Competition and search in internet markets for used books

A couple of years back in an email about my book The Theory of the Firm: An overview of the economic mainstream I wrote:

The other thing I don't get is the price dispersion. $180 at the book depository but $355 at the NZ based Mighty Ape website. Isn't this internet thingy supposed to do away with price dispersion by making information more available?

Well it appears, for one market at least, I'm wrong about the effects of the internet on price dispersion. The advent of the online market for used books has increased price dispersion in online relative to offline sales. It has also raised prices but improved welfare for both sellers and buyers, especially where unusual titles are concerned.

The following is by Morgan Foy and comes from the March 2018 issue of the NBER Digest.

Online shopping has become ubiquitous. Has this raised profits or raised consumer welfare? Both, at least in one market. In Match Quality, Search, and the Internet Market for Used Books (NBER Working Paper No. 24197), Glenn Ellison and Sara Fisher Ellison find that digitization of the used book market increased prices and price dispersion in online relative to offline sales. Profits on used books were 80 percent higher online, but the higher prices facing buyers were more than compensated for by the expanded access to hard-to-find volumes that the internet provided.

By visiting physical bookstores in 2009, the researchers created a sample of 335 books. They then collected online prices for the same titles in 2009 and in 2012. Contrary to what many might have expected, they found that the used books were typically more expensive online than in brick-and-mortar stores: the average online price was about $20, while the equivalent offline price was roughly $11. There was also a lot of dispersion in the online prices. The accompanying figure provides one illustration: online prices for what the researchers call "standard" titles — fairly obscure, typically out-of-print books — were much higher and much more dispersed than offline prices.

Normally, price dispersion is interpreted as a sign that markets are not working well, and higher prices are interpreted as evidence that buyers are worse off. But the researchers note that neither is necessarily true. They point out two avenues through which the rise of internet markets and the associated availability of online search technologies could affect prices. Better search technologies could lead to buyers being better informed, inducing sellers to reduce prices in an attempt to win business. This is the "competition effect." Online markets could also make it easier to find products with unique value to a specific buyer — an increase in match quality. For example, a buyer searching for a specific 15-year-old used book may have a hard time tracking it down at a brick-and-mortar store. The internet facilitates search, thereby increasing demand for unusual titles. The latter effect benefits buyers, but will also tend to increase prices. Knowing only that average prices are higher online does not permit any conclusion about whether this is because the "competition effect" was small or the "match effect" was strong enough to offset increased competitive pressure.

To explore the hypothesis that both effects are important in the used book market, the researchers examine how price levels and price dispersion vary across different types of used books and over time, looking for patterns that would be expected if match quality effects were important. They find several different pieces of evidence consistent with the view that price increases reflect match-quality improvements and that search technologies have made consumers more informed. For example, they looked separately at what they termed "local interest" books — books about the history or geography of a specific area or otherwise associated with that area. They noted that brick-and-mortar bookstores in those areas had high prices for these books relative to online sellers, consistent with the notion that brick-and-mortar stores were already providing about the best match quality one could imagine for such books.

Whether buyers' welfare is higher or lower in the online market depends on the strength of the match quality effect. To address this issue, the researchers develop a model of competing sellers of unusual items, and infer important quantities like the rates at which potential consumers are arriving and the magnitudes of potential gains from selling to well-matched consumers. They use the price data they collected as well as sales data they inferred from disappearances of specific online listings in sequential data gatherings. The researchers estimate that per-bookseller revenues were 80 percent higher online than offline in 2009, due to both higher prices and a higher likelihood of sale. And, more strikingly, they estimate that the consumer welfare gains are not only positive, but roughly equally as large. In the case of the used book market, they therefore conclude that moving online has been a win-win process for sellers and buyers. More generally, the paper suggests that match quality may be an important and underappreciated source of welfare gains from online sales.

Venezuela's inflation rate

An interesting graph from Steve Hanke showing Venezuela's rate of inflation. Not a pretty sight.

Trump the worst president?

A question asked by Jason Brennan at the Bleeding Heart Libertarians blog.

Trump is the worst president ever?

So say an important subset of political scientists:

That was the finding of the 2018 Presidents & Executive Politics Presidential Greatness Survey, released Monday by professors Brandon Rottinghaus of the University of Houston and Justin S. Vaughn of Boise State University. The survey results, ranking American presidents from best to worst, were based on responses from 170 current and recent members of the Presidents and Executive Politics section of the American Political Science Association.

Brennan hoped that the political scientists involved could put aside their current partisan resentment and answer this question somewhat objectively, but it appears not. Brennan writes,

Sure, I despise Trump too. But the worst president ever?

Worse than McKinley and Teddy Roosevelt, who oversaw the straightforwardly evil US-Phillipine war, which left 200,000 civilians dead? Worse than Hoover, who greatly exacerbated the Great Depression with stupid interventions? Worse than Wilson, who put Americans needlessly into the unjustifiable Great War and then so screwed up post-war negotiations that World War II became close to inevitable? Worse than the long string of presidents who oversaw the extermination, forced relocation, and genocide of Native Americans? Worse than FDR, who put Japanese Americans in concentration camps? Worse than Nixon, who had to resign because of his corruption? Worse than Bill Clinton, whose sanctions of Iraq may have killed around 500,000 Iraqi children? (Note, that this number is controversial. HT: Dan Bier) Worse than Ulysses Grant, whose administration had a cartoonish degree of corruption? Worse than Polk, who unjustly seized massive amounts of land from Mexico?

Thus we do have to ask if a more objective ranking would put Trump at the bottom. Or at least they should be a lot clearer as to the criteria used to determine "worst".

On the link between US pay and productivity

From VoxEU.org comes a column by Anna Stansbury and Lawrence Summers on the relationship between pay and productivity in the US.

Since 1973, there has been divergence between labour productivity and the typical worker’s pay in the US as productivity has continued to grow strongly and growth in average compensation has slowed substantially. This column explores the causes and implications of this trend. Productivity growth appears to have continued to push workers’ wages up, with other factors to blame for the divergence. The evidence casts doubt on the idea that rapid technological progress is the primary driver here, suggesting rather that institutional and structural factors are to blame.

Stansbury and Summers writes,

Our contribution to these debates is, we believe, to demonstrate that productivity growth still matters substantially for middle income Americans. If productivity accelerates for reasons relating to technology or to policy, the likely impact will be increased pay growth for the typical worker.

We can use our estimates to calculate a rough counterfactual. If the ratio of the mean to median worker's hourly compensation in 2016 had been the same as it was in 1973, and mean compensation remained at its 2016 level, the median worker's pay would have been around 33% higher. If the ratio of labour productivity to mean compensation in 2016 had been the same as it was in 1973 (i.e. the labour share had not fallen), the average and median worker would both have had 4-8% more hourly compensation all else constant. Assuming our estimated relationship between compensation and productivity holds, if productivity growth had been as fast over 1973-2016 as it was over 1949-1973, median and mean compensation would have been around 41% higher in 2016, holding other factors constant.

This suggests that the potential effect of raising productivity growth on the average American’s pay may be as great as the effect of policies to reverse trends in income inequality – and that a continued productivity slowdown should be a major concern for those hoping for increases in real compensation for middle income workers.

This does not mean that policy should ignore questions of redistribution or labour market intervention – the evidence of the past four decades demonstrates that productivity growth alone is not necessarily enough to raise real incomes substantially, particularly in the face of strong downward pressures on pay. However it does mean that policy should not focus on these issues to the exclusion of productivity growth – strategies that focus both on productivity growth and on policies to promote inclusion are likely to have the greatest impact on the living standards of middle-income Americans.

So productivity still matters for pay with increases in productivity increases resulting in pay increases.

Economic costs of hosting the Olympics and World Cup

In this audio economist Andrew Zimbalist, a professor of economics at Smith College and the author of Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup (Brookings Institution Press, 2015), reveals the real economic costs and benefits of hosting mega-sporting events and discusses the prospects of FIFA following the corruption scandal.

You know your economy is in trouble when ......

you get paid in eggs!

A Wall Street Journal report on the situation in Venezuela tells us

One U.S. dollar now fetches around 236,000 bolivars on the street, around 80 times what it bought at the start of last year. Five years ago, that could buy a small apartment; now it barely covers an appetizer at lunch.

