Keynes Vs. Hayek

Here’s a link, from BBC Radio 4, to the debate between George Selgin and Jamie Whyte on Team Hayek and Lord Skidelsky and Duncan Weldon on Team Keynes on the virtues and vices of Keynesian economics.

What caused the financial mess we're in? And how do we get out of it? Two of the great economic thinkers of the 20th century had sharply contrasting views: John Maynard Keynes believed that government spending could create employment and longer term growth. His contemporary and rival Friedrich Hayek believed that investments have to be based on real savings rather than increased public spending or artificially low interest rates. Keynes's biographer, Professor Lord Skidelsky, will take on modern day followers of Hayek in a debate at the London School of Economics. Paul Mason, economics editor of Newsnight, is in the chair.

Foreign ownership may be good for you, if you are a firm that is

Foreign ownership of firms is one of those topics which, for reasons I have yet to workout, generates much heat and little light. There are those who just seem to oppose it for reasons that have little to do with the economics of the situation. A working paper by Francisco Pérez-González, of the Stanford business school, looks at "The Impact of Acquiring Control on Productivity". The abstract reads,

Empirical studies on the importance of control rights on efficiency are hindered by actual –presumably efficient– ownership patterns. Finding settings where the right owner does not own the right asset and where ownership arbitrarily changes is challenging. In this paper I aim at overcoming these problems by investigating the elimination of foreign majority ownership restrictions in Mexico. Specifically, I study the performance of affiliates of multinational corporations for which (1) ownership restrictions appeared to bind before they were lifted, and (2) parent ownership increased from minority to majority as the reform was implemented. Using detailed plant-level information, I find that multinational control leads to large improvements in total factor productivity, particularly in industries that rely on technological innovations from their parent companies. Control is also associated with higher investment –particularly in technology intensive forms of production–, and with an improvement in the skill profile of the labor force. Overall, I interpret the evidence as supportive of the property rights theory of the firm.

The conclusion says, in part

In this paper I study the impact of acquiring majority ownership on the performance of Mexican affiliates of multinational corporations (MNCs.) I use the elimination in foreign majority ownership restrictions as a plausible source of exogenous variation.

I find that the allocation of control does affect production decisions and production efficiency. The results show that ownership restrictions to foreign ownership harmed the production efficiency of affiliates of multinational corporations. Upon liberalization, a large fraction of minority owned affiliates became majority or wholly-owned by their parent companies. Plants for which foreign ownership translated into majority or full ownership experienced economically and statistically large productivity gains. Overall, the analysis shows strong evidence that the choice of organizational form affects productivity, particularly in technology intensive industries.

The evidence suggests that government policies directed to attract technological transfers should recognize the importance of residual control rights, particularly in countries with weak legal enforcement. Governments often limit foreign ownership to promote local interests or to prevent expropriation by multinationals. While domestic majority rules do shift the balance in favor of local partners, the impact on overall welfare is uncertain. Fear from expropriation by local partners deters foreign investors from sharing their technologies or making country specific investments, which does hurt economic performance.

In short what Pérez-González finds is that a movement to majority foreign ownership, via increased control by a foreign multinational, leads to large improvements in total factor productivity and to higher levels of investment .

For the geeks out there, Pérez-González interprets this evidence as supportive of the property rights theory of the firm as developed by Grossman and Hart (1986) and Hart and Moore (1990).

“Keynesian Death Spiral”

Jerry O’Driscoll discuses the problem at the ThinkMarkets blog. He writes,

The more powerful one believes fiscal stimulus to be, the more adept the Keynesian policymaker must be. If the stimulus has powerful positive effects when added, it will have powerful negative effects when withdrawn. Hence, the application of stimulus and its withdrawal must be precisely timed. An economist would ask from whence the knowledge to do this would come.

As Hassett notes, however, stimulus has not two but three stages. It may boost growth when added, but must slow growth when withdrawn. The third stage comes when taxes (current or future) must be paid to fund the stimulus. That stage is always negative in its effects. Thus, Hassett concludes that “the total impact of the Keynesian policy is negative over its life.”

But politicians use an aggressive stimulus to avert what they see as near-term distress which has negative effects when removed or has to be paid for so they use another stimulus to avert another near-term set of problems which ..... and the cumulative effect of which can be ruinous.

