What makes a charter school effective?

An interesting question given that charter schools have been in the news recently. From the latest NBER Digest comes this note by Laurent Belsie:

Traditional measures of what makes a good school - small class size, high per pupil spending, and a large share of teachers with advanced degrees but a small share with no certification - don't necessarily determine student achievement, according to a new study of 35 New York charter schools by Will Dobbie and Roland Fryer. Instead, they find that five policies that rarely get measured systematically - frequent teacher feedback, data-driven instruction, intensified tutoring, increased instructional time, and high expectations - can explain roughly half of the variation between more effective and less effective schools. In Getting Beneath the Veil of Effective Schools: Evidence from New York City (NBER Working Paper No. 17632), the authors conclude that these five policies also do a better job of predicting student success than indicators for whether schools offer wrap-around services that serve the "whole child," whether they focus on finding and keeping the best teachers, and whether they use a "No Excuses" approach to teaching.

For this analysis, Dobbie and Fryer amassed a large data base on 35 charter schools that vary widely in their approach to teaching and learning. For example, the Bronx Charter School for the Arts focuses on the arts, while the KIPP Infinity School uses a "no excuses" approach, emphasizing instructional time, parental involvement, and a concentrated focus on math and reading. When the authors study these varied approaches, they find that schools with a larger share of certified teachers actually scored lower in math gains among pupils than other schools. They also find a slightly negative effect on test results for schools with smaller class sizes, higher per pupil expenditures, and a relatively smaller share of uncertified teachers. However, schools that offered feedback ten or more times every semester, and those that tutored students at least four days a week in small groups (six or less), had annual math and English gains that were higher than those of other schools without such programs.

This study comes with two important caveats. First, the five factors that predict student success might be the results rather than the causes of school effectiveness. The authors didn't study other potentially important inputs, such as the principal's skills, or the effects of the lottery system in selecting students. Second, this study didn't examine all of New York City's charter schools, so there may be other dynamics at work that make it hard to generalize the results for other charter schools or public schools.

The authors summarize their findings by writing that: "While there are important caveats to the conclusion that these five policies can explain significant variation in school effectiveness, our results suggest a model of schooling that may have general application."

Economic conditions have an effect on CEOs

Lester Picker writing in the latest NBER Digest says,

In Shaped by Booms and Busts: How the Economy Impacts CEO Careers and Management Style (NBER Working Paper No. 17590), authors Antoinette Schoar and Luo Zuo find that economic conditions at the start of a manager's working life have lasting effects on his or her career path. Those CEOs who begin their careers during recessions take less time to become CEOs, but end up heading smaller firms, receiving lower compensation, and being more likely to stay with a given firm, rather than to move across firms and industries. Managers who start in recessions also have more conservative management styles once they become CEOs: they spend less on capital expenditures and R and D and show more concern about cost effectiveness.

Early economic conditions also affect the career path of a manager along the way to becoming CEO, according to the authors. The number and speed of outside offers, and industry switches during the career, increase when the manager starts his or her career in better economic conditions.

The authors also find that accepting a first job at a firm that is one of the ten firms that are most likely to be a source of CEOs is associated with favorable outcomes for a manager. Those CEOS end up heading larger companies and receiving higher compensation. However, it may be that people with certain skills self-select into jobs early on, and that the firms that are sources of CEOs attract particularly talented workers in the first place. In either case, the effects of a good start on the career path are quite persistent: they are related to the managers' career choices even twenty years later.

Greece and the Eurozone: political leaders should get off their high horses

In this audio from VoxEU.org Willem Buiter talks to Viv Davies about Greece and the Eurozone. Buiter believes that Greece’s public debt should be written off, it’s banks recapitalised and that the country be provided with sufficient conditional support to grow its economy. They discuss the LTROs and the risks of loss of control over the aggregate size of the balance sheet and potential national central bank insolvencies. Buiter suggests that now is not the time for self-righteousness amongst European policymakers.

Economists lie more

From the Economic Logic blog comes this comment on some recent research.

