Things to not criticise economics about

At the Unlearning Economics blog some advice is given on How Not to Criticise Economics. The advice is don't,

Criticising early assumptions

Don’t get me wrong, criticising economist’s perversion of the use of assumptions is fair game. However, critics often go down the path of criticising ’pure rationality’ or ‘perfect information.’ Whilst these are elements of core models (and these models should be attacked because of this, but with the caveat that the core models are the target), they are generally not found in the higher echelons of economics. Many of these assume imperfect information, bounded rationality, and can also incorporate other biases.

Most specifically, idea that economic theory assumes everybody is a selfish, emotionless self-maximiser is common trope, but as Chris Dillow noted in the link above, it’s not entirely true. More importantly, it is also defensible as an assumption – a heuristic by which to approximate behaviour, at least until something better comes along. It is important to distinguish between good and bad assumptions from a scientific standpoint, rather than how absurd they appear to be at first glance.

Equilibrium

Many critics of economics, including well-informed ones, make the mistake of arguing that economics always assumes the economy is in equilibrium, tending to equilibrium, oscillating closely around equilibrium, or something along these lines. It is true that many economic models do this; it is also true that economic models start from the assumption that the economy is in equilibrium, and see what happens from there. However, economists generally mean something very different to other scientists when they say equilibrium. From the horse’s mouth:

An equilibrium in an economic model is characterized by two basic conditions which hold in all of the model’s time periods: i) all agents in the model solve the maximization problems implied by their preferences, resource constraints, information sets, etc; and ii) markets for all goods in the model “clear.” An equilibrium is not a snapshot of the model economy at one point in time. Instead, it is the model’s entire time path.

Even on first inspection, this type of equilibrium clearly has problems of its own, but I will save them for another post. The important thing to remember is that this, rather than a stable state, is what economists often mean when they talk about equilibrium.

Economist’s Political Beliefs

Economists are not all free marketeers – in fact, they generally lean to the left. Neoclassical economics, broadly speaking, concludes that we should: regulate oligopolies, monopolies and banking; do more to protect the environment and intervene in the case of other externalities; have some public provision of health, education and welfare; and as that survey shows, economists are generally approving of things such as safety regulations.

As I have said before, I think economic theory as taught lends itself to being used by free marketeers, because of the way the ‘market’ is presented as natural and the government ‘intervenes.’ I also object to the fact that economics applies the same analysis to every market from apples to education to labour. And it is true that the market is presented as generally equilibrating and efficient, except in a few choice cases. However, the impact of these things is not that all economists support ‘right wing’ policy prescriptions, but that neoclassical theory can generally be coopted to provide justification for them.

My only comment would be with the political beliefs comment. There is nothing in neoclassical economics which is "right wing", as it is put. In fact what caused the break between the Austrian school and the neoclassical school was the use by the socialists during the socialist calculation debate of the neoclassical model (standard GE) to argue that market socialism would work. Put simply they replaced the auctioneer with the central planner and showed that everything worked very nicely. Thus the neoclassical model looks very left wing,

Will our anti-economics friends at The Standard take the advice?

Maximisation v. morality

At the Stumbling and Mumbling blog Chris Dillow asks,

What is, or should be, the link between morality and narrow economic rationality?

which in turn causes him to ask a second question,

should maximizing behaviour really be tempered by considerations of morality?

His answer begins,

In many cases, the answer is clearly yes, because there is in fact no trade-off between rational maximization and moral conduct.As Deirdre McCloskey has argued, "bourgeois virtues" of prudence and temperance enrich both individuals and societies. Trustworthiness is one way of overcoming the problem of asymmetric information which can cause markets to fail to develop.

But could you ask in this case, Are you in fact being moral or just rational? If being moral is a purposeful act then is acting in this way moral? Morally seems to be externality here.

Dillow continues,

In other cases, though,there is a sharp trade-off between morality and economic maximization.

