What use is a graduate programme?

Recently when thinking about developments in university education Bill Kaye-Blake asked What’s the point of academic research? Is it to be 'critic and conscience of society' or is it to 'advance knowledge and understanding'? Or both? Whatever the answer, the results of research are certainly one of the two major outputs of universities. The second main output of a university relates to the results of teaching, both undergraduate and graduate, students of the institution. With regard to teaching I wish to ask, What use is a graduate programme?

What does a university department need to be be serious? Can a department live without a graduate programme? If a department within a university didn't have such a programme what effect would it have on that department? How would the department hold current staff and how would it attract new staff? What effect would it have on students?

In terms of student numbers obviously you would lose all your graduate students, but if you are planning to do away with a grad programme I guess it would be because it didn't have many students to begin with so it wouldn't be a great loss, as far as the bean-counters are concerned. One may argue that a small but high quality programme is worth keeping on grounds of quality rather than quantity. Can graduates of the programme get good jobs in good places, can they succeed in good overseas Ph.D. programmes?

But what effect would the closure of a graduate programme have on undergraduate student numbers? If you can't do a graduate degree at a given university you have to ask, Why do an undergraduate degree there? Given that you are going to have to move to another university for grad school why not just move to the second university for your undergrad degree as well? Importantly in New Zealand, unlike for example the U.S., an undergrad degree in the subject you want to do grad work in is normally assumed so there is a more direct link between undergraduate degrees and graduate degrees in the New Zealand system. This means moving universities is more difficult since your undergrad training may not integrate easily into the grad programme you are moving to. This gives students an incentive to do their undergrad and grad work at the same university. For some subjects this may not matter much since an undergraduate degree is the terminal degree, e.g. engineering,  but for others, e.g. clinical psychology or economics, where an advantaged degree is necessary for employment it matters more.

So if you only teach undergrads you have to teach in such a way as to have your students be able to move to any other university in the country for their graduate work. This is not a simple issue to deal with given the differences in what is assumed about students backgrounds in different graduate programmes. Knowing that student have to leave their current institution to do graduate work gives other institutions an incentive to head-hunt the best of the local students thereby damaging the local undergraduate programme.

Thus there are push factors making students want to leave an institution without a postgrad programme and there will be pull factors as well as other universities try to attract good undergraduate students. If this results in a falloff in undergraduate students, certainly it will not help undergraduate numbers, it could be to the point where the undergraduate programme is also seen by management as unsustainable.

Knowing this can a move by university administrators  to close a department's graduate programme just be seen as a signal that they want an excuse to close the department itself?

EconTalk this week

Edward Glaeser of Harvard University and author of The Triumph of Cities talks with EconTalk host Russ Roberts about American cities. The conversation begins with a discussion of the history of Detroit over the last century and its current plight. What might be done to improve Detroit's situation? Why are other cities experiencing similar challenges to those facing Detroit? Why are some cities thriving and growing? What policies might help ailing cities and what policies have helped those cities that succeed? The conversation concludes with a discussion of why cities have such potential for growth.

Do entrepreneurs matter?

According to Sascha O Becker and Hans K. Hvide over at VoxEU.org the short answer is yes.

Becker and Hvide write

Governments try to boost competitiveness through a vast array of policies. Newly founded firms have the potential to give new impetus to an economy. The question arises: what matters more, the horse (i.e. the products) or the jockey (i.e. the owner-manager) in the life of young firms? Do entrepreneurs matter and should they be encouraged by economic policy? Few empirical studies focus on how entrepreneurs affect the performance and value of firms (see Syverson 2011). If entrepreneurs personally embed a major part of the value of the firm, it will be difficult to pledge the value of the firms to outside investors, which in turn leads to liquidity constraints and underinvestment in entrepreneurial firms (as in Hart and Moore 1994).

Brynjolfsson (1994) and Rabin (1993) are additional papers which highlight the problems that reliance on human capital can have for the development of firms. While the Brynjolfsson model is distinct from the Rabin model, they are complementary. The relationship between information, ownership and authority is central to both papers. Rabin works within a framework utilising an adverse selection model and shows that the adverse selection problems can be such that, in some cases, an informed party has to take over the firm to show that their information is indeed useful. The Brynjolfsson model is a moral hazard type framework which deals with the issue of incentives for an informed party to maximise uncontractible effort.

Brynjolfsson argues that the increased importance of information technology will result in reduced integration and smaller firms insofar as this increased reliance on IT leads to better informed workers, who need incentives; enables more flexibility and less lock-in in the use of physical assets, and allows direct coordination among agents, reducing the need for centralised coordination. On the other hand, the Brynjolfsson framework suggests that more integration will result from information technology where network externalities or informational economies of scale support the centralised ownership of assets, and it facilitates the monitoring, and thus contractibility, of agent’s actions. Clearly in any given case more than one of these phenomena may be important.

