Love it or hate it... the dollar's here to stay

In this audio from VoxEU.org Eswar Prasad talks to Viv Davies about Prasad's recent book, ‘The Dollar Trap: How the US dollar tightened its grip on global finance’, which examines how, paradoxically, in light of the financial crisis, the dollar continues to play a central role in the world economy and why it will remain the cornertsone of global finance for the forseeable future. They also discuss the current frameworks for international economic cooperation as well as currency wars, unconventional monetary policy and the prospects for the renminbi becoming the world's reserve currency.

A direct link to the audio is available here.

A revised version of a paper

you really want to read.

Yes you do!!!

Simple models of a human-capital based firm: a reference point approach by Paul Walker

The economics of the America's Cup - did we lose or win?

A question I'm very pleased to see Sam Richardson asking. As I'm sure most of you will have heard by now the Minister for Economic Development has been going round saying that the taxpayer money that went into the America's Cup campaign was money well spent. I wonder if he has asked any taxpayers about that?

Well now Sam Richardson of the econ department at Massey, likely the best guy in the country to do this, has given the Market Economics Limited report, written for MED,  the once over. Richardson writes,

The Government's share of the total Team NZ revenues of approximately $180m was 20 percent (it was capped at $36 million), with 66 percent coming from overseas. The report found that the total outcome of $87 million to the New Zealand economy would not have occurred without the Government's involvement.

and he continues,

I'm not going to question the final point - it isn't unreasonable to assume that the Government's contribution was pivotal to the challenge - but then, one could also argue that it wouldn't have happened without the overseas or private domestic funding either. That being said, however, there are two aspects of this report that do require challenging.

Getting down to business Richardson writes,

First, attributing the entire economic impact of a project to a 20 percent contribution is something I (and many others) have a real problem with. You could just as easily credit the economic impact figure of $87 million to the overseas funding (and you could do so with confidence, as it is 'new money' and thus more likely to be beneficial to the New Zealand economy) more than the Government's investment. Still, it is not an easy issue to resolve. It's not as easy as saying that because the Government contributed 20 percent means it should be 'credited' with 20% of the economic impact. The combination of public and private funding makes attributing the economic impact to one or the other parts problematic. A more accurate statement would be that the entire project (regardless of where the money came from) generated $87 million in impacts. After all, the tax revenues generated by Team New Zealand were between $38 and $40 million.

The second issue is the absence of opportunity costs of public funding in the report, which would help us to determine to what extent the $87 million impact be considered an economic benefit, and therefore money well spent. If there was no Team New Zealand, would nothing have happened? Of course not - life (and the economy) would have continued to tick away as per usual. $36 million of taxpayers money went into this campaign. Public funding has alternative uses, which should at the very least be considered as part of an objective analysis. If there was no Team New Zealand, what would have happened to the $36 million in taxpayer funding that was invested there? Chances are it would have gone to some other worthy recipient, for example the health sector or the education sector. In order to determine whether the $36 million spent on the America's Cup was money well spent, we need to know what $36 million would do when put to an alternative use. If the $36 million for Team New Zealand returned a higher impact than, say, paying each and every New Zealander $8 as compensation for there being no Team New Zealand, then it might have been money well spent. Determining what the appropriate alternative use for $36 million is the subject of debate - and my example above is very much tongue in cheek - but one thing is for sure: it is certainly not nothