Human capital and the industrial revolution

Or the knowledge economy has been important for a long time. A question often asked about the industrial revolution is, Why Britain? Well part of the answer may be human capital, the knowledge and skills of the British workforce. A new NBER working paper,"The Rate and Direction of Invention in the British Industrial Revolution: Incentives and Institutions", by Ralf Meisenzahl and Joel Mokyr argues:

During the Industrial Revolution technological progress and innovation became the main drivers of economic growth. But why was Britain the technological leader? We argue that one hitherto little recognized British advantage was the supply of highly skilled, mechanically able craftsmen who were able to adapt, implement, improve, and tweak new technologies and who provided the micro inventions necessary to make macro inventions highly productive and remunerative. Using a sample of 759 of these mechanics and engineers, we study the incentives and institutions that facilitated the high rate of inventive activity during the Industrial Revolution. First, apprenticeship was the dominant form of skill formation. Formal education played only a minor role. Second, many skilled workmen relied on secrecy and first-mover advantages to reap the benefits of their innovations. Over 40 percent of the sample here never took out a patent. Third, skilled workmen in Britain often published their work and engaged in debates over contemporary technological and social questions. In short, they were affected by the Enlightenment culture. Finally, patterns differ for the textile sector; therefore, any inferences from textiles about the whole economy are likely to be misleading.

If human capital was a big player in the industrial revolution then the claims made by some politicians and bureaucrats that in recent times we have developed a "knowledge economy" based around ICTs and the growing importance of human capital look a bit odd. They seems to have missed the basic point that knowledge and human capital have always been important to the economy.

Government ditches 2025 taskforce

But what is surprising here. As I have written on the taskforce before

I think most economists would basically agree that the government is involved in areas where it shouldn't be and reducing the government's business footprint and size in general would help simulate growth. The other points noted above also don't look all that radical. But the government will nevertheless ignore the report.

And if you are going to ignore the commission's reports, why have the commission?

As this report from YahooExtra news notes

The 2025 Taskforce made several recommendations the Government ruled out adopting, such as slashing spending by $9 billion, cutting taxes, reducing beneficiary numbers, raising the pension age, selling state-owned assets and vigorously encouraging foreign investment.

and there was never anyway that this government was going to run with such recommendations. This is a conservative government, in all meanings of the word.

Incentives matter: cycling file

This from Eamonn Butler at the blog for the Adam Smith Institute,

UK transport minister Norman Baker this week refused to apologise for saying that cyclists may be safer not wearing helmets. Baker, whose role includes responsibilities for cycling, cited research that drivers tend to go closer to cyclists who are wearing helmets, but give a wider berth to those who are not. Indeed, the national cyclists' organisation itself argues that those who wear helmets are 14% more likely to have a collision than those who don't. Perhaps drivers take more risks because they believe that helmet-wearing cyclists are well protected; or perhaps they think that cyclists without helmets are more amateur and likely to cycle more erratically, making it best to keep well out of their way.

The basic point is simple, and widely applicable: if people believe they are safer, they will take more risks. The strangest thing here is that a politician is saying something so sensible.

Christchurch door open for asset sales

We can only hope. An obvious question here is when should the government -local or national- own a firm? As a general guide, Hart, Shleifer and Vishny ("The Proper Scope of Government: Theory and an Application to Prisons", Quarterly Journal of Economics, 112(4): 1127-61, November 1997) argue that the case for government provision of goods or services is generally stronger when non-contractible cost reductions have large deleterious effects on quality, when quality innovations are unimportant and when corruption in government procurement is a severe problem. It has been argued that the case for government production is strong in such services as the conduct of foreign policy, police and armed forces. The case can also be made reasonably persuasively for the case of prisons. The case for private sector provision is stronger when quality reducing cost reduction can be controlled through contract or competition, when quality innovations are important and when patronage and powerful unions are a severe problem inside the government.

