Broadband helps arrest rural decline

Or so Homepaddock points out in a recent post. She writes,

Getting broadband into rural areas could help arrest the urban population drift, findings from a recent survey conducted by Professor Geoff Kearsley from Otago University’s Department of Media, Film and Communication, show.

Department of Media, Film and Communication? Why do I have a bad feeling about this? Anyway, my first question is, Why do we care if getting broadband into rural areas could help arrest the urban population drift? Such movements may not be a bad thing.

Homepaddock later says,

“The Internet has enhanced their social lives, created and enhanced business opportunities, replaced lost services and is helping rural people to stay where they would most like to live. One or two people have even been able to go and live in the country because of broadband facilities.

“When ultra-fast broadband becomes available to all rural households, then these benefits are likely to be greatly enhanced.”

We’ve got broadband which works at a similar speed as mobile using a T-stick. It’s considerably better than dial-up but a long way from ultra-fast. Improved speed and connectivity would make a big difference.

In terms of productivity at least fast broadband may not make as much difference as you think. If fact it may not may any difference at all. Recent work, see “The Need for Speed: Impacts of Internet Connectivity on Firm Productivity" by Arthur Grimes, Cleo Ren and Philip Stevens (Motu Working Paper 09-15 Motu Economic and Public Policy Research October 2009), argues that

Fast internet access is widely considered to be a productivity-enhancing factor. Internet access speeds vary regionally within countries and even within cities. Despite articulate pleas for network upgrades to accelerate internet access, there is little rigorous research quantifying benefits to individual firms that arise from upgraded internet connectivity. We use a large New Zealand micro-survey of firms linked to unit record firm financial data to determine the impact that differing types of internet access have on firm productivity. Propensity score matching is used to control for factors, including the firm’s (lagged) productivity, that determine firms’ internet access choices. Having matched firms, we examine the productivity impacts that arise when a firm adopts different types (speeds) of internet connectivity. Broadband adoption is found to boost productivity but we find no productivity differences across broadband type. The results provide the first firm-level estimates internationally of the degree of productivity gains sourced from upgraded internet access.

The paper's conclusion reads, in part,

After estimating our prediction models for connectivity choices, we match each “treated” firm with a set of like “control” firms (both in terms of their estimated propensity to have broadband and on their observable characteristics). Two types of matching (kernel and stratified) are adopted to check robustness of results. We then estimate the average treatment effect for treated firms (ATT) across a range of samples. We focus on ATTs relating to shifts from: (i) broadband versus no broadband, (ii) slow versus no broadband, and (iii) fast versus slow broadband. We find a (levels) productivity effect of broadband relative to no broadband of approximately 10% across all firms. The estimates indicate a marginally stronger impact on firm productivity for firms in rural (low population density) relative to urban (high density) areas but the differences are not significantly different. Our estimates show that all of these productivity gains can be attributed to adoption of slow relative to no broadband, with no discernable additional effect arising from a shift from slow to fast broadband. (Emphasis added)

Thus we can conclude that a shift to broadband connectivity (from dial-up) appears to raise firm's productivity but a move from slow to fast broadband may have no effect on productivity at all.

Pirates and football teams

What do pirates and football teams have in common? It may not be obvious, but I would argue they are both examples of human-capital based "firms". Each of these types of "firms" is based upon the skills of their members. What is interesting about them, and what needs to be explained, is the very different organisational forms each of them takes.

Consider first the case of the (illegal) pirates, and compare them with their (legal) counterpart privateers. While both pirates and privateers practiced maritime plunder they had very different organisational forms. What they had in common, apart of their business, was the need for human capital in the form of a crew and the need non-human capital in the form of a ship. However an important difference between privateers and pirates is that although they were both in the same business, privateers were state-sanctioned while, by definition, pirates were not. That is, governments would commission privateers to attack and seize enemy nations' merchant shipping during times of war. As already noted the most obvious piece of non-human (physical in this case) capital for both the pirates and the privateers was their ship.