Within the Rabin framework it is suggested that firms are more likely to trade through markets when informed parties are also superior providers of productive services that are related to their information. But if, on the other hand, information is a firm’s only competitive advantage, it is likely to obtain control over assets, possibly by buying firms that currently own those assets.

Becker and Hvide argue that human capital/personalities are important for firms. Looking into the death of a firm’s founder during the first ten years of a company’s existence, the data suggest that entrepreneurs matter – they are the ‘glue’ that holds a business together.

We expected businesses that experienced the death of a founder-entrepreneur to have some kind of a dip in performance immediately after the death owing to the upheaval, but we anticipated there would be a bounce back. However, the results were quite surprising. Even four years after the death, most firms show no sign of recovering and the negative effect on performance appears to continue even further beyond that, [...]

A simple explanation for our findings could be reverse causality: poor firm performance leads to entrepreneurs having a higher probability of dying. To deal with this possibility, we look at whether there are pre-treatment differences between treated and matched controls. We do not find evidence of pre-treatment effects, [...]. This suggests that reverse causality is not a major force behind our findings.

For how long in a firm's life does the entrepreneur matter? The very youngest companies suffered most after the founder’s death, but significant effects were still felt by companies that were up to ten years old. The degree of ownership the founder had retained matters. The death of a founder with a 50% stake had about half the impact of losing a founder who had retained a majority shareholding. The level of formal education of the founder also showed a strong correlation with the damage that person’s death could have. Those with the most highly educated founders experienced the largest drops in sales performance after the founder’s death. There was no difference between the results for family and non-family companies, between rural and urban businesses, or when comparisons were made between different sectors.

It could simply be that the founder was a fantastic sales person who generated a disproportionately high level of sales. On the other hand, it could be down to a leadership effect, where the founder-entrepreneur inspires the employees to perform as best they can and without the presence, that drive slips away.

Possibly, entrepreneur death induces a voluntary shutdown by heirs of unprofitable firms that provided the entrepreneur with private benefits, so that there is no social loss. Using quantile regressions, we find strong negative effects of entrepreneur death on sales and assets also among successful firms. The bankruptcy code in Norway is similar to Chapter 7 in the US bankruptcy code, i.e., bankruptcy is associated with creditors taking control and is not 'voluntary' as in Chapter 11 in the US bankruptcy code. We find that firms where the entrepreneur dies have twice the probability of going bankrupt. This, again, is evidence supporting that entrepreneurs create value.

Another concern is that many firms in our database are very small, and possibly motivated by providing tax or private benefits to the entrepreneur.

Fortunately, a substantial fraction of firms in our database are not tiny, even in the first year – the 75th percentile for book value of assets and number of employees in the first year of operations is about $400,000 and four, respectively.

The conclusions of the article are

All our results are consistent with a simple mechanism: entrepreneurs personally embed a major part of the value of the firm, and the entrepreneur vanishing has a large negative impact. The death of the founder appears to shift the firm outcome distribution to the left. For firms in the lower part of the outcome distribution, the consequence is a higher probability of closing down, while for firms higher up in the quality distribution, the effect will be a significant reduction in firm growth.

Refs:

• Brynjolfsson, Erik (1994). ‘Information Assets, Technology, and Organization’, Management Science, 40(12): 1645-62.
• Hart, O and J Moore (1994), 'A Theory of Debt Based on the Inalienability of Human Capital', Quarterly Journal of Economics, 109, 841-879.
• Rabin, Matthew (1993). ‘Information and the Control of Productive Assets’, Journal of Law, Economics, and Organization, 9(1) Spring: 51-76.
• Syverson, C (2011), “What Determines Productivity?”, Journal of Economic Literature 49, 326-365.

Hogan writes to David and David (updated)

Over at the Offsetting Behaviour blog Seamus Hogan has an excellent open letter to David Shearer and David Parker. He writes,

Dear David and David,

I have read with interest the policy document you released yesterday: New Zealand Power, Energising New Zealand. I wonder if you could clarify a few points for me.