The Eurozone crisis: Greek recovery and the challenges of asymmetric monetary union

At VoxEU.org David Vines talks to Viv Davies about the recovery prospects for Greece following the country’s second bailout. They discuss the challenges of asymmetric monetary union, Eurobonds, the peripheral economies and the current situation in Italy. Vines presents the case for stronger fiscal management and political leadership.

How minimum wages encourage discrimination

Yet another unfortunate consequence of minimum wages is the encouragement it gives for discrimination. Karthik Reddy writes on this point over at the IEA blog. She explains,

The free market is a powerful tool that forces market participants to pay for their discriminatory tendencies. In a free market system, for example, if a discriminatory employer would like to hire a worker to do some task, and the employer is, say, disinclined to hire blue-eyed workers, he must be willing to pay for the extra cost of brown-eyed labour if he follows his discriminatory tendencies; blue-eyed labourers faced with such discrimination may compete on the basis of price and lower the wage they receive.

A wage floor, however, prohibits workers from competing amongst one another on the basis of price, and removes economics from the discriminatory employer’s decision-making process. The employer must pay potential labourers, whether blue-eyed or brown-eyed, the same wage, and because the equal wage ensures that this employer will pay no price to discriminate against the blue-eyed worker, he is free to make his hiring decision on some basis other than price and productivity, and will hire the brown-eyed worker.

Such an outcome is in this day and age an unintended consequence of minimum wages but a consequence none the less.

Reddy continues,

This theoretical discussion is not without real-world evidence; there have been instances in societies with significant racial animosity of the use of wage floors as tools to deliberately diminish the labour participation of certain groups. In the early twentieth century southern United States, for example, racist activists trying to exclude black Americans from the workforce found minimum wages to be an effective tool to accomplish this insidious goal in a seemingly inoffensive way.

In 1909, the prejudiced Brotherhood of Locomotive Firemen demanded that the Georgia Railroad fire all Black workers. Economist Walter Williams observes that instead of such a transparent and overtly discriminatory measure, the exclusion was accomplished through the imposition of wage controls: ‘Instead of eliminating blacks … the arbitration board decided that black firemen, hostlers, and hostlers’ helpers should be paid wages equal to the wages of white men doing the same job.’1 The strategy satisfied white unionists, who knew that when forced to pay an equal wage to blacks and whites, discriminatory employers would no longer pay any cost for their discrimination and would hire white workers at the expense of blacks. The union stated: ‘If this course of action is followed by the company and the incentive for employing the Negro thus removed, the strike will not have been in vain.’

Similarly, white supremacist groups in South Africa under apartheid pushed for minimum wage laws as a way to reduce black participation in the labor force. The overtly racist Mine Workers Union, for example, demanded a minimum wage to protect their dominance in the workplace and openly stated: ‘The real point on is that whites have been ousted by coloured labour. It is not because a man is white or coloured, but owing to the fact that the latter is cheap … when that [minimum wage] is introduced we believe that most of the difficulties in regard to the coloured question will automatically drop out.’ Similarly, the South African Wage Board, which set minimum wages in different sectors of that country’s economy beginning in 1925, ‘concentrated its wage determinations only on those areas of industry where nonwhites were in competition with whites, and made no wage determinations in areas where there was no such competition.’

As noted above, modern minimum wage laws are not, we hope, imposed with such underhanded or targeted intentions. But it still turns out that the use of minimum wages to achieve discriminatory ends is indicative of the ability of wage floors to erase the cost employers must pay to discriminate. And demand curves slope downwards, as something gets cheaper you get more of it. So whether or not it is intentional it has to be recognised that discrimination increases to the extent that minimum wages rise above the market wage.