The role of investors in providing this capital was important to the organisational form that pirates and privateers developed. Pirates had no investors; they simply stole the capital they needed. Privateers, on the other hand, as legal enterprises could not just go out and steal the capital they required, they needed external financiers to supply their capital requirements. This difference in capital supply resulted in very different organisational forms: the privateers having a more autocratic management system than pirates. Pirate crews were equal contributors and equal part owners of the "firm" they worked for. Given they had no investors the pirate's "firm" was based around the relatively homogeneous human capital of the crew. Having no need for investors, pirates did not need to develop mechanisms to protect the interests of the firm's financiers as the privateers needed to. This meant that incentive problems could be dealt with by developing a "worker-owned firm" with the crew (usually) sharing equally in "profit" and electing its leaders and having power dispersed among multiple members of the crew such as the captain and the quartermaster. In contrast the privateer had investors and a management system designed to protect their investments. The investors appointed privateer captains and developed an organisational scheme that in some important respects mirrored the managerial organisation of (also investor backed) merchant ships.

So the relative importance of human capital is an important determinant of organisational form, as long as the human capital is homogeneous. An issue the football team example speaks to.

So what of footballs teams? Here we have a situation where human capital, talent at playing football, is the basis for the "firm" but unlike the pirates, ownership by the human capital, i.e. the players, is extremely rare since, I would argue, a worker-owned team would be at a disadvantage relative to a player-as-employee based team. There are many forms of ownership of football teams, from teams having shareholders and being traded on the stock exchange, to teams being owned by an individual, but one form of ownership not seen (as far as I know -a counter example would be great!) is a labour (in this case, player) owned firm.

Heterogeneity among playing talent and thus earning potential acts as a disincentive to the formation of a worker cooperative, which involves (rough) equality in payment¹, since those players with the greatest earning potential, the largest outside options, will transfer away from the cooperative to maximise their income stream.² Differential payment schemes can occur, especially within partnerships, but they require that the individual employee productivities are sufficiently easy to measure so that a relatively objective method of productivity related pay is possible. Given the team production nature of team sports productivities are difficult, if not impossible, to estimate and thus payment by productivity is not feasible, which argues in favour of equality in payments. Thus a worker-owned team would have few, if any, star players, a handicap in the winner-takes-all world of professional sports.^{3, 4}

Another issue for a cooperative sports team is that while the star players may leave the team too soon, the "average players" may stay too long. The average players will have smaller outside options and thus less incentive to leave but as they are also owners of the team it would be more difficult to get rid of those who are not performing. It would be easier for an employee-based team to remove under performing players as they are not owners of the firm.

Also to the degree that exit barriers are entry barriers a worker-owned organisation is at a disadvantage. Such an organisation could hinder rapid transfers between clubs. Problems with transfers could arise, for example, if the terms of the exit have to be negotiated with the remaining player-owners at the time of exit. Or the remaining owners may be unable or unwilling to buy out the exiting player - under a "right of first refusal" or "right of first offer" scheme - or any of them could veto an incoming replacement player-owner. Also there is the question of the value of a player's interest in the team as well as the question of the time period over which an agreed upon value would be paid. These costs make exit more difficult than it would be under an employment contract and thus tend to lock-in the player/owner to the team. Such lock-in is a disincentive to forming, or joining, a labour-owned firm, especially for the best players.⁵ Many of these problems can, to a degree, be contracted around but this imposes additional negotiation costs at the time of entry into the team, which again is a disincentive to forming an worker-owned team. Utilising a worker-owned organisation results in additional haggling costs, either ex ante or ex post, relative to a player-as-employee team.

Put simply, an employee can leave a organisation more quickly and easily than an owner and in the case of professional sports, transfers between teams, or at least a credible threat to transfer, are particularly valuable to the best players. Therefore a player-owned team would be at a competitive disadvantage compared to teams comprised of employee players.