1. In the document and the associated speeches, you quote the Wolak report's figure of $4.3b of, in your words, "super profits". Have either of your read the report, or any of the trenchant criticisms of that report? (A bit egotistically, I can suggest work that I was involved in, here, here, and here, but there are others.) 
2. You say that "prices are rising faster than in many of our major competitor countries", and show a graph comparing the price trend in a number of countries since 1986. . Let's leave aside the question of what is meant by "competitor country". Is it your position that prices were correct in New Zealand in 1986? Elsewhere you say that your new agency, New Zealand Power, will set prices based on operating costs and a fair return on capital. Is it your position that prices were generating a fair return on capital in 1986?
3. You say that the faster rate of price growth in New Zealand "undermines the competitiveness of our economy". But one of your graphs shows that real industrial prices have remained about constant since 1986 and commercial prices have fallen. What exactly do you mean by "competitiveness"? 
4. Your graph shows that the faster increase of prices relative to other countries has been fairly steady since 1986 albeit with an acceleration around 2000. Since your explanation for this price trend is a lack of competition in the market and the use of marginal-cost rather than average-cost pricing, is it your position that these factors have been changing steadily over the past 25 years, accelerating during the period of the last Labour government? Is it possible that the trend might be attributable to steady increases in demand over time and regulatory obstacles to power companies building new capacity? 
5. You say that selling assets will "push up power prices even more as foreign and corporate investors look to maximise profits". Is it your position that the state-owned electricity companies are not currently looking to maximise profit, even though that is their fiduciary duty under the State-Owned Enterprises Act? 
6. You state that the Wolak report found that the four big generators made "super profits of $4.3b at the expense of consumers". You also state that hydro generators earn "super profits" by using free water to generate electricity that is sold at the same price as generators using more expensive methods. Do you think this is what Wolak meant when he calculated the excess profits earned? Have you read the Wolak report? 
7. As I noted earlier, you state that price will be set based on operating costs and a fair return to capital. But the Wolak report assumed that there was excess capacity in New Zealand so that a competitive market would have produced prices based only on operating costs. Are you stating that Wolak's $4.3b figure is overstated? Have you read the Wolak report? 
8. Drawing on a report you have commissioned from BERL, you state that your policy will create 5,000 jobs and boost the economy by $450 million per annum. In their report, BERL state that they are assuming an economy with deficient demand so that unemployed resources are available to the industrial and commercial sector with no opportunity cost. In citing that figure as an on-going per annum benefit, are you stating that it is your view that the economy will remain in a state of deficient aggregate demand forever, and that your government would take no other action to increase demand?
9. And if you have time, could you ask BERL whether it is not an oxymorn to have a computable general equilibrium model, and then state that "the model's calculation of the impacts on the government accounts exclude the direct loss of revenue from lower generator dividends and lower tax receipts from the generator's reduced profits". 
10. By the way, did you know that one of the implicit assumptions Wolak used in his report implied that there was no efficiency loss from the putative overcharging, just a transfer from users to taxpayers. If you accept this report, wouldn't it be easier just to use the tax and benefit system to transfer money back to poorer consumers? Have you read the Wolak report?

Kindest Regards....

I have to ask that if this idea works for electricity why not for food. petrol and who knows what else? Also if monopoly is bad how is it that monopsony is suddenly good? Can we get iPredict to set up a contract on the chances off Seamus getting a reply or anyone getting any sensible comment from either David on this?

Update: Kiwiblog writes on Electricity Prices and notes

David Parker is on record as saying a single buyer will increase the cost of power. Simon Bridges quotes from a 2006 cabinet paper by Parker:

“As Minister of Energy he said that “a single buyer would likely result in higher capital and operating costs”. He went on to say that: “The risks involved in changing arrangements could be significant. The resulting uncertainty could lead to investment proposals being put on hold. Direct implementation costs could be large.” And, he admitted that “The single buyer would be relatively poor at sustaining pressure on operational costs.”

Adam Smith: a man of the left or right? (updated)

I shall put aside the obvious response that since the left/right distinction developed from the political divisions of the French Revolution and Smith died in 1790 it is somewhat pointless to think about Smith in terms that had no meaning in his time and concentrate instead on the recent trend in Smith studies that concerns itself with the extent to which Smith’s ideas can be distanced from the more vociferous of his free market admirers such as Milton Friedman, James Buchanan and F.A. Hayek. In the field of political economy there has developed a line of argument that sees Smith’s ideas associated not with the right or liberal (or libertarian for any Americans reading this) concerns but with the contemporary left’s concerns with fairness, equality and social justice.

In a forthcoming article (“Adam Smith: Left or Right?”) in the journal Political Studies well-known Adam Smith scholar Craig Smith writes

Amartya Sen (2009) has drawn inspiration from Smith in developing his own theory of social justice and Samuel Fleischacker (2004) has made the case for reading Smith as a precursor of modern notions of social justice. Iain McLean (2006), on the other hand, makes the stronger claim that Smith’s true legacy lies, not with the libertarian economists of the Adam Smith Institute, but rather with the social democrats of the John Smith Institute. In all three cases the broad claim is that there are grounds for associating Smith with the modern egalitarian idea of social justice understood as the state-backed redistribution of wealth to ameliorate the effects of poverty.

Smith expands on this by saying,

Fleischacker offers perhaps the most detailed version of the argument under consideration. He admits that Smith wrote in a period prior to the modern notion of distributive justice and that this leads Smith to consider justice in the commutative sense favoured by the natural law tradition, but he goes on to argue that Smith helped to point the way towards the notion of distributive justice that animates the contemporary left (Fleischacker, 2004, p.213).Fleischacker accepts that there are both libertarian and egalitarian themes in Smith’s work and that he can thus be read as providing a legacy fo both contemporary positions (Fleischacker, 2004, p. 19), but in his view Smith’s abiding concern for the poor brings him closer in spirit to the contemporary left (Fleischacker,2004,p.265). Fleischacker’s argument is based on the idea that Smith does not operate with an absolute and pre-social, moralised notion of property rights and that as a result of this Smith has no principled reason to consider it unjust to use ‘redistributive taxation to help the poor’ (Fleischacker, 2004, p. 145). What replaces the principled objection in this reading is a case-by-case assessment of the likely success of particular government attempts to alleviate poverty with a presumption against the likely success of such activity drawn from Smith’s distrust of the political process. This leads to a‘Smithian’state which,while unlikely to be as extensive as the modern welfare state (Fleischacker,2004,p.236),is nonetheless open to the use of politics to pursue the goals of egalitarian distributive justice. Fleischacker then argues that the contemporary left has much to learn about the pursuit of its goals from Smith’s criticism of state bureaucracies and his stress on competition.