Incentives matter: blood file

In an article from VoxEU.org Joan Costa-i-Font, Mireia Jofre-Bonet and Steven Yen argue that paying some people to donate blood while others receive a cursory “thanks” has been shown to crowd out the altruistic donors. They write,

Individuals might undertake certain altruistic actions guided by an extrinsic motivation, including a “warm-glow” or moral satisfaction. Trying to answer the question of whether altruistic behaviour can be incentivised, in recent research (Costa-Font et al. 2011) we investigate whether different financial and non-financial incentives have the same effect on willingness to donate when other observed and unobserved factors are controlled for. In particular, we investigate whether crowding-out takes place with all kinds of rewards, or specifically with only monetary rewards. We answer this question by exploiting a large data set representative of 15 European countries containing information on whether or not an individual has been a donor in the past and her preferences towards monetary and non-monetary compensation for blood donation. This information allows estimation of two recursive equation systems and exploration of the relationship of preferences over different types of rewards and the probability of being a donor.

Importantly, we find that a monetary reward reduced the probability of donation consistent with the crowding out hypothesis, whilst a non-monetary reward consistently with a normal supply curve suggests a positive and significant effect on the donation probability.

These results are robust to different specifications and indicate that crowding out is a phenomenon linked to the introduction of a market-based rationale for non-market decisions, and that socially motivated individuals remain willing to donate when non-monetary rewards are offered.

and

Non-monetary rewards could potentially be used to incentivise blood donation as this kind of rewards seem not to remove, in the terminology of Andreoni et al. (2008), the warm-glow associated to blood giving.

So incentives matter, but the form the incentive takes may also matter.

But on blood donations and incentives compare the above with this study: Will There Be Blood? Incentives and Substitution Effects in Pro-social Behavior by Nicola Lacetera, Mario Macis and Robert Slonim, Discussion Paper No. 4567, November 2009, Institute for the Study of Labor. The abstract of the paper reads:

We examine how economic incentives affect pro-social behavior through the analysis of a unique dataset with information on more than 14,000 American Red Cross blood drives. Our findings are consistent with blood donors responding to incentives in a “standard” way; offering donors economic incentives significantly increases turnout and blood units collected, and more so the greater the incentive’s monetary value. In addition, there is no disproportionate increase in donors who come to a drive but are ineligible to donate when incentives are offered. Further evidence from a small-scale field experiment corroborates these findings and confirms that donors are motivated by the economic value of the items offered. We also find that a substantial fraction of the increase in donations due to incentives may be explained by donors substituting away from neighboring drives toward drives where rewards are offered, and the likelihood of this substitution is higher the higher the monetary value of the incentive offered and if neighboring drives do not offer incentives. Thus, extrinsic incentives motivate pro-social behavior, but unless substitution effects are also considered, the effect of incentives may be overestimated.

• Andreoni, J, WT Harbaugh, L Vesterlund (2008), “Altruism in experiments”, in SN Durlauf and LE Blume (eds.), The New Palgrave Dictionary of Economics, 2nd Edition, Palgrave Macmillan, 134-138.
• Costa-Font, Joan, Mireia Jofre-Bonet, Steven T Yen (2011), “Not All Incentives Wash Out the Warm Glow: The Case of Blood Donation Revisited”, CESifo Working Paper No. 3527.

Interesting blog bits

1. rauparaha on Greens on poverty

   I like the idea of helping poor families but is the best plan really to:
   

   • raise marginal tax rates on them,
   • give them cheaper bachelor’s degrees,
   • increase the barriers to entering the workforce at the minimum wage; and,
   • increase the cost of rental properties?

2. Eric Crampton explains Why I still can't take the Greens seriously

   I love the Greens on civil liberties, or at least relative to most other parties and with a big caveat on their nannying proclivities with respect to tobacco and fatty foods. And they're good on copyright. But their economic policy prescriptions...egads.

3. Seamus Hogan gives us A Diatribe Against Capital Gains Taxes-Part I

   I noted in my post on Labour’s tax policy here that there were arguments on both sides for capital gains taxes. This was a euphimistic way of saying that there are economists who I respect who are in favour of capital gains taxes, so I wouldn’t want to dismiss the idea out of hand, but I have a hard time understanding how they could come to that conclusion. So I am going to lay out the case against in a couple of posts. Most of the points below are standard fare but a couple of them I haven’t seen before.

4. Seamus Hogan gives us A Diatribe Against Capital Gains Taxes-Part II

   I noted yesterday that the main argument put by proponents of capital gains taxes is that they are needed to encourage savings into productive investments rather than into chasing capital gains. This sounds plausible on the surface, but I’m not sure that those making that argument have fully stated their implicit assumptions.