What this suggests is that a labour-owned, human-capital only, firm with heterogeneous human capital, as in the football example, is likely to be unstable and thus a long lasting human-capital only firm which is labour owned will consist of homogeneous human capital, e.g. the pirate example. Thus the "types" of human capital in a firm is an important determinant of the organisational form the firm will take. This doesn’t mean you cannot have a firm which involves heterogeneous human capital but such a firm will require some “glue”, in the form of non-human capital of some kind, to remain viable. Given the importance of this glue to the firm, ownership of the firm by the owner of the non-human capital is likely. Hart (1995: 56) notes that such non-human capital could be as simple as “[ ... ] patents, client lists, files, existing contracts or the firm's name or reputation.” Or it could be a good location for carrying out the firm's business or a contract preventing the non-owner from working for competitors, etc

So overall we get two basic organisational forms for human-capital based firms: 1) a homogenous human capital firm which could be a labour owned firm and 2) a heterogeneous human capital firm which is owned by the owner of the "glue" that keeps the human capital in place.

Notes:

(1) Some worker cooperatives do require all staff to be paid the same wages while others have a limit on the range of pay offered. Such limit is normally expressed as a ratio of the highest paid worker to the lowest paid, e.g. 3:1 or 4.5:1. Also an owner's allocation of the "profits" of the firm will be proportionate to that owner's labour input, so for similar labour inputs, owners receive a similar allocation of  "profits". Thus overall compensation is commonly roughly equal.

(2) Ricketts (1999: 20) explains the problem as ``[f]urther, to minimise antagonism a rough equality in the division of the residual will be necessary and this may conflict with outside opportunities. Those with high transfer earnings reflecting high productivity elsewhere will desert the co-operative. It is for these reasons that control of the firm by its labour force is usually found in circumstances which permit a high degree of common interest." Jossa (2009: 709-10) explains the basic issue in terms of the management of capitalistic versus co-operative firms: ``[g]iven the tendency of cooperatives to distribute their income equitably among all the members, it is difficult to deny that few cooperatives are in a position to pay the high salaries that able managers can expect to earn in capitalistic firms. Whenever a group of people resolve to work as a team-we may add-the member who outperforms the others in initiative and organizational skills will inevitably take the lead. The crux of the matter is that such a person has no incentive to establish a cooperative and share power and earnings with others. He or she will prefer to found a capitalistic firm, where he or she will hold all authority and, if sole owner, appropriate the whole of the surplus [references deleted]

(3) Scully (2008) notes that there is a relationship between a team's finances and a team's success since better financed teams can buy the best players: ``[h]ow good a professional sports team is depends, of course, on the quality of its players. Because teams compete for better players by offering higher salaries, the quality of a team depends largely on how strong it is financially. The financially stronger teams will, on average, be the better teams."

(4) One way around he problem is to pay all players the amount necessary to retain the best player. But this implies paying most players more than their productivities and has obvious implications for the teams budget constraint. This would also aggravate the problem of non-performing average players-owners not wanting to leave the team.

(5) There are also problems such as those which could arise between the manager or coach and the player/owners in their roles as players and as owners. In addition to this there is the problem that if the players provide any financial capital the team needs themselves they risk being badly underdiversified. If the team goes bankrupt they lose not only their job but also (at least part of) their savings. Given the short time span that a player is likely to be a member of the team there is the issue of the return on any capital the player has invested in the team. To ensure a suitable post playing standard of living players are likely to place an emphasis on high returns on their investments.


Refs.:

• Hart, Oliver D. (1995).  Firms, Contracts, and Financial Structure, Oxford: Oxford University Press.
• Jossa, Bruno (2009). `Alchian and Demsetz's Critique of the Cooperative Firm Thirty-Seven Years After', Metroeconomica, 60(4) November: 686-714.
• Ricketts, Martin (1999).  The Many Ways of Governance: Perspectives on the control of the firm, The Social Affairs Unit, London.
• Scully, Gerald W. (2008). `Sports'. In David R. Henderson (ed.), Concise Encyclopedia of Economics, 2nd edn., available from http://www.econlib.org/library/Enc/Sports.html

Harnessing the potential of natural resource extraction for development

From VoxEU.org comes this audio in which Paul Collier of Oxford University talks to Romesh Vaitilingam about how low-income countries that are rich in natural resources can harness the opportunity for development in a way that benefits all their citizens.