Craig Smith argues against those who would claim Adam Smith for the left, in terms of an adherence to social justice, by explaining,

[...] that not only would Smith have been dubious about the modern conception of social justice, but that he actually takes care to draw a conceptual distinction between his notion of justice and the sort of redistributive and welfare programmes that we understand under the vague catch-all notion of social justice. My point is not that Smith was unconcerned with the situation of the poor; it is rather that he makes a quite clear philosophical distinction between this concern and the concept of justice. I want to claim that we should not dismiss this distinction as merely a feature of the language that Smith inherited from his predecessors. Instead I want to take his attempt at conceptual clarity seriously and suggest that the normative distinctions Smith draws might prove to be a further lesson for the contemporary left in addition to the empirical and social theoretical points that Fleischacker concedes (Fleischacker, 2004, p. 226). Put another way, for the purposes of this article it does not matter how much of a role Smith allowed for deliberate attempts to ameliorate the effects of poverty; what matters is that he does not conduct this discussion in terms of justice.

In the conclusion to his paper Smith argues that in Adam Smith's ideas we see the existence of a sphere of devolved (local level) human activity distinct from the political concerns of the state. Craig Smith continues,

The proper conceptual vocabulary for this sphere then is clearly distinct from the vocabulary both of justice and of beneficence. Justice has its place in Smith’s vision of society, but that place is specific and limited and this must surely give us pause in attempting to relate Smith’s thought to modern conceptions of social justice. Indeed, at least one conclusion that might be drawn from the reading presented here is that, far from offering us a theory or even an inspiration for a theory of social justice, Smith actually gives us good grounds to want to keep some conceptual distance between ideas of justice, police and beneficence. That he is wary of any automatic reliance on the political process and the state to pursue our social objectives is admitted even by those such as Fleischacker who want to reclaim Smith for the left. As Fleischacker (2004, p. 241) also admits, this points us toward a presumption against the state and a presumption in favour of private action by voluntary associations of individuals. But if this is the locus for the exercise of beneficence and the provision of public works then we are dealing with something very different from the modern debates about intra-national transfers or even international transfers and distributive patterns.

Craig Smith goes on to say that what this implies for a ‘Smith-based’ notion of distributive or social justice is clear,

we should take more seriously Smith’s silence on modern distributive justice, his desire to place conceptual distance between beneficence and justice, his distrust of the political process and his temperamental distaste for utopianism. And we should pay more attention to his localist, prudential category of police and his desire to press a normative distinction between strict principles of justice and political or beneficent decisions guided by expediency. These are not accidental aspects of Smith’s thinking, however imperfectly they are carried over into his own policy prescriptions. They suggest a very different understanding of the normative ideal of justice and one that might actually give us good reasons to doubt the efficacy of thinking about our moral obligations to the poor and welfare provision in terms of social justice.

When thinking of our moral obligations a related question about Adam Smith’s thinking is raised by Maria Pia Paganelli in a chapter forthcoming in the Oxford Handbook on Adam Smith. Paganelli asks why Smith promotes free markets and argues that he promotes them for at least two reasons: efficiency and morality. In terms of morality Paganelli argues that Smith thought that markets can foster morality just as much as morality can foster markets. Paganelli concludes her chapter by noting,

Adam Smith favours commerce on grounds of both morality and efficiency. Commerce is intertwined with morals, it supports moral development and at the same time it is supported by it. Commerce requires morals for its functioning and gives the conditions under which people can live, can live freely, and can live morally.

Returning to the question of whether Adam Smith was “left or right” James Otteson writes in the epilogue to his 2011 book Adam Smith,

He [Smith] was instead an old-fashioned liberal: favoring individual liberty, endorsing state institutions to protect this liberty, and, where they conflicted, favoring the individual over the state as a default. But he was also a sceptical empiricist. He favored free trade, free markets, and a government robust but limited to the enforcement of a few central tasks not because they comported with a priori principles but because they seemed to work.

It is worth noting that this sceptical empiricist approach to markets, trade and government rather than an a priori principle approach would most likely disqualify Smith as a libertarian, at least of the Radian or Nozickean kind.