This is most clear in the euro. The moral belief that reckless debtors and lenders must suffer ther consequences of their imprudence is perhaps the biggest obstacle to a resolution of the debt crisis.

But it's also true in other areas. For example, social solidarity and fellow-feeling can retard growth by encouraging the emergence of "Olson groups" who lobby for special favours.

And one might argue that the trade-off also exists in the cases I started with:

- The same sort of desire to follow rules that would have prevented Barclays from manipulating Libor can also inhibit innovation. One feature of genuine entrepreneurship is the desire to reject established ways of doing things. A society in which people followed unwritten rules would have fewer Libor manipulators - but also fewer good entrepreneurs.

- Greater tax morale would encourage governments to spend more, not necessarily on useful projects.

- A stronger work ethic would make the unemployed even more unhappy.

So what we see here is that having a stronger moral code may make us worse off in economic terms. Thus there is a trade-off between morality and economic well being, something that those who argue for economic agents to act in a moral way should keep in mind.

Steven Horwitz: "Do We Really Need a Central Bank?"

As we have just had a new Governor of the Reserve Bank appointed, perhaps it is timely to ask this question.

Steven Horwitz gave this lecture entitled "Do We Really Need a Central Bank?" at the Future of Freedom Foundation's Economic Liberty Lecture Series at George Mason University on December 2, 2009.

The ‘good-citizen’ economist

As the NZAE meetings are on right now I would hope that one issue being discussed is how can we be, what Donald J. Boudreaux calls, The ‘good-citizen’ economist?

Boudreaux's answer involves attempts to chip away at the Everest-sized mountain of "man-in-the-street" myths that wildly distort the public's understanding of the workings of the economy. Chief among these myths is the notion that the key to economic prosperity lies not in attending chiefly to the long-run interests of consumers but, rather, in attending to the short-run interests of producers – the false notion that the ultimate point of consumption is to stimulate production rather than the understanding that the ultimate justification for production lies only in the consumption it makes possible. This myth is made especially pernicious because it is so politically convenient for office-holders and seekers.

Notice that economists have for a long time have been battling this myth. Adam Smith pointed out more than 240 years ago that "Consumption is the sole end and purpose of all production" and that the measure of a country's true wealth, is the total of its production and commerce. That is, a country's wealth is what the people of that country can consume. The great 19th century French economic pamphleteer Frédéric Bastiat wrote, "Consumption is the end, the final cause, of all economic phenomena, and it is consequently in consumption that their ultimate and definitive justification is to be found."

Here'e hoping that those at the NZAE meeting are "good-citizen economists". I have my doubts about some of them :-(.

Sale of the century ...... not

From Stuff comes the news that

The Government has written down the value of KiwiRail's land and network assets from $13.4 billion to $6.7b and converted $322.5m of debt to equity in a major restructuring of the state-owned rail company.

The change will hit the Budget deficit adding another $1.8b of red ink to the expected operating balance which on Budget day was forecast to be $10.6b deficit for the year to June 30.

Michael Cullen thought the buying back of KiwiRail was the Sale of the Century and I'm thinking it was, for the seller. But Cullen was spending other people's money so he really didn't care what price was paid.

The report continues,

They said the Government was committed to ensuring KiwiRail could fund its business on a commercial basis.

Good luck with that! Just what bits of KiwiRail are commercial viable? It will be intersting to find out.

Another interesting question is, Will KiwiRail become part of the government's (partial or full) privatisation plans? I guess that Labour and the Green have nothing to fear from this since I can't see that anyone would ever want to buy KiwiRail.