Social costs of alcohol 'are vastly inflated'

Or so says a Canadian economist whose name I forget.

Chris Kenny writes in The Australian that the social costs of alcohol in Australia have been routinely exaggerated by at least $10 billion. Kenny open his article by saying,

THE alcohol and hospitality industries are countering the threat of increased taxation by promoting new academic research that claims the negative costs of alcohol to the community have been routinely exaggerated by at least $10 billion.

This undermines a key argument used by the anti-alcohol lobby for increased excise, and represents an escalation of the robust national debate about alcohol-related health issues.

The research, conducted through the University of Canterbury in New Zealand and funded by the industry, claims that the net public costs of alcohol are lower than the amount of revenue raised in alcohol taxes.

The health fascists in Australia are pushing for higher taxes on alcohol and have consistently argued that the social costs of alcohol total $15bn, a figure from a 2008 paper by Australian academics David Collins and Helen Lapsley. Kenny continues,

But the new study by Eric Crampton, commissioned by the National Alcohol Beverage Industry Council, says most of the negative costs of alcohol are borne by private individuals and the public costs total just $3.8bn, which is less than the $4bn raised by alcohol taxes.

Dr Crampton says his study simply applies "straight down the line, neo-classical economics" to the Collins/Lapsley work.

He argues that consumers of alcohol choose to drink for their own benefit, therefore any negative impacts on themselves, such as a shorter lifespan or accident and injury, are private costs and not public burdens.

Dr Crampton's study only counts the costs to third parties, such as victims of crimes or people killed and injured by drink-drivers, not the drivers themselves.

Eric is right here, private costs should not be counted as social costs since social costs are the third party costs of an activity. That is, social costs are the costs imposed on others, not ourselves, of our activities.

Dr Crampton's work, for instance, says it is wrong to count money spent by alcoholics buying drinks as a public cost.

Likewise, we should not count the lost wages of people incarcerated for alcohol-related crimes or the out-of-pocket medical expenses of abusers of alcohol. These, he argues, are all private costs, not borne by the public.

A point to keep in mind is that only costs are being considered here. The benefits of alcohol are being ignored but for policy making purposes both benefits and costs have to be taken into account.

Dr Crampton has not studied the benefits of alcohol and says more work is required in that area to provide an accurate cost/benefit outcome.

"Consumer enjoyment forms the bulk of the economic benefit consumers receive from the consumption of alcohol and by allocating zero benefit to alcohol consumption, the earlier studies convert billions of dollars in private costs to policy-relevant social costs," he said.

Fiscal stimulus doesn't work

There is an interesting piece on Robert Barro in the U.K.'s Telegraph. Barro is reported as saying:

Stimulus packages, when they are needed, should only direct funds to programs that can be justified on their merits.

"The lesson is you want government spending only if the programmes are really worth it in terms of the usual rate of return calculations. The usual kind of calculation, not some Keynesian thing. The fact that it really is worth it to have highways and education. Classic public finance, that's not macroeconomics."

and

But he said they [stimulus measures] should be delivered through necessary capital projects and tax cuts, to deliver required services and make the economy more efficient.

On the U.S. stimulus package,

Turning to the $600bn (£373bn) to $800bn US package, he added it was "mainly a waste of money". Stimulus programmes, he said, offer little more than "rearranging the timing" of economic growth. "Possibly you could make an argument that it's worth it. But it's going to be a negative-sum thing overall, so you have to think it's a big benefit for boosting the recovery."

On fiscal multipliers,

Mr Barro argued that, taken over the long term, for every £1 spent, the cost to the economy will be more than £1 – creating what he called a negative fiscal multiplier. Orthodox thinking is that current stimulus programmes have a positive multiplier effect by creating growth.

Manne on law and economics

Henry G. Manne, Dean Emeritus, George Mason University School of Law, discusses "The Power of Law and Economics."