“The authorities have lost control, they can’t stop creating bolivars even if they wanted to,” said Omar Zambrano, a former economist for the Inter-American Development Bank. “This ends in two ways: Either we adopt the dollar or we go back to bartering.”

That’s what Marina Fernandez, a professor of architecture at a Caracas university, has done, finding out that some people will take, yes, the humble egg. When she didn’t have enough cash to pay for parking, she handed over two eggs. Her university department, short of cash, paid a computer programmer with a carton of eggs.

Ms. Fernandez said onions or bananas, for some reason, just won’t do. “If you’re going to receive food as payment, the people want it to at least be a protein,” she said. “The egg is perfect.”

Barter is really, really inefficient but sometimes its the best you can do. Hyperinflation means money is worthless so people go back to barter. Or they start to use a new medium of exchange. But eggs seem a bit too breakable to be a totally satisfactory replacement for money.

Such is the crazy, sad world of Venezuela today.

Islam and economic performance: historical and contemporary links

An interesting looking article by Timur Kuran forthcoming in the Journal of  Economic Literature goes sunder the above title.

The abstract reads,

This essay critically evaluates the analytic literature concerned with causal connections between Islam and economic performance. It focuses on works since 1997, when this literature was last surveyed. Among the findings are the following: Ramadan fasting by pregnant women harms prenatal development; Islamic charities mainly benefit the middle class; Islam affects educational outcomes less through Islamic schooling than through structural factors that handicap learning as a whole; Islamic finance hardly affects Muslim financial behavior; and low generalized trust depresses Muslim trade. The last feature reflects the Muslim world’s delay in transitioning from personal to impersonal exchange. The delay resulted from the persistent simplicity of the private enterprises formed under Islamic law. Weak property rights reinforced the private sector’s stagnation by driving capital out of commerce and into rigid waqfs. Waqfs limited economic development through their inflexibility and democratization by restraining the development of civil society. Parts of the Muslim world conquered by Arab armies are especially undemocratic, which suggests that early Islamic institutions, including slave-based armies, were particularly critical to the persistence of authoritarian patterns of governance. States have contributed themselves to the persistence of authoritarianism by treating Islam as an instrument of governance. As the world started to industrialize, non-Muslim subjects of Muslim-governed states pulled ahead of their Muslim neighbors by exercising the choice of law they enjoyed under Islamic law in favor of a Western legal system.

In short, institutions matter. They help explain why around 1000 years ago the Islamic world was the most advanced area of the world but slowly they lost that advantage as Western countries developed more growth friendly institutions.

The case for 'touting'

From the IEA comes this audio on scalping and the value of it.

The resale of tickets has been around for as long as humans have charged entry to events. Evidence of ticket 'touting' goes all the way back to Ancient Rome.

In the 21st century though, it's becoming an increasingly controversial practice.

Companies like Viagogo, Seatwave and Stubhub now offer tickets to otherwise hard-to-reach events - but, often, at a hefty price.

Today on our podcast, IEA News Editor Kate Andrews interviews Dr Steve Davies, the IEA's Head of Education and author of new report 'Digital Resellers: The case for Secondary Ticket Markets'.

Steve believes that ticket resale is simply one aspect of the 'Sharing Economy' which enables voluntary transactions to take place between willing buyers and sellers. Those who aim to resell tickets for a profit, Steve argues, are themselves taking on considerable risk.

We examine the economics, and the morality, of ticket resale, and take a look at the way artists like Ed Sheeran, Taylor Swift and Madonna use market mechanisms to sell their products.

The discussion by Steve Davies is based on a new paper he has written for the IEA entitled Digital Resellers: The Case for Secondary Ticket Markets. A summary of the report is:

• The reselling of tickets for events has a long history, dating back at least to Roman times.
• Such secondary markets in tickets are no different from other kinds of secondary market, and serve the same purpose: to correct flaws in the initial primary market.
• In recent years, new technology has led to the appearance of many new players in this market. Most of these are facilitating platforms rather than being directly involved as buyers or sellers of tickets.
• This market is fragmented with no firm having more than a very small part of the total secondary ticket market. That market itself is still small compared to the general market for tickets but is growing rapidly.
• This has led to many calls for limitations on ticket resale and, in particular, for what are effectively price caps.
• These arguments are wrongheaded and would disrupt an effective market. The more fundamental or underlying objections to secondary ticket markets are simply rejections of the principles of trade and a refusal to accept the reality of scarcity.
• It is the primary market for tickets that is dysfunctional. The secondary market is correcting its defects, so that tickets get into the hands of those who value them most. We are probably moving towards a new kind of market in tickets.

Zingales on Hart

At the 2018 ASSA meeting Luigi Zingales delivered a lecture honouring Oliver Hart, co-winner of the 2016 Nobel Prize for economics.

In part Zingales said,

In the 1970s, this question [the make-or-buy decision] started to receive attention in the so-called transaction-cost literature. The key contributions during that period were Alchian and Demsetz (1972), Williamson (1971 and 1975) and Klein, Crawford, and Alchian (1978). Alchian and Demsetz identified the unique nature of the firm in the team production and the associated cost of metering individual contributions to the collective output. This is the line of research the other Nobelist we are celebrating today, Bengt Holmstrhom, pursued. By contrast, Williamson and Klein, Crawford, and Alchian focused on the role of the firm in mitigating the cost of opportunism. Imagine a printing press owned and operated by someone different from the publisher. If alternative users have much lower valuations for the services of the printing press than the current user, there exists an appropriable quasi rent. Klein, Crawford, and Alchian conclude that “if an asset has a substantial portion of quasi rent which is strongly dependent upon some other particular asset, both assets will tend to be owned by one party.” They are quick to add that “this advantage of joint specialized assets … must of course be weighed against the cost of administering a broader range of assets within the firm.”

In these few lines there are all the key insights of the pre-Hart literature, but also all its limitations, among them:

1. If integration has to do with joint specialized physical assets, to what extent does an employee “belong” to a firm? What makes an employee different from an independent contractor? Are Alchian and Demsetz right in claiming that “I can fire my grocer by stopping purchases from him”? (Not just a theoretical discussion, think about Uber.)
2. What aspect of integration produces all these benefits? Why can’t they be achieved through long-term contracting?
3. Can you have too much integration? Are the limits of the firm determined only by “administrative or bureaucratic costs” or can integration also be detrimental? Does communism not work only because of bureaucracy?

It is these limitations that Hart along with Sandy Grossman and John Moore sort to deal with.

The main source of these limitations is the lack of a formal model, the lack of a language to express clearly the driving forces. The work by Grossman and Hart and Hart and Moore answers all these questions.

1. First of all, the emphasis moves from the specialization of physical assets to that of human capital. In this way, they are able to explain how a firm has “power” over its employees. When my colleague “fires” United Airlines, he does not deprive United employees of any asset they have specialized to. When the CEO of United fires a pilot, he does deprive her of assets (physical and organizational) she specialized to. A pilot (especially an older pilot) is more valuable inside United than outside of it. Thus, a specialized pilot will continue being employed by United. Nevertheless, United’s ability to control the pilot’s quasi-rent is the source of the power an employer has over its employee.

One of the many merits of Oliver’s contribution is to have brought back the concept of power inside economics. This is a concept pervasive in political science and sociology, and pervasive in Marxian economics, but completely absent from neoclassical economics. In fact, Oliver’s view of the firm is very reminiscent of the Marxian view, but where Marx sees exploitation, Oliver sees an efficient allocation.

1. Having identified the source of power, Grossman and Hart help us understand why this can only stem from integration.

To cut this Gordian knot, Oliver and Sandy introduce a new concept: the “residual right of control,” i.e. the right to dispose of an asset in all the situations that have not been explicitly contracted out. They identify this residual right of control with ownership.

With regard to ownership being identified with residual rights of control it is interesting to note a footnote in the Grossman and Hart paper,

Richard Posner, whose opinion on the legal definition of ownership we solicited, has referred us to the following statement by Oliver Wendell Holmes (1881/1946, p. 246): "But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits prescribed by policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one but him."

Zingales continues,

Of course, this opens the question of why some contingencies cannot be written in a contract, a question Oliver has spent a great deal of time on and a question I will return to momentarily, if time allows.

But if we accept that contracts are incomplete, then it is easy to see how the residual right of control can be used opportunistically to reduce the share of the surplus of other parties in a relationship.