The past and present of the invisible-hand proposition

There is always much discussion of what Adam Smith meant or said about this or that. One of the most discussed ideas is the "invisible hand". (Take a look at Gavin Kennedy's blog for extended discussion.) A new working paper looks at The Past and Present of the Invisible-Hand Proposition: From 'Scottish Political Economy' to Axiomatic General Equilibrium Analysis. It is by Arash Molavi Vasséi. The abstract reads,

The present study raises the following questions: To what extent is axiomatic general equilibrium analysis a rational reconstruction of Scottish Political Economy as defined by the writings of David Hume and Adam Smith? How much is gained and how much lost by the axiomatic transformation of the invisible-hand proposition? What are the implications of negative results like the Sonnenschein-Mantel-Debreu demonstrations for the Scottish point of view? Did it reach deadlock, or is there still hope for the dominant trajectory in the history of economics? In contrast to the rich historical literature on the invisible-hand proposition, the present study does not level any paradigmatic criticism at neo-Walrasian analysis. Rather, by focalizing the most important results against the backdrop of Scottish Political Economy, it provides some flesh to the bones of axiomatic economics and, insofar, may inform theory choice within the neo-Walrasian paradigm. Naturally, the answers to the questions raised are complex and do not fit into an abstract. Instead, the reader is referred to the final section, which lists, interrelates, and discusses the major results of the study.

I'm not sure that Smith would have believed in any invisible-hand proposition so I'm not sure that its even meaningful to ask what is "lost by the axiomatic transformation of the invisible-hand proposition?" In a working paper of my own I write,

For Smith competitive markets were the most prominent mechanism for coordinating and motivating people to maximise the grains that result from increased specialisation and an expanded division of labour. Well functioning market institutions leave individuals free to pursue self-interested behaviour, but guide their choices by the prices they pay and receive. For economists, the 200 years following Smith involved a search for conditions under which the price system would function well, conditions under which it would not descend into chaos.

The formal (neoclassical) model that arose from this search is one which abstracts completely from any form of centralised control in the economy.

But I add the footnote,

For Adam Smith this would be an abstraction too far. Smith knew of the importance of institutions to the proper functioning of the market economy. Mark Blaug points out that “[ . . . ] Smith’s faith in the benefits of ‘the invisible hand’ has absolutely nothing whatever to do with allocative efficiency in circumstances where competition is perfect `a la Walras and Pareto; the effort in modern textbooks to enlist Adam Smith in support of what is now known as the ‘fundamental theorems of welfare economics’ is a historical travesty of major proportions. For one thing, Smith’s conception of competition was, as we have seen, a process conception, not an end-state conception. For another society, a decentralised competitive price system was held to be desirable because of its dynamic effects in widening the scope of the market and extending the advantages of the division of labour - in short, because it was a powerful engine for promoting the accumulation of capital and the growth of income”. (Blaug 1996: 60-1).

Thus the question "[t]o what extent is axiomatic general equilibrium analysis a rational reconstruction of Scottish Political Economy as defined by the writings of David Hume and Adam Smith?" would have the answer, very little.

Stand your ground laws and homicides

Earlier I posted on a paper that asked Does Strengthening Self-Defense Law Deter Crime or Escalate Violence? Evidence from Castle Doctrine. At the end of that posting I said,

One thing that is interesting is that they don't seem able to deal with the issue as to whether the increase in deaths is due to an "increased use of lethal force in self-defense situations, or the escalation of violence in otherwise non-lethal situations". I take it this to mean that they can't tell whether more attackers are being killed by would-be victims or if the level of violence is being forced up in general. And I would think that for many people that difference is important. In the first case fewer victims are being killed while in the second more victims are dying.

Now a new NBER working paper claims that the increase in killing is unlikely to be driven entirely by the killings of assailants. The paper is Stand Your Ground Laws and Homicides by Chandler B. McClellan and Erdal Tekin. The abstract reads,

Since 2005, eighteen states have passed legislation that has extended the right to self-defense, with no duty to retreat, to places a person has a legal right to be, and several other states are debating to introduce similar legislation. The controversies surrounding these laws have captured the nation's attention recently. Despite significant implications that they may have on public safety, there has been little empirical investigation of the impact of these laws on crime and victimization. In this paper, we examine how Stand Your Ground laws that extend the right to self-defense to areas outside the home affect homicides using monthly data from the U.S. Vital Statistics. We identify the impact of these laws by exploiting the variation in the effective date of these laws across states. Our results indicate that Stand Your Ground laws are associated with a significant increase in the number of homicides among whites, especially white males. According to our estimates, between 4.39 and 7.44 additional white males are killed each month as a result of these laws. We find no evidence to suggest that these laws increase homicides among blacks. Our results are robust to a number of specifications and unlikely to be driven entirely by the killings of assailants. Taken together, our findings raise serious doubts against the argument that Stand Your Ground laws make America safer.