Henry G. Manne on the Power of Law & Economics from MasonLEC on Vimeo.

Interesting blog bits

1. Tim Worstall on Ban PowerPoint!

   Here’s the answer to the European economic woes: ban PowerPoint.
   
   Yes, really, that’s the suggestion from a Swiss political party. They’re collecting signatures to hold a referendum on the issue: under that country’s system they need 100,000 signatures to put a ban on PowerPoint and similar software to the nation in a national referendum. Such referenda are binding so it’s not an entirely idle threat.

2. Kenneth Rogoff on Technology and Inequality

   There is no doubt that income inequality is the single biggest threat to social stability around the world, whether it is in the United States, the European periphery, or China. Yet it is easy to forget that market forces, if allowed to play out, might eventually exert a stabilizing role. Simply put, the greater the premium for highly skilled workers, the greater the incentive to find ways to economize on employing their talents.

3. Kristian Niemietz on If the minimum wage cannot be scrapped, at least make it predictable

   If scrapping the minimum wage is not politically feasible at the moment, then at least it should be made predictable. One way of doing this is creating an automatic uprating formula which cannot easily be changed. The rate could be pegged to hourly wages at some lower percentile (the 10th, say) of the regional wage distribution, thus effectively regionalising it and removing it from political discretion.
   
   This would not solve the fundamental problem that some people are effectively banned from working. But for the borderline cases, it could still make a big difference.

4. Eamonn Butler on Paying professors not to teach

   At Oxford Adam Smith was taught another lesson in economics – that if you pay people whether they work or not, they will invariably choose not to.

5. Alberto Alesina, Paola Giuliano and Nathan Nunn on Women and the plough.

   Gender inequality is an old story. This column presents new evidence to suggest it may be as old as the horse and plough. It says there is a robust negative relationship between historical plough-use and unequal gender roles today. Traditional plough-use is positively correlated with attitudes reflecting gender inequality and negatively correlated with female labour force participation, female firm ownership, and female participation in politics.

6. Berk Ozler on Working Papers are NOT Working.

   Working papers are the research equivalent of sweatshirts with pizza stains on them, but we wear them on our first date with our audience.

7. Michael Giberson on Oil markets appear unfazed by announced release of oil from strategic reserves

   On June 23 the International Energy Agency announced the release of 60 million barrels of oil from strategic reserves held by member governments. Oil prices dipped for a day or two, then recovered more or less to pre-June 23 levels. Overall, it seems, the release merited a collective yawn from the markets.

8. Art Carden on Time to Close the Security Theater

   The problem isn’t that the TSA is harassing the wrong people. The problem is that the TSA is harassing anyone. The TSA is encroaching on fundamental liberties and providing no discernable benefit.

9. Lasse Lien on Productivity: The Mother of (Nearly) All Good Things

   The mother of all good (material) things is productivity growth. Competitive advantage, firm level growth and survival, profits, economy-wide economic growth, job creation, and destruction, etc. are all outcomes that depend critically on relative productivity and productivity changes. So if you understood productivity really well, you would understand a lot about (material) outcomes across firms, industries and countries, too.

10. Tim Worstall asks Who Makes Money From Windmills?

    Well, for the UK, the answer to who makes money from windmills is quite easy: The Queen.

The effects of 40 years of drug prohibition.

In this short video from the Cato Institute, Jeffrey A. Miron speaks about the effects of 40 years of drug prohibition.

The subprime lending debacle

From the Cato Institute comes "Policy Analysis no. 679" on The Subprime Lending Debacle: Competitive Private Markets Are the Solution, Not the Problem by Patric H. Hendershott and Kevin Villani.

The abstract reads,

The United States' market-government hybrid mortgage system is unique in the world. No other nation has such heavy government intervention in housing finance. This hybrid system nurtured the excessively risky loans, financed with too much leverage, that fueled the U.S. housing bubble of the last decade and resulted in the systemic collapse of the global financial system.