According to this piece at stuff.co.nz the City Council owns the following assets,

Christchurch City Holdings Ltd (CCHL) is the commercial and investment arm of the Christchurch City Council. CCHL manages the ratepayers' investment in these seven fully or partly-owned council-controlled trading organisations: Orion New Zealand Ltd – 89.3 per cent shareholding. Christchurch International Airport Ltd – 75 per cent. Lyttelton Port Company Ltd – 78.9 per cent. Christchurch City Networks Ltd (trading as Enable Networks) – 100 per cent. Red Bus Ltd – 100 per cent. City Care Ltd – 100 per cent. Selwyn Plantation Board Ltd – 39.3 per cent.

It's hard to see how any of these assets are in anyway like foreign policy, the police or the armed forces. It is difficult see how non-contractible cost reductions would have negative effects on quality and it seems likely that quality innovations are important in these areas, so (local) government ownership is not justified.

Matching markets: theory and practice

This the title of a new paper by Atila Abdulkadiroglu and Tayfun Sonmez which was presented at the 2010 Econometric Society World Congress in Shanghai.

This survey cover both one-sided matching and two-sided matching. In Section 2 they introduce and briefly go over some of the key results in two-sided matching model by Gale and Shapley (1962). In Section 3 they introduce the "housing market" model by Shapley and Scarf (1974) as well as a number of more recent one-sided matching models, some of which are closely related to two-sided matching models. In Section 4 they present the recent developments in School Choice and in Section 5 they present the recent developments in Kidney Exchange.

EconTalk this week

John Papola of Emergent Order talks with EconTalk host Russ Roberts about their collaboration creating rap videos based on the ideas of John Maynard Keynes and F. A. Hayek. Their first was "Fear the Boom and Bust" which was released January 25, 2010. This past week they released "Fight of the Century." The latest video discusses the overarching differences between the philosophies of Keynes and Hayek and their views on whether government spending promotes recovery from an economic downturn and whether it leads to prosperity. In this conversation, Papola and Roberts discuss some of the underlying ideas in the video--whether the military spending of World War II ended the Great Depression, the debate between Malthus and Say and their influence on Keynes and Hayek, and the fundamental differences between Keynes and Hayek in how economic prosperity is created.

Entrepreneurship and the economic theory of the firm

This is the title of a talk given by Peter Klein at the University of São Paulo. Click here to see the whole lecture.

The Church and the firm

From the JEL article mentioned in a previous posting comes the following comment:

Firms are an essential part of the economy. However, as Daniel Spulber points out [...] the modern firm is a relatively recent phenomenon. From the earliest times to the eighteenth century, business was carried out by farmer, artisans, and merchants (Spulber, p. 103). According to Alfred D. Chandler, merchants still ruled the (American) economy in 1790. The family remained the basic business unit. The general merchant bought and sold all types of products and carried out all the basic commercial functions. By the 1840s, such tasks were being carried out by different types of specialized enterprises. However, it was still true that these enterprises were personally managed by their owners or by managers who worked closely with the owners. It was only in the second half of the nineteenth century that the world saw the emergence of the modern corporation, a multiunit enterprise operated by teams of salaried managers who had little or no equity in the firm (Chandler 1977, p. 17; Chandler 1990, pp. 1, 14).

But I can't help thinking that the multiunit enterprise is older than this would comment would suggest. In fact what is, I'm guessing, the oldest multinational company still operating in world today would tell us that the large corporation is older than many would think.

The Roman Catholic Church has been in operation for hundreds of years, in multiple countries. From the start it has been a large, sophisticated, multinational company with the Pope acting as the CEO, the College of Cardinals as the board of directors and the bishoprics and monasteries as its franchises. It is an early antecedent to the General Motors, BPs and Microsofts of today. The Church is basically what Oliver Williamson calls a M-form corporation. The Church assigned operating decisions to self-contained operating divisions consisting of monastic orders, dioceses and other sub-entities. The general office maintains the papal bureaucracy (the Curia) that acts as an advisor to the Pope in his role of CEO. It also monitors the behaviour of the clergy (rather poorly in come obvious cases) who are in the operating divisions, in much the same was as franchises are controlled. Strategic policy for the Church is made by the general office, the Vatican in this case. The Vatican also allocates resources among the competing divisions-the monasteries, national churches etc.