Raúl López-Pérez and Eli Spiegelman performed some experiments where lying could be a winning strategy. While religiosity or gender does not impact the propensity of lying, one's undergraduate major matters, and the Business and Economics students fare the worst. And this does not come from selection into the major, it is acquired. So economists do lie more, because they see incentives to do so. Hence journalists should learn to interview economists that have no incentives to lie.

So non-economists don't lie because they are not smart enough to workout there is an advantage to doing so? So they are honest but dumb. If you point out the incentive to lie, do non-economists then lie? If the result is due to training, they should. If they don't then is the result really due to training?

Also shouldn't journalists learn not interview anyone who has an incentive to lie? Of course this would mean they would have no one to interview!

Too little reform

There has been much talk about the government's reforms of welfare recently. One issue I have with the reforms is that they don't go far enough. Reforms aimed at getting people into work need to have jobs available for these people to go to. That is, if the government is serious getting people into jobs then it needs to reform the labour market at the same time it reforms welfare.

An unreformed labour market will have trouble adjusting to having a new intake of people looking for work. Given the level of unemployment we have at the lower skill/experience end of the labour market having a whole bunch more people entering it isn't going to end well.

So if the government is serious about reform, rather than  just pulling a political stunt, then it needs to reform the labour market if it wants its welfare reforms to work.

Not good thinking

From Stuff comes the news that:

All Black great Chris Laidlaw believes the crisis in Otago rugby highlights the need for provincial rugby to return to its amateur roots.

Not good thinking. Either Otago (and other amateur teams) will lose all its good players to (semi-)professional teams or we will see all teams being amateur and we are back to the bad old days of under the table payments to these "amateur players", which was one of the reasons for going pro in the first place.

Or good players head to professional teams overseas. Or the good players play only in the professional leagues (Super Rugby and the ABs) and we never see them at the provincial level.

Or some combination of the above. All in all not a good outlook.

Is China’s economic future a rosy one?

So asks Gary Becker. He writes,

Starting with the opening of agriculture to private incentives in the late 1970s, China has experienced faster and more prolonged economic growth than any other country. In a mere three decades China has moved from a very poor nation to a middle-income level country, a development that pulled hundreds of millions of Chinese out of poverty. China’s aggregate GDP is now second in the world only to that of the US. While its per capita income is still much smaller than that of America’s, many are predicting that even China’s per capita GDP will surpass that of the US in a few decades.

But as Becker points out, good economic growth today doesn't always mean good growth tomorrow. At different times the Soviet Union and Japan had faster growth than any country in the West but they didn't manage to become the world's economic superpower. We know what happened to the Soviet Union and Japan's rapid growth stopped abruptly during the early 1990s, and Japan has largely stagnated economically for the past two decades.

A major problem for China is its efforts to maintain growth may be political rather than economic. Economic growth will come at the price of political power. As people become wealthier, they have more to lose to the grabbing hand of government. People will want, and will demand, protection from the state and this means the Communist Party in China will lose power. Limits on the arbitrary power of the state are needed if growth is to continue at the rate it is now. The incentives are wrong for growth if people are not sure they will keep the rewards of their efforts. Even in the West we see an example of this problem in the effects of Regime Uncertainty. People don't invest when they fear the loss of any return to their investment.

A related problem is that the party will also have to give up its economic power. As an example of this problem look at the SOEs in China. As Becker notes

The China 2030 report argues that the SOEs must operate more like commercial companies, but that is not easy since officials from the Communist Party usually have high positions in these enterprises, and many of the larger SOEs are closely related to the Communist Party and the military. The ideal solution would be to privatize most SOEs, but that does not seem likely in the near future. This is partly because government officials would lose power if SOEs were privatized, and partly because the government fears that privatized companies would greatly cut employment and increase social unrest.Unfortunately for China, it would not be possible to close rapidly the per capita income gap with rich countries as long as a large fraction of manufacturing output in China is produced in over-manned and inefficient state enterprises.

So for growth to continue at anything near its current rate, at some point, the Communist Party in China will have to give up some, if not all, of its political and economic power. And its unlikely they will be too keen on that.