Otteson goes on to say,

Smith’s concern with the poor leads some commentators to suggest that he must have been a proto-“progressive” liberal, since, as some believe, only progressive liberals care about the poor. Samuel Fleischacker, for example, argues that Smith’s concern for the poor is one reason to see him as “left-leaning” rather than “right-leaning” . Concern for the poor is, however, hardly the exclusive provenance of the political left. And Smith’s strong arguments in favor of decentralization of power, competition, and free markets would seem to put him rather on the right of today’s political spectrum than on the left.

Otteson's conclusion is that Smith is a classical liberal, which is consistent with the arguments made above, but if accepted this does mean Smith is not a man of the left.

Update: Adam Smith scholar Gavin Kennedy comments on this post at this Adam Smith's Lost Legacy blog.

EconTalk this week

Jeffrey Sachs of Columbia University and author of The Price of Civilization talks with EconTalk host Russ Roberts about the state of the American economy. Sachs sees the current malaise as a chronic problem rather than a short-term challenge caused by the business cycle. He lists a whole host of issues he thinks policymakers need to deal with including the environment, inequality, and infrastructure. He disagrees with the Keynesian prescriptions for stimulating the economy and believes that the federal government budget deficits are a serious problem. The conversation closes with a discussion of the state of economics.

Unemployment is bad for employment 2

I have made the point that the longer you are unemployment the less likely it is that you will become employed before but more evidence confirming it comes from this article in the Washington Post:

Here’s one big reason why America’s unemployment crisis may be here to stay. Thanks to the lasting effects of the recession, there are currently 4.7 million workers who have been out of work for at least 27 weeks. And new research suggests that employers will almost never consider hiring them.

Matthew O’Brien reports on a striking recent experiment by Rand Ghayad of Northeastern University. He sent out 4,800 fake resumes at random for 600 job openings. And what he found is that employers would rather call back someone with no relevant experience who’s only been out of work for a few months than someone with more relevant experience who’s been out of work for longer than six months.

In other words, it doesn’t matter how much experience you have. It doesn’t matter why you lost your previous job — it could have been bad luck. If you’ve been out of work for more than six months, you’re essentially unemployable. Many companies won’t even consider you for a job.

One obvious question this raises is, Are companies irrationally discriminating against the long-term unemployed or do they have good reasons for screening out these applicants? The Washington Post article writes,

Privately, many employers worry that someone who’s been out of work for six months “may have outdated skills, or may be a short-timer who is desperate enough to take any work now but will leave when something better comes along.”

One worry with this is that the current cyclical unemployment problems could become structural and very long-lasting.

Local authority chief executives are boosting their pay packets by "empire-building"

The following link is to a TV3 news item in which Dr Glenn Boyle, professor of finance at Canterbury University, discusses his recent paper in which he shows that that some local authority chief executives are boosting their pay packets by "empire-building". Boyle found that councils which collect the most revenue per ratepayer also pay their chief executives the most. The pay rate is not related to things the amount of infrastructure the councils controls but is related to the additional hiring of bureaucrats.

http://www.3news.co.nz/Empire-building-CEOs-boost-pay/tabid/370/articleID/294292/Default.aspx

Scoop reports,

A new study by UC finance professor Glenn Boyle and former UC student Scott Rademaker found councils which collect the most revenue per ratepayer pay their chief executives the most.

``While this could indicate that chief executives with more revenue to manage have more complex jobs, and hence deserve to be paid more, it turns out that the additional revenue is primarily used to employ additional council personnel,’’ Professor Boyle says.

"The more bureaucrats a council chief executive is able to employ, relative to the size of their ratepayer base, the greater the remuneration he or she is able to extract on average. Chief executives who have increased personnel costs the most during the 2005-10 period have, on average, received the biggest pay rises during that time. In short, council chief executives are being rewarded for good old-fashioned empire building.

Margaret Thatcher’s economic legacy

From VoxEU.org comes a couple of articles looking at Margaret Thatcher’s economic legacy. John Van Reenen argues:

Margaret Thatcher’s economic legacy lives on. This column provides a markedly balanced assessment of her mistakes and achievements. Most pressingly, Thatcherism left the UK failing to properly think about long-run investment, especially in infrastructure, in the skills of those at the lower end of the ability distribution and in innovation. The UK is addressing some of these problems, but this failure to invest in prosperity is the main challenge we face as a nation over the next 50 years.

while Nicholas Crafts explains that

The policies of the Conservative governments led by Margaret Thatcher between 1979 and 1990 remain highly controversial more than 20 years later. In many respects, they represented a sharp break with the earlier postwar period and this was certainly true of supply-side policies relevant to growth performance. Reforms of fiscal policy were made including the restructuring of taxation by increasing VAT while reducing income-tax rates and, notably, by indexing transfer payments to prices rather than wages while aiming to restore a balanced budget. Industrial policy was downsized as subsidies were cut and privatisation of state-owned businesses was embraced while deregulation, including most notably of financial markets with the ‘Big Bang’ in 1986, was promoted. Legal reforms of industrial relations further reduced trade union bargaining power which had initially been undermined by rising unemployment. In general, these changes were accepted rather than reversed by Labour after 1997.