The responsibility for the massive failures of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, at the center of American housing finance and the private securitization system that supports housing finance, falls directly on regulators and indirectly on their political overseers. Private and GSE prudential regulators were given politically determined social lending goals that ultimately trumped prudential regulation, forcing the GSEs to fund subprime lending in competition with private label securitizers. The result was the extension of lower and lower quality loans, creating a race-to-the-bottom between the GSEs and private mortgage providers, all while regulators and politicians looked on approvingly. The financial crisis resulted when many of those loans turned sour in the latter part of the last decade.

We find no evidence that the United States housing market has unique characteristics requiring a hybrid GSE system, thus we conclude that the system and the political risks it is subject to are unnecessary. Any U.S. housing finance policy that does not safeguard prudential regulation from political influence by separating housing subsidy from finance and eliminating government- induced distortions will result in another systemic failure. To re-privatize the GSEs while maintaining their political goals, or to create new, specially chartered enterprises that pursue those goals, would exacerbate systemic risk. (Emphasis added.)

Who guards the guardians is always a question with regulators. When regulators are subject on going political pressure which distorts the incentives they face, the outcome will never be good. Thus in housing, as in any other industry, maximising the "distance" between politicians and firms via privatisation without political stings attached is a necessary step to avoid a repeat of the subprime debacle.

TVHE is alive again

Yes there is econ blogger life in Wellington again. Well as much as there is any form of real life in Wellington! At TVHE rauparaha covers the action at the recent NZAE conference noting the conference related activities of bloggers such as himself, Eric Crampton and Seamus Hogan.

Hopefully the rest of the TVHE crew will be back on-board ASAP.

EconTalk this week

David Skeel of the University of Pennsylvania Law School talks with EconTalk host Russ Roberts about bankruptcy and the government bailout of the auto industry. Skeel argues that the bailout damaged the rule of law by not allowing a bankruptcy procedure to take its course. Skeel speculates on how bankruptcy for GM and Chrysler might have proceeded. He also argues that the costs to the taxpayer of the bailout have been underestimated. The conversation concludes with a general discussion of the effects of bankruptcy.

Sending profits abroad is a good thing

At the CIS website, Oliver Marc Hartwich makes the point that the idea that sending profits overseas is somehow bad for the local economy is "just a protectionist fallacy". He writes,

Let's say the Australian branch of a US company is very profitable. What happens to these profits?

First, the profits might stay in Australia to expand the business of the US company, creating more jobs and extra economic activity here. Even ardent nationalists would find it hard to argue against this.

If the parent company however decided to transfer the profits from its Australian branch to America, it would soon find out that Australian dollars are pretty useless outside Australia and change them into US dollars.

But what happens to the Australian dollars? Since Australian dollars don't buy anything abroad, they will return to Australia to buy Australian goods and services. Maybe a US company will use them to buy Australian minerals. Perhaps US tourists will come here to spend their holidays. Or the US might import Australian-made cars.

In any case, Australian dollar profits transferred abroad return to Australia sooner rather than later because outside Australia, our dollars are just printed paper that will not get you a cup of coffee.

This is where the 'Australian-owned' argument falls to pieces. For Australia's wealth and prosperity, it does not matter where the profits from Australian businesses end up. All that matters for the Australian economy is that Australia remains a place where business transactions take place – irrespective of who owns the business.

Replace Australia with New Zealand in the above quote and the argument applies just as well to us. Profits don't go overseas, as New Zealand dollars are only useful in New Zealand so they have to come back.

North Korea shuts down universities to send students to work

From Fox News we learn that,

North Korea has shut down its universities for the next 10 months so students can work in factories to help rebuild the country's depleted economy, according to the Daily Telegraph.

The communist regime ordered all universities Monday to cancel all classes until next April 2012.

The Telegraph reports that North Korean students will be put to work on construction projects in major cities.

Well that should be be a big step forward for the development of the "knowledge economy" and increasing productivity in North Korea.

An MP makes sense

No, I'm not making this up.