5. Seamus Hogan gives us Capital Gains Taxes Redux

   A couple of comments on my previous posts have suggested two possible efficiency motivations for having capital gains taxes. Both are theoretically correct, but neither makes a convincing case for a real-world CGT, in my opinion.

6. Freakonomics on Killer Cars: An Extra 1,000 Pounds Increases Crash Fatalities by 47%

   Ever since the SUV craze began in the late 1980s, we’ve all known that heavier vehicles are safer for those driving them, but more dangerous for others on the road. Which is why we all started driving them. Now, in a new working paper, a pair of Berkeley economists have quantified not only the fatality risks of heavier cars for other drivers, but also the costs associated with them.

7. Quamrul Ashraf and Oded Galor on The “Out of Africa” hypothesis, human genetic diversity, and comparative economic development

   The reasons given for the vast divide in standard of living between different parts of the world are many, with some economic historians claiming the roots lie in the colonial period. This column goes back even further to the cradle of humankind in East Africa, suggesting that the genetic diversity of the tribes that dispersed to different parts of the globe determined their success many thousands of years later.

8. David Starkie argues that Air Passenger Duty - damaging a major growth industry

   UK aviation has been a major growth industry in recent years, with high gross value added - just the sort of industry you might imagine the government would wish to encourage. Yet recent changes to Air Passenger Duty (APD) mean that it is the most highly taxed aviation industry in the world and it is showing serious signs of fatigue.

9. Mark Pennington on Ha Joon Chang: Wrong on Free Trade, Markets and Development

   My first post on 23 Things They Don’t Tell You About Capitalism addressed Ha Joon Chang’s dubious debating tactics when discussing ‘free market economics’. I turn now to some of Chang’s more specific critiques of economic liberalism to illustrate these tactics in greater detail.

EconTalk this week

Anat Admati of Stanford University talks with EconTalk host Russ Roberts about ways to make the financial system more stable. In particular, Admati explores the implications of higher capital requirements. She argues that current policies subsidize leverage--high levels of debt relative to equity--and that current levels of leverage increase the vulnerability of the system to swings in asset prices. She then gives her response to criticisms of higher equity levels. The conversation concludes with a discussion of the role of academic economists and finance professors as advocates for various policies.

The impact of Chinese imports on innovation, it, and productivity

Writing in the August 2011 issue of The NBER Digest Laurent Belsie notes:

In Trade-Induced Technical Change? The Impact of Chinese Imports on Innovation, IT, and Productivity (NBER Working Paper No. 16717), authors Nicholas Bloom, Mirko Draca, and John Van Reenen examine more than a half million firms in 12 European countries between 1996 and 2007. They find that every 10 percentage point rise in Chinese imports in a firm's industry was associated with an increase of: 3.2 percent in patents, 3.6 percent in IT spending, 12 percent in R and D spending, and 2.6 percent in total factor productivity (TFP). The authors observe that more innovative firms tended to grow while the less innovative ones tended to shrink or disappear altogether. In fact, they conclude, a surge in Chinese imports appears to have been responsible for about 15 percent of the technological upgrades at European firms between 2000 and 2007. At the same time , that surge led to decreases in employment, profits, prices, and skill share in the affected industries. Imports from other low-wage nations had a similar impact, but imports from developed nations did not.

"What may be happening is that trade is stimulating technical progress, which in turn is increasing the demand for skilled labor," the authors write. "It is not simply that patents per worker, or average TFP, increases -- total innovation in the affected firms and industries expands when they face more exogenous threats from Chinese imports." One explanation may be that companies already have certain "trapped factors," such as equipment or firm-specific skills, which they might as well try to use to develop new processes or products. Opening up to trade effectively lowers their opportunity cost of innovation.

At the same time, employment is being reallocated among firms. For every 10 percentage point increase in imports, employment falls 3.5 percent overall in the affected sectors, but this decline is not shared evenly. Highly innovative companies are more likely to grow; less innovative ones are more likely to shrink. A 10 percentage point increase in Chinese imports decreases the probability of survival of European firms by about 17 percent.