The Roman Catholic Church has been, among many other things, a large economic player in many regions of the world for a lot longer than most people realise and thus the "modern" firm isn't as modern as you may think.

Firms in economics

An obvious question to ask when thinking about the production side of the economy is, What is a firm? After all most production takes place in organisations which people would tend to regard as firms. When commenting on this question in a recent Journal of Economic Literature article Oliver Hart writes,

The fact that this question is so difficult to answer may be one reason that the theory of the firm is one of the less developed and agreed-upon areas of economics.

A more likely reason, if New Zealand experience is anything to go by, for the underdeveloped state of the theory of the firm is 1) a general anti-theory bias in research and teaching. How much “research” is of the form ‘I ran a million regressions and picked the one that confirmed my prejudices, or is a report on some experiment or another, or is a vacuous piece on some policy issue. Just what are the costs of alcohol in New Zealand? 2) an anti-production bias is the research that is done, both theory and empirical. And the teaching side is no better. How many student get though an economics degree and only meet the neoclassical model of the firm? Of course the lack of interest in teaching organisational economics should not surprise us given the lack of interest in researching this area.

Returning to the original question, What is a firm? A recent answer has been offered in a book by Daniel Spulber. In “The Theory of the firm: Microeconomics, with Endogenous Entrepreneurs, Firms, Markets and Organizations” Spulber argues that

The firm is defined to be a transaction institution whose objectives differ from those of its owners. The separation is the key difference between the firm and direct exchange between consumers” (p. 63).

Think of Robinson Crusoe, if he wants to eat apples he has to produce apples, so his consumption and production objectives are basically one and the same. Now consider Crusoe in a market economy. If he wants to consume apples he just buys apples in the market, he doesn’t have to produce apples. He could produce oranges, sell them and use the money to buy his apples. His consumption and production objectives differ. For Spulber, while Crusoe produces apples in the first case, he is not a firm, but the production of oranges, with consumption of apples, in the second case means he is a firm. This definition means that consumer organisations like clubs and basic partnerships are not firms since ``the objectives of consumer organizations cannot be separated from those of their owners” (p. ix). Similarly, many family businesses are not firms, and nor are worker cooperatives, nonprofit organizations, or public enterprises (chapter 1, pp. 42–61). At the same time, clubs (and worker and consumer cooperatives and partnerships) become firms if and when a market is created in memberships. (Hart 2011: 108).”

Hart notes that,

The intellectual stimulus for Spulber’s approach is Irving Fisher’s famous separation theorem (Fisher 1930). Fisher addressed the separation of the firm’s investment decisions from owners’ consumption and savings objectives. As Spulber says: “Under reasonable assumptions the firm’s optimal investment decisions are independent of the preferences of its owners and independent of how the investment is financed” (p. 65). The firm’s owners are affected by the firm’s decisions only through their wealth.

The separation of consumption and production objectives is what gives rise to profit maximisation in the neoclassical model of the firm. As the firm only effects the owners via the owner’s wealth, the owners want the firm to maximise profits, thereby maximising their wealth, so they can maximise consumption.

So the independence of consumption and productions objectives is the basis for telling a firm apart from other organisations. Hart takes issue with this idea:

There are some very important institutions in the United States that almost everyone would regard as firms, but it is not clear that they pass the Spulber test. Bill Gates is still a significant owner of and quite involved in Microsoft, so is Microsoft a firm? Larry Page and Sergey Brin are significant owners of and (even more) involved in Google, so is Google a firm? Will these organizations become firms only when their founders are long gone? Similar questions arise in varying degrees with respect to other companies with large and active owners, e.g., News Corporation, Berkshire Hathaway, CBS, and the New York Times.