In fact, before, during and after Thatcher, government policy moved in the direction of increasing competition in product markets. In particular, protectionism was discarded with liberalisation through GATT negotiations, entry into the European Community in 1973, the retreat from industrial subsidies and foreign-exchange controls in the Thatcher years, and the implementation of the European Single Market legislation in the 1990s. Trade liberalisation reduced price-cost margins. The average effective rate of protection fell from 9.3% in 1968 to 4.7% in 1979, and 1.2% in 1986 (Ennew et al. 1990), subsidies were reduced from £9bn (at 1980 prices) in 1969 to £5bn in 1979 and £0.3bn in 1990 (Wren 1996), and import penetration in manufacturing rose from 20.8% in 1970 to 40.8% by 2000.

Van Reenan sees Thatcher's polices as a failure.

Nevertheless, there are many important economic and social failures that are part of the Thatcher legacy. First, there was a tremendous growth of inequality both in pre-tax incomes and through changes to tax and benefit policies that favoured the rich. [...]. Some of this inequality was addressed by the Labour governments through tax credits and the minimum wage, but the share of income going to the top 1% continued to rise inexorably, driven by the financial sector. This was the second failure – excessive deregulation of financial services starting with the Big Bang in 1986, but continuing until the eve of the 2007 crisis. Even free markets need to be properly regulated. Third, her early years were marked by a failure to understand that the public employment service needs to be active in helping people find jobs. A major mistake was splitting benefit offices from job centres and pushing many unemployed onto disability benefits (which are much harder to escape from) in an effort to massage down the unemployed claimant count statistics. Unemployment claims peaked at over three million in 1986 when Restart was launched – a policy that finally put more effort into getting the unemployed searching for work and was deepened under the New Deal policies after 1997.

Finally, and perhaps most importantly, there was been a failure of long-run investment: in infrastructure, in the skills of those at the lower end of the ability distribution, and in innovation. The UK addressed some of its problems, but this failure to invest in prosperity is the main challenge we face as a nation over the next 50 years. The LSE Growth Commission has put forward some proposals to deal with this – let’s hope the current generation of political leaders takes heed.

Crafts concludes by saying,

In sum, Thatcherism was a partial solution to the problems which had led to earlier underperformance, in particular, those that had arisen from weak competition (Crafts 2012). The reforms encouraged the effective diffusion of new technology rather than greater invention and worked more through reducing inefficiency than promoting investment-led growth. They addressed relative economic decline through improving TFP and reducing the NAIRU. At the same time, the short-term implications were seriously adverse for many workers as unemployment rose and manufacturing rapidly shed two million jobs while income inequality surged, to no small extent as a result of benefit reforms.

Indeed, any judgement on Thatcherism turns heavily on value judgements concerning the relative importance of income distribution and economic growth as policy objectives. The 1980s saw a very rapid increase in the Gini coefficient by about nine percentage points, which has turned out to be largely permanent. Ultimately, the Thatcher experiment was about making a liberal market economy work better. There will be those who think a German-style coordinated market economy is preferable. That was not really an option available to Mrs Thatcher but in any event it was hardly a vision of which she approved.

John Taylor's Hayek Lecture at Duke University

The title of his lecture is Why We Still Need to Read Hayek given on Wednesday, April 10 2013:

EconTalk this week

Anat Admati of Stanford University talks with EconTalk host Russ Roberts about her new book (co-authored with Martin Hellwig), The Bankers' New Clothes. Admati argues that the best way to reduce the fragility of the banking system is to increase capital requirements--that is, require banks to finance their activities with a greater proportion of equity rather than debt. She explains how debt magnifies returns and losses while making each bank more fragile. Despite claims to the contrary, she argues that the costs of reducing debt are relatively small for society as a whole while the benefits are substantial.

Winston Peters on exporter's tax rate

From Stuff

New Zealand First leader Winston Peters says his party wants to cut the corporate tax rate for exporters from 28 per cent to 20 per cent.

More mercantalism from Peters. Will it never die? Why not lower the rate rate for all business? What is so special about exporters? In short, nothing. Adam Smith pointed out more than 240 years ago that "Consumption is the sole end and purpose of all production" and that the measure of a country's true wealth, is the total of its production and commerce. That is, a country's wealth is what the people of that country can consume. The great 19th century French economic pamphleteer Frédéric Bastiat wrote, "Consumption is the end, the final cause, of all economic phenomena, and it is consequently in consumption that their ultimate and definitive justification is to be found." Note also that exports are things that we produce and send to other (overseas) people. That is, they are goods and services that we produce but do not consume and thus they lower our welfare. Imports on the other hand, are goods and services that other counties produce and send to us to increase our consumption. This means imports increase our welfare. So imports are welfare increasing and exports are welfare decreasing. Therefore "imports are good; exports are bad"

But this does raise the question of why do we bother to export and not just import? The obvious answer is that exports are the way we pay for our imports. If we want people to send their goods and services to us we have to send our goods and services to them in exchange. Adam Smith also noted that in any free exchange, both sides must benefit. The buyer profits, just as the seller does, because the buyer values whatever he gives up less than the goods he obtains. That's why we trade at all.

