MacDoctor on student loans

KPMG has come up with the idea that only students doing courses that "benefit the economy" should receive interest-free loans, agriculture being a example of such a course. In response to this MacDoctor takes up the keyboard and writes,

While I have sympathy for the agribusiness sector, because it is increasingly difficult to interest young people in the sector, I have nothing but horror for the idea of government attempting to pick winners in education. Exactly how will politicians and educationalists determine which degrees would be “useful”? The very fact that both I and the sub-editor at Stuff need to place the word “useful” in inverted commas tells the story. Trying to determine what part of tertiary education will have the most economic impact is an exercise in gross stupidity. Governments are notoriously bad at picking winners.

and

I have little problem with the current interest-free student loan scheme and believe that, in the long run, the large expense involved will prove to be worthwhile.

Now on the first point he is right: governments can not pick winners, in education or anything else. Markets, by and large, do a much better job of sorting out the wheat from the chaff, sorting out the valuable or worthwhile and rejecting what is useless or worthless. But on the second point he is wrong. If markets are to do their sorting then prices must reflect opportunity costs. This is just as true for loans as it is for bread or cars or pens or ... There may be a case for the government providing loans to students, problems with borrowing against human capital, but pricing these loans at zero will missallocate resources. When taking out a loan one of the questions a student should ask is, How will I pay this back, including interest. If the returns to the education can not pay for the loan and interest then that loan could be better used by someone else.

Inflation Targeting Turns 20

Scott Roger writes in Finance and Development (March 2010, Volume 47, Number 1) that Inflation Targeting Turns 20. In the last 20 years a growing number of countries have been making a specific inflation rate the primary goal of monetary policy, with success. Roger writes,

TWO decades ago, New Zealand adopted a new approach to monetary policy, based on achieving a specific target for inflation. What made this approach new was the explicit public commitment to controlling inflation as the primary policy objective and the emphasis on policy transparency and accountability.

Today 26 countries use inflation targeting, about half of them emerging market or low-income economies. Moreover, a number of central banks in more advanced economies—including the European Central Bank, the U.S. Federal Reserve, the Bank of Japan, and the Swiss National Bank—have adopted many of the main elements of inflation targeting, and several others are in the process of moving toward it.

This article examines how inflation targeters have performed over the past 20 years—including during the commodity price shocks of 2006–08 and the global financial crisis that began in 2007. The article also highlights some especially important issues inflation targeters are likely to face in the next few years.

This is one example where New Zealand lead the world in economic policy.

Sir Walter Scott, advocate of free banking

They say you learn something new everyday. Well here is something I didn't know until today. This bit of somewhat useless information is from Kurt Schuler at the Free Banking blog; free banking counts among its advocates Scotland’s most famous novelist, Sir Walter Scott.

Under the pen name of Malachi Malagrowther, Scott wrote "letters" — more accurately, short essays — defending the Scottish system of bank note issue. A banking crisis in England in 1825-26 led to a search for remedies, and some people argued that raising the minimum denomination of bank notes, then £1, would reduce the risk of future crises. Today, £1 is so little that there is no note for it, just a coin, but back then it was more than two week’s wages for many workers. Scott and other advocates of the £1 note pointed out that Scotland’s banking system had withstood the crisis much better than the more heavily regulated English system. They were successful in making their case: the British Parliament raised the minimum denomination of notes to £5 in England but kept it at £1 in Scotland. Although Scottish free banking ended in 1844, Scottish banks continued to issue notes under regulations that made them more or less Bank of England notes with distinctive designs. Fittingly, Sir Walter Scott’s portrait today adorns all notes issued by the Bank of Scotland.

Today another Scotsman, Mr A. Smith, appears on the English £20 note. The first Scotsman to do so.

Tim Harford video

This is edited highlights from a RSA Event video: "Why success always starts with failure". It is Tim Harford discussing some of the ideas behind “Adapt”.