To correct for the possibility that unobserved technological shocks affected their results, the authors examine the effects of Chinese imports after China`s entry into the World Trade Organization, which led to the end of import quotas on textiles and apparel. This allows them to study industries that had widely different experiences after trade liberalization and to focus on textiles and apparel: although relatively low tech, they were still the source of more than 22,000 patents from European companies during the period they study. The authors also control for differential industry-specific time trends and exploit the fact that Chinese imports tended to increase where China already had established a "bridgehead" by the mid-1990s. The results support their main conclusion that Chinese trade spurred innovation.

The authors conclude that the surge in Chinese imports was responsible for about 15 percent of European technological change for the whole period from 2000 to 2007, but the impact now seems to be growing stronger. They write that "this effect appears to be increasing over time and may even be an underestimate as we also identify a role for offshoring to China in increasing TFP and IT adoption (although not for innovation). This suggests that increased import competition with China has caused a significant technological upgrading in European firms in the affected industries through both faster diffusion and innovation."

Yet another reason to fight for free trade. An increase of 10 percentage points in Chinese imports in a firm's industry is associated with an increase of: 3.2 percent in patents, 3.6 percent in IT spending, 12 percent in R&D spending, and 2.6 percent in total factor productivity (TFP). Under increased competition from imports the more innovative firms grow while the less innovative ones tend to shrink or disappear. Overall, competition from imports is significantly increasing technological upgrading. This is all to the good.

Economists thinking about sex

I came across this piece by (non-economist) Grover Cleveland at the Pileus blog. Cleveland writes,

I was stuck at the airport for much of last Saturday and so perused the magazine racks there at some length during breaks from the pain of trying to work in an airport chair. At one point, my eyes wandered over to the newest edition of Psychology Today - a pretty awful magazine - and noticed the front cover advertising an article titled something like: Why Smart People Have Less Sex. (Emphasis added)

Well, this just goes to proves I must be a genius! :-(

Cleveland goes on to note that

I instantly and without really thinking at all said to myself, “Well that must be due to their higher opportunity cost,” before I even processed anything on a more intellectual level or even picked up the magazine. I decided to see if the article did touch on this (obvious) possible explanation and was disappointed during a quick perusal to see it wasn’t really discussed as an alternative in anything more than a cursory fashion.

May be I should point out that the tile of the Cleveland's article is "I’m spending too much time around economists". Personally I don't see how that's possible, but may be that just me.

Consumer surplus of event 2

At Offsetting Behaviour Eric Crampton responds to my post on Consumer surplus of events by arguing that what I am missing is that there could be a market failure preventing the realisation of potential consumer surplus.

First I am yet to be convinced that there really are market failures of this type. There are many ways to get people to pay at least some of – enough of - their CS to have an event put on. Second its not clear to me that even if there is such a market failure the use of a government subsidy is the optimal policy response. Think of the argument for the use of tariffs to deal with problems of infant industries. Back in 1969 Richard Baldwin pointed out that even if some form of government action is need to protection infant industries tariffs were a bad way of providing such protection. He argues that what is needed to handle the problems of infant industries is a much more direct and selective policy measure than import duties. I wonder if a similar case cannot be made here. There has to be a better more direct, selective policy response to whatever market failure is occurring than the use of a subsidy. Is there really no way to address the market failure at its source rather than distort multiple markets via the use of subsidies and the taxes to fund them?

What role can trade policy play in the fight against malaria?

May be an odd sounding question, but at VoxEU.org Lucian Cernat argues for greater coherence between trade, foreign investment, and other malaria-related policy initiatives. In particular, technical assistance should prioritise the removal of "killer tariffs" on mosquito nets. He writes,

At first sight one would argue that trade policy cannot be called upon to contribute directly to this important public-health challenge. Yet, trade policy was seen as one additional tool to fight malaria by African leaders. In April 2000, at the African Summit on Roll Back Malaria in Nigeria, 39 African countries have pledged to remove taxes and tariffs on insecticide-treated nets and other malaria-related preventive materials and drugs (WHO 2003).

This was hailed as a quick and effective contribution that trade policy could make towards the eradication of malaria in Africa. But, more than a decade later, it turns out that quite a few countries severely affected by malaria still maintain tariffs on the importation of mosquito nets and other malaria-fighting products and drugs.