EconTalk this week

Eric Topol of the Scripps Research Institute and the author of The Creative Destruction of Medicine talks with EconTalk host Russ Roberts about the ideas in his book. Topics discussed include "evidence-based" medicine, the influence of the pharmaceutical industry, how medicine is currently conducted for the "average" patient, the potential of genomics to improve health care and the power of technology, generally, to transform medicine.

David Farrar just doesn't get it.

With regard to the mixed ownership model David Farrar writes,

This is the model that the unions and their allies have tried to destroy.

Everyone is a winner – the Bay of Plenty Regional Council and its ratepayers, Port of Tauranga’s minority shareholders and the company itself.

It is totally inappropriate to look at partial privatisation as a zero sum game, a game where there must be a loser for every winner. Partial privatisation can lead to a substantial increase in value and income for a regional council, or the government, if the listed company is well governed and managed.

Absolutely. There can be no argument that privately owned and managed companies do better overall than wholly owned public ones. By this I do not mean no private companies fail and no public companies succeed. Of course not. But if you look at decades of economic data across OECD countries, the difference is stark.

Yes and if you look at the economics literature you will also find that fully private companies outperform mixed ownership firms. Some insight on this is offered by a recent paper in the Scottish Journal of Political Economy (Volume 59, Issue 1, pages 1–27, February 2012). The paper "What Drives the Operating Performance of Privatised Firms?" by Laura Cabeza García and Silvia Gómez Ansón argues that the greater the amount of privatisation the better the performance of the firm. Not an entirely surprising result as the full force of market discipline can only be applied if the firm is fully in private hands but it is something for the government to keep in mind. It would suggest that any performance improvements due to the government's partial privatisation plans will be modest.

The abstract reads,

Using a panel data analysis of Spanish privatised firms, we study how different factors influence the operating performance of divested companies. The results show that it is not privatisation per se but other factors that matter. After controlling for possible sample selection bias related to government timing of divestments, we find that the greater the relinquishment of State control and the smaller the percentage of ownership held by managers and/or employees, the better the firms’ post-privatisation performance. Moreover, privatisations that are accompanied by liberalisation programmes and occur during buoyant economic cycles turn out to be more successful. (Emphasis added.)

When you look at the performance of mixed ownership firms they don't do as well as fully privately owned firms. For example, Aidan Vinning and Anthony Boardman in "Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed, and State-Owned Enterprises", Journal of Law and Economics vol. XXXII (April 1989) conclude

'The results provide evidence that after controlling for a wide variety of factors, large industrial MEs [mixed enterprises] and SOEs perform substantially worse than similar PCs [private corporations].'

So fully private firms out-perform mixed ownership firms. Thus if Farrar followed his own logic he would be arguing for 100% privatisation of SOEs.

A case study in privatisation

At the IEA blog Wayne A. Leighton discusses the telecom reforms undertaken in Guatemala. He writes,

In 1996, Guatemala adopted one of the most market-oriented telecom reforms in the world. The benefits to the country followed quickly as coverage expanded, competition surged, and prices plummeted.

He then asks the question, So, what is special about the Guatemalan experience? His answer:

Firstly, Guatemala’s reform was based solidly on market principles. Secondly, it was a huge success, providing greater consumer benefits than reforms in most other countries.

One of the most significant aspects of the Guatemalan experience is that the market was opened to competitors before the state-run telecom monopoly was privatised. Most countries did the opposite, selling the government’s monopoly phone company at a high price and promising to open the market at a later date. While such an approach put a lot of funds in these governments’ treasuries, it also created a private monopoly with the incentive to lobby for slow and cautious market liberalisation. By contrast, in Guatemala the buyer of the state phone company would have no special privileges and its competitors would face no special restrictions.

An interesting point here is that opening the telecom market to competition before privatisation highlights the importance of a point I have made before that getting the highest possible price when selling an SOE isn't always the best policy. Selling the SOE as a monopoly would have generated more money for the government but would have, as Leighton notes, slowed, or even stopped, the liberalisation of the telecom market and thus stopped the benefits that flowed to consumers from the privatisation and liberalisation.

In addition,

The other key aspect of reform is that it fostered a free market in the airwaves (electromagnetic spectrum). Guatemala created what are essentially property rights to the spectrum. This matters greatly, because access to spectrum is needed for wireless communications, and in low-income countries wireless is the most cost-effective way to extend service.

and

Significantly, the right to use spectrum in Guatemala for commercial purposes was not defined as a licence, as is the case in many other countries. Rather, usufruct titles were issued, which grant much more flexibility to determine how the spectrum will be used, subject to very basic restrictions on interference and international agreements. This closely approximates a property right. It creates greater certainty for wireless providers and greater potential for the spectrum to be put to its highest valued use.