Charter cities

In this audio from VoxEU.org Paul Romer of NYU’s Stern School of Business talks to Romesh Vaitilingam about his vision of dysfunctional poor countries kick-starting their own development by creating new cities with new rules – what he calls ‘charter cities’.

Interesting blog bits

1. Eric Crampton suggests that you Check my sources
   

   If the Government said that the minimum price for a new car were $50, nobody would expect it to affect sales. Neither would an increase to $65. But it would certainly start mattering if the Government applied a minimum price of $5000 to all cars, new and used. This is the situation in New Zealand with youth minimum wages, which were abolished in 2008 in favour of adult rates for all workers over 16 years old. This increased the youth minimum wage by 25 per cent.

2. Al Roth has a few Misc. repugnant transactions: marijuana, camel meat, and concealed carry on campus.
3. Raghuram Rajan on Money Magic

   Some Americans view Fed Chairman Ben Bernanke as a modern-day wizard, able to revive the economy through a swish of his monetary wand – first ultra-low interest rates, then quantitative easing, and perhaps eventually money-printing. If inflation is low, they want the Fed to use every spell it knows to revive the economy. Like the World War I generals who reacted to every slaughter of their men by sending even more over the top of their trenches in a vain attempt to overwhelm the enemy, “free money” types react with “More!” if their policy does not seem to be working.

4. George Selgin on Those “Other” 100 Percent Reserve Banking Advocates

   It was in response to this supposedly inherent drawback of fractional reserve banking that several prominent economists—including Henry Simons, Irving Fisher, Loyd Mints, and (eventually) Milton Friedman—began offering or endorsing proposals for “100 Percent Money,” meaning money consisting either of basic money itself or of bank deposits fully backed by basic money. Although these proposals closely resembled later proposals for 100-percent reserve banking forwarded by Murray Rothbard and his Austrian-School followers, they differed in treating either fiat or “commodity-bundle” central bank money rather than either gold or silver as the ideal form of basic money, and also in not basing their arguments on any appeal to ethics: unlike their Austrian counterparts, the “Chicago” 100-percenters (for want of a more accurate designation) did not claim that fractional-reserve banks swindled their customers. Instead they condemned them solely for contributing to monetary instability.

5. John Taylor is Comparing 2011 with 1937
   

   He explores reasons for the current weak recovery, and in particular whether there is an analogy with what happened in the recession of 1937-38 which interrupted the recovery from the Great Depression. Several charts elaborate on numbers provided there which argue against such an analogy.

6. Don Boudreaux on More on the Economic Irrelevance of Political Borders

   Writing about the economically unjustified Trade Adjustment Assistance (TAA) program in today’s Washington Post, George Will gets it exactly right about the nature of that lamentable program. Here’s the heart of the column.

7. Shimelse Ali, Uri Dadush and Rachel Esplin Odell ask Is protectionism dying?
   

   The limited resort to protectionism during the financial crisis is often attributed to the WTO or to sensible macroeconomic policy. This column argues that there is more to the story. The combination of national laws, regional agreements, and powerful interest groups has worked to stop protectionism in its tracks.

8. Holger Görg and Christiane Krieger-Boden note that Trade protection backfires on FDI

   The global financial crisis has raised the threat of protectionism. This column argues that the worst offenders will suffer a drop in foreign direct investment inflows.

Grossman and Hart at 25

In a previous post I asked Is the theory of the firm big business and answered no for New Zealand. Well there may be little interest shown in it here but not so overseas. There is an upcoming conference on "Grossman and Hart at 25". This year marks the 25th anniversary of the publication of Grossman and Hart's seminal paper “The Costs and the Benefits of Ownership: A Theory of Vertical and Lateral Integration."