This insight applies in all walks of life. For example, I just launched an economic podcast. In preparation for this event, I have spent a lot of time and effort. Much of this effort is specific to this particular podcast. So how does ownership of this podcast, which currently is in the hands of the University of Chicago, affect my incentives? Not only I, but most of the economics profession would not have a framework to think about this important question without the work of Oliver.

This is an inconsequential example, but it illustrates how rich the Grossman-Hart-Moore framework is in addressing a fundamental problem of entrepreneurs: how to allocate cash flow and control rights to maximize the commitment of all the key players to a new venture. I regularly teach this in my entrepreneurship class and I would not know how to frame this problem if it wasn’t for Grossman-Hart-Moore.

Note that—unlike Williamson—their results do not rely on friction in the renegotiation process. Grossman-Hart-Moore assume costless renegotiation ex post. Still, ownership (and the residual right of control it confers) matters because of the way it affects the out-of-equilibrium outside option and, through it, the share of ex post surplus each party appropriates. This share impacts not only the distribution of the quasi-rents, but also the ex ante incentives to make firm-specific investments, and thus efficiency itself.

1. Having identified how integration works, Grossman-Hart-Moore can also explain the costs of integration. Since control is zero-sum, control given to party A takes control away from party B, reducing B’s incentives to make firm-specific investments. Thus, integrating a supplier reduces the incentive of the supplier to invest in his human capital. As a result, who should own what, the famous question of the boundaries of the firm, finds a very simple answer: it depends upon the relative importance of the contribution to the various parties.

Hart's work has affected many areas of economics.

Before Oliver finance scholars had focused on the allocation of cash flow rights. Yet, it was difficult to explain why capital structure mattered purely on the basis of cash flow right allocation, since all the effects produced by financing decisions could be undone by contracts. It is thanks to Oliver’s model that researchers could start thinking in terms of control allocation: capital structure mattered because it provides a contingent way to allocate control. In other words, Grossman-Hart-Moore changed the way corporate finance theory was done and did so in an irreversible way.

Unlike poets who only allow people to express their feelings, economic theorists also provide a framework for empirical researchers to study new phenomena. The work of Kaplan and Stromberg (2003) on the allocation of control rights in venture capital contracts or the work of Michael Roberts and Amir Sufi on debt covenants would be inconceivable without Oliver’s work.

Similarly, it is very difficult to understand corporate governance without Oliver’s contribution. The famous survey by Shleifer and Vishny (1997) that incorporates Oliver’s work on control rights, changed the literature on corporate governance. Without Oliver’s seminal contribution that change would not have taken place.

While finance has been the main area of application of ICT, there is hardly a field in economics that has not been impacted. One of the first applications, pioneered by Oliver himself with Tirole, is to industrial organization. ICT provides a way to rationalize the famous market foreclosure argument. Another natural area of application is to the costs and benefits of public ownership. This also was pioneered by Oliver with Shleifer and Vishny in the famous prison paper. It is also not surprising that ICT has been applied to internal organization (Aghion) and to international trade (Antras). Finally, issues of power and contract incompleteness are essential to political economy, and in fact in recent years we have seen a proliferation of applications in this direction.

There are a lot of other areas where Oliver’s theory of incomplete contracts can be profitably applied, as family economics. There is hardly a contract that is more incomplete than marriage and one where relationship specific investments (like the children) are more important.

Oliver is a role model not only for his intellectual achievements, but also for the integrity with which he has achieved them. For more than a decade he argues back and forth with two other Nobelist Erik Maskin and Jean Tirole abut the foundations of his theory of incomplete contract. In spite of the enormous amount of reputation he had a stake, he had the courage to recognize that Maskin and Tirole’s critiques were valid and he went back to the drawing board and produced with John Moore a new foundation of incomplete contracts [this work is the 'reference point' approach to incomplete contracts].

The incomplete contracts theory has been one of the major theoretical advances in economics in the last 30 years and Hart's role in it fully justifies the award of the Nobel Prize.

Latest Blogwatch column

My Blogwatch column from the latest issue (Issue 60, December 2017) of the NZAE magazine Asymmetric Information.

Are Google and Facebook monopolies?

On this episode of The Big Question, Chicago Booth’s Luigi Zingales and George Mason University’s Tyler Cowen discuss the market power wielded by digital platforms, and how to promote competition.


This is a very interesting discussion of an important issue. Well worth the half hour needed to watch it.

Venezuela officially enters the not-REAL-socialism stage

Writing at the IEA blog Kristian Niemietz says,

Now we’ve finally learned what went wrong in Venezuela: it wasn’t real socialism. At the World Economic Forum summit in Davos, Shadow Chancellor John McDonnell explained:

“It’s not that the issue is socialism vs capitalism. […]

All the objectives of Chavez […] would have been successful if they had mobilised the oil resources to actually invest in the long term […]

I think in Venezuela they took a wrong turn, a not particularly effective path, not a socialist path.”

McDonnell is in good company. Quite a few prominent figures on the left, such as Noam Chomsky and Slavoj Žižek, are now explicitly disputing Venezuela’s socialist credentials.

So Venezuela joins the very long list of countries that at some point are held up as role models of "socialism" by Western intellectuals but which, once they start failing, became an embarrassment to the socialist cause. When the problems become so obvious and undeniable socialism in these countries ceases to be ‘real’ socialism, which of course why it fails. Or so we are told. But every socialist country seems to suffer the same fate. Why is this I wonder.

"A Brief Prehistory of the Theory of the Firm". Update

The book is now in the hands of a production editor. The publication of the hardback version is due in June 2018.

You can, however, pre-order it here (Routledge) or here (Amazon) or here (Book Depository). Prices seem to vary a lot so check multiple sellers to see who gives the best deal.

Eric Crampton on "Recipe for Disaster"

On Radio New Zealand Nights, Dr Eric Crampton of the New Zealand Initiative talks through the findings of the Initiative's latest report, Recipe for Disaster, about the government's policy preparedness for the next big earthquake.

The effects of rent controls

The example of Mumbai, India.

In this video, from Marginal Revolution University, Alex Tabarrok discusses the effects of rent controls on the supply of rental properties in Mumbai.

Distracting from poverty relief: the Oxfam report debunked

In this podcast, IEA Research Director Dr Jamie Whyte is interviewed by Kate Andrews and they discuss Oxfam's latest report on global inequality, arguing that the poverty-relief charity is attacking the economic system that has lead to the greatest fall in absolute poverty the world has ever seen.

Silent Revolution: the directors cut

The album Silent Revolution by The Benevolent Dictators is an album in which the songs draw on material from the works of Adam Smith. Four songs relate to Smith's A Theory of Moral Sentiments and four related to An Inquiry into the Nature and Causes of the Wealth of Nations.

In the Director's Cut version of Silent Revolution the motivation for and the reasoning behind the songs and the songs relationship to Smith's work is explained.

Alexander the Great: narcissist or hero?

A new working paper by Teodoro Garcia (grad student, Department of History, University of Texas - Rio Grande Valley) on Alexander the Great: Narcissist or Hero?

My paper will not focus on the legend of Alexander rather my paper will focus on what motivates a man enough to conquer most of the known world. I will argue that Alexander’s motivations stem from a rather unhealthy self-love or narcissism that was brought on from an early age through a close attachment to his mother, Olympias.

Why is it I find narcissist so plausible?

No Ordinary Woman: The Life of Edith Penrose

At the Marginal Revolution blog Tyler Cowen writes on the new biography of economist Edith Penrose, No Ordinary Woman: The Life of Edith Penrose, by Angela Penrose. Cowen writes,

What a dramatic and eventful book. Edith Penrose (1914-1996) is a not so well-known but highly underrated economist, with her major contributions coming in the theory of the firm and industrial organization. As a girl, she survived only because her father shot a rattlesnake about to kill her. Later, her first husband was murdered, right before their first child was born. She and her second husband, working in Switzerland, helped Jews escape from Germany, and she later did food planning during the war in England. In 1948 the couple lost one of their three children, right before his third birthday. Later she received a doctorate in economics from Johns Hopkins, studying under Fritz Machlup. Machlup at one point wrote a ten-page letter to her, with the top proclaiming: “I implore you to shut off your hypersensitivity and to overlook it if I sound condescending, arrogant or otherwise unpleasant. I just want to be helpful.”