In addition to this you have to ask, How can you apply this test to see if real world organisations are firms? How empirically can we say a firm’s objectives do or do not differ from their owner’s objectives? How do you determine a firm’s objectives? You can’t run your million regressions if you don’t know what data to collect in the first place.

So we are back where we started, we still don’t have a fully satisfactory definition of the firm. Without this we will have trouble in getting a satisfactory theory of the firm, if we are looking for A theory of the firm at all. Should we be looking for one theory that encompasses all organisational forms we see in the `real world’? Or should we be looking for several different theories? To answer any of these question we will need economists to show more enthusiasm for the study of the firm than we see now.

All of this said, Spulber's book is still a must read, agree with it or not, for anyone wanting to be up with the play in the theory of the firm. Not that he will get too many sales from New Zealand.

• 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.
• Spulber, Daniel F. (2009). The Theory of the Firm: Microeconomics with Endogenous Entrepreneurs, Firms, Markets, and Organizations, Cambridge: Cambridge University Press.

PS: one reason for not getting too many sales is the price of this book: US$130.00 for the hardback and US$46.00 for the paperback. Someone should point out to CUP that demand curves really do slope downwards!

Roberts on Rosser on Keynes

In an earlier post I noted that Barkley Rosser claimed that John Papola and Russ Roberts have accused Keynes of having “a central plan” in their latest rap video. Russ Robert now responds to Rosser,

There’s only one problem with all this and that’s that the accusation against us is something of a straw man. Here’s the line that Rosser is referring to, but in context:

HAYEK
Creating employment’s a straightforward craft
When the nation’s at war, and there’s a draft
If every worker was staffed in the army and fleet
We’d have full employment and nothing to eat

REFRAIN

HAYEK
Jobs are a means, not the ends in themselves
People work to live better, to put food on the shelves
Real growth means production of what people demand
That’s entrepreneurship not your central plan

Hayek isn’t saying Keynes is a socialist or wants to centrally plan the entire economy. He is singing about Keynes’s plan to create jobs via government spending. Surely having the government spend, say, $800 billion in stimulus is a central plan of sorts. Maybe we should have said “centralized plan” but it wouldn’t scan as well.

Tyler Cowan at Marginal Revolution also has a say. He asks if Keynes favoured central planning:

Barkley Rosser and Brad DeLong say no, but it depends on definition and context. Barkley tries to talk his way out of it, but Keynes in the General Theory did advocate “a somewhat comprehensive socialisation of investment.” “somewhat” — that’s my kind of weasel word! In any case this was not the same as classical central planning circa 1920, but in a rap video I consider that acceptable license. By my count “central plan” comes up once in a ten-minute video and most importantly Keynes does not accept the characterization but rather responds that the debate is about spending. The video is not suggesting that each and every rapped point is true at face value, and if the two characters seem to debate past one another that too reflects the reality at the time.

Brad DeLong's comment are here. Paul Krugman just thinks the whole thing is stupid.

Ideology and repugnant markets

In a paper, "Taboo Trade-Offs, Relational Framing, and the Acceptability of Exchanges and the Acceptability of Exchanges", from the Journal of Consumer Psychology authors A. Peter McGraw and Philip E. Tetlock note that ideology plays a role in determining which transactions we see as appropriate.

Whereas liberals and conservatives find efforts to monetize babies, body parts, and basic rights and responsibilities of democratic citizenship abhorrent, we find that among libertarians the objections to these types of transactions wane (Tetlock et al., 2000). Moving left on the political spectrum toward socialism increases the tendency to find not only surrogate motherhood unacceptable but also the buying and selling of borderline controversial commodities such as medical care and legal representation as well as currently uncontroversial commodities such as houses and food. Devout egalitarians tend to see such exchanges as inherently inequitable because they put the poor at a profound disadvantage (and because they seem to carry the implication that the lives and rights of the poor are worth less than those who can pay large sums for doctors and lawyers).