In the years that have followed, we have witnessed an explosion of literature on incomplete contracts. Just how large an explosion is shown by the areas cover by the conference: Incomplete Contracts and Boundaries of the Firm, Incomplete Contracts and Internal Organization of the Firm, Incomplete Contracts and Corporate Finance, the Foundations of Incomplete Contracts, Incomplete Contracts and Industrial Organization, Incomplete Contracts and International Trade, Incomplete Contracts, Public Ownership, and Cooperatives, Incomplete Contracts and Political Economy and New Directions of Incomplete Contracts and Experiments. We just have to hope someone publishes the papers from the conference.

A useful (and surprisingly readable) survey article on some of these areas can be found in the Spring 2011 issue (Vol. 25, No. 2) of the "Journal of Economic Perspectives": “Incomplete Contracts and the Theory of the Firm: What Have We Learned over the Past 25 Years?” by Philippe Aghion and Richard Holden. The introduction outlines the paper as:

In the first section of this paper, we spell out Grossman and Hart’s argument using a simple numerical example, then then we show how the incomplete contracts approach can be extended beyond the firms’ boundaries issue to analyze firms’ internal organization; firms’ financial decisions; the costs and benefits from privatization; and the organization of international trade between inter- and intrafirm trade. In the second section, we discuss several criticisms of the incomplete contracts/property rights methodology, especially what we call the “implementation criticism,” and then we briefly review some recent developments of the incomplete contracts approach.

How long before a Nobel gets given for incomplete contracts?

The never ending supply of administrators

Malcolm Harris writes about Bad Education at the n+1 website:

As faculty jobs have become increasingly contingent and precarious, administration has become anything but. Formerly, administrators were more or less teachers with added responsibilities; nowadays, they function more like standard corporate managers—and they’re paid like them too. Once a few entrepreneurial schools made this switch, market pressures compelled the rest to follow the high-revenue model, which leads directly to high salaries for in-demand administrators. Even at nonprofit schools, top-level administrators and financial managers pull down six- and seven-figure salaries, more on par with their industry counterparts than with their fellow faculty members. And while the proportion of tenure-track teaching faculty has dwindled, the number of managers has skyrocketed in both relative and absolute terms. If current trends continue, the Department of Education estimates that by 2014 there will be more administrators than instructors at American four-year nonprofit colleges. A bigger administration also consumes a larger portion of available funds, so it’s unsurprising that budget shares for instruction and student services have dipped over the past fifteen years.

Mark Perry at the Carpe Diem blog notes,

Hey, where I teach (University of Michigan-Flint), we're way ahead of the national trend - the administrative/professional ranks outnumbered the full-time faculty (tenured, tenure-track and full-time instructors/lecturers) years ago, starting in 2005 (see chart above).

And before you ask the situation in New Zealand isn't that much different. We also seem to have a never ending supply of administrators, doing I don't know what. One thing is for sure they aren't teaching or doing research, which is what I thought universities are there for.

Treasury: drop all screening of foreign investment

That is the headline from an article from the NBR last week.

Acting Secretary to the Treasury Gabriel Makhlouf  has hit out at critics of foreign investment in New Zealand, saying Treasury has consistently recommended removing all screening.

The British civil servant who arrived in this country 15 months ago told the New Zealand Institute of International Affairs that lowering foreign investment would be counter-productive to growth ambitions.

Small, high productivity economies relied heavily on international connections of people, capital, trade and ideas, he said.

He advocated the reduction of costs and distortions associated with capital inflows, particularly tax.

"If we are to continue to screen foreign investment, and Treasury has consistently recommended removing all screening, it needs to be kept to a minimum and under constant review," he said.

The article continues by noting that Makhlouf made the obvious point that,

[...] it had become fashionable to question foreign direct investment, arguing there was a loss of control of land assets and profits were exported.

The issue was really how the land was used, rather than who owned the land, Mr Makhlouf said.

Regulatory mechanisms governing land use applied to all land owners irrespective of nationality.

And for the Canadian economist whose name I forget, I note that Makhlouf used the following example,

"Some of you might have followed the story of the big Swedish furniture outlet called IKEA, and its attempts to find a site for a store in the North Island," Mr Makhlouf said.

