A conversation with Ronald H. Coase

From Newmedia at UFM.edu comes this 2001 video of  A Conversation with Ronald Coase.

Dismissals and CEO incentives

CEO's face relatively stronger incentives from their compensation package than from the threat of dismissal, so a firm should put a lot of time and effort into getting that package right.

What is a firm?

This seems an obvious question which many people would assume would have an obvious answer. And yet it doesn't.

No one can agree on a definition. For neoclassical theory, a firm is little more than a production function or production possibilities set. For Demsetz a firm is an organisation in which production is carried out exclusively for sale to those formally outside the organisation. For Coase the firm is defined as an employment relationship. X is a firm because the owner of X employs A and B to work for him. For Williamson and Hart a firm is defined in terms of the ownership of alienable assets. The question for them is who owns what rather than who employs who. Spulber sees a firm as a transaction institution whose objectives differ from those of its owners. For Foss and Klein a firm is made up of an entrepreneur and the assets owned by them. All of these ideas have some merit. Its much like a group of blind men trying to describe an elephant, each man can tell you about the part he can feel while remaining unaware of the rest of the animal.

At first, it may seem odd that economists can not agree on what a firm is. But is it really that strange? When you think about it, coming up with a definition that covers every organisation from a sole proprietorship to a partnership to a limited liability company to a multinational is asking a lot, maybe too much. Foss, Klein and Linder (2015: 275)  suggest that a "[...] better question than "what is a firm" is "what are the important research questions that can be answered when the firm is defined in a particular way?" ".

That idea does seem to have merit.  At least then you can use a definition which is useful for the question under consideration rather than trying to come up with an all-embracing definition. A lot of otherwise wasted time and energy could be saved by not having to come up with the perfect one size fits all definition.

Ref.:

• Foss, Nicolai J., Peter G. Klein and Stefan Linder (2015). 'Organizations and Markets'. In Peter J. Boettke and Christopher Coyne (eds.), The Oxford Handbook of Austrian Economics (pp. 272-95), Oxford: Oxford University Press.

Paul Krugman talks trade

From the Peterson Institute for International Economics comes this interview in which Soumaya Keynes and Chad Bown talk with Paul Krugman about trade theory and policy.

Soumaya Keynes and Chad Bown sit down with Nobel Prize-winning economist Paul Krugman (CUNY and New York Times) in a wide-ranging interview about international trade. They discuss NAFTA, labour standards, and the USMCA (2:25); the current toxicity of trade politics (8:00); the wonky economics of comparative advantage versus increasing returns to scale trade (16:55); when and why the trade world changed (21:30); trade’s impact on US wage inequality (25:10); more wonky economics of strategic trade policy (29:30); China’s trade and industrial policy (34:45); what the Trump administration gets right about trade (39:40); and more.

IEA Christmas special 2018: a year in review

Welcome to our Christmas special - 2018: A Year in Review.

Joining our Associate Director Kate Andrews today is IEA Director General Mark Littlewood, Research Director Dr Jamie Whyte and Director of the IEA’s FREER initiative Rebecca Lowe.

The four talk through the biggest stories of the year, ranging from the ongoing Brexit negotiations, to the state of British political parties and ideologies, to other important happenings around the world.

You’ll also get to hear who Mark, Jamie, and Rebecca have chosen as their person of the year, event of the year, and best of all, their top prediction for 2019.

Thomas Sowell on the myths of economic inequality

Peter Robinson at Uncommon Knowledge of the Hoover Institution interviews Thomas Sowell about the myths of economic inequality.

Thomas Sowell discusses economic inequality, racial inequality, and the myths that have continued to falsely describe the system of poverty among different racial and economic classes. He explains the economic theories behind these pervasive myths and proposes fact-based solutions for seemingly intractable situations.

Sowell discusses his early life as a high school dropout and his first full-time job as a Western Union messenger delivering telegrams. He admits to flirting with Marxism in his early twenties as he first tried to grapple with the housing inequality he saw across the neighborhoods of New York City. Marxism, he says, was the only explanation he could find at the time. He went on to serve in the Marine Corps before continuing his education in economics at Harvard and earning a master’s at Columbia and a PhD at the University of Chicago.

Sowell’s first job after his receiving his PhD in economics was working for the Department of Labor, and he says it was there that he realized Marxism was not the answer. He argues that the government has its own institutional interests in inequality that cannot be explained through Marxism. He began to be discouraged by Marxism and the government in general and began searching for better economic ideas and solutions (the free market).

Robinson and Sowell discuss Sowell’s written works, his ideas of racial and economic inequality, the state of the United States today, and much more.

How legalizing marijuana is securing the border

From the Cato Insitute comes this Cato Daily Podcast in which Caleb O. Brown interviews David Bier on the question of How effective would a border wall be against drug smugglers? The answer can tell us a lot about how effective it would be against illegal migrants.

A millenium of history: Steve Davies from the Norman Conquest to the world wars

From History Twins Podcast comes this interview with Dr. Stephen Davies of the IEA involving topics from the Norman Conquest all the way through to the World Wars. Find out what's wrong with Rousseau, who started the First World War, and what we're missing about the Industrial Revolution.

Latest Blogwatch column

My Blogwatch column from the latest issue (Issue 62, August 2018) of the NZAE magazine Asymmetric Information.

Annotation in the JEL 2

The Journal of Economic Literature, a journal of the American Economic Association, sets out to fulfil the following policy:

Our policy is to annotate all English-language books on economics and related subjects that are sent to us. A very small number of foreign-language books are called to our attention and annotated by our consulting editors or others. Our staff does not monitor and order books published; therefore, if an annotation of a book does not appear six months after the publication date, please write to us or the publisher concerning the book.

In Vol. 56 No. 4 December 2018 it annotated one of the two greatest books ever written:

So now go and buy, many many copies!

25% off the two greatest books ever written

Up to December 31st Routledge is having a sale which gives a 20% discount if you buy one book and a 25% discount if you buy two.

So you can get the two greatest books ever written for 25% less!

The Theory of the Firm: An Overview of the Economic Mainstream

A Brief Prehistory of the Theory of the Firm

Why are firms with more managerial ownership worth less?

An interesting, if somewhat counterintuitive, question. One could expect that a firm with more managerial ownership would be worth more since the incentives of the managers will be better aligned with those of the owners.

Why are Firms with More Managerial Ownership Worth Less?
Kornelia Fabisik, Rüdiger Fahlenbrach, René M. Stulz, Jérôme P. Taillard

NBER Working Paper No. 25352
Issued in December 2018
NBER Program(s):Corporate Finance

Using more than 50,000 firm-years from 1988 to 2015, we show that the empirical relation between a firm’s Tobin’s q and managerial ownership is systematically negative. When we restrict our sample to larger firms as in the prior literature, our findings are consistent with the literature, showing that there is an increasing and concave relation between q and managerial ownership. We show that these seemingly contradictory results are explained by cumulative past performance and liquidity. Better performing firms have more liquid equity, which enables insiders to more easily sell shares after the IPO, and they also have a higher Tobin’s q.

The human freedom index 2018

The Cato Institute Human Freedom Index is out for 2018.

The Human Freedom Index presents the state of human freedom in the world based on a broad measure that encompasses personal, civil, and economic freedom. Human freedom is a social concept that recognizes the dignity of individuals and is defined here as negative liberty or the absence of coercive constraint. Because freedom is inherently valuable and plays a role in human progress, it is worth measuring carefully. The Human Freedom Index is a resource that can help to more objectively observe relationships between freedom and other social and economic phenomena, as well as the ways in which the various dimensions of freedom interact with one another.

The areas of freedom considered.

And again New Zealand is number one.

And the bottom three will not surprise too many people.

John Nye on revisionist economic history and having too many hobbies

From Conversations with Tyler comes this audio in which Tyler Cowen interviews economic historian Professor John Nye.

Is John Nye the finest polymath in the George Mason economics department?

Raised in the Philippines and taught to be a well-rounded Catholic gentleman, John Nye learned the importance of a rigorous education from a young age. Indeed, according to Tyler he may very well be the best educated among his colleagues, having studied physics and literature as an undergraduate before earning a master’s and PhD in economics. And his education continues, as he’s now hard at work mastering his fourth language.

On this episode of Conversations with Tyler, Nye explains why it took longer for the French to urbanize than the British, the origins of the myth of free-trade Britain, why Vertigo is one of the greatest movies of all time, why John Stuart Mill is overrated, raising kids in a bilingual household, and much more.

Revised version: Being neoclassical before it was cool to be neoclassical: the case of the theory of the firm

This essay looks at the contribution made by pre-1870 writers to what would later become the neoclassical theory of the firm. In particular it briefly considers the work of Dionysius Lardner, Johann von Thunen, John Stuart Mill, Charles Ellet, Jr. and Antoine Augustin Cournot. The neoclassical theory of the firm should, in many ways, be more properly called the proto-neoclassical theory of the firm

Being neoclassical before i... by on Scribd

Scott Lincicome: in defense of free trade

From Conversations with Bill Kristol comes this interview with Scott Lincicome on a defense of free trade.

Scott Lincicome is a leading international trade attorney, adjunct scholar at the Cato Institute, and senior visiting lecturer at Duke University. In this Conversation, Lincicome explains the system of free trade agreements and alliances that the U.S. has built over many decades and how the system contributes to peace and prosperity for America. Lincicome also shares his perspective on the renegotiation of NAFTA, the decision not to participate in the Trans-Pacific Partnership (TPP), and other trade agreements. Finally, Kristol and Lincicome consider where Republicans and Democrats stand on trade today—and where the parties are likely to go in the future.