Do we find some markets repugnant because this fits in with an ideology we hold for other reasons or do we hold a given ideology because we believe certain markets are or are not repugnant?

The Economist magazine argues that there is more to it than just seeing some markets as repugnant.

But there's more to it than this. It's not just that buying and selling certain things is creepy or gross; it's that there is something inherently ennobling and honourable about government providing or assuring the provision of these same things.

But the Economist also points out there is a problem with all of this,

This is a pretty picture, but it's also a problem—a problem economists generally help us to see through. The policies that publicly express good will and mutual respect—that successfully broadcast that we care about one another—often are not the policies that would actually deliver the goods—the policies you'd favour if you cared more about people than signaling that you care about people. The policies that would actually deliver often would do so by enabling and encouraging consumer choice and entrepreneurial discovery and innovation in competitive markets. If the deep worry about certain forms of market exchange is that they put the poor at a disadvantage, we can address the worry by making certain that means-tested transfers are generous enough to ensure sufficient market power for all. But we can't address concerns about market inequity in this way if market-based policy is preemptively ruled out of bounds by a misguided public theology of markets and politics. Widespread public commitment to a vocabulary of moral and political symbolism according to which "merely commercial" transactions and relationships are seen to be profane, while political transactions and relationships are seen to be sacred, is a significant impediment to improving human welfare with policy that harnesses the power of markets. One task of the liberal intellectual is to chip away at taboos that cause preventable suffering by limiting the range of politically-feasible policy.

So trying to signal that we care may result in worse outcomes for those we claim to care about. Thus if ideology rules out certain types of markets then that ideology may make the disadvantaged worse off. The opposite of what is intended.

Rosser on Keynes

Barkley Rosser asks did Keynes really favour central planning? He claims that the accusation that he did doesn't holds up.

However, I do find it disturbing that increasingly Austrians and some others have taken to charging Keynes with having supported "central planning," as indeed done in this video[for the video see here]. Is this correct? I think that the answer is largely "no," with it certainly being that answer if one means by that command central planning of the Soviet type that Hayek criticized in his Road to Serfdom (which Keynes praised, btw, when it first came out).

And Rosser's position is not a case of defending the indefensible. But Arnold Kling makes a good point when he says,

Still, Keynes was clearly less obsessed with the knowledge problem than was Hayek. And among the followers of Keynes and Hayek, the polarization seems to have increased. Contemporary Keynesians are committed to treating government as if it were a knight in shining armor prepared to slay the many dragons of market failure. Contemporary Hayekians are probably even more convinced than Hayek that localized knowledge, imperfect science, and public choice considerations argue in favor of markets.

Russ Roberts on Hayek

Russ Roberts, of Cafe Hayek fame, is interviewed here on what Hayeks' view of the budget deficit in the U.S. would have been.

The first question Roberts was asked is "What did Hayek believe about the role of government?" His answer:

In his 1974 Nobel Prize lecture, he said (and I'm paraphrasing),"I prefer imperfect knowledge that is true, to perfect knowledge that is false." Having perfect knowledge is impossible. As he got older, Hayek became increasingly skeptical of formal models to measure the impact of any of a particular project or program on the economy. So he was very skeptical of macroeconomic predictions.

Hayek was not an anarchist- he didn't believe there should be zero government. But he was also not a conservative. He was a classical liberal- he believed in personal freedom and responsibility. This idea that we'd need to increase the budget by $1 billion to "stimulate the economy", he would view with extreme skepticism. So he was very skeptical of macroeconomic predictions. He believed in the importance of bottom-up, emergent actions of individuals: planning for the future should be done by individuals, not by someone at the top.

He didn't believe that anyone can steer the economy. Hayek would also be skeptical of the idea that we'd need to keep spending to prop our economy up and to keep our economy going. He'd want to let entrepreneurs and individuals make decisions based on the knowledge available to them, rather than a top-down approach [by the government] that tries to micro-manage at a macro level.

