Saturday, 28 March 2020

Social Credit, again

Thanks to a comment from Michael Reddell my attention has been drawn to the discussion of Socal Credit that appears in the report of the New Zealand Royal Commission on Monetary, Banking, and Credit Systems. This report was published in 1956.

Wednesday, 18 March 2020

Costs of regulation

There is a new NBER working paper out on Measuring the Cost of Regulation: A Text-Based Approach by Charles W. Calomiris, Harry Mamaysky and Ruoke Yang.

The abstract reads,
We derive a measure of firm-level regulatory costs from the text of corporate earnings calls. We then use this measure to study the effect of regulation on companies’ operating fundamentals and cost of capital. We find that higher regulatory cost results in slower sales growth, an effect which is mitigated for large firms. Furthermore, we find a one-standard deviation increase in our preferred measure of regulatory cost is associated with an increase in firms’ cost of capital of close to 3% per year. These findings suggest that regulatory risk is a major cost to firms, but the largest firms are able to manage that risk better.
One obvious point here is that regulation is costly to firms. But it is less costly to large firms than small, this has implications for competition policy. Large firms may support regulation as a way of increasing the costs of small firms relatively more than for large firms. This means that large firms can use regulation as a way of forcing new, innovative small firms out of the market, and thus reduce competition.

Friday, 6 March 2020

What everyone should know about social credit

Of the ideas that economists have to deal with every so often, one of the stranger ones is that of Social Credit monetary theory. Here in New Zealand Social Credit was once a third party with a reasonable following by voters. Back in 1955 it was such a force that an economist at the University of Canterbury, Alan Danks (later Professor and Sir) wrote a short pamphlet explaining what was wrong with the Social Credit approach to economics. The pamphlet is What Everyone Should Know about Social Credit by A.J. Danks, Christchurch: The Caxton Press, 1955.

Latest Blogwatch column

My Blogwatch column from the latest issue (Issue 66, December 2019) of the NZAE magazine Asymmetric Information


Saturday, 22 February 2020

X-inefficiency

A basic assumption of the neoclassical model of production is that production is carried out in a technically efficient manner.(1) Leibenstein (1966) challenges this assumption. First, he argues that the empirical evidence suggests that producers typically do not achieve technical efficiency and he called this technical inefficiency, `X-inefficiency'.(2) Secondly, he argues, in terms of a theoretical explanation for this inefficiency, that there are four major reasons for X-inefficiency:
  1. Labour contracts are incomplete. Such contracts do not and can not completely specify what is to be done by employees. The hiring of labour involves the hiring of time on the job but the intensity of effort is variable, that is, there are, in addition to incompleteness, moral hazard problems to contend with.(3)
  2. Not all of the factors of production needed to achieve technical efficiency are markable and thus some of these factors may not be available to a producer. In particular, significant problems can arise when there are market imperfections in the market for management, meaning the quality of managers is hard to assess ex ante, that is, there are adverse section problems in the market for managers.
  3. The production function is not completely specified nor completely known by the producer. Prior experience and ability to experiment are factors affecting the producer's knowledge of the production process. But if the producer does not fully understand the production function, it will struggle to achieve fully efficient production.
  4. If there are strategic interactions between producers and uncertainty about competitors' reaction to a move by any given producer, then tacit collusion and imitation between producers can result and this could prevent producers from achieving fully efficient production. Put simply, competition matters for efficiency.
In later work, Leibenstein (1975, 1976), the theory of X-inefficiency has been expanded. It is noted that organisations are collections of individuals, each of whom has their own self-interest and whose efforts on behalf of the organisation are variable. Leibenstein emphasises the variability of effort by the individual rather than the mutuality of individuals' interests within the organisation. Individuals will pursue their own interests, which may (or may not) contribute to the interests of the organisation in its entirety. But there are constraints placed on the individual's actions by the organisation.
"The 'tightness' of these constraints depends upon the nature of the job being done, the system of payments (e.g. payment by results, payment by time, etc.), and the type of organization. Two important factors in determining the tightness of the constraint are likely to be the strength of the competition in the markets where the firm operates, and its degree of success" (Sawyer 1975: 131).
It is worth noting that the idea of X-inefficiency is related to the concept of `slack' noted in the sections above. It arises in this context due to the pursuit of self-interest by individuals, variations in their effort and incomplete monitoring of individuals. In the behavioural theory, it arises because of the bargaining processes within the organisation while in the managerial models it is due to the pursuit of self-interest by managers. But the presence of slack, for whatever reason, suggests the non-minimisation of costs and thus the non-maximisation of profits.