The company ran into so many obstacles that it eventually abandoned its plans to establish a New Zealand branch. Domestic policy settings relating to roading infrastructure, the Environment Court process and the approach of the local council managed to sink IKEA’s plans.

Not the kind of outcome that will attract foreign investment, and New Zealand needs foreign investment to cover the gap we have between national savings and national investment. Otherwise we will have to reduce investment, which will not help the economy or our growth, or cut consumption, which people don't seem too keen on.

Lessons from the financial crisis for teaching economics

John Taylor discuses this topic at his blog Economics One. He writes,

I emphasized that one’s view of how economics teaching should change depends greatly on one’s view of the crisis. For example, Alan Blinder and I have different views of the crisis and the policy response, so naturally we have different views about how the crisis should affect teaching.

In my view the problem was that economic policy deviated from basic economic principles which had worked well. The result was a great recession, a financial panic, and now a very weak, nearly nonexistent, recovery. The deviations included a monetary policy which set interest rates too low for too long and a regulatory policy which failed to enforce existing rules. The deviations from sound principles continued when government responded with an ad hoc bailout process and temporary fiscal stimulus programs. The good news for the economy is that economic growth and stability can be restored by adopting policies consistent with basic economic principles.

Taylor goes on the argue that the good news for teaching from the financial crisis is that we now have many more examples to illustrate basic economic principles including that incentives matter, the permanent income hypothesis, regulatory capture, and the money multiplier. And you can never have too many examples to drive home the importance of basic economics.

A correction

In an earlier post I said with reference to the New College for the Humanities (NCH)

As far as I know this will be only the second private university in the U.K.

Looks like I was wrong. At the Adam Smith Institute blog Anna Moore writes

Once opened, the NCH will be the UK’s third private university, the latest in a trend that began with the University of Buckingham in 1976.

A quick bit of research suggests to me that the third private university will be Richmond University. There are several other private degree awarding bodies including BPP University College, Ashridge Business School, ifs School of Finance, The College of Law and Regent's College.

If only it would happen in New Zealand

Over at Marginal Revolution Tyler Cowen blogs on The new British university model?

Well, it’s certainly star-studded. A new private university in London, devoted to the humanities, will have the philosopher and public intellectual A.C. Grayling as its “master.” Richard Dawkins will teach evolutionary biology, Niall Ferguson economic history, Steven Pinker psychology, and Ronald Dworkin the philosophy of law.

[...] Daniel Davies notes correctly that few if any of these illustrious names will be resigning their normal academic posts. That is the real innovation of this business model. Why not rent illustrious names rather than paying the whole set of fixed costs? Then hire excellent teachers — mostly not top researchers — to provide most of the actual instruction.

The Guardian reports,

A new private university in London staffed by some of the world's most famous academics is to offer degrees in the humanities, economics and law from 2012 at a cost of £18,000 a year, double the normal rate.

The Oxbridge-style university college aims to educate a new British elite with compulsory teaching in science literacy, critical thinking, ethics and professional skills on top of degree subjects taught in one-to-one tutorials.

Its first master will be the philosopher AC Grayling, and top teachers from Harvard, Princeton, Oxford and Cambridge will include Richard Dawkins teaching evolutionary biology and science literacy, Niall Ferguson teaching economics and economic history and Steven Pinker teaching philosophy and psychology.

New College of the Humanities, based in Bloomsbury, is being backed by private funding and will aim to make a profit. It will offer some scholarships, with assisted places being granted to one in five of the first 200 students.

Grayling said he was motivated in part by fears that government cuts to university humanities and arts courses could leave "the fabric of society poorer as a result".

"Society needs us to be thoughtful voters, good neighbours, loving parents and responsible citizens," he said. "If we are to discover and inspire the next generation of lawyers, journalists, financiers, politicians, civil servants, writers, artists and teachers, we need to educate to the highest standards and with imagination, breadth and depth."