He was skeptical of the idea that the Federal Reserve, through manipulating interest rates, could create prosperity or improve the economy. Hayek would argue in fact the Fed is a major reason we're in the mess we're in.

Soros on Hayek

George Soros writes,

Friedrich Hayek is generally regarded as the apostle of a brand of economics which holds that the market will assure the optimal allocation of resources — as long as the government doesn’t interfere. It is a formalized and mathematical theory, whose two main pillars are the efficient market hypothesis and the theory of rational expectations.

This is usually called the Chicago School, and it dominates the teaching of economics in the United States. I call it market fundamentalism.

That has to be one of the greatest misrepresentations of Hayek ever penned!

Hayek, "formalized and mathematical"? Hayek's thought is based on the "efficient market hypothesis and the theory of rational expectations"? Hayek and the Chicago School do at times reach similar conclusions but they get there via different routes. Hayek and the Austrian School in general see the market in terms of a process while the Chicago School see them is terms of equilibrium. And there are many other differences. Roger W. Garrison notes the difference between Hayek and Milton Friedman on monetary economics,

[...] Hayek’s Monetary Theory and the Trade Cycle ([1928] 1975) and Friedman’s Optimum Quantity of Money and Other Essays (1969) are worlds apart. [...] the methods and substance of the their economics, particularly the economics of money and business cycles, divide them.

I am not the only one who thinks Sorocs's view of Hayek is odd. Arnold Kling writes,

Soros equated Hayek with the Chicago school of economics. In particular, Soros blamed Hayek for promoting rational expectations and the efficient markets hypothesis. I doubt that anyone else on the panel or in the room shared this view of Hayek. However history views Hayek, I do not expect him to get credit for anticipating Fama or Lucas. In fact, as Frydman and Goldberg point out in Imperfect Knowledge Economics, rational expectations runs counter to Hayek's theory of local knowledge, which is one of his most important contributions. I do not see how Hayek could approve of any form of representative-agent modeling.

One wonders if Soros has ever read Hayek.

More on privatisation

At RogerKerr.wordpress.com Roger Kerr writes,

Recently the Treasury released a December 2010 paper Short History of Post-Privatisation in New Zealand, written by John Wilson, an experienced former Treasury official.

It records in a balanced and objective way the history of nine major privatisations by central and local governments.

Kerr continues

The paper notes the range of objectives of privatisation of governments around the world:

* Putting businesses under the full pressures of private capital markets, and thus making them more efficient.
* Reducing the exposure of the government balance sheet to risky debt financed assets.
* Removing the capacity of the businesses to seek government aid in bad times, thus both promoting better business management (to avoid that risk) and reducing risks to government fiscal outcomes.
* Promoting the development of local capital markets, and/or encouraging a broad ownership of shares in the community.
* Using the sale proceeds for higher priorities, typically to reduce government debt.

All of these objectives have been relevant at different times in New Zealand.

The basic point about privatisation is that it will depoliticise the firm. The aim is to have the greatest possible distance between the government and the firm. Government interference in the running of a firm is impossible to eliminate completely but a good privatisation plan will result in a situation where any government interference is as obvious and politically costly as feasible.

Kerr adds that,

On methods of privatisation, the paper comments:

Typically, in an asset sale, the best price is obtained by selling a controlling shareholding to a single entity that can control the destiny of the business (a trade sale). A float generally gets a lower price.

New Zealand governments mainly employed trade sales, with some floats or sell-downs. Privatisation was not ‘done the wrong way’, as some critics allege.

There are two points to keep in mind here. The first being that selling a controlling interest in a firm gives a higher price because it gives control over the firm. People are willing to pay more for control over a firm, so 51% of a firm is worth a lot more than 49%. This shows a problem with partial privatisation, ceteris paribus, it lowers the price a would be buyer will pay. It also leaves the business politicised since the government still has the controlling share.