According to the information provided by the Malaria Taxes and Tariffs Advocacy Project (a joint project sponsored by the WHO and Gates Foundation), in August 2010, some 30 countries in Africa still maintained tariffs as high as 20% on ITNs.

Imposing a tariff on a life-saving product can be tantamount to a "killer tariff" for some poor African households who would have to choose between food or other essential products and a more expensive mosquito net.

Over 100 million people are living in malaria-endemic countries that still apply a tariff on mosquito nets. For the top African countries with the highest number of reported malaria cases in 2010, tariffs on mosquito nets are still between 5% and 35% and the mosquito net ownership ratios are very low, except in Gambia. The correlation is not very strong since ownership ratios are in some countries largely determined by (duty) free distribution of mosquito nets by donors and international agencies.

It should be noted that several countries (e.g. Kenya, Uganda, Senegal, Ghana, Nigeria) have taken the right steps and have eliminated tariffs on mosquito nets. Furthermore, countries like Nigeria, Ethiopia, and Madagascar have explicitly created several duty-free tariff lines for products including "mosquito net" in their descriptions (thus avoiding customs classification misunderstanding or abuse). Other countries have announced that, even if tariffs are still officially in place, they would waive the tariffs on mosquito nets.

But, as long as some double-digit tariffs persist, several malaria-endemic countries seem to import negligible amounts of mosquito nets in commercial terms, despite low coverage rates among vulnerable groups.

Another reason for free trade.

Yet another benefit of globalisation:

better management practices in firms.

Peter Klein at Organizations and Markets points us to this new paper:

The Land that Lean Manufacturing Forgot? Management Practices in Transition Countries
Nicholas Bloom, Helena Schweiger, John Van Reenen
NBER Working Paper No. 17231, July 2011
We have conducted the first survey on management practices in transition countries. We found that Central Asian transition countries, such as Uzbekistan and Kazakhstan, have on average very poor management practices. Their average scores are below emerging countries such as Brazil, China and India. In contrast, the central European transition countries such as Poland and Lithuania operate with management practices that are only moderately worse than those of western European countries such as Germany. Since we find these practices are strongly linked to firm performance, this suggests poor management practices may be impeding the development of Central Asian transition countries. We find that competition, multinational ownership, private ownership and human capital are all strongly correlated with better management. This implies that the continued opening of markets to domestic and foreign competition, privatisation of state-owned firms and increased levels of workforce education should promote better management, and ultimately faster economic growth. (Emphasis added)

So more evidence that globalisation can be good for your growth.

Consumer surplus of events

In my recent posting on World cup costs and benefits I made mention of the Ph.D. thesis of Sam Richardson from Massey University. Richardson’s thesis was on "Assessing the economic justification for government involvement in sports facilities and events in New Zealand".

On taking a quick look at the thesis the following comment stood out for me:

The final analytical contribution of this research involves the estimation of consumer surplus benefits from a demand model for representative rugby in Wanganui. The consumer surplus benefits are then compared to the cost of local government involvement in the upgrade of the playing facility to evaluate whether the council’s involvement was economically justified. (Emphasis added.)

What I don’t see is why you would compare consumer surplus (CS) to costs to evaluate the council’s investment.

Three question came to mind for me: 1) If CS is a reason for government involvement in a project then isn’t this a reason for government involvement in almost everything? I meant the CS generated by computer software, for example, must be huge and thus should the government not subsidise Bill Gates?! 2) If there really is enough CS to justify government involvement doesn’t this tell us that that real issue here is one of the pricing of the event? If the council priced in such a way as to capture the CS, e.g. some form of price discrimination, then evaluation of its investment would be easy, just look at the profits generated. 3) If there is a large amount of CS to be captured then why have the council involved at all? Why not just let the private sector run/build the event/stadium, pricing in such a way as to capture the CS, and let the event stand on its own economic feet? No government involvement is necessary.

Of course I could just be missing something obvious.