The college aims to attract candidates with at least three A grades at A-level with the promise of more direct teaching than at traditional universities. The student-teacher ratio will be better than 10 to one and there will be 12 to 13 hours' contact with teachers each week.

As far as I know this will be only the second private university in the U.K. Starter for 10, name the other one.

More on ticket scalping

CBC Vancouver interviewed Mike Munger, and some Canadian economist whose name I forget, last week about the prices for tickets to the Vancouver Canucks's Stanley Cup Finals games and ticket scalping. The program can be listened to here. It lasts about 8 minutes.

Chairman of the Council of Economic Advisers Goolsbee to step down

Reuters reports,

WASHINGTON, June 6 (Reuters) - Top White House economist Austan Goolsbee said on Monday he was stepping down, marking the exit of one of President Barack Obama's top aides at a time when new signs of weakness have emerged in the U.S. economy.

Less than a year after he was named chairman of the White House Council of Economic Advisers, Goolsbee plans to return to his teaching job at the University of Chicago, the Obama administration said in a statement. He will be back in Chicago in time for the start of the next school year.

I guess the only real question is, Why do you step down from such a job after less than 1 year into a 3 year term? What is the signal here?

JS Mill on compensation to slave owners

In a previous posting I asked under what situations should compensation be paid for changes in government policy. One case I asked about was,

Consider the situation of salve owners at the time the British government declared slavery illegal. The salve owners previously legal business was just shut down by an arbitrary decision by the government. The slave owners suffered a very large loss because of the government's decision. Should they have been compensated?

John Stuart Mill wrote this on the topic in his text "Principles of Political Economy":

[Ilniquitous as ... [“property in human beings”] is, yet when the state has expressly legalized it, and human beings, for generations, have been bought, sold, and inherited under sanction of law, it is another wrong, in abolishing the property, not to make full compensation.

So what was Mill's argument for compensation? The following comes from a paper "Reparations for Emancipation: Mill's Vindication of the Rights of Slave Owners" by Dale E. Miller, The Southern Journal of Philosophy, Summer 2005, Volume 43, Issue 2, pages 245-65:

3.1. Mill’s Argument

Mill’s assertion that slave owners are owed fair compensation when their slaves are freed is no mere whim on his part. It appears not only in all seven editions of the Principles of Political Economy, a work that changes substantially over the years as his views evolve, but also in a number of his other writings. The idea did not appear so strange in his day as it might today. British slave owners in the West Indies were paid some twenty million pounds for their slaves in 1833. Some American slave owners were compensated as well; in 1862 Congress appropriated one million dollars for this purpose when it ended slavery in the District of Columbia. Abraham Lincoln’s “Preliminary Proclamation,” issued 22 September 1862, called for compensating all slave owners loyal to the Union who freed their slaves, and Congress passed a resolution that same year calling on the federal government to compensate any state that undertook a gradual abolition of slavery for the “inconveniences, public and private, produced by such a change of system”

Political support for compensating slave owners may have been motivated in part by an obvious pragmatic consideration; it may have looked like the easiest way for a nation to end slavery quickly and, at least in the United States, without bloodshed. Mill, in contrast, considers “emancipation without compensation” to be not merely inexpedient but a “flagrant injustice.” The fact that he does not argue for this contention suggests that his reasons for advancing it are not overly complicated or obscure. Although he never explicitly formulates it, he clearly subscribes to a principle of justice that calls upon the state to compensate citizens when it deprives them of property that they legally acquired and held. For example, at one point in the Principles Mill says that the division of large Irish estates, with cottier tenants being converted into landowning peasants, would only be acceptable subject to the proviso that those who lost land received “its pecuniary value, or an annual income equal to what they derived from it.” He seems to regard the state’s obligation to compensate slave owners when it abolishes slavery as one more straightforward consequence of this principle. Drawing on language from American constitutional law, we can call this the “takings principle.”