An interesting question is why there in an increase in killings among whites but not blacks.

Shadow economies all around the world

Ceyhun Elgin and Oguz Oztunali are two economists who have been looking at the size of black-market economies around the world. Using a dataset with 7,395 observations for 161 countries from 1950 to 2009, they're looking into how the size of black markets differs in rich and poor countries.

Their estimate of the (mean) size of the shadow economies is 22.67 percent of world GDP.  Elgin and Oztunali  note a downward trend in the size of the black markets around the world.

For almost all country groups (except for the post-Socialist one), we observe a declining trend over time. However, the pace of the reduction seems to lose some momntum in the last decade. Somewhat more interestingly, we observe a spike staring in 2007. Considering the emergence of the global economic crisis, this could give further support for the hypothesis that the size of the shadow economy is countercyclical [ ... ].

Another, not too surprising, result Elgin and Oztunali find is that Latin American and sub-Saharan economies have significantly larger shadow economies than the other groups of countries, while the OECD-EU group has a significantly smaller shadow economy.

In Figure 2, we group countries with respect to GDP per-capita and then report the average GDP-weighted shadow economy size in each group. Here, we divide the countries into five categories – poorest, second, third, fourth and the richest 20%. Not surprisingly, richer countries tend to have a smaller shadow economy; [ ... ]

How much of the Lain American black market is drugs and how much of the sub-Saharan shadow economies is related to political corruption? Related to these questions is the question of whether rich countries have smaller shadow economies or if having a smaller black market results in you being measured as being rich. Does the smaller shadow economy just mean that more economic activity is in the measured sectors of the economy, and thus you are considered as being rich, while the overall size of an economy, black plus white markets, could be similar between rich and poor countries. One wonders what the true size of some Latin American countries GDP would be if both black and white markets were measured correctly and countered.

EconTalk this week

Enrico Moretti of the University of California, Berkeley and the author of the New Geography of Jobs talks to EconTalk host Russ Roberts about the ideas in his book. Moretti traces how the economic success of cities and the workers who live there depends on the education of those workers. Moretti argues that there are spillover effects from educated workers--increased in jobs and wages in the city. He uses changes in the fortunes of Seattle and Albuquerque over the last three decades as an example of how small changes can affect the path of economic development and suggests a strong role for serendipity in determining which cities become hubs for high-tech innovation. The conversation concludes with Moretti making the case for increasing investments in education and research and development.

How to lower productivity and employment

From the New York Times

BRUSSELS — For most Europeans, almost nothing is more prized than their four to six weeks of guaranteed annual vacation leave. But it was not clear just how sacrosanct that time off was until Thursday, when Europe’s highest court ruled that workers who happened to get sick on vacation were legally entitled to take another [paid] vacation.

If you want to raise the costs of employing people this looks like a good way of doing it. Such a ruling  doesn't give much of an incentive to an employer to want to employ anyone and if he does employ someone they could be a way from work for even more weeks that he thought. Not having workers actually at work doesn't improve productivity.

The Times article goes on to make the point,

With much of Europe mired in recession, governments struggling to reduce budget deficits and officials trying to combat high unemployment, the ruling is a reminder of just how hard it is to shake up long-established and legally protected labor practices that make it hard to put more people to work and revive sinking economies.

But what about prices?

From the McKinsey Global Institute.