The message here: getting property rights right matters.

EconTalk this week

Scott Sumner of Bentley University and blogger at The Money Illusion talks with EconTalk host Russ Roberts about the basics of money, monetary policy, and the Fed. After a discussion of some of the basics of the money supply, Sumner explains why he thinks monetary policy in the United States during and since the crisis has been inadequate. Sumner stresses the importance of the Fed setting expectations and he argues for the dominance of monetary policy over fiscal policy.

The architecture of innovation

From VoxEU.org comes this audio in which Josh Lerner of Harvard Business School talks to Romesh Vaitilingam about his book "The Architecture of Innovation: The Economics of Creative Organizations". They discuss a variety of issues around the challenges of innovation, including corporate venturing, venture capital-based enterprises, patents and public investment in science.

EconTalk for three weeks

Leigh Steinberg, legendary sports agent, talks with EconTalk host Russ Roberts about his career as a sports agent. He discusses the challenges of building a clientele, how sports agents spend their time, strategies for building a brand as an athlete, and safety issues currently affecting the National Football League.

Doc Searls, author of The Intention Economy and head of Project VRM at Harvard University's Berkman Center talks with EconTalk host Russ Roberts about the how the relationship between buyers and sellers might evolve as the internet evolves. Searls imagines a world where buyers would advertise their intentions and desires and sellers would respond with offers. Other topics discussed include Google and Apple's business strategies and the role of the cable and telephone companies in providing access to the internet.

Angus Burgin of Johns Hopkins University and the author of The Great Persuasion talks with EconTalk host Russ Roberts about the idea in his book--the return of free market economics in the aftermath of the Great Depression. Burgin describes the reaction to Hayek's Road to Serfdom, the creation of the Mont Pelerin Society, and the increasing influence of Milton Friedman on public policy.

Incomplete contracts and the internal organisation of firms

The theory of the firm - or organisational economics - spends much time on asking questions about the boundaries of the firm, about where one firm ends and the next one begins and where firms end and markets take over. But such questions are not the only ones asked by economists. Increasingly questions are also being asked about the internal organisation of firms. Like the boundary questions the standard approach to the internal structure of firms is that of incomplete contracts. Recently Philippe Aghion, Nicholas Bloom and John Van Reenen have released a NBER working paper that looks at the literature on the internal organisation of firms. Their paper is Incomplete Contracts and the Internal Organization of Firms and the abstract reads:

We survey the theoretical and empirical literature on decentralization within firms. We first discuss how the concept of incomplete contracts shapes our views about the organization of decision-making within firms. We then overview the empirical evidence on the determinants of decentralization and on the effects of decentralization on firm performance. A number of factors highlighted in the theory are shown to be important in accounting for delegation, such as heterogeneity and congruence of preferences as proxied by trust. Empirically, competition, human capital and IT also appear to foster decentralization. There are substantial gaps between theoretical and empirical work and we suggest avenues for future research in bridging this gap.

Unemployment is bad for employment

No really!

The following is a summary by Lester Picker, from the latest (March 2013) NBER Digest, of the findings of the paper, Duration Dependence and Labor Market Conditions: Theory and Evidence from a Field Experiment (NBER Working Paper No. 18387) by Kory Kroft, Fabian Lange and Matthew J. Notowidigdo. Lester writes,

According to a recent report by the Congressional Budget Office, long-term unemployment may "produce a self-perpetuating cycle wherein protracted spells of unemployment heighten employers' reluctance to hire those individuals, which in turn leads to even longer spells of joblessness." Policymakers and researchers alike tend to believe that this adverse effect of a long spell of unemployment undermines the smooth functioning of the labor market and entails large social costs. Economists refer to the phenomenon as "negative duration dependence."

In Duration Dependence and Labor Market Conditions: Theory and Evidence from a Field Experiment (NBER Working Paper No. 18387), authors Kory Kroft, Fabian Lange, and Matthew Notowidigdo confirm that the likelihood of receiving a callback for a job interview sharply declines with unemployment duration. This effect is especially pronounced during the first eight months after becoming unemployed. Their estimates suggest that this effect is quantitatively important, and that duration dependence is stronger when jobs are relatively abundant. These results imply that employers statistically discriminate against workers with longer unemployment durations and that employer screening plays an important role in generating duration dependence.

To study duration dependence, the authors submitted fictitious resumes to real, online job postings in each of the 100 largest metropolitan areas in the United States, and then tracked "callbacks" from employers for each submission. In total, they "applied" to roughly 3,000 job postings in Sales, Customer Service, Administrative Support, and Clerical job categories, submitting roughly 12,000 resumes. The resumes they created characterized the "applicant's" employment status and, if unemployed, the length of the current unemployment spell, which ranged from 1 to 36 months and was randomly assigned. As a result, this experiment directly uncovered duration dependence arising through employers' beliefs about unemployed workers.

In short, the longer you are unemployment the less likely it is that you will become employed.