One may want to object immediately that the takings principle is irrelevant here because human beings are not in fact property. Mill would agree that, in the most profound sense, this is true. Yet apparently he interprets the takings principle so that it applies whenever the state has allowed people to treat something as if it were property. To understand why he interprets the principle in this way, it is necessary to examine his particular reasons for subscribing to it. In the framework of Mill’s utilitarianism, the obvious place to find theoretical support for the takings principle is an even more fundamental principle of justice, one that he does state explicitly.

[Ilt is confessedly unjust to break faith with any one: to violate an engagement, either express or implied, or disappoint expectations raised by our conduct, at least if we have raised those expectations knowingly and voluntarily....

In other words, once one has freely encouraged others to form expectations about one’s future behavior and to base their plans around these expectations, one has an obligation to follow through. This might be called the “expectations principle.” Mill takes this to be one of the weightiest principles of justice, because violations of it have especially detrimental effects on our happiness.

The important rank, among human evils and wrongs, of the disappointment of expectation, is shown in the fact that it constitutes the principal criminality of two such highly immoral acts as a breach of friendship and a breach of promise. Few hurts which human beings can sustain are greater, and none wound more, than when that on which they habitually and with full assurance relied, fails them in the hour of need ....

The expectations principle entails that if the government has knowingly and voluntarily encouraged citizens to expect to retain property they have acquired, then it has an obligation to let them do so. Two more premises are needed to get from this to the takings principle. The first is that by making it legal for citizens to own a certain type of property, the state is encouraging them to believe that this will remain legal into the future. The second is that when one violates another’s rights one must fairly compensate them. Mill takes both of these premises for granted-and while more may need to be said about the first, the second probably can be safely assumed. If the takings principle is derived from the expectations principle, then it comes into play whenever the state has knowingly and voluntarily encouraged citizens to rely upon something’s being legally regarded as property.

So Mill apparently reasons from the abstract expectations principle to the more concrete takings principle. From the takings principle, then, he concludes that the state must compensate slave owners upon abolition. There is an inference involved in calling this Mill’s argument, since he never spells it out himself, but it seems like a safe one; he clearly accepts the argument’s premises, and it is thoroughly congruent with his utilitarianism. Perhaps neither step in the argument is as straightforward as he thinks, but if it fails then it is not obvious where. (p. 250-2)

So there is an argument for the compensation of (ex)slave owners, a "takings" argument, which may sound strange - especially as it comes from a well known anti-slavery campaigner, but as Miller notes if the argument fails its not obvious where. Actually the next section in Miller's paper considers objections to Mill's argument.

TEDxEast - Tyler Cowen - The Great Stagnation

EconTalk this week

Barry Eichengreen of University of California, Berkeley and author of "Exorbitant Privilege" talks with EconTalk host Russ Roberts about the history and importance of the dollar as the dominant international currency. Eichengreen explains the advantages to the United States of the dollar's dominance, the historical circumstances that led to its dominance, and the likelihood that the dollar might be supplanted by a competitor. Along the way they discuss China's currency policy, the state of U.S. monetary policy, the causes of the crisis, the risk of inflation in the United States, and the future of the Federal Reserve.

Smith and Keynes share a birthday 2 (updated)

Previously I commented here at Anti-Dismal on a posting by Don Bouudreaux on the irony that Adam Smith and John Maynard Keynes have the same birthdate. In a comment to Don Boudreaux's posting I said,

Actually there is no irony here. We don’t know Smith’s date of birth. June 5 is most likely the date of his baptism.

to which Don Boudreaux kindly replied

Not quite. Smith was born a sickly infant and, many historians believe, was likely baptized immediately rather than, as was the custom for more-healthy newborn babies, a few weeks later.

Here’s Nicholas Phillipson, on pages 16-17, of his 2010 biography of Smith entitled Adam Smith: “Smith was by all accounts a sickly child, and it may be that the slight confusion about his birth day arises from his having been baptized on the day of his birth – a common enough practice in the case of infants not expected to survive.”