EconTalk this week

David Weinberger of MIT and author of Too Big to Know, talks with EconTalk host Russ Roberts about the ideas in the book--how knowledge and data and our understanding of the world around us are being changed by the internet. Weinberger discusses knowledge and how it is attained have changed over time, particularly with the advent of the internet. He argues the internet has dispersed the power of authority and expertise. And he discusses whether the internet is making us smarter or stupider, and the costs and benefits of being able to tailor information to one's own interests and biases.

Education and economic development: evidence from the industrial revolution

In this short audio from VoxEU.org Sascha Becker of the University of Warwick talks to Romesh Vaitilingam about his research on the important role that formal education played in facilitating industrialisation in nineteenth century Prussia. They also discuss the relationship between education and fertility, and historical evidence in support of ‘unified growth theory’.

Boundedly rational dynamic programming

A new NBER Working paper on Boundedly Rational Dynamic Programming: Some Preliminary Results by Xavier Gabaix

The abstract reads

A key open question in economics is the practical, portable modeling of bounded rationality. In this short note, I report ongoing progress that is more fully developed elsewhere. I present some results from a new model in which the decision-maker builds a simplified representation of the world. The model allows to model boundedly rational dynamic programming in a parsimonious and quite tractable way. I illustrate the approach via a boundedly rational version of the consumption-saving life cycle problem. The consumer can pay attention to the variables such as the interest rate and his income, or replace them, in his mental model, by their average values. Endogenously, the consumer pays little attention to interest rate but pays keen attention to his income. One consequence of this is that Euler equations will be biased, and the intertemporal elasticity of substitution will be biased toward 0, in a manner that is quantitatively important.

Now who says economists don't do super-cool stuff!!

A relationship between income and freedom

There is a new working paper by Derek Stimel out on The Short-Run Relationship between Income and Freedom: Evidence from 128 Countries. The abstract reads:

The relationship between income, economic freedom, and political freedom is often examined over the long-run but recently, there is increased interest in the short-run. From a review of the literature, I develop possible short-run relationships between a country’s income per capita, economic freedom, political rights, and civil liberties while taking into consideration broad institutional differences across countries. The empirical strategy is to estimate a structural panel vector autoregression where each equation is estimated using the dynamic panel general method of moments procedure of Arellano and Bover (1995). I then estimate impulse responses for the full sample of 128 countries between 1994-2009 as well as key sub-samples. From this relatively a theoretical approach, results indicate that improvements in economic freedom benefit more developed countries relative to less developed countries, as do improvements in income per capita. Improvements in political rights improve economic freedom in highly developed countries and low developed countries but improve income the most in countries with medium development. Improvements in civil liberties have somewhat the opposite effect as political rights. Implications of these results are discussed with an eye toward their practical relevance for business as well as policymakers.

Daron Acemoglu and James Robinson now have a blog

This is good news. You can find the blog here. The blog is related to their forthcoming book Why Nations Fail.

(HT: Marginal Revolution)

Economics is what exactly?

Reading the Prologue to Roger Backhouse's book "The Ordinary Business of Life: A History of Economics from the Ancient World to the Twenty-First Century" (a very readable book even for non-economists) I found a number of definitions of economics.

Backhouse offers us

• Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. (From Lionel Robbins)
  
• The study of mankind in the ordinary business of life. (From Alfred Marshall. Guess where the title of the book comes from!)
• Economics deals with the production, distribution and consumption of wealth. (I guess that would capture much of classical economics.)
• How production is organised to in order to satisfy human wants. (Surely economics is more than this. What of public choice for example?)
• The logic of choice. (But what about production?)
• The study of markets. (But what about all non-market institutions, like firms or clubs or farms or ....)

I'm not sure any of these really work for me.

Later Backhouse writes

Is is possible, for example, to have societies in which money does not exit [...], in which production is not undertaken by firms, or in which transactions are undertaken without markets.

I'm willing to accept this, apart from the no markets bit. I can't think of an example of a society without markets and I can't help thinking if there is such an example it would be a very poor, very small and very limited kind of society. As the division of labour is limited by the extent of the market, no markets means that the division of labour would be, basically, non-existent. This alone would make for a very poor society.