She headed the Owen Lattimore Defense Fund. Later, she did not feel entirely comfortable teaching at Johns Hopkins (she was treated badly and not tenured) and so she ended up teaching in Baghdad and Beirut and was also an important early faculty member at INSEAD, perhaps their first world class hire. She became an expert on energy economics and multinationals, traveling and advising around the world more or less without stopping. Drawing on her doctoral work, she also published on IP problems for developing economies, an area where she was well ahead of her time.

She enjoyed writing poems and limericks for her own pleasure. She also was known for her “direct questions” and her “disconcerting remarks.”

Cowen makes a couple of other comments which for me are interesting. He says,

I would describe her work as halfway between economics and the business school tradition, broadly in the Austrian school but more descriptive and without the political slant of Mises and Hayek.

and

She was the founding thinker behind “resource-based” theories of the firm, whereby firms are best understood in terms of what resources they have access to, rather than their products. This was a dominant approach from the 1980s onward, though she received only marginal credit for her seminal role. She also focused on which were the slack resources of a firm or not, as a means of ascertaining where the firm was headed, and ran all this analysis through a lens of expectations and perceptions, reflecting her studies with Machlup. She thought in terms of what a firm’s “moat” might be, as you might expect from a contemporary Silicon Valley analyst.

These comments for interesting since an anonymous referee for my upcoming book, A brief prehistory of the theory of the firm, wrote,

Third, I’m a bit befuddled by the fact that Penrose’s work isn’t covered as part of the history. Her work has been very influential and fits neatly in the history of the theory of the firm (as is noted in the manuscript). But she also fits in the overall development of ideas, as one of two branches following the work of Robinson (the other is Coase, as noted by Jacobsen (2008; 2011)).

This gave me purse to think more about why I hadn't included Penrose in the book. I replied to the referee by saying,

I was in two minds about Penrose since her work is pre-1970 [and thus in the time period covered by my book] but is, like Bylund and Winter, more heterodox than mainstream. Penrose is properly more well known in management than economics. The economics mainstream hasn’t taken up Penrose’s ideas to any great degree.

and, in a latter email,

Thinking more about Penrose, I would place her work more in the heterodox category than in the mainstream. Penrose's influence is felt more in strategic management, largely via the resource-based view, than in the mainstream of economics. Rightly, or more likely wrongly, standard economics has not put much effort into developing Penrose's ideas.

And I think I'm right in saying that Penrose has been more influential in management than economics. This related to Cowen's point about Penrose being "halfway between economics and the business school tradition". It is the management, business school, scholars who have developed Penrose's ideas, in the "resource-based theories of the firm", rather than the economists who have followed Ronald Coase, and to a lesser degree Frank Knight.

Cowen is likely right when he says Penrose,

is a not so well-known but highly underrated economist

At least as far as economics is concerned.

The Big Mac index

The Economist’s Big Mac index gives a flavour of how far currency values are out of whack. It is based on the idea of purchasing-power parity, which says exchange rates should move towards the level that would make the price of a basket of goods the same everywhere. Our basket contains only one item, but it is found in around 120 countries: a Big Mac hamburger.

If the local cost of a Big Mac converted into dollars is above $5.28, the price in America, a currency is dear; if it is below the benchmark, it is cheap. The average cost of a Big Mac in the euro area is €3.95, or $4.84 at the current exchange rate. That implies the euro is undervalued by 8.4% against the dollar.

The New Zealand dollar looks a bit cheap.

Emily Oster on diabetes and diet, disease and vaccinations and debunking pregnancy myths

From the Economic Rockstar podcast come this interview of Emily Oster by Frank Conway. Professor Oster (Economics, Brown Univeristy) is the author of “Expecting Better: Why the Conventional Pregnancy Wisdom Is Wrong — and What You Really Need to Know”.

The life of Edith Penrose

Angela Penrose, writer and journalist and daughter-in-law of Edith Penrose, will present 'No Ordinary Woman', the first biography of Edith Penrose, author of The Theory of the Growth of the Firm, a remarkable woman and distinguished scholar. Born in 1914, Edith Penrose spent much of her academic career as Professor of Economics at SOAS, having previously held a joint appointment at LSE and SOAS. As well as the theory of the firm, her research included the international patent system and innovation; multinational firms and foreign investment; oil companies and the economies of the Middle East; and economic development.

In the week Angela Penrose was given The Theory of The Growth of the Firm to read as part of her PPE course at Oxford she met her future husband, Perran Penrose, the son of the author, Edith Penrose. She and Perran went on to teach in Libya, Ethiopia, Burundi, and Zambia where Angela also worked as a journalist. She has extensive experience of communicating in the printed and broadcast media and working directly with children and young people as a teacher and youth worker. She has worked with development and humanitarian organisations and was Director of Policy with Save The Children.

This event is co-organised by the SOAS Department of Economics and the SOAS School of Finance and Management.

Robots and jobs: evidence from the US

From VoxEU.org comes this audio in which Daron Acemoğlu is interviewed by Tim Phillips on the topic "Robots and jobs: Evidence from the US".

Concerns that industrial robots will replace human labour are widespread. Daron Acemoglu discusses how automation creates a displacement and a productivity effect. Furthermore, the effect of automation on employment heavily depends on the sector it is used in.

A link to the audio is available here.

The sugar levy: a briefing

The IEA in London has released a short paper, The Sugar Levy: A Briefing, on the 'sugar levy' that was announced in March 2016 by the then Chancellor, George Osborne, in the UK.

A summary of the paper's conclusion reads:

• In March 2016, George Osborne announced a ‘sugar levy’ on soft drink companies to start in April 2018. Under this policy, companies will be taxed on sales of medium and high sugar drinks (excluding fruit juice and milk-based drinks).
• As an anti-obesity policy, the sugar levy seems arbitrary. Consumption of both sugar and sugary drinks has been falling for years while obesity has been rising. Soft drinks make only a small contribution to average calorie intake. Comparisons between European countries show no correlation between sugary drink consumption and obesity.
• There is unambiguous evidence that ‘sin taxes’ of this sort take a greater share of income from the poor than from the rich. Since low income groups tend to buy larger quantities of SSBs, the impact of the sugar levy will be particularly regressive.
• The Office for Budget Responsibility says the levy will increase inflation by a quarter of a per cent in 2018-19 thereby adding £1 billion to accrued interest payments on index-linked gilts. The inflationary effect will raise the cost of index-linked salaries, pensions and benefits by many millions of pounds. The levy will also require additional funding for enforcement and administration. For the first few years, at least, the sugar levy will be loss-making.
• Hopes of extensive reformulation to reduce sugar content in the soft drink market are highly unrealistic. There is no more sugar to be removed from diet drinks and companies will not change the recipe of their popular original brands. Instead, the levy gives companies the perverse incentive to raise sugar levels up to the threshold of each tax bracket.

Such results should act as a a cautionary tale for those wanting such taxes in other countries.

Here's how we solve Britain's housing crisis

The Institute of Economic Affairs’s Kristian Niemietz and former Head of Research at the Adam Smith Institute Ben Southwood discuss the housing shortage, its supply-side nature and the politics which underpin it.

Interviewed by the IEA's Kate Andrews, the pair examine the historical origins of the housing crisis, which date back to legislation introduced under Clement Attlee’s government in the 1940s.

They also look at the well-organised NIMBY movement (short for “Not In My Back Yard”), and its influence on government policy.

Many of the issues discussed here apply not just to the UK but also to many other countries, like New Zealand.

Silent Revolution by The Benevolent Dictators

Great news, the album Silent Revolution by The Benevolent Dictators is now available. The album is based on the works of Adam Smith. What could be cooler?!!

Songs

1. Fellow-Feeling 03:29
2. Impartial Spectator 04:12
3. Silent Revolution 03:44
4. The Street Porter & the Philosopher 03:51
5. Chinese Earthquake 02:58
6. Pin Factory 02:49
7. The Dumb Specialist 03:50
8. Man of Luxury 04:48

Available in digital and CD formats. Available on Spotify, iTunes, Apple Music, Google Play, and here on bandcamp for web streaming.

Enjoy!!

Fun in the sun

Organizational Economics Workshop
Barcelona Graduate School of Economics
14-15 June 2018.