Just how "sickly" would have Smith had to have been on the day of his birth for a baptism to be arranged the very same day? We know Smith was unwell as a child but how early this was manifested itself is, without further documentary support, speculative. And we have no evidence that he was baptised on the day of his birth. Ian Simpson Ross writes in his book "The Life of Adam Smith",

The Fife seaport of Kirkcaldy, ten miles across the Firth of Forth from Edinburgh, was the scene of Adam Smith's baptism on 5 June 1723, in the Old Parish Kirk of St Brisse (Bryce). Possibly this was his birth-date, though there is no annotation on the 'Register of Baptismes in the Kirk of Kirkcalsie' (Bonar, 1932: 208), stating 'born this day', as there is in the case of Smith's great friend David Hume (Mossner, 1980: 6). It is reported, however, that as an infant Smith was 'infirm and sickly' (Stewart I.2), and understandable anxieties of the time about infant mortality and salvation may have hastened baptism (Flinn, 1977: 284). (Emphasis added)

while Gavin Kennedy writes in his "Adam Smith: A Moral Philosopher and His Political Economy",

His son, the world-famous Adam Smith, was baptised on 5 June (his birth date is unknown; old calendar; Bonar, [1894] 1966, 208).

So it is possible that Smith was baptised on the day of his birth but it is equally possible he was not. On the evidence I would go with Kennedy and say we know his date of baptism but his date of birth is unknown.

There is a second problem with Boudreaux's claim, the date 5 June is the date from the Julian calendar. Scotland continued to use the Julian Calendar until 1752. It was only then that the Gregorian calendar was commonly used. But Keynes's birth date is, of course, recorded using the Gregorian calendar and Smith's birth date under this calendar would be 16 June. So again the birthdays would not coincide.

Update: At his blog, Adam Smith's Lost Legacy, Gavin Kennedy author of "Adam Smith's Lost Legacy " and "Adam Smith: A Moral Philosopher and His Political Economy" writes,

The 5 June, 1723, is the date on his baptism certificate; his birth date is not known for certain. Also, 5 June is under the old calendar; the modern calendar (from 1752) places it on 16 June, as pedants keep informing me. However, I think it best to stick to the convention of the date on the only known certificate, because retrospectively changing every date on every document before the date was changed by a modern calculation would make historical work prior to 1752 a hopeless mess, as anybody working with 18th century documents will tell you.

Competition cured the “British Disease”

Many may wonder if being British really can be cured!!! But in this article from VoEU.org Nicholas Crafts argues that the "British Disease" can be cured and competition is the way to do it.

Britain’s relative economic decline throughout the 20th century – the so-called “British disease” – was a national embarrassment that only went away in the 1980s. This column presents new research showing that competition provided the cure. Only when Britain returned to a regime of competition and openness similar to that which had prevailed before World War I did productivity growth resume.

This has obvious implications for New Zealand. An effort to increase market competition and making sure we maintain our openness to foreign trade will help in the New Zealand's efforts to boost productivity. Crafts argues that

Over the last 20 years or so, there has been a big change in the way economists look at the relationship between competition in product markets and economic growth. Nowadays, at least for “close-to-the-frontier” advanced economies, it is widely accepted that a strong competition policy promotes productivity growth.

[...] Once it is recognised that competition plays this role, the range of relevant policies expands beyond competition policy narrowly defined to include, for example, deregulation and trade liberalisation – both of which impact on barriers to entry.

There are a number of channels vis which competition and productivity are linked.

1. Stimulating innovation to sustain rents close to the technology frontier;
2. Acting as an antidote to corporate governance problems arising from weak shareholders and the separation of ownership and control;
3. Acting as a discipline which leads to better management practices; and
4. Removing the basis for low-productivity effort bargains between firms and their workers.