The McKinsey Global Institute (MGI) finds these trends gathering force and spreading to China and other developing economies, as the global labor force approaches 3.5 billion in 2030. Based on current trends in population, education, and labor demand, the report projects that by 2020 the global economy could face the following hurdles:

• 38 million to 40 million fewer workers with tertiary education (college or postgraduate degrees) than employers will need, or 13 percent of the demand for such workers
• 45 million too few workers with secondary education in developing economies, or 15 percent of the demand for such workers
• 90 million to 95 million more low-skill workers (those without college training in advanced economies or without even secondary education in developing economies) than employers will need, or 11 percent oversupply of such workers

But what about prices? Don't prices adjust when there is a shortage or over supply? An econ 101 supply and demand diagram tell us they do. If there really is a shortage of workers with tertiary education will the wages paid to those with such education raise, thereby giving an incentive to gain tertiary qualifications? If there are too many workers with low levels of skills will their wages not drop, thereby giving an incentive to gain additional education?

Talking about changes to markets without taking into account prices does seem a little strange.

Privatising the city

Something to keep Bob Parker awake at night. From the New York Times comes this piece on Sandy Springs, Georgia.

Cities have dabbled for years with privatization, but few have taken the idea as far as Sandy Springs. Since the day it incorporated, Dec. 1, 2005, it has handed off to private enterprise just about every service that can be evaluated through metrics and inked into a contract.

To grasp how unusual this is, consider what Sandy Springs does not have. It does not have a fleet of vehicles for road repair, or a yard where the fleet is parked. It does not have long-term debt. It has no pension obligations. It does not have a city hall, for that matter, if your idea of a city hall is a building owned by the city. Sandy Springs rents.

The town does have a conventional police force and fire department, in part because the insurance premiums for a private company providing those services were deemed prohibitively high. But its 911 dispatch center is operated by a private company, iXP, with headquarters in Cranbury, N.J.

and

Applying for a business license? Speak to a woman with Severn Trent, a multinational company based in Coventry, England. Want to build a new deck on your house? Chat with an employee of Collaborative Consulting, based in Burlington, Mass. Need a word with people who oversee trash collection? That would be the URS Corporation, based in San Francisco.

Even the city’s court, which is in session on this May afternoon, next to the revenue division, is handled by a private company, the Jacobs Engineering Group of Pasadena, Calif. The company’s staff is in charge of all administrative work, though the judge, Lawrence Young, is essentially a legal temp, paid a flat rate of $100 an hour.

As any contract theorist will tell you one of the big problems with contracting out is a reduction in quality over time. Sandy Springs has come up with a way of dealing with this problem, at least in part:

To dissuade companies from raising prices or reducing the quality of service, the town awarded contracts to a couple of losing bidders for every winner it hired. The contracts do not come with any pay or any work — unless the winning bidder that prevailed fails to deliver. It’s a bit like the Miss America pageant anointing the runner-up as the one who will fulfill the winner’s duties if, for some reason, Miss America cannot.

Does it all work?

It does for Sandy Springs, says the city manager, John F. McDonough, who points not only to the town’s healthy balance sheet but also to high marks from residents on surveys about quality of life and quality of government services.

If only we could see such experimentation and innovation here in Christchurch. This looks at lot better than the some old `lets spend $800 million of other people's money on our pet projects' approach we are seeing.

Spending other people's money: more on stadiums

The Press reports that

A new uncovered, rectangular stadium seating 35,000 contains two of the three elements sought by Canterbury rugby bosses.

That was the sentiment from Canterbury Rugby Football Union (CRFU) chief executive Hamish Riach yesterday after news the annual-plan recommendation to go before Christchurch City councillors next week contained two things he had hoped for in a new stadium.

He said it was disappointing the recommendation was not for a covered stadium.

Hamish Riach may want a covered stadium but is he willing to pay for it? The CRFU seems to be getting excited a covered stadium but appears rather less excited about paying for it. The Union's view would carry more weight if they were saying that they are willing to spend their money rather than other people's money.

Woodward and Bernstein talk about Watergate

From Face the Nation:



A reminder of just how bad politics can be.