A non-exhaustive list of topics is:

• Relational contracts
• Theory of the Firm
• Incomplete Contracts
• Internal Organization and Incentive Systems
• Management practices
• Business Law and Economics

Keynote speaker
Robert Gibbons (MIT)

When doing good goes bad

There is a new NBER working paper out on the moral hazard effects of corporate social responsibility.

When Corporate Social Responsibility Backfires: Theory and Evidence from a Natural Field Experiment
by John A. List and Fatemeh Momeni

Abstract:

Corporate Social Responsibility (CSR) has become a cornerstone of modern business practice, developing from a "why" in the 1960s to a "must" today. Early empirical evidence on both the demand and supply sides has largely confirmed CSR's efficacy. This paper combines theory with a large-scale natural field experiment to connect CSR to an important but often neglected behavior: employee misconduct and shirking. Through employing more than 3000 workers, we find that our usage of CSR increases employee misbehavior - 20% more employees act detrimentally toward our firm by shirking on their primary job duty when we introduce CSR. Complementary treatments suggest that "moral licensing" is at work, in that the "doing good" nature of CSR induces workers to misbehave on another dimension that hurts the firm. In this way, our data highlight a potential dark cloud of CSR, and serve to forewarn that such business practices should not be blindly applied.

So "doing good" can result in workers "doing bad".

"The Second World Wars" with Victor Davis Hanson

These videos come from Uncommon Knowledge with Peter Robinson at the Hoover Institution. Robinson interviews Victor Davis Hanson about Hanson's new book, "The Second World Wars".

How were the Axis powers able to instigate the most lethal conflict in human history? Find out in this two part episode of Uncommon Knowledge as military historian, editor of Strategika, and Martin and Illie Anderson Senior Fellow, Victor Davis Hanson, joins Peter Robinson to discuss his latest book, The Second World Wars.

Victor Davis Hanson explains how World War II initially began in 1939 as a multitude of isolated border blitzkriegs that Germany continued to win. In 1941, everything changed when Germany invaded their ally, the Soviet Union, and brought Japan into the war. He argues that because of the disparate nature of World War II, it’s much harder to think about as a monolithic conflict.

World War II was the deadliest conflict in human history with approximately sixty million people killed. Victor Davis Hanson argues that World War II and the many lives lost was preventable, but due to a series of missteps by the Allied forces, Germany believed they were stronger and their enemies weaker than the reality. He argues “it took Soviet collusion, American indifference or isolation, and British or French appeasement in 30s” to convince Germany that they had the military capabilities to invade western Europe. In the aftermath of World War I, the allies believed the cost of the Great War had been too high, while Germany bragged about their defeat as no enemy soldiers had set foot on German soil. Great Britain and France both chose appeasement over deterrence, which encouraged rather than deterred Hitler and Germany from moving forward with their plans.

Could the Axis powers have won? What are the counterfactuals for World War II?

Victor Davis Hanson explains the counterfactuals of World War II, the “what-ifs” that easily could have changed the outcome of the war. If Hitler had not attacked Russia or the Japanese had not attacked Pearl Harbor, the USSR would have never turned on Germany and the United States would have never entered the war. Hanson argues that the leaders of the Axis powers overreached in their strategies, which ultimately caused their downfall. Hanson also explores the counterfactual surrounding the American commanders and the “what-ifs” that could have prevented American success in the war.

Victor Davis Hanson also reflects on his own family history and connections to World War II and how it shaped him as both a person and a scholar in his life today. He talks about his motivations to write his latest book, The Second World Wars, and how his family history and the current political climate inspired him to write it.

Hal Varian interview

Hal Varian is interviewed by James Pethokoukis of the AEI. Varian is, of course, well known by all economics students due to his undergraduate and graduate microeconomics textbooks. Varian is now Google's chief economist. He is professor emeritus at the University of California, Berkeley.

Fighting talk

A new working paper from M E Brady will not go down well with everyone.

"G. L. S. Shackle Was J. M. Keynes's Rival and Opponent: He Was an Austrian and Never a Keynesian of Any Type"

Michael Emmett Brady, California State University - Department of Operations Management

Shackle was a tireless opponent of both Keynes and the Keynesian revolution. He was a 100% Austrian subjectivist. He never was a disciple of Keynes at any time in his life. Shackle was successful in a tricky sleight of hand and legerdemain due to the support of Joan Robinson and Paul Davidson, neither of whom had any idea of the concept of the weight of the evidence from the A Treatise on Probability that was the foundation for Keynes’s uncertainty analysis in both the A Treatise on Probability and General Theory.

Shackle successfully substituted his rival and directly conflicting definition (See for example, pages 162-164 of Epistemics and Economics) of uncertainty, which meant total and complete ignorance. Shackle’s concept of total and complete ignorance goes under the synonyms irreducible uncertainty, fundamental uncertainty, unquantifiable uncertainty, utter uncertainty and radical uncertainty. None of Shackle’s analysis holds except in the special, but important, case of investment in long lived, physical durable capital or producer goods that are subject to innovation, technological change and advance, and obsolescence over time. Keynes’s treatment in the A Treatise on Probability and General Theory is superior to Shackle’s, so there is no need for any consideration of Shackle’s convoluted approach based on possibilities (not probabilities), imagination and the entrepreneur’s private dreams.

Keynes was the first to put forth an original IS-LP (LM) model in October, 1933. This model appeared in the 1934 draft copy of the GT. This original model is very inferior to the final model constructed in chapters 10, 11, 12, 13, 14, and 15 of the GT. It was presented in its entirety in chapter 21 in sections IV, V and VI and briefly in Section IV of chapter 15. The investment multiplier and marginal propensity to consume are both missing. Keynes had not yet integrated Y, Aggregate realized or actual Income, into the LP equation because he had not yet formulated his D-Z model, which allowed him to present an elasticity analysis in Section VI of chapter 21.

There is no Shackleian interpretation of the GT. There is a deliberate, Shackleian misinterpretation of the 1937 QJE article, in which Shackle tries to sabotage the Keynesian revolution by attempting to claim that Keynes was really an Austrian Subjectivist like Shackle.

Fitzgibbons was not able to come to the correct conclusion regarding Shackle simply because his belief in a Shackleian interpretation of Keynes makes no sense because Keynes had always rejected Austrian Subjectivism.

King’s 2002 “history” is a version of Shackle’s claim that Keynes was an Austrian Subjectivist. King’s “History” is completely contradicted by the 1937-38 Keynes-Townshend correspondence, where Keynes agrees with Townshend’s tentative conclusion that the Theory of Liquidity Preference, as presented in the General Theory, is based on Keynes’s TP concepts of weight of the evidence and non numerical probabilities, which are interval valued probabilities that can be indeterminate or imprecise. The Keynes-Townshend correspondence represents a complete rejection of Shackle’s and Joan Robinson’s claims about radical uncertainty being the foundation of the GT.

The Uncertainty fraud is the foundation upon which Post Keynesianism and Institutional economics is founded. This foundation is composed of the myths made up by Joan Robinson and GLS Shackle about Keynes and the GT. These myths were then passed on to hundreds of thousands of readers by way of Paul Davidson during the 37 years, from 1978-2014, that he was the editor of the Journal of Post Keynesian Economics.

A review of the year from the IEA

A round-up of 2017, featuring the IEA's Director General Mark Littlewood and Communications Director Stephanie Lis.

Interviewed by the IEA's News Editor Kate Andrews, the three discuss the state of the Brexit negotiations, the problems in Parliament, Donald Trump's America, and predictions for 2018.

The most valuable companies of all-time

Not sure I totally believe the calculations that underlie the figure but it does still give an indication of just how large companies like Dutch East India Company (known in Dutch as the VOC, or Verenigde Oost-Indische Compagnie) were. Makes me wonder how the English East India Company would look in comparison.

For more information see here.

Courtesy of: Visual Capitalist

Brink Lindsey and Steven Teles on the "Captured Economy"

Brink Lindsey of the Niskanen Center and Steven Teles of the Niskanen Center and Johns Hopkins University talk with EconTalk host Russ Roberts about their book, The Captured Economy. Lindsey and Teles argue that inequality has been worsened by special interests who steer policy to benefit themselves. They also argue that the influence of the politically powerful has lowered the overall growth of the American economy.

A direct link to the audio is available here.

Potatoes reduced the number of civil wars!

Three cheers for the stud!