Notes.

(1) This section is based on Sawyer (1975: section 8.4)

(2) A more formal model of X-inefficiency is given in Crew (1975: 110-5).

(3) Hawkins (1973: 50) explains that human beings are different from other factors of production in important ways.
``Machines have a potential output which can be achieved by pressing the right switches. Human beings by contrast can adjust the quality and pace of their work in line with their own preferences. By supervision, by punishments and incentives, human effort can be varied. There is no reason why a shop-floor worker, or manager, should have a utility function which coincides with that of the firm as a whole or of its shareholders. Employees may maybe compelled to produce a minimum output - or lose their job. There may also be a maximum output of which they are capable given all the right sticks and carrots. But between these levels they can choose to vary the amount of time they spend on various activities, the pace at which they work and the quality of the work they do. There is no single-valued relationship between the number of man-hours purchased and the quality or quantity of effort that is expended in production. As a result, it is unlikely that every employee's choices will be exercised in such a way as to give maximum output per unit of input. So X-inefficiency almost always exists".
Refs.
  • Crew, Michael A. (1975). Theory of the Firm, London: Longman.
  • Hawkins, C. J. (1973). Theory of the Firm, London: The Macmillian Press.
  • Leibenstein, Harvey (1966). 'Allocative Efficiency vs. X-Efficiency', The American Economic Review, 56(3) June: 392-415.
  • Leibenstein, Harvey (1975). 'Aspects of the X-Efficiency Theory of the Firm', Bell Journal of Economics, 6(2) Autumn 1975: 580-606.
  • Leibenstein, Harvey (1976). Beyond Economic Man, Cambridge Mass.: Harvard University Press.
  • Sawyer, Malcom C. (1979). Theories of the Firm, London: Weidenfeld and Nicolson.

Wednesday, 19 February 2020

Are rights always right?

The Winter 2020 issue (vol. 34, no. 1) of the Journal of Economic Perspectives contains an article that looks at The Consequences of Treating Electricity as a Right, by Robin Burgess, Michael Greenstone, Nicholas Ryan and Anant Sudarshan (pp. 145-69).

Abstract
This paper seeks to explain why billions of people in developing countries either have no access to electricity or lack a reliable supply. We present evidence that these shortfalls are a consequence of electricity being treated as a right and that this sets off a vicious four-step circle. In step 1, because a social norm has developed that all deserve power independent of payment, subsidies, theft, and nonpayment are widely tolerated. In step 2, electricity distribution companies lose money with each unit of electricity sold and in total lose large sums of money. In step 3, government-owned distribution companies ration supply to limit losses by restricting access and hours of supply. In step 4, power supply is no longer governed by market forces and the link between payment and supply is severed, thus reducing customers' incentives to pay. The equilibrium outcome is uneven and sporadic access that undermines growth.
Making something a "right" can have negative unintended consequences.

Saturday, 8 February 2020

Bernie Sanders and the disastrous rent control plan

Rent controls really are a bad idea.
There isn’t much disagreement among economists about what a national rent control policy would do to harm renters, housing prices, housing stock, and the incentive to build new housing. Nonetheless, Bernie Sanders persists. Ryan Bourne comments.

Monday, 13 January 2020

Sir Roger Scruton (1944-2020)

From Uncommon Knowledge comes this interview of Sir Roger Scruton by Peter Robinson.
Sir Roger Scruton was an English writer and philosopher who published more than fifty books in philosophy, aesthetics, and politics. His book discussed in this episode was How to Be a Conservative; it was published in 2014. He is a fellow of the British Academy and a fellow of the Royal Society of Literature. He teaches in both England and America and is a senior fellow at the Ethics and Public Policy Center, Washington. DC. He is currently teaching an MA in philosophy course for the University of Buckingham. Sir Scruton was knighted in 2016 by Queen Elizabeth II for his “services to philosophy, teaching and public education.”