EconTalk this week

Keith Hennessey of Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about the debt ceiling and the budget process. Hennessey, who worked for Senate Majority Leader Trent Lott on budget issues in the late 1990s, explains the politics of the debt ceiling and the budget process. Using his past experience as a staffer, Hennessey gives those of us on the outside a window into what is actually going on in the hallways, who has power, and how information flows up and down in the chain of constituents, members, party leaders. The conversation closes with Hennessey's best guess of which outcomes of the current negotiations are most likely and why

Interesting blog bits

1. Karyn Scherer writes about Roger Kerr: The happy warrior

   Government indifference, public hostility, even cancer - despite it all, the Business Roundtable's Roger Kerr can't help being an optimist

2. Mark Pennington on What Ha Joon Chang Doesn’t Tell You about ‘Free Market Economics’

   Professor Ha Joon Chang has become something of a hero to those who champion heterodox economic theory and who rail against the supposed intellectual hegemony of ‘neo-liberalism’. In a number of books such as Kicking Away the Ladder Chang sets out to overturn the alleged orthodoxies of mainstream economics by questioning the case for free trade as an appropriate development strategy in poorer countries and more widely making the case for a high regulation/big government agenda. These themes are vividly on display in Chang’s latest best seller 23 Things They Don’t Tell You About Capitalism. Unfortunately, also on display in this book is Chang’s penchant for misrepresenting opponents, the use of straw man analyses and claims to theoretical innovation for what amounts to ‘re-inventing the wheel’.

3. Tim Worstall notes that The Washington Consensus Works

   I know this isn’t what Dani Rodrik is trying to point out in this blog post but it is the lesson that I take away from it

4. Art Carden has a few Thoughts on Liberty and Society

   I spent this week teaching at an Institute for Humane Studies “Liberty and Society” Summer Seminar. The weekend closed with a panel wherein the members of the seminar faculty answered questions about the importance of liberty, strategies for advancing liberty, our worldviews, and so on. Here are a few thoughts based on the questions that jumped out at me.

5. Tony Wrigley on Opening Pandora’s box: A new look at the industrial revolution

   Before the industrial revolution, economists considered output to be fundamentally constrained by the limited supply of land. This column explores how the industrial revolution managed to break free from these shackles. It describes the important innovations that made the industrial revolution an energy revolution.

6. Matt Nolan on Keeping NZ inflation in perspective

   Holy shit. Since I’ve started getting the chance to read opinion pieces again I’ve noticed one extreme theme running through them – a sharp and angry fear of inflationary pressures

7. David Friedman on Austrian Fantasy

   Browsing the web, I came across the following claim by Lew Rockwell:
   
   " Need I note, as this article indirectly indicates, that the whole world is reading Rothbard, but that Friedman is almost a nobody outside of mainstream academic economics?"

8. Eric Crampton on A public responsibility?

   When we have a public health system, and when folks worry about costs others impose through the health system, all kinds of private behaviours have external effects.

9. James Otteson on Stiglitz on Deregulation and the Rich

   Nobel Prize-winning economist Joseph Stiglitz argued recently that both the economic downturn of the last two years and the looming debt crisis are the fault of “a powerful ideology—the belief in free and unfettered markets,” whose “30-year ascendance” has “brought the world to the brink of economic ruin.”
   
   As an economist, I can’t hold a candle to Stiglitz. Still I am puzzled by a couple of Stiglitz’s claims.

World cup costs and benfits

Eric Crampton at Offsetting Behaviour notes this piece about Massey University economist Sam Richardson who is taking about the benefits (or otherwise) of the rugby world cup.

Dr Richardson, who researched public spending on major sporting events for his PhD, says the $507m to $700m [in economic benefits] bandied about is a lofty and unrealistic figure.

[...]

“Maybe the Government shouldn’t talk about economic impact,” he says. “I do not think we should be using economic impact as a justification for hosting sporting events. Maybe we should forget the magic figures and focus on the long-term benefits.”

Dr Richardson is sceptical of any argument that suggests we are going to get something tangible out of hosting events. “The bottom line is yes, we are going to bring in visitors, and yes, they will spend money. We also know that the taxpayer will pick up a sizeable chunk of what is expected to be a loss of around $40 million.

[...]

He says research from the United States shows the real figure could be gained by moving the decimal point one place to the left.

“Based on the original figure, this would give us $50.7 million – there is an element of truth to that view,” he says. “But we cannot confidently say it is going to bring in so many dollars. If we are justifying government spending on these numbers, it tends to become a creative accounting exercise.”