Management practices

A quick Look at the paper "Recent Advances in the Empirics of Organizational Economics" by Nicholas Bloom, Raffaella Sadun and John Van Reenen, Annual Review of Economics (2010) 2: 105–37, shows up a few interesting results with regard to management practices and decentralisation of firms. In particular the paper suggest that (a) Competition seems to foster improved management and decentralisation; (b) larger firms, skill-intensive plants, and foreign multinationals appear better managed and are more decentralised; (c) firms that are both family owned and managed appear to have worse management and are more centralised; and (d) firms facing an environment of lighter labour market regulations and more human capital specialise relatively more in people management. Decentralisation here means the degree to which lower levels of the hierarchy have power relative to upper levels of the hierarchy (e.g., a higher degree of autonomy of junior managers from senior managers, a higher degree of autonomy of shopfloor workers from management)

The point about foreign firms being better managed is one that more than a few politicians, and others, in New Zealand would do well to take on board. Also the importance of competition to management practices needs to be kept in mind. This is just one advantage of increasing competition via a well implemented program of deregulation.

The paper also argues that there is evidence for complementarities between information and communication technology, decentralisation, and management, but the relationship is complex, and identification of the productivity effects of organisational practices remains to be fully investigated. But it does raise a possible reason for New Zealand's poor productivity performance. How well have we integrated ICTs into our businesses?

EconTalk this week

Adam Davidson of NPR's Planet Money talks with EconTalk host Russ Roberts about manufacturing. Based on an article Davidson wrote for The Atlantic, the conversation looks at the past, present, and future of manufacturing. Davidson visited an after-market auto parts factory in Greenville, South Carolina and talked with employees there as well as with executives at corporate headquarters. What is the future of factory work in America? Why are some manufacturing jobs in America while others are in China or elsewhere? The conversation looks at these questions as well as how well or poorly the U.S. education system prepares students for the world of work.

Just for fun: theory of the firm 12

A recent, but still relatively unknown, contribution to the theory of the firm which can be seen as outside, if related to, the mainstream of the economic approach to the theory of the firm is Daniel F. Spulber, "The Theory of the Firm: Microeconomics with Endogenous Entrepreneurs, Firms, Markets, and Organizations", Cambridge: Cambridge University Press, 2009. If we think of the mainstream theory of the firm as being concerned with three basic issues to do with the existence, boundaries and internal organisation of the firm then Spulber's book is somewhat outside of the mainstream but the issues it deals with are related closely enough to those of the mainstream to justify a brief overview. (For criticisms of the Spulber approach to the firm from inside the mainstream see Hart (2011).) In addition Spulber offers insights into a number of important issues missing from the mainstream and thus lays the groundwork for future research in both the theory of the firm and industrial organisation more generally. Spulber "[ ... ] seeks to explain (1) why firms exist, (2) how firms are established, and (3) what firms contribute to the economy" (Spulber 2009: ix). These issues are clearly related to those of the mainstream but they are not the same. In particular the mainstream does not have a theory of the entrepreneur or market creation. Spulber's book in an attempt to create a general approach to microeconomics in which entrepreneurs, firms, markets, and organizations are all endogenous.

To start Spulber defines a firm "[ ... ] to be a transaction institution whose objectives differ from those of its owners. This separation is the key difference between the firm and direct exchange between consumers". (Spulber 2009: 63). Note that under this definition organizations such as clubs, basic partnerships, many family firms, worker cooperatives, non-for-profit organisations and public enterprises are not firms. The basic reason being that the objectives of these types of organizations cannot be separated from those of their owners. The separation of objectives between owners and firms also justifies the profit maximisation objective. Consumers who are the owners of the firm, obtain income via the firm's profits and thus want profit maximisation so they can maximise their consumption (utility).

Spulber has three additional players in his story: consumers, organisations and markets. Consumers are individuals who consume the goods and services generated within the economy. Organisations are transaction institutions whose objectives cannot be separated from those of their owners. Markets are transaction mechanisms that bring buyers and sellers together.