Steven Baker is the MP for Wycombe in the U.K. and he writes,

I had the great pleasure last night of speaking to the Economic Research Council on the subject of Political Economy and the Crisis. I argued that:

Economics should become political economy, embracing the problem of knowledge in the social sciences, morality (think Adam Smith’s Theory of Moral Sentiments) and public choice theory, in particular.

• Classical liberalism is the most robust political economy.
• The Austrian School offers important insights, particularly into business cycles and capital theory.
• The Austrian School predicted and intellectually survived the crisis.
• That reality is, or should be, a challenge to the contemporary paradigm.
• The implications for financial reform are profound.

I wonder how many MPs in N.Z. have ever said such things!

Interesting blog bits

1. Steven Rattner on The Great Corn Con

   FEELING the need for an example of government policy run amok? Look no further than the box of cornflakes on your kitchen shelf. In its myriad corn-related interventions, Washington has managed simultaneously to help drive up food prices and add tens of billions of dollars to the deficit, while arguably increasing energy use and harming the environment.

2. Roger Kerr on The truth about privatisation 15 - profits going offshore

   Last year the Treasury provided a report to its ministers headed Should we be concerned about profits going offshore? It is a competent analysis and very relevant to the privatisation debate.

3. Art Carden asks The drug war: what is it good for?

   Bugger all that I can see.

4. Walter Russell Mead on The Failure of Al Gore: Part One and The Failure of Al Gore: Part Deux

   The green movement’s core tactic is not to “hide the decline” or otherwise to cook the books of science. Its core tactic to cloak a comically absurd, impossibly complex and obviously impractical political program in the authority of science. Let anyone attack the cretinous and rickety construct of policies, trade-offs, offsets and bribes by which the greens plan to govern the world economy in the twenty first century, and they attack you as an anti-science bigot.

5. Tim Worstall notes that Smoking Reduces Obesity

   Do obese people smoke more than thin people? Does one unhealthy habit lead to another that is? Or do people tend to be only one of the two, either smokers or obese?

6. Economic Logic on Venezuela's downfall

   Venezuela was once the poster child in Latin America on how to do well (the opposite being Argentina), growing richer than European economies in the 1950's from quite modest means in less than two generations. And then all went downhill, and the country continues to slide into poverty. While many like to put blame on Chavez and his "revolution," the trend started long before he came to power.

7. The Economist on Two thousand years in one chart

   Over 28% of all the history made since the birth of Christ was made in the 20th century. Measured in years lived, the present century, which is only ten years old, is already "longer" than the whole of the 17th century. This century has made an even bigger contribution to economic history. Over 23% of all the goods and services made since 1AD were produced from 2001 to 2010

8. Willem Buiter and Ebrahim Rahbari on The ‘strong dollar’ policy of the US: Alice-in-Wonderland semantics vs. economic reality

   The strong-dollar rhetoric of the US government contrasts with a weak-dollar reality. This column argues that talking a strong-dollar talk while walking a weak-dollar walk has damaged the reputational capital of the US monetary and fiscal authorities. That has reduced their ability to use statements of intent or announcements of future policy actions to influence markets.

Government created "adverse section" in the war on drugs

Art Carden writes,

“But these drugs are so dangerous!” people might contend. Indeed, they are. But this overlooks the fact that drugs have increased in potency as a response to government crackdowns. Which would be easier to smuggle: $1,000,000 worth of marijuana, or $1,000,000 worth of cocaine? $1,000,000 worth of cocaine can be packed into a much smaller space than $1,000,000 of marijuana. If we decide to fight drugs, what is likely to disappear from the market and what is likely to end up all over the market? Low-potency drugs are likely to disappear. High-potency drugs—like higher-potency marijuana—are likely to stay. According to Milton Friedman, “crack would never have existed. ... if you had not had drug prohibition.”

So in a effort to drive all drugs out of the market the government has has only succeeded in creating a situation in which more dangerous drugs are driving less dangerous drugs from the market. Certainly a very "adverse selection".

Does homebrewing destroy jobs?

Clearly one of the most important economic issues of the age! Because they brew at home, those evil economy wrecking homebrewers don't buy as much beer from breweries and retail liquor stores. This means a reduction in brewery and liquor store jobs. Thus homebrewing results in a loss of jobs in the economy ... and thus should be banned!