Richarson's PhD thesis was done on, "Assessing the economic justification for government involvement in sports facilities and events in New Zealand". Perhaps the takeaway line comes from the abstract, where he writes,

Findings of the research suggest that the economic impact argument for government involvement in the construction of sports facilities and the hosting of internationally oriented events is generally not justified [...]

If only central and local government could understand this point as such an understanding it would save the taxpayers and ratepayers of New Zealand a lot of money.

Contemporary work in Austrian Economics

Contemporary work in Austrian Economics is the title of a new working paper by Anthony J. Evans, Associate Professor of Economics, ESCP Europe. The paper is based on a talk given as “Austrian Economics: Past, Present and Future”, The Adam Smith Institute, St Stephens Club London, September 23rd 2010.

The abstract reads,

This article provides a brief survey of contemporary developments in the Austrian school of economics, signalling that: (i) the amount of Austrian research and the number of Austrian researchers is growing exponentially; (ii) good Austrian economists are not being marginalised by the economics profession; and (iii) there have been significant advances in our understanding of economics made recently. Scholars can embrace the second revival of Austrian economics and look confidently hat the increasing academic credibility of the school.

When discussing Organisational culture & management Evans writes,

Paul Dragos Aligica (2007) uses Misesian notions of human action to explore the role of scenario-building as a tool for decision-making, whilst in Capital in Disequilibrium, Peter Lewin (1999) analyses the subjective nature of capital, how it fits into a firm’s organisational structure, and how capital is evaluated and allocated ina world of disequilibrium. Fred Sautet’s (2000) An Entrepreneurial Theory of the Firm shows how firms flatten their organisation structure to benefit from entrepreneurial alertness, and Charles Koch (2007) creates an Austrian theory of management and shares the results of applying it to the world’s largest private company. Nicolai Foss and Peter Klein’s (forthcoming) book, The Theory of the Firm highlights an exposure to uncertainty and thus resource ownership as the key aspect of entrepreneurship, to develop an entrepreneurial theory of judgment.

This is interesting because I would argue that the Austrian theory of the firm, or theory of organisations in general, is one of the lest developed areas of Austrian economics. The Austrian approach to markets is much more developed than the their approach to the suppliers and demanders (firms and households) within those markets.

Evans ends on a positive note by saying,

Any half-decent economist should be able to quibble with my list, and I’m sure it reflects a bias towards my own research interests and background. I also recognise that I have missed out an even newer generation of Austrian economists. This all serves my point – Austrian scholarship is a spontaneous order and younger academics are constantly pushing out the boundaries of what can be accomplished. They are demonstrating that it is possible for Austrian school economists to take a seat at the top table of the professional debate without compromising their message - it just takes the right attitude and a lot of work. I’ve provided evidence of the remarkable progress that’s been made since the first revival, and will continue to be made. The academic wing of the Austrian school is flourishing, and the future of good economics is Austrian.

Do parents matter? Q&A with Bryan Caplan

Reason's Nick Gillespie interviews Bryan Caplan about Caplan's new book "Selfish Reasons to Have More Kids: Why Being a Great Parent Is Less Work and More Fun Than You Think".

The youth unemployment scandal

Roger Kerr has blogged on the following graph from the recent New Zealand Institute publication "More ladders, fewer snakes: Two proposals to reduce youth disadvantage."

Kerr writes,

But the chart shows that it is New Zealand that stands out with youth unemployment being 45% of total unemployment, the worst outcome in the OECD.

Why are our political parties not talking about this appalling state of affairs? One reason is that many of them are complicit in bringing it about. The abolition of the youth minimum wage, sponsored by the Greens and Labour, is clearly a major contributing factor to the surge in youth unemployment. National in office has declined to reintroduce youth wages. The New Zealand Institute in its report also ducked the issue.

The Economist magazine has also noted that The ratio of youth to adult unemployment worsens. Their graph is

The Economist notes,

In New Zealand, Sweden and Luxembourg, the youth-to-adult unemployment ratio is more than four.

For the data used in the Economist graph the adult unemployment rate as around 5% with the youth rate at over 20%.

Kerr ends by noting that with regard to youth unemployment,

This conspiracy of silence on the subject is an indictment of New Zealand’s seeming inability to face up to grim social realities.