The Long-run Effects of Agricultural Productivity on Conflict, 1400-1900
Murat Iyigun, Nathan Nunn, Nancy Qian
NBER Working Paper No. 24066
Issued in November 2017
NBER Program(s):DEV, POL

This paper provides evidence of the long-run effects of a permanent increase in agricultural productivity on conflict. We construct a newly digitized and geo-referenced dataset of battles in Europe, the Near East and North Africa covering the period between 1400 and 1900 CE. For variation in permanent improvements in agricultural productivity, we exploit the introduction of potatoes from the Americas to the Old World after the Columbian Exchange. We find that the introduction of potatoes permanently reduced conflict for roughly two centuries. The results are driven by a reduction in civil conflicts.

Yet another reason to love potatoes. They not only taste good, they do good.

An overview of "A brief prehistory of the theory of the firm"

As the manuscript for "a brief prehistory of the theory of the firm" has been delivered to the publisher its worth giving a short over view of what is covered in the book and why.

Firms play a critical role in the modern economy and society. With regard to the size of the contribution made by firms to economic activity McMillan (2002: 168-9) explains that for the US economy more than 70 percent of all transactions take place within firms leaving less than a third taking place via markets. In a mid-20th century report for the Social Science Research Council in the US economist H. R. Bowen identified the firm as one of the most significant institutions in our society, “[t]he business enterprise is one of the most pervasive and influential institutions of our society, and one in which innumerable important decisions and responses are made. These decisions and responses, in small and large enterprises, are links in the chain of factors determining the range of products available to consumers, the level of national income, the degree of economic security, the rate and direction of economic progress, and the distribution of income. These decisions and responses also significantly influence the character of human relations in industry, the quality of the lives of those who work in industry, and even the power structure of our society” (Bowen 1955: 1). More recently, at the beginning of the 21st century, journalists John Micklethwait and Adrian Wooldridge went so far as to argue that “[t]he most important organization in the world is the company: the basis of the prosperity of the West and the best hope for the future of the rest of the world” (Micklethwait and Wooldridge 2003: xv).

Given the significance of firms to today’s economy it would seem plausible to expect that one component of a proper understanding of how an economy functions would be a sophisticated theoretical understanding of the nature, structure and scope of firms. And yet up until very recent times the theory of the firm has largely been neglected as a field of interest in the study of economics. According to Oliver Hart

“[...] the theory of the firm is one of the less developed and agreed upon areas of economics” (Hart 2011: 102).

Birger Wernerfelt argues similarly insofar as he contends that a

“[...] foundational debate, over what exactly a “firm” is, has been raging in economics. Although two Nobel prizes ii have been awarded for answers to this question, the only agreed-upon proposition is that we, as of 2016, do not have a commonly accepted theory of the firm” (Wernerfelt 2016: 3)

This distinct lack of interest in the theory of the firm has in the recent past extended from theoretical economists to historians of economic thought. Fleckner (2016: 5, footnote 2) comments,

“[p]robably the best evidence of the traditional disinterest in the theory of the firm is the fact that the firm has no prominent place, if it is broached at all, in books on the history of economic thought. Two examples: In Sandmo 2011, a new and very readable book, none of the almost 500 pages are devoted to the theory of the firm (the selection of topics is explained on pp.vii, 23, 112); in Heilbroner 1999, one of the best-selling books in economics of all time, firms are mentioned more frequently, especially those whose shares are publicly traded, but there is no discussion of the issues that are typically associated with the theory of the firm (which, given the broad scope of the book, is not meant to be a criticism; neither Heilbroner nor Sandmo would have been well advised to focus on the firm)”.

Backhouse (2002), another well regarded introduction to the history of economic thought, does better in terms of coverage of the theory of the firm than either Sandmo (2011) or Heilbroner (1999) insofar as Backhouse devotes, roughly, one page out of 369 to the history of the post-1970 developments in the theory of the firm.

That the theory of the firm receives little, if any, treatment in recent history of economics texts is one motivation for this book. Here we wish to offer an introductory investigation into the history of the mainstream iv approach to the theory of the firm or production up until the 1970s. This pre-1970 literature is what is referred to here as the ‘prehistory’ of the theory of the firm. It was only starting in the 1970s that the theory of the firm proper came into being with the work of authors such as Armen Alchian, Robert Crawford, Harold Demsetz, Michael Jensen, Benjamin Klein, William Meckling and Oliver Williamson. These authors started the development of the transaction cost based and contract based theories of the firm. Approaches to the firm such as these were inspired, mainly, by the works of Ronald Coase. Before this time what we had was at best a discussion of the theory of micro-level production, and this only developed around 1930. Up until 1930s the most economics had to offer were theories which were predominantly theories of macro-level production. Before the 1970s the development of the theory of the firm was largely a story of neglect and disinterest.

The discussion in the pages that follow concentrates on the mainstream of economic thought and thus ignores the heterodox approaches to the firm. Concentrating on the mainstream in an introductory discussion is reasonable since it is these theories that students are most likely to meet during their initial studies. Also such an emphasis may do little damage to the story of the development of the theory of the firm since there is a close relationship between the advancement of the theory of the firm and the general economic mainstream. Foss and Klein (2006) claim that

“[...] the evolution of the theory of the firm has never taken place far away from the economic mainstream. On the contrary, it has in fact been much driven by advances in the mainstream, and the relatively limited borrowing from other disciplines that has taken place has usually been strongly adapted to conform to central mainstream tenets” (Foss and Klein 2006: 3).

What we hope to offer here is a concise, readable introduction to the ‘prehistory’ of the firm which is aimed at undergraduates and beginning graduate students. The book has been written in a manner which is, hopefully, understandable to students, with the little mathematics used explained in enough detail that undergraduates can follow it. As background, some knowledge of the basics of the contemporary theory of the firm would be useful. See Walker (2015) and Walker (2016: chapters 3 and 4) for introductions to this literature. The book is designed to give readers an understanding of how the mainstream theories they are taught developed and why the theories are the way they are. This is an understanding that most students, and many of their lecturers, do not have since it is not conveyed via the textbook presentations of the standard models of the firm. These models are presented devoid of all context, there are no consideration given to their development or past and current criticisms of or controversies surrounding the models being discussed. The material on the periods before the neoclassical era is almost never presented. The book may also prove to be of interest to economists working in the history of economic thought and given that most economists are not well acquainted with the history of their subject it could, in addition, be of interest to those working in areas such as the theory of the firm, organisational economics and industrial organisation.

An analysis of the past of the theory of the firm helps cultivate an understanding of the historical developments that have resulted in the contemporary theories. This inquiry helps to add depth to our knowledge of the ideas that are commonly employed today but whose origins lie in past debates to do with production and the firm. It also allows us to see how and why changes in thinking about these issues took place. Such a background will help readers understand why the developments after 1970, when they do finally meet them, are so important and why the modern discussion of the theory of the firm is so different from the past.

As just mentioned the mainstream theory of the firm did not exist, in any meaningful way, until around 1970. It was only then that the current theory of the firm literature began to emerge, based largely upon the work of Ronald Coase and to a lesser degree Frank Knight. It was work by Armen Alchian, Robert Crawford, Harold Demsetz, Michael Jensen, Benjamin Klein, William Meckling and Oliver Williamson, among others, that drove the upswing in interest in the firm among mainstream economists Before then there was no great interest shown in the firm as a significant economic institution by any school of economic thought. For more than two thousand years tools (eg the division of labour) were available that could have given rise to a theory of the firm but none appeared. During this time the best that occurred were discussions of micro-level production, and that only after 1930, while before then the deliberations that did transpire, limited though they were, were more focused on macro-level or aggregate production.

To begin our survey of the development of the theory of production and/or the theory of the firm we briefly look at the history of thought on the division of labour. As has been made clear by work beginning in the twentieth century the division of labour can act as a catalyst for a theory of the firm, but it took more than two thousand years - starting with the ancient Greeks and Chinese - for it to act as such. Until Alfred Marshall at the end of the nineteenth century many authors, including Adam Smith, wrote on the division of labour without applying it to the theory of micro-level production or the firm.

Following on from this discussion we will next consider approaches to production and the firm proposed in the pre-classical, classical and neoclassical periods other than those derived from the division of labour. It will be argued that before the later neoclassical economists no group of writers developed a theory of micro-level production and only Alfred Marshall wrote explicitly on the theory of the firm. Before the neoclassicals the best available theory was one of macro or aggregate production.

As has already been explained the theory of production/the theory of the firm was ignored for a long time in economics. Five, interrelated, explanations for this fact have been put forward. First, the (large/integrated) firm was until very recently just not that important to the economy and thus was ignored by early economic writers. Second, many economists did not see economic theory as being relevant to business or saw the internal workings of the firm to be outside the competence of economists. Thirdly, the development of a theory of the firm was limited by the lack of tools to deal with the task. Fourthly, for much of the development of economic analysis there was a normative/macro origination to economics which could result in a lack of interest in the theory of micro level production and the firm. Lastly, the rise of formalism within economics resulted in the firm being deemphasised.

An extensive bibliography is provided to help guide any readers interested in considering topics raised in the discussion in greater depth.

References. Backhouse, Roger E. (2002). The Ordinary Business of Life: A History of Economics from the Ancient World to the Twenty-First Century, Princeton, NJ: Princeton University Press. Bowen, Howard R. (1955). The Business Enterprise as a Subject for Research: Prepared for the Committee on Business Enterprise Research, Social Science Research Council, Pamphlet No. 11, New York: Social Science Research Council. Fleckner, Andreas Martin (2016). ‘Adam Smith on the Joint Stock Company’, Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2016-1, 1 January. Foss, Nicolai J. and Peter G. Klein (2006). ‘The Emergence of the Modern Theory of the Firm’, Center for Strategic Management and Globalization, Copenhagen Business School, SMG Working Paper 1/2006, January. Hart, Oliver D. (2011). ‘Thinking about the Firm: A Review of Daniel Spulber’s The Theory of the Firm’, Journal of Economic Literature, 49(1) March: 101-13. Heilbroner, Robert L. (1999). The Worldly Philosophers–The Lives, Times, and Ideas of the Great Economic Thinkers, 7th edn., New York: Simon & Schuster. McMillan, John (2002). Reinventing the Bazaar: A Natural history of Markets, New York: W.W. Norton and Company. Micklethwait, John and Adrian Wooldridge (2003). The Company: A Short History of a Revolutionary Idea, New York: The Modern Library. Sandmo, Agnar (2011). Economics Evolving–A History of Economic Thought, Princeton: Princeton University Press. Walker, Paul (2015). ‘Contracts, Entrepreneurs, Market Creation and Judgement: The Contemporary Mainstream Theory of the Firm in Perspective’, Journal of Economic Surveys, 29(2) April: 317-38. Walker, Paul (2016). The Theory of the Firm: An overview of the economic mainstream, London: Routledge. Wernerfelt, Birger (2016). Adaptation, Specialization, and the Theory of the Firm: Foundations of the Resource-Based View, Cambridge: Cambridge University Press.

Doug Irwin on the history of US trade policy

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Doug Irwin on the history of US trade policy.

Douglas Irwin is a professor of economics at Dartmouth College and a leading expert on trade economics. He joins David Beckworth to discuss his new book, Clashing over Commerce: A History of US Trade Policy, which examines the history of American trade policy from the late 1700s to the present. Doug explains how US attitudes toward trade evolved over time and how free trade became the postwar consensus. Specifically, Doug argues that the history of US trade policy has been guided by the “three R’s: revenue, restriction, and reciprocity.” Finally, David and Doug discuss some of Doug’s work on the gold standard and the Great Depression.

What is a Marxist Libertarian?

Yes that is a serious question.

Brendan O’Neill (Editor of Spiked Online) joins Dave to discuss why he defines himself as a ‘Marxist Libertarian,’ his views on the pursuit of happiness, self censorship in the U.S., the issue with Bill of Rights only existing in writing and not in the hearts of Americans, the debate surrounding tearing down monuments, and more.

Tyler Cowen interviews Douglas Irwin

From Conversations with Tyler comes this interview between Tyler Cowen and Douglas Irwin about trade policy. Well worth the hour it takes to lesson to.

Tyler thinks Douglas Irwin has just released the best history of American trade policy ever written. So for this conversation Tyler went easy on Doug, asking softball questions like: Have tariffs ever driven growth? What trade exceptions should there be for national security, or cultural reasons? In an era of low tariffs, what margins matter most for trade liberalization? Do investor arbitration panels override national sovereignty? And, what’s the connection between free trade and world peace?

They also discuss the revolution as America’s Brexit, why NAFTA is an ‘effing great’ trade agreement, Jagdish Bhagwati’s key influence on Doug, the protectionist bent of the Boston Tea Party, the future of the WTO, Trump, China, the Chicago School, and what’s rotten in the state of New Hampshire.

Why do planning economies fail? The economic calculation problem and how markets solve it ....

To appreciate why market prices are essential to human well-being, consider what a fix we would be in without them. Suppose you were the commissar of railroads in the old Soviet Union. Markets and prices have been banished. You and your comrades. Passionate communists all. Now, directly plan how to use available resources.

You want a railroad from city A to city B, but between the cities is a mountain range. Suppose somehow you know that the railroad once built. Will serve the nation equally well. Whether it goes through the mountains or around. If you build through the mountains, you'll use much less steel for the tracks.

Because that route is shorter. But you'll use a great deal of engineering to design the trestles and tunnels needed to cross the rough terrain. That matters because engineering is also needed to design irrigation systems, mines, harbor installations and other structures. And you don't want to tie up engineering on your railroad if it would be more valuable designing those other structures instead.

You can save engineering for other projects. If you build around the mountains on level ground. But that way you'll use much more steel rail to go the longer distance and steel is also needed for other purposes. For vehicles, girders, ships, pots and pans and thousands of other things.

Which route should you choose for the good of the nation? To answer, you would need to determine which bundle of resources is less urgently needed for other purposes. The large amount of engineering and small amount of steel for the route through the mountains, where the small amount of engineering and large amount of steel for the roundabout route.

But how could you find out the urgency of need for engineering and steel in other uses?

Firm-level political risk: measurement and effects

One obvious risk that firms face, especially these days, is political risk, but how does it effect firms and what do they do about it?

These questions are looked at in a new NBER working paper,

Firm-Level Political Risk: Measurement and Effects
Tarek A. Hassan, Stephan Hollander, Laurence van Lent and Ahmed Tahoun
NBER Working Paper No. 24029
Issued in November 2017
The abstract reads:

We adapt simple tools from computational linguistics to construct a new measure of political risk faced by individual US firms: the share of their quarterly earnings conference calls that they devote to political risks. We validate our measure by showing that it correctly identifies calls containing extensive conversations on risks that are political in nature, that it varies intuitively over time and across sectors, and that it correlates with the firm's actions and stock market volatility in a manner that is highly indicative of political risk. Firms exposed to political risk retrench hiring and investment and actively lobby and donate to politicians. Interestingly, we find that the incidence of political risk across firms is far more heterogeneous and volatile than previously thought. The vast majority of the variation in our measure is at the firm-level rather than at the aggregate or sector-level, in the sense that it is neither captured by time fixed effects and the interaction of sector and time fixed effects, nor by heterogeneous exposure of individual firms to aggregate political risk. The dispersion of this firm-level political risk increases significantly at times with high aggregate political risk. Decomposing our measure of political risk by topic, we find that firms that devote more time to discussing risks associated with a given political topic tend to increase lobbying on that topic, but not on other topics, in the following quarter.

Book contract signed

I have just signed a contract with Routledge for them to publish my second book, "A brief prehistory of the theory of the firm". The manuscript is due first thing in December (I have much work to do over the next couple of weeks) and thus with luck the book will appear a few months later.

Keep an eye out and save up so you can be one of the first lucky people to own a copy!


Contents

    Preface and acknowledgements
    A note on the numbering of equations, tables and figures

Background

    Chapter notes
    References

The division of labour and the firm

    Ancient philosophers

    Medieval period

    Pre-classical economics period

    19th century

    20th century

    Chapter notes
    References

Development of a theory of production or the firm

    Pre-classical economists

    The classical economics period

    The neoclassical era

        Behavioural and managerial models

        Contemporary criticisms of the neoclassical model

        Coase versus Demsetz on the neoclassical model

        Profit maximisation

    Malmgren (1961)

    Chapter notes
    References

Possible reasons for the neglect of the firm

    Chapter notes
    References

    Index

Common ownership, competition, and top management incentives

An interesting looking revised version of a working paper from the Cowles Foundation for Research in Economics at Yale University on "Common Ownership, Competition, and Top Management Incentives" (pdf). The paper is by Miguel Antón, Florian Ederer, Mireia Giné, and Martin Schmalz.

The abstract reads:

We show theoretically and empirically that managers have steeper financial incentives to expend effort and reduce costs when an industry’s firms tend to be controlled by shareholders with concentrated stakes in the firm, and relatively few holdings in competitors. A side effect of steep incentives is more aggressive competition. These findings inform a debate about the objective function of the firm.

The basic conclusion of the paper is,

We found that the sensitivity between top managers’ wealth and their firm’s performance is weaker when the firms’ largest shareholders are also large shareholders of competitors. The wealth-performance relation for managers is steeper when firms are owned by shareholders without significant stakes in competitors.

Thus you will get more competition when a firm is owned by shareholders without significant stakes in competitors.

Trade, merchants, and the lost cities of the Bronze Age

An interesting new NBER working paper on Trade, Merchants, and the Lost Cities of the Bronze Age by Gojko Barjamovic, Thomas Chaney, Kerem A. Coşar and Ali Hortaçsu.

NBER Working Paper No. 23992
Issued in November 2017
NBER Program(s): ITI

We analyze a large dataset of commercial records produced by Assyrian merchants in the 19th Century BCE. Using the information collected from these records, we estimate a structural gravity model of long-distance trade in the Bronze Age. We use our structural gravity model to locate lost ancient cities. In many instances, our structural estimates confirm the conjectures of historians who follow different methodologies. In some instances, our estimates confirm one conjecture against others. Confronting our structural estimates for ancient city sizes to modern data on population, income, and regional trade, we document persistent patterns in the distribution of city sizes across four millennia, even after controlling for time-invariant geographic attributes such as agricultural suitability. Finally, we offer evidence in support of the hypothesis that large cities tend to emerge at the intersections of natural transport routes, as dictated by topography.

Alex Tabarrok writes on this paper at Marginal Revolution:

In a stunningly original paper Gojko Barjamovic, Thomas Chaney, Kerem A. Coşar, and Ali Hortaçsu use the gravity model of trade to infer the location of lost cities from Bronze age Assyria! The simplest gravity model makes predictions about trade flows based on the sizes of cities and the distances between them. More complicated models add costs based on geographic barriers. The authors have data from ancient texts on trade flows between all the cities, they know the locations of some of the cities, and they know the geography of the region. Using this data they can invert the gravity model and, triangulating from the known cities, find the lost cities that would best “fit” the model. In other words, by assuming the model is true the authors can predict where the lost cities should be located. To test the idea the authors pretend that some known cities are lost and amazingly the model is able to accurately rediscover those cities.

Dennis Rasmussen on Hume and Smith and "The Infidel and the Professor"

In this audio from EconTalk Russ Roberts interviews Dennis Rasmussen about Rasmussen's new book "The Infidel and the Professor: David Hume, Adam Smith, and the Friendship that Shaped Modern Thought".

How did the friendship between David Hume and Adam Smith influence their ideas? Why do their ideas still matter today? Political Scientist Dennis Rasmussen of Tufts University and author of The Infidel and the Professor talks with EconTalk host Russ Roberts about his book--the intellectual and personal connections between two of the greatest thinkers of all time, David Hume and Adam Smith.

A direct link to the audio is available here.

Its a book that's well worth reading.

Claudia Goldin on the gender earnings gap

Claudia Goldin (Professor of Economics at Harvard University) writes, in the New York Times, on How to Win the Battle of the Sexes Over Pay (Hint: It Isn’t Simple.)

The executive summary

In sum, the gap is mainly the upshot of two separate but related forces: workplaces that pay more per hour to those who work longer and more uncertain hours, and households in which women have assumed disproportionately large responsibilities.

And now a bit more detail.

Yet it is also true that the time demands of many jobs can explain much of the pay difference, a finding that has sobering implications. Eliminating the gender earnings gap will require changes in millions of households and thousands of individual workplaces.

and

The gap is larger among more educated people, for example, and varies according to occupation, often in big ways. Among college graduates, it is far larger in business, finance and legal careers than in science and technology jobs. In health care, it is larger when self-employment is high (think dentists) and much lower when professionals are mainly employees (think pharmacists).

What’s more, the gap is a statistic that changes during the life of a worker. Typically, it’s small when formal education ends and employment begins, and it increases with age. More to the point, it increases when women marry and when they begin bearing children.

and

Similar patterns appear using data for women and men who have earned master’s degrees in business administration. Immediately after graduation, women earn 92 cents for each male dollar. A decade later they earn only 57 cents.

Correcting for time off and hours of work reduces the difference in the earnings between men and women but doesn’t eliminate it.

On the face of it, that looks like proof of disparate treatment. It may seem understandable that when a man works more hours than a woman, he earns more. But why should his compensation per hour be greater, given the same qualifications? But once again, the problem isn’t simple.

and

The data shows that women disproportionately seek jobs — including full-time jobs — that are more likely to mesh with family responsibilities, which, for the most part, are still greater for women than for men. So, the research shows, women tend to prefer jobs that offer flexibility: the ability to shift hours of work and rearrange shifts to accommodate emergencies at home.

Such jobs tend to be more predictable, with fewer on-call hours and less exposure to weekend and evening obligations. These advantages have a negative consequence: lower earnings per hour, even when the number of hours worked is the same.

Is that unfair? Maybe. But it isn’t always an open-and-shut case. Companies point out that flexibility is often expensive — more so in some jobs than others.

Certain job characteristics have a big impact on the gender earnings gap. I have looked closely at these issues, including the extent to which workers are:

• Subject to strict deadlines and time pressure
• Expected to be in direct contact with other workers or clients
• Instructed to develop cooperative working relationships
• Assigned to work on highly specific projects
• Unable to independently determine their tasks and goals

Occupations with a lower level of these characteristics (like jobs in science and technology) show smaller gaps, corrected for hours of work. Occupations with a higher level (like those in finance and law) have greater gaps. Men’s earnings tend to surge when there are fewer substitutes for a given worker, when the job must be done in teams and when clients demand specific lawyers, accountants, consultants and financial advisers. Such differences can account for about half the gender earnings gap.

Ask yourself, do you really care who your pharmacist is versus do you care who your doctor or lawyer is? A particular pharmacist not having to be there to deal with customers mean greater flexibility in hours worked but this comes with lower pay while the fact that people want a particular doctor or lawyer to deal with them means long hours with little flexibility but with higher pay to compensate.

These findings provide more nuance in explaining why the gap widens with age and why it is greater for women with children. Whatever changes have already taken place in American society, the duty of caring for children — and for other family members — still weighs more heavily on women. And if you thought that moving to a more family-friendly nation would eliminate the gap, think again. In several nations, including Sweden and Denmark, a “motherhood penalty” in earnings exists, even though these nations have generous family policies, including paid family leave and subsidized child care.

Such considerations bring us to a very sensitive area: domestic arrangements at home, especially among couples with children. These are personal questions. In theory, gender earnings equality is possible when both parents take off the same amount of time and enjoy the same flexibility at work.

So domestic arrangement with a more equal distribution of childcare may reduce the wage gap but it may also make the family poorer.

From a classic economic standpoint, if one spouse or partner can earn more by working less flexible hours, as a family, the couple would earn more money by having that parent in that job, while the other partner accepts the more flexible one. A man can certainly be the more flexible member of this household — though he typically is not. Such decisions need to be made couple by couple.

So the answer to the pay gap may be in the choices made within the home. And that makes it difficult for public policy to deal with.

Zingales, McCloskey, Karlson and Kuran on populism and the free society

What does populism mean? Why do people buy it? Is the critique against the established elites valid? What are the main causes of the populist threats to the free society? How can public discourse and liberal democracy be restored?

Deirdre McCloskey, Luigi Zingales and Timur Kuran are some of the sharpets minds in academia today. They have all written extensively on the foundations of liberal societies. In conjunction with a special meeting with the Mont Pelerin Society on the populist threats to the free society and the reconstruction of the liberal project hosted by the Ratio Institute in Stockholm Sweden, they got together for a dialogue on some of the most pressing issues of our time. Professor Nils Karlson, CEO of the Ratio Institute and author of the book Statecraft and Liberal Reform in Advanced Democracies (Palgrave Macmillan), was the chair of the discussion.