Economic experimentation and regulation

Obviously experimentation is important in the economy. Consumers experiment with new goods and services, they do a bit of 'learning by doing' to see if they prefer the new things compared to what they have been buying in the past. Firms experiment on many dimensions, they try out new business models, they introduce new products and services, change their organisational structures etc. This experimentation is a normal part of the 'creative destruction' that we see around us all the time.

Over at the Knowledge Problem blog Lynne Kiesling has been writing on the effects of regulation on economic experimentation.

In all industries and markets, regulatory policy affects the extent to which such economic experimentation can occur. Some regulations restrict the nature of new technologies, products, or services that can be offered to consumers (think, for example, of all of the debate over the past three years about retail financial services and the new CFPB). Some regulations either directly or indirectly affect the scale and scope of the organizational structure that firms can have. Some regulations restrict entry into the provision of specific technologies, products, or services (one example here is occupational licensing, which erects entry barriers). And some regulations do all three of these things, stifling economic experimentation in multiple dimensions.

Traditional electricity regulation restricts product and service characteristics and restricts entry, thereby reinforcing the old vertically-integrated monopoly utility organizational structure (three for three in my above taxonomy). Not surprisingly, then, this is an industry in which exogenous technological change and pervasive economic dynamism in the rest of the economy has been so slow to penetrate, because traditional cost-based regulation of vertically-integrated monopolists presents sizable barriers to economic experimentation. If Rosenberg and Greenstein and Shane and others are correct that the freedom to engage in economic experiments is one of the most significant causal factors in economic growth, the limit on economic experimentation in an industry that is so intimately connected to innovation and well-being and thriving in so many dimensions of our lives is an exceedingly costly limit that electricity regulation imposes on all of us.

The comments on the electricity market are interesting give the debate here over the partial sell-off of SOEs in that industry. Something I have heard nothing about is whether a partial change in ownership for the SOEs will be accompanied by changes to the regulatory environment. If one of the hoped for changes to be bought about by the partial sell-off of shares in the SOEs is greater innovation and experimentation then we have to ask the question, How much of the lack of experimentation and innovation now is due not to ownership but due to regulation? The partial sell-off of shares is unlikely to do much to increase experimentation since 51% of the firms will still be in government hands. May be looking at the regulatory structure the industry works under would do more to invigorate innovation than a partial ownership change.

Interesting blog bits

1. Anna Jacobson Schwartz (November 11, 1915–June 21, 2012)
   

   • Milton Friedman (pdf)
   • George Selgin
   • Robert Higgs
   • Don Boudreaux
   • David Henderson
   • Wall Street Journal

2. Gary Becker on Controls Over consumer Choices

   New York Mayor Michael Bloomberg’s proposal to ban sugary drinks larger than 16 ounces from restaurants, street carts, movie theatres, and stadiums would seem to be a joke for hosts of late night shows were he not completely serious. Although the proposal makes little sense, and could even increase the consumption of these drinks, (see my later discussion), it does raise once again the question of how far governments should go in interfering with consumer choices?

3. Ed Dolan on Behind the Russian Protests: Rising Economic Expectations and a Business Leader Turned Activist

   Last week saw another mass protest in Moscow, the first since Vladimir Putin has returned to the presidency and undertaken tough new measures to curb the opposition. As seen on Western TV, the demonstrations appear to be dominated by the colorful flags of monarchists, anarchists, communists, and other extremist groups, but those images are misleading.

4. Steve Sexton on How California’s GMO Labeling Law Could Limit Your Food Choices and Hurt the Poor

   The American Medical Association resolved this week that “there is no scientific justification for special labeling of bioengineered foods.” The association has long-held that nothing about the process of recombinant DNA makes genetically engineered (GE) crop plants inherently more dangerous to the environment or to human health than the traditional crop plants that have been deliberately but slowly bred for human purposes for millennia. It is a view shared by the National Academy of Sciences, the World Health Organization, the Food and Agriculture Organization of the U.N., the European Commission, and countless other national science academies and non-governmental organizations.