Don Boudreaux on free trade, protectionism, and the China shock

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Don Boudreaux on Free Trade, Protectionism, and the China Shock.

Don Boudreaux is a professor of economics at George Mason University as well as the co-director of the Program on the American Economy and Globalization at the Mercatus Center. He joins the show today to talk about the future of trade and globalization. David and Don also discuss the history of protectionism in the US, President Trump’s trade policies, and why the China Shock thesis may signal bad economics.

Broken market or Broken policy? The unintended Consequences of restrictive planning

Is the title of an article by Paul Cheshire in the National Institute Economic Review, Volume 245, No. 1, August 2018.

The abstract reads:

This paper summarises the evidence from recent research relating to the British Planning system’s impact on the supply of development. Planning serves important economic and social purposes but it is essential to distinguish between restricting development relative to demand in particular places to provide public goods and mitigate market failure in other ways, including ensuring the future ability of cities to expand and maintain a supply of public goods and infrastructure; and an absolute restriction on supply, raising prices of housing and other urban development generally. Evidence is presented that there are at least four separate mechanisms, inbuilt into the British system, which result in a systematic undersupply of land and space for both residential and commercial purposes and that these have had important effects on both our housing market and the wider economy and on welfare more widely defined.

The article's conclusion reads,

The evidence shows, then, that our planning system is restrictive in terms of the overall supply of land and housing space in the aggregate. It is not just locally restrictive in order to preserve land of significant environmental quality which in its unbuilt state generates amenity or has recreational value. Such purely local restrictions are likely to have positive welfare effects although the costs they impose also need to be taken into account. Overall restrictiveness of supply relative to demand, in the absence of such environmental gains, does not increase welfare but does increase the price of housing relative to incomes, so reduces welfare, and has, as we have seen, unintended adverse consequences; for example on the length of commuting.

Our planning system imposes this overall restrictiveness by means of at least four separate mechanisms. Its decision making is systemically restrictive because results of applications and conditions imposed for ‘affordable’ housing are unpredictable, so development risk is increased; it imposes quantitative restrictions on the supply of space (where it is most valued) by its imposition of Green Belts and height controls; its mechanism for deciding how much land to allocate for housing ignores the most important determinant of demand, so systematically undersupplies land; and there is substantial variation in local restrictiveness measuredby the proportion of applications refused.

Since all have the effect of reducing the supply of housing and other development relative to demand this drives up prices in real terms. Not only has this made housing increasingly unaffordable but it has had very regressive distributional effects, especially redistributing assets to older home owners. There are other unintended effectsof more restrictive planning. A more restrictive pattern of local decisions on housing proposals causes a substantial increase over time in the proportion of local homes that are empty. Not only that but greater local restrictivenesssignificantly increases the average length of commutes for those working locally. There is also evidence consistent with Green Belts increasing commuting distances as workers leap frog out to buy less expensive housing space. This increases the spatial extent of cities even if it reduces the footprint of urbanisation.

The extent of the price distortions induced by restrictions on the supply of land and housing mean that there is a misallocation of resources. Even in the US, where overall restrictiveness has historically been considerably less than in Britain, it has been estimated (Hseih and Moretti, 2017) that GDP would have been some 13.5 per cent higher had not restrictions on building slowed the flowof labour to the highest productivity locations over the period 1964 and 2009. No similar estimates have been done for other countries. Cheshire et al. (2015), however, did estimate that the loss of total factor productivity in the supermarket sector in England, as a result of forcing them to locate on particular sites in ‘town centres’, was 32 per cent just between 1996 and 2008. Cheshire and Hilber (2008) estimated that the restriction on the supply of office space in British cities reached the equivalent of a tax on construction costs of 800 per cent in London’s West End and even in less prosperous cities, such as Birmingham, averaged 250 per cent: there is certainly evidence that the economic effects of planning which is generically restrictive, can be large.

To sum up, there seem to be many reasons for concluding that our policies determining housing supply are broken but no obvious reason to conclude that the housing crisis results from a ‘broken housing market’.

So the answer to the question in the title seems to be broken policy. This raises the interesting and important question of, if you did a similar study for New Zealand would you get similar results? I'm very afraid you would. But just how broken are New Zealand's housing policies? And how costly are these blunders?

Housing and the economy

Two minutes on the topic of "Housing and the Economy" from Jagjit Chadha, Director of the National Institute of Economic and Social Research in the UK. The sorts of issues he talks about apply in New Zealand as well as in the UK.

Being neoclassical before it was cool to be neoclassical: the case of the theory of the firm

This essay looks at the contribution made by pre-1870 writers to what would later become the neoclassical theory of the firm. In particular it briefly considers the work of Dionysius Lardner, Johann von Thunen, John Stuart Mill, Charles Ellet, Jr. and Antoine Augustin Cournot. The neoclassical theory of the firm should, in many ways, be more properly called the proto-neoclassical theory of the firm

Being neoclassical before i... by on Scribd