The second point is that there will be times when you do not want to maximise the price you get for a SOE. One example as why it could want to do so is given by Anbarci and Karaaslan's idea of An Efficient Privatization Mechanism:

In this paper, we consider the privatization of State-Owned Enterprises (SOEs) that are legal monopolies but not natural monopolies; their markets can be opened to competition once privatization takes place and other competitors can emerge and compete successfully against them in a few years. But until that happens, these privatized SOEs can have a significant level of market power. The currently used “Revenue Maximization (RM)” privatization scheme maximizes the government revenue from privatization but does not provide sufficient incentives for the privatized SOE eiher to charge a price lower than the monopoly price or to improve production efficiency until competition arises. We propose a new scheme to privatize such SOEs. We term this new scheme the “Welfare Maximization (WM)” scheme. The WM scheme practically yields no revenue to the government from the privatization of any such SOE; however, it induces the privatized SOE to charge a competitive price in the absence of any regulation. It also turns out that the WM scheme provides greater incentives for post-privatization process invention (i.e., for post-privatization cost reduction) than RM scheme. (emphasis added)

This is a very specific situation but it helps make the point that just trying to maximise the price received for an asset is not necessarily a good idea. In the above example welfare is maximised while revenue is basically zero.

For successful privatisation it is more important to get the regulatory environment right so that competition can breakout in the industry than it is to maximise the price for which the asset is sold. Basically I'm arguing we should have lexicographic preferences, with price low on the list. Worrying about whether or not the ‘family silver’ was sold too cheaply misses the point, the price received can only be see as too high or low relative to the market structure the firm finds itself it. Just arguing that a higher price could be obtained with a different market structure is only useful if the new market structure improves welfare. 

Political bias at the New York Times

Volume 11 issue 1 of The B.E. Journal of Economic Analysis and Policy contains an article on Being The New York Times: the Political Behaviour of a Newspaper by Riccardo Puglisi, University of Pavia. The abstract reads:

I analyse a dataset of news from The New York Times, from 1946 to 1997. Controlling for the activity of the incumbent president and the U.S. Congress across issues, I find that during a presidential campaign, The New York Times gives more emphasis to topics on which the Democratic party is perceived as more competent (civil rights, health care, labor and social welfare) when the incumbent president is a Republican. This is consistent with the hypothesis that The New York Times has a Democratic partisanship, with some “anti-incumbent” aspects, in that—during a presidential campaign—it gives more emphasis to issues over which the (Republican) incumbent is weak. To the extent that the interest of readers across issues is not systematically related with the political affiliation of the incumbent president and the election cycle, the observed changes in news coverage are consistent with The New York Times departing from demand-driven news coverage. In fact, I show that these findings are robust to controlling for Gallup data on the most important problem facing the country, which I use as a proxy for issue tastes of Times’ readers.

How surprising is such a result?

Fight of the Century

Keynes vs. Hayek Round Two. The second rap video created by Russ Roberts and John Papola.

Econ students are nice people too!

A Staff Report from the Federal Reserve Bank of New York asks Is Economics Coursework, or Majoring in Economics, Associated with Different Civic Behaviors? The abstract reads,

Studies regularly link levels of educational attainment to civic behavior and attitudes, but only a few investigate the role played by specific coursework. Using data collected from students who attended one of four public universities in our study, we investigate the relationship between economics coursework and civic behavior after graduation. Drawing from large samples of students in economics, business, or general majors, we compare responses across the three groups and by the number of undergraduate economics courses completed. We find that undergraduate coursework in economics is strongly associated with political party affiliation and with donations to candidates or parties, but not with the decision to vote or not vote. Nor is studying economics correlated with the likelihood (or intensity of) volunteerism. While we find that the civic behavior of economics majors and business majors is similar, it appears that business majors are less likely than general majors to engage in time-consuming behaviors such as voting and volunteering. Finally, we extend earlier studies that address the link between economics coursework and attitudes on public policy issues, finding that graduates who studied more economics usually reported attitudes closer to those expressed in national surveys of U.S. economists. Interestingly, we find the public policy attitudes of business majors to be more like those of general majors than of economics majors.