5. Eric Crampton on Tax incidence: alcohol edition

   Pop quiz: if the alcohol excise tax is charged to consumers rather than to producers, are winemakers better off?

6. Chris Dillow on Tax-dodging: the left's problem

   Lefties love talking about tax dodging, perhaps because it's an easy way of claiming moral superiority. But in fact, it raises an embarrassing question for them, namely: why do legal tax loopholes persist?

Economists reach a conclusion on subsidies for stadiums

After the comment on the economics of sports stadiums in my previous posting I was reminded of this survey paper on the topic:

Do Economists Reach a Conclusion on Subsidies for Sports Franchises, Stadiums, and Mega-Events?

by Dennis Coates and Brad R. Humphreys

Abstract

This paper reviews the empirical literature assessing the effects of subsidies for professional sports franchises and facilities. The evidence reveals a great deal of consistency among economists doing research in this area. That evidence is that sports subsidies cannot be justified on the grounds of local economic development, income growth or job creation, those arguments most frequently used by subsidy advocates. The paper also relates survey evidence showing that economists in general oppose sports subsidies. In addition to reviewing the empirical literature, we describe the economic intuition that probably underlies the strong consensus among economists against sports subsidies. (Emphasis added)

May be I should send a copy of the paper to Mayor Parker.

Anna Schwartz, economist who collaborated with Friedman, dies at 96 (updated)

So reports the New York Times. The Times writes,

Anna J. Schwartz, a research economist who wrote monumental works on American financial history in collaboration with the Nobel laureate Milton Friedman while remaining largely in his shadow, died on Thursday at her home in Manhattan. She was 96.

Her death was confirmed by her daughter Naomi Pasachoff.

Mrs. Schwartz, who earned her Ph.D. in economics at the age of 48 and dispensed policy appraisals well into her 90s, was often called the “high priestess of monetarism,” upholding a school of thought that maintains that the size and turnover of the money supply largely determines the pace of inflation and economic activity.

The Friedman-Schwartz collaboration “A Monetary History of the United States, 1867-1960,” a book of nearly 900 pages published in 1963, is considered a classic. Ben S. Bernanke, the Federal Reserve chairman, called it “the leading and most persuasive explanation of the worst economic disaster in American history.”

The authors concluded that policy failures by the Fed, which largely controls the money supply, were one of the root causes of the Depression.

and

“Anna did all of the work, and I got most of the recognition,” Mr. Friedman said on one occasion.

After Mr. Friedman’s death in 2006, Mrs. Schwartz “became the standard-bearer” of Friedman monetarism, said Michael D. Bordo, a professor of economics at Rutgers University and for decades a Schwartz collaborator himself.

Though “not a deep theorist,” he said, Mrs. Schwartz was “probably the best woman economist of the 20th century.”

During the financial collapse that began in 2008, she was one of the few surviving economists with a firsthand recollection of the Depression. After praising early moves by Mr. Bernanke, she wrote, at age 93, a bitingly critical Op-Ed article for The New York Times in July 2009 opposing the reappointment of the Fed chairman who had been so influenced by her work.

She contended that Mr. Bernanke had erred in producing “extreme ease” in monetary policy and in failing to warn investors that new financial instruments were difficult to price.

Mrs. Schwartz also held that the government had been a bigger contributor to the crisis than had been widely realized. By her measure, the government had oversold the benefits of homeownership, pushing Fannie Mae and Freddie Mac, the government-backed mortgage finance giants, to lend increasingly to lower-income borrowers and fostering exceptionally low mortgage rates.

10 days ago it was Elinor Ostrom who died, now Anna Schwartz, its a bad run for economics.

Update: James A. Dorn at Cato@Liberty notes Anna Jacobson Schwartz (1915–2012), RIP . San Francisco Chronicle on Anna Schwartz, Economist Milton Friedman's Co-Author, Dies at 96.