Next Crafts asks, What caused the British Disease? His answer,

These ideas help make sense of the “British Disease” which was particularly virulent from the 1950s through the 1970s. The term refers to the relative economic decline which Britain experienced when other European countries grew more quickly and Britain was overtaken by many of them. The symptoms of “British Disease” included debilitating industrial relations and self-indulgent management. In turn, this episode of British economic history, and the way in which it came to an end, offer further support for the claim that weak competition impairs productivity growth in advanced economies.

and

The retreat from competition in the British economy was triggered by the 1930s crisis but was not fully reversed until the 1980s. Early postwar Britain was notable for cartelisation, nationalisation, weak competition policy, and protectionism. [...]

The weakness of competition in product markets interacted with two aspects of British exceptionalism in terms of institutions, namely, corporate governance, and industrial relations. The former was characterised by the absence of strong shareholders and an ineffective market for corporate control, the latter by the presence of craft control, multi-unionism, and legal immunities which underpinned trade-union bargaining power. The evidence is that, in these circumstances, weak competition led to poor productivity outcomes. Competition policy was largely neglected which was clearly a mistake. On the one occasion where a serious reform was made, the Restrictive Practices Act in 1956 which led to the abandonment of collusion in many sectors, there was a significant impact on productivity performance.

Given the problems with productivity in the U.K. in the period from the end of World War Two up until roughly 1980, what changed in the 1980s to reverse things?

The results of the “Thatcher Experiment” in the 1980s make the case and paved the way for reversing relative economic decline. Competition was much strengthened by ongoing trade liberalisation, deregulation, and discontinuing 1970s’ industrial policy. As competition strengthened, there were major changes in industrial relations which were associated with organisational change, together with divestment and restructuring in large firms.

At the sectoral level, stronger competition and greater openness were correlated with improved productivity performance. As the age of information and communication technology came along, Britain was able to embrace the opportunities associated with rapid diffusion of the new technologies, which required big changes in working practices and management hierarchies, better than its continental-European peer group. This would not have happened with 1970s-style industrial relations and a heavily-regulated service sector.

Some reflections on this story are worth remembering.

• First, it was not just Thatcherism that made the difference.

Trade liberalisation was well under way already and the reform of British anti-trust policy was only seriously undertaken by the Labour government in Acts of 1998 and 2002.

• Second, by implication, it is clear that Britain’s failure to sign the Treaty of Rome in 1957 had a substantial cost in terms of its adverse impact on productivity performance.
• Third, although Britain is an egregious example of the long-lasting damage that the 1930s did to supply-side policy, somewhat similar impacts of that financial crisis were felt across the OECD countries.

Fortunately, this time it has been different.

Is the theory of the firm big business?

In a recent survey of the Theories of the Firm-Market Boundary, Todd R. Zenger, Teppo Felin and Lyda Bigelow write

As one recent review explained, “the theory of the firm has become a big business” (Gibbons, 2005: 200)

And indeed Robert Gibbons did write,

After halting beginnings, the theory of the firm has become a big business. Coase (1937) posed the theory’s defining question: which transactions are more efficiently conducted in a firm than in a market? But then the field lay fallow for several decades. Since the 1970s, however, the theory of the firm has become one of the most fertile fields in the profession.

This seemed strange to me. From the viewpoint of New Zealand the theory of the firm looks more like a struggling intellectual corner dairy than a big business. The halting never seems to have ended in New Zealand. No matter how fertile the fields no one seems to be ploughing them in this part of down under.

But I figured this could just be me, what do I know?, so I wasted a whole pile of bandwidth and checked out the websites of New Zealand’s universities (most of which are awful by the way) to see how many of the economics departments have courses on the theory of the firm or on organisational economics. Answer, none. Or at least, none that I could find. Yes I’m sure that the theory of the firm get a mention in courses on industrial organisation or managerial economics or in more general microeconomics courses but its in passing or just as background needed to deal with whatever the course is really about. There appear to be no dedicated courses on the subject. Are firms really considered as unimportant to the economy as this would suggest?

So theory of the firm economists unite, you have nothing to lose but your obscurity! Assuming there is someone else to unite with.