (especially an older pilot) is more valuable inside United than outside of it. Thus, a specialized pilot will continue being employed by United. Nevertheless, United’s ability to control the pilot’s quasi-rent is the source of the power an employer has over its employee.

One of the many merits of Oliver’s contribution is to have brought back the concept of power inside economics. This is a concept pervasive in political science and sociology, and pervasive in Marxian economics, but completely absent from neoclassical economics. In fact, Oliver’s view of the firm is very reminiscent of the Marxian view, but where Marx sees exploitation, Oliver sees an efficient allocation.

1. Having identified the source of power, Grossman and Hart help us understand why this can only stem from integration.

To cut this Gordian knot, Oliver and Sandy introduce a new concept: the “residual right of control,” i.e. the right to dispose of an asset in all the situations that have not been explicitly contracted out. They identify this residual right of control with ownership.

With regard to ownership being identified with residual rights of control it is interesting to note a footnote in the Grossman and Hart paper,

Richard Posner, whose opinion on the legal definition of ownership we solicited, has referred us to the following statement by Oliver Wendell Holmes (1881/1946, p. 246): "But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits prescribed by 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."

Zingales continues,

Of course, this opens the question of why some contingencies cannot be written in a contract, a question Oliver has spent a great deal of time on and a question I will return to momentarily, if time allows.

But if we accept that contracts are incomplete, then it is easy to see how the residual right of control can be used opportunistically to reduce the share of the surplus of other parties in a relationship.

This insight applies in all walks of life. For example, I just launched an economic podcast. In preparation for this event, I have spent a lot of time and effort. Much of this effort is specific to this particular podcast. So how does ownership of this podcast, which currently is in the hands of the University of Chicago, affect my incentives? Not only I, but most of the economics profession would not have a framework to think about this important question without the work of Oliver.

This is an inconsequential example, but it illustrates how rich the Grossman-Hart-Moore framework is in addressing a fundamental problem of entrepreneurs: how to allocate cash flow and control rights to maximize the commitment of all the key players to a new venture. I regularly teach this in my entrepreneurship class and I would not know how to frame this problem if it wasn’t for Grossman-Hart-Moore.

Note that—unlike Williamson—their results do not rely on friction in the renegotiation process. Grossman-Hart-Moore assume costless renegotiation ex post. Still, ownership (and the residual right of control it confers) matters because of the way it affects the out-of-equilibrium outside option and, through it, the share of ex post surplus each party appropriates. This share impacts not only the distribution of the quasi-rents, but also the ex ante incentives to make firm-specific investments, and thus efficiency itself.

1. Having identified how integration works, Grossman-Hart-Moore can also explain the costs of integration. Since control is zero-sum, control given to party A takes control away from party B, reducing B’s incentives to make firm-specific investments. Thus, integrating a supplier reduces the incentive of the supplier to invest in his human capital. As a result, who should own what, the famous question of the boundaries of the firm, finds a very simple answer: it depends upon the relative importance of the contribution to the various parties.

Hart's work has affected many areas of economics.

Before Oliver finance scholars had focused on the allocation of cash flow rights. Yet, it was difficult to explain why capital structure mattered purely on the basis of cash flow right allocation, since all the effects produced by financing decisions could be undone by contracts. It is thanks to Oliver’s model that researchers could start thinking in terms of control allocation: capital structure mattered because it provides a contingent way to allocate control. In other words, Grossman-Hart-Moore changed the way corporate finance theory was done and did so in an irreversible way.

Unlike poets who only allow people to express their feelings, economic theorists also provide a framework for empirical researchers to study new phenomena. The work of Kaplan and Stromberg (2003) on the allocation of control rights in venture capital contracts or the work of Michael Roberts and Amir Sufi on debt covenants would be inconceivable without Oliver’s work.

Similarly, it is very difficult to understand corporate governance without Oliver’s contribution. The famous survey by Shleifer and Vishny (1997) that incorporates Oliver’s work on control rights, changed the literature on corporate governance. Without Oliver’s seminal contribution that change would not have taken place.

While finance has been the main area of application of ICT, there is hardly a field in economics that has not been impacted. One of the first applications, pioneered by Oliver himself with Tirole, is to industrial organization. ICT provides a way to rationalize the famous market foreclosure argument. Another natural area of application is to the costs and benefits of public ownership. This also was pioneered by Oliver with Shleifer and Vishny in the famous prison paper. It is also not surprising that ICT has been applied to internal organization (Aghion) and to international trade (Antras). Finally, issues of power and contract incompleteness are essential to political economy, and in fact in recent years we have seen a proliferation of applications in this direction.

There are a lot of other areas where Oliver’s theory of incomplete contracts can be profitably applied, as family economics. There is hardly a contract that is more incomplete than marriage and one where relationship specific investments (like the children) are more important.

Oliver is a role model not only for his intellectual achievements, but also for the integrity with which he has achieved them. For more than a decade he argues back and forth with two other Nobelist Erik Maskin and Jean Tirole abut the foundations of his theory of incomplete contract. In spite of the enormous amount of reputation he had a stake, he had the courage to recognize that Maskin and Tirole’s critiques were valid and he went back to the drawing board and produced with John Moore a new foundation of incomplete contracts [this work is the 'reference point' approach to incomplete contracts].

The incomplete contracts theory has been one of the major theoretical advances in economics in the last 30 years and Hart's role in it fully justifies the award of the Nobel Prize.

Latest Blogwatch column

My Blogwatch column from the latest issue (Issue 60, December 2017) of the NZAE magazine Asymmetric Information.

Are Google and Facebook monopolies?

On this episode of The Big Question, Chicago Booth’s Luigi Zingales and George Mason University’s Tyler Cowen discuss the market power wielded by digital platforms, and how to promote competition.


This is a very interesting discussion of an important issue. Well worth the half hour needed to watch it.

Venezuela officially enters the not-REAL-socialism stage

Writing at the IEA blog Kristian Niemietz says,

Now we’ve finally learned what went wrong in Venezuela: it wasn’t real socialism. At the World Economic Forum summit in Davos, Shadow Chancellor John McDonnell explained:

“It’s not that the issue is socialism vs capitalism. […]

All the objectives of Chavez […] would have been successful if they had mobilised the oil resources to actually invest in the long term […]

I think in Venezuela they took a wrong turn, a not particularly effective path, not a socialist path.”

McDonnell is in good company. Quite a few prominent figures on the left, such as Noam Chomsky and Slavoj Žižek, are now explicitly disputing Venezuela’s socialist credentials.

So Venezuela joins the very long list of countries that at some point are held up as role models of "socialism" by Western intellectuals but which, once they start failing, became an embarrassment to the socialist cause. When the problems become so obvious and undeniable socialism in these countries ceases to be ‘real’ socialism, which of course why it fails. Or so we are told. But every socialist country seems to suffer the same fate. Why is this I wonder.

"A Brief Prehistory of the Theory of the Firm". Update

The book is now in the hands of a production editor. The publication of the hardback version is due in June 2018.

You can, however, pre-order it here (Routledge) or here (Amazon) or here (Book Depository). Prices seem to vary a lot so check multiple sellers to see who gives the best deal.