Friday, 22 May 2020

Foundations of Organisational Economics: Histories and Theories of the Firm and Production

This essay provides introductions to five of the major topics to do with the history of the theory of production and the theory of the firm. The first chapter is an introduction. The second considers the change from a normative approach to the theory of production to a largely positive approach. Before, roughly, the 17th century the main approaches to the theory of production were normative. The third looks at the relationship (or the lack of a relationship) between the division of labour and the theory of the firm. Even today the mainstream of economics does not emphasise the division of labour in the theory of the firm. In the fourth chapter, the development of the proto-neoclassical approach to production is examined. The development of theories of monopoly, oligopoly and perfect competition as well as the theory of input utilisation are discussed. The fifth chapter looks at Marshall’s idea of the representative firm. This was the main early neoclassical approach to the theory of industry-level production. Marshal wished to be able to construct an industry supply curve without having to assume all firms were identical. The sixth examines the challenges to the neoclassical model in the period 1940-1970. The last chapter is a short conclusion.

Foundations of Organisation... by Paul Walker on Scribd

Sunday, 19 April 2020

Phllip W. Magness on the New York Times 1619 Project

From ReasonTV.
When The New York Times launched its 1619 Project last year, it sought to "reframe the country's history by placing the consequences of slavery and the contributions of black Americans at the very center of our national narrative." What began as a series of articles in the Times magazine morphed into a collection of lesson plans for K-12 students and provoked an immediate controversy.

Five of the nation's most eminent academic historians co-signed a letter to the Times describing the project as "partly misleading" and containing "factual errors." And Northwestern University Professor Leslie M. Harris revealed that she had been a fact-checker on the series and that her warnings of a major error of interpretation had been ignored. But Harris also took "detractors of the 1619 Project" to task for "misrepresent[ing] both the historical record and the historical profession," writing that the "attacks from its critics are much more dangerous" than the Times' "avoidable mistakes."

Enter Phillip W. Magness, an economic historian, a research fellow at the American Institute for Economic Research, and the author of a new collection of essays on the project. Magness praises aspects of the series but he says that the project's editor, Nikole Hannah-Jones, is guilty of blurring lines between serious scholarship and partisan advocacy. And he has called for the retraction of an essay in the series by Princeton sociologist Matthew Desmond, which was headlined, "In order to understand the brutality of American capitalism, you have to start on the plantation."

Nick Gillespie spoke with Magness from his office in Great Barrington, Massachusetts, about what the Times gets right and wrong about U.S. history, capitalism and slavery, Abraham Lincoln's contested legacy, and why our interpretation of American history matters to contemporary society.

Saturday, 18 April 2020

Lives vs the economy

From NPR's Planet Money comes this podcast on Lives Vs. the Economy. Hosts Sarah Gonzalez and Kenny Malone interview Betsey Stevenson and W. Kip Viscusi on how we value a life.
A question we've been hearing lately: "Is it worth it to shut down the economy to save lives?" Or "Should we let people die to save the economy?" The only way to answer this question is to figure out what a human life is worth ... in dollars. This happens all the time. In fact, U.S. government federal agencies have a very specific answer. They say a human life is worth about $10 million.

Today on the show, how economists came up with that number, why that number needs to exist, and an answer to the question: Is it worth it to restart the economy right now? (No. The answer is No.)

Friday, 17 April 2020

Kristian Niemietz talks about Socialism

This week on The #GSPodcast Stephen Knight talks to Kristian Niemietz (@k_niemietz). Kristian is Head of Political Economy at IEA London and the author of ‘Socialism: The Failed Idea That Never Dies’. They talk about: Classical Liberalism, defining ‘socialism’, Communism v Socialism, the ‘Nordic model’, food banks and more.

Sunday, 12 April 2020

Tuesday, 7 April 2020

Coronavirus: a cost-benefit analysis of the economic shutdown

From the Capitalisn't podcast comes this episode on the cost-benefit analysis of the coronavirus crisis in which Luigi Zinglas and Kate Waldock interview Russ Roberts. Roberts comes in around the 15-minute mark.

One of the prominent economic debates to emerge during the coronavirus outbreak has been whether to continue with shelter in place measures that are hurting the economy but, hopefully, slowing the virus' spread. On this episode, Luigi does a cost-benefit analysis that shows why it could be better to keep the economy closed, and debates his proposal with Russ Roberts, host of the popular EconTalk podcast.

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


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.


(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".
  • 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).

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.”