For Spulber the entrepreneur is important because it is their efforts that leads to the creation of firms. A combination of market opportunities interacting with the individual's preferences, endowments and other such characteristics leads the consumer to take on the role of entrepreneur. The individual is an entrepreneur for the time it takes to establish the firm. Assuming that the firm is successfully established, the entrepreneur's role changes to that of an owner of the firm. Ownership is valuable insofar as it provides returns to the (former) entrepreneur. This change from entrepreneur to owner is in Spulber's terms, `the fundamental shift'. (Spulber 2009: 152). The point is that before the change from entrepreneur to owner, the objectives of the organisation cannot be separated from those of the (then) entrepreneur. After the fundamental shift has occurred, the entrepreneur is now the owner and the firm's objectives are separate from those of the owner, which means a firm has been established.

Other organisations can be formed that allow consumers to take advantage of joint production. Such advantages include economies of scale, public goods, common property resources and externalities. Unlike the firm, the objectives of the organisation reflect the consumption objectives of the members of the organisation. A problem with an organisation is that it can experience inefficiencies due to free riding. Firms overcome such problems by separating the objectives of the organisation from the consumption objectives of its owners and thus inducing profit maximisation. Profit maximisation may not achieve full efficiency due to problems such as allocative inefficiencies that result from market power. Thus the comparison between a firm and an organisation depends on the trade-off between profit maximisation and free riding. When the number of consumers is small, free riding problems tend to be small and thus an organisation may be more efficient than the firm.

Given we have firms, firms can create markets. Firms can act as intermediaries and in doing so they increase the gains from trade and reduce transactions costs when consumers are separated by time, distance and uncertainty. Firms create markets by providing centralised mechanisms for matching consumers, in their roles as buyer and sellers, in a more efficient manner than decentralised exchange can achieve. Market making firms are required to buy and sell at any moment meaning that buyers and sellers avoid the costs involved with trading delays and the risk of being unable to find a trading partner. In the world of financial markets, market-making firms provide liquidity by being ready to buy and sell financial assets. Addition transaction efficiencies are bought about by market-making firms being able to consolidate trades which allows traders to reduce the costs involved with having to find multiple trading partners or with having mismatched trades. Firm can also avoid the problems inherent with complex bartering arrangements by simplifying the trading process vis the use of posted prices. Supply and demand can be equated in a market by firms adjust their buying and selling behaviour thereby reducing potential losses due to market imbalances. Thus market creation is endogenous.

Spulber offers insights into a number of issues that the mainstream theory of the firm does not deal with well, if at all. The discussion of issues such as the role of the entrepreneur and the creation of markets are important issues that lie outside of the mainstream of the theory of the firms, at least as far as the mainstream is conceived of here. Such issues do however raise questions for the future of the theory of the firm and industrial organisation.

• 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.

To GE or not GE

That is the question. While looking on the web for material for a paper I'm working on, "The Past and Present of the Theory of the Firm", I came across a number of discussions on the evils or the non-evils of general equilibrium theory. Some people argue McKenzie, Arrow and Debreu et al are the great satans who are out to destroy economics - if not the world. Others believe GE theory is the greatest achievement in the history of economics. This interested me because I end my paper with the following observation (a couple of footnotes have been removed)

A final point about the models of the firm discussed in this essay is that they highlight a general issue to do with post-1970 microeconomics, that is, the movement away from the use of general equilibrium (GE) models. All the models considered above are partial equilibrium models, but in this regard the theory of the firm is no different from most of the microeconomic theory developed since the 1970s. Microeconomics such as incentive theory, incomplete contract theory, game theory, industrial organisation etc, has largely turned its back, presumably temporarily, on GE theory and has worked almost exclusively within a partial equilibrium framework. This illustrates the point made at the beginning of the paper that there is a close relationship between the economic mainstream and the theory of the firm; when the mainstream forgoes general equilibrium, so does the theory of the firm.