Bob's wishlist

We now have Bob Parker's master-plan and wishlist for Christchurch. The graph below is from The Press and gives the big-ticket items on Bob's list.



The Press reports,

Mayor Bob Parker has unveiled his $800 million big-ticket wishlist for the new Christchurch.

He will ask councillors on Monday to sign off on his annual-plan recommendations for the city – the most ambitious of his mayoralty.

The city council's final draft of the 2012-13 annual plan will be considered on Monday, Tuesday and Wednesday next week after a long public submissions and hearings process.

It covers community facilities, infrastructure and support programmes deemed critical to the city's recovery.

Ten big-ticket items have been identified, costing $823m over the next six financial years, with most of the cost budgeted for 2013-14 onwards.

The most expensive item is a $220.7m convention centre, which would rely on a $70m government contribution.

Parker said the council's plan was "utterly unique" and a fair budget for ratepayers.

Bob may think its "fair". But there are a number of items on his wishlist that questions have to be asked about. The most obvious ones are the new AMI stadium and the new convention centre. What is the justification for these items.?As have been noted many times on the various New Zealand economics blogs, stadiums don't pay, so why are we being ask to front-up with $241.4 million for a white-elephant? I'm thinking that the economics of convention centres will be similar to that for sports stadiums so, again, why are we being ask to pay $220.7 million for another white-elephant?

We need to see the reports that justify the spending of the $823.1 million and we need to see it now. A healthy scepticism  seems in order about the benefits that these project will bring to Christchurch.

Government must stop meddling and leave pay decisions to shareholders

So argues Elaine Sternberg at City AM.

Government regulation of corporate governance is not justified by envy or inequality, or by gaps between aggregated remuneration levels and averaged share performance. When unequal payouts reward unequal contributions, they are not an indication of unfairness or market failure. Similarly, reciprocal back-scratching, upward ratcheting of pay, and the capture by executives of remuneration consultancies, are not necessary features of market operations. They can be corrected by free market mechanisms. It is the shareholders’ responsibility to insist that rewards fairly reflect the corporate objective.

Shareholder own the firms, if they are happy with the remuneration of the top management then it is not the job of the government, or anyone else, to interfere with that remuneration. If the shareholders are not happy they can use one of "voice or exit" strategies. That is, they can either change the remuneration or sell their shares.

The High Pay Commission, an inquiry set up to look at executive remuneration, concluded that high pay is corrosive and unfair. But the purpose of corporations is not to promote an egalitarian society. Corporations aren’t creatures of the state, there to serve official social ends. They are the private property of their shareholders, and serve the ends designated by their owners.

This idea that firms "serve the ends designated by their owners" helps explain why there are so many types of firms, each with there own governance structure. We see for-profit firms, not-for-profits, producer cooperatives, consumers cooperatives, worker-owned firms etc and we see each of them because each is best at serving the particular ends designated by their owners. One size does not fit all in firms.

Corporate governance refers to ways of ensuring that corporate actions, agents and assets are directed at the constitutional objectives of the corporation, set by the shareholders. It should be up to the shareholders to determine the rights, responsibilities and remuneration of all their corporate agents, and to specify the kinds of accountability they require. Given the varied history, size, activity, jurisdiction and shareholder composition of corporations, one size will emphatically not fit all.

Keep in mind that regulation by the government is often counterproductive. It is by its very nature inflexible and imposes substantial costs, both in funds and freedoms: even disclosure is not costless. And regulation can make it more difficult or even prevent a firm's owners from governing their firm in their way.

The government needs to reduce obstacles to free markets and genuine owner control. Free markets elicit innovative solutions to problems as they arise, in all their real-life variety; they effectively test those solutions and disseminate best practice. In a genuine market for corporate control, companies would compete for shareholders, and investment managers would compete for funds, partly on the degree and kinds of accountability they offered to owners and investors. The best way to ensure good corporate governance would be to maximise shareholders’ freedom to govern their own corporations in their own ways.

Shareholder power, not government power, is the key issue for good governance.