Or is it a case of the seen and unseen? At the Market Power blog Phil Miller makes the case that it is.

But we brewers have to obtain ingredients with which to brew. We need our brewing grains, our adjuncts, our hops, our yeast, etc. We also have to have a few pieces of equipment that most people do not have sitting around the house. We need carboys and 5 gallon food-grade plastic buckets. We need bottle cappers, kegging equipment, CO2 canisters for force-carbonating our beer, and many other pieces of equipment. Homebrewers' demand for these products creates jobs in the industries where this stuff is made and sold. That's the unseen effect.

You can say similar things about other do-it-yourselfers. Home cooks, woodworkers, and do-it-yourself handymen simultaneously destroy jobs in one industry and create them in another industry. Calling Dr. Schumpeter!

So it is silly to say that homebrewing decreases the number of net jobs.

So relax when having that glass of home brew tonight safe in the knowledge you are not damaging the economy. Your kidneys may be, but not the economy.

The problem is central banking not fractional reserve banking

or so argues Steve Horwitz at the Free Banking blog. Some economists, especially Austrian economists, see fractional reserve banking as one of the great evils of the world. Murray Rothbard being an obvious example. But not all economists, even Austrian economists, see it that way. Horwitz looks at arguments against fractional reserve banking and finds them wanting.

He opens by noting,

In some free-market circles fractional reserve banking (FRB) is blamed for everything from business cycles to bad breath. Defenders are seen as apologists for inflation and fraud. Thankfully these views remain a minority because they are gravely mistaken. As I, and other Austrian monetary theorists, such as George Selgin and Larry White, have argued, there’s nothing wrong with FRB that getting rid of a central bank can’t cure. Fractional reserve banking works just fine in a free market.

And here, in a few words, is the point. The problem isn't with FRB as such, it is more to do with having a central bank. Get rid of the central bank and move to free banking and FRB would work just fine.

The whole Horwitz piece is worth reading.

EconTalk this week

James Otteson of Yeshiva University talks with EconTalk host Russ Roberts about Adam Smith. The conversation begins with a brief sketch of David Hume and his influence on Smith and then turns to the so-called Adam Smith problem--the author of The Wealth of Nations appears to have a different take on human nature than the author of The Theory of Moral Sentiments. Smith worked on both books throughout his life, yet their perspectives seem so different. Otteson argues that the books focus on social behavior and the institutions that sustain that behavior--market transactions in The Wealth of Nations and moral behavior in The Theory of Moral Sentiments. Both books use the idea of emergent order to explain the evolution of both kinds of social behavior and social institutions. The conversation concludes with a discussion of what Smith got right and wrong.

Politicising your role

As Eric Crampton notes over at Offsetting Behaviour Steve Maharey, Vice-Chancellor of Massey University, has decidied he is a labour economist and that the standard views on minimum wages are all wrong. Eric deals with his claims and I agree with what he says so I will raise another issue: Should Vice-Chancellors go round politicising their positions?

Ex-Labour MP and cabinet minister Maharey has taken a position on minimum wages, against much of the economic literature - see "Minimum Wages" by David Neumark and William L. Wascher (The MIT Press: 2008) for a recent overview of this area - but supportive of the Labour Party and trade union views. Is taking such an obvious political stance the role of VCs? How do you feel if you are in the economics department at Massey given your non-economict VC has decide he is a labour economist? Should VC be careful to keep public comments limited to their roles as head of the university or at least restricted to areas in which they are academically qualified and actively engaged? Maharey was once a senior lecture in sociology and claims "academic interests" in social policy (particularly social development), education, media and cultural studies, social change and politics. None of this suggests a great knowledge of the economics relevant to minimum wages. When was his last academic publication and on what?

Surely the role of a VC is to advance the interests of university and public statements by a VC should be to advocate for policy changes that assist the welfare of the staff and students of the university. Public statements should not be used to make party political broadcasts.