For the case of contract theory, a field closely related to that of the theory of the firm, Salanie (2005: 2) has argued,

``[t]he theory of contracts has evolved from the failures of general equilibrium theory. In the 1970s several economists settled on a new way to study economic relationships. The idea was to turn away temporarily from general equilibrium models, whose description of the economy is consistent but not realistic enough, and to focus on necessarily partial models that take into account the full complexity of strategic interactions between privately informed agents in well-defined institutional settings".

As was noted in Section 4.1 the post-1970s literature on the firm can be classified into two general groups based on which of two of the standard assumptions of GE theory, namely symmetric information and complete contracts, is violated when modelling the firm. This requirement to violate basic assumptions of GE theory so that we can model the firm, suggests that as it stands GE can not deal easily with firms, or other important economic institutions. As Bernard Salanie notes,

``[ ... ] the organization of the many institutions that govern economic relationships is entirely absent from these [GE] models. This is particularly striking in the case of firms, which are modeled as a production set. This makes the very existence of firms difficult to justify in the context of general equilibrium models, since all interactions are expected to take place through the price system in these models". (Salanie 2005: 1).

This would suggest that creating GE models that can account for information asymmetries, contractual incompleteness, strategic interaction and the existence of institutions is needed if GE theory is to be able to deal with the issues - including those related to the firm - that microeconomists wish to tackle.

Now what I'm wondering is, Is the problem with GE a problem with the idea of general equilibrium as such or a problem with the Arrow-Debreu approach to GE? I can't help thinking that the world is GE and thus to handle the "real world" we need general equilibrium models. But the way we model GE leaves much to be desired. The current generation of GE models don't deal well with things like information asymmetries, contractual incompleteness, strategic interaction and economic institutions. Thus do we need at new GE which doesn't just try to model the extreme decentralisation of the perfectly competitive framework? Not that it is obvious what such a form of GE would look like. How much, if any, of the current approach to GE can be saved? Or is the Arrow-Debreu framework the right way to go? Or should we just stay with partial equilibrium models and not worry about interactions between markets?

Things you ponder on a Thursday afternoon.

Its ok to hate Valentine's Day

Let me repeat my posting from a few years back, it still applies.

The Times has a list, "20 reasons it's okay to hate Valentine's Day". Number 14 is

It's such a rip-off. With flowers, dinner and cabs, you’re looking at a hundred quid minimum. Wouldn’t she just prefer the cash instead?

This has to be true, as any economist will tell you. Just giving her the cash must be Pareto improving. With the cash she can either go out and buy what you would have bought, so she and you are no worse off, or she can buy what she really wants, and you would not have bought, so you will both be better off.

So next year, just give her the money guys.

EconTalk this week

David Owen of the New Yorker and author of The Conundrum talks with EconTalk host Russ Roberts about the ideas in his book. Owen argues that innovation and energy innovation have increased energy use rather than reduced it and similarly, other seemingly green changes do little to help the reduce humanity's carbon footprint or are actually counter-productive. Only large reductions in consumption are likely to matter and that prescription is unappealing to most people. Owen points out that New York City, ironically perhaps, is one of the greenest places to live because of the efficiencies of density. The conversation concludes with a discussion of how to best approach global warming given these seeming realities.

The past and present of the theory of the firm

There is a new paper available at SSRN that looks at The Past and Present of the Theory of the Firm.

The abstract reads,

In this survey we give a short overview of the way in which the theory of the firm has been formulated within the 'mainstream' of economics, both past and present. As to a break point between the periods, 1970 is a convenient, if not entirely accurate, dividing line. The major difference between the theories of the past and the present, as they are conceived of here, is that the focus, in terms of the questions asked in the theory, of the post-1970 literature is markedly different from that of the earlier (neoclassical) mainstream theory. The questions the theory seeks to answer have changed from being about how the firm acts in the market, how it prices its outputs or how it combines its inputs, to questions about the firm's existence, boundaries and internal organization. That is, there has been a movement away from the theory of the firm being seen as developing a component of price theory, namely issues to do with firm behavior, to the theory being concerned with the firm as a subject in its own right.