I wonder how much of this is self section? Is it not likely that people who are interested in politics, for example, are also interested in economics? It may not just be what they are learning in their course work that is affect their decisions. Unfortunately it turns out that in the paper the authors state,

[...] we cannot say if our results reflect what individuals have learned in these courses and majors, or if the relationships identified here are due to self-selection among college graduates into different college majors and economics course taking.

So we don't really know.

Don Boudreaux's great fact

In a column in the Pittsburgh Tribune-Review Don Boudreaux discusses Deirdre McCloskey's book "Bourgeois Dignity". He opens by saying,

Economist and historian Deirdre McCloskey calls it "the Great Fact" -- the humongous increase in humans' standard of living that began about 200 years ago.

And what a Great Fact it is! It's great not only in the sense of being amazingly, resplendently good for ordinary men and women, but also in the sense of being the single most surprising and astounding change that we humans have experienced in our 70,000 or so years on this planet.

For 99.7 percent of the time that we bipedal, scantily haired, language-blessed apes have trod this globe, we did so under material conditions that you and I from 2011 would find utterly intolerable. As another economist, Todd Buchholz, correctly noted, "For most of man's life on earth, he has lived no better on two legs than he had on four."

Then all of a sudden, starting a mere 200 or so years ago in northwestern Europe, boom! Material riches start pouring forth not only into the castles and manor houses of royalty and the nobility, but into the humble homes of peasants, of hoi polloi, of human creatures who, generation after generation -- tracing back all the way to their single-celled ancestors -- lived lives poor, nasty, brutish and short.

What did our great-great-great-great-grandparents do to suddenly deserve access to new and remarkable goods such as underwear made of tightly woven cloth that could be vigorously washed without unraveling? What did our great-grandparents do to deserve access to "Tin Lizzy" Fords?

What did our grandparents do to deserve access to antibiotics and televisions? What did our parents do to win access to air conditioning and inexpensive jet travel? What did we do to deserve access to cellular telephony, GPS driving directions and supermarkets that routinely stock 50,000 different items?

So what happened to get us to these 50,000 different items.

Something else happened -- something else that has, until now, been overlooked.

That something else is what McCloskey calls "the Bourgeois Revaluation." Only when merchants, tinkerers and practical seekers of profit in markets came to be respected -- and to be widely spoken of with respect, even with admiration -- did the social status of the bourgeoisie increase enough to make membership in that group desirable to large numbers of people. And when this Bourgeois Revaluation happened, innovation skyrocketed.

It's this innovation -- mad, fevered, historically off-the-charts amounts of innovation -- that really is what we today call "capitalism."

So unite with your local capitalist, you have nothing to lose but your poverty!

Say what??

Shamubeel Eaqub of the New Zealand Institute of Economic Research has a short comment on the "Economic Impacts of the Christchurch Earthquake: Lessons from Napier", in 'Asymmetric Information' the newsletter for members of the NZAE. In this comment Eaqub writes,

Despite the human and economic costs, there are some positives. In particular, the earthquake provided the catalyst to invest in infrastructure and new technology.

But wait! What catalyst is needed? Wasn't there incentives enough to invest in infrastructure and technology before the quake? And if the earthquake distorted infrastructure and "old" technological capital, how is this good? If it is good should we not go around distorting capital every few years in all cities in New Zealand to gain the payoffs from "the catalyst" on an ongoing basis?

And you have ask, Is it good? No being the answer is at least two reasons. First the owners of capital will have an optimal time to replace that capital and unless the earthquake occurs exactly at that time replacing capital at the time of the quake will be sub-optimal. Second the investment in "infrastructure and new technology" has an opportunity cost. The resources now going in infrastructure and technology would have gone into something else, which we now have lost.

As I have noted before, the literature on the economic effects of natural disasters like earthquakes show there are no long term increases in growth because of a quake. So where are the gains implied by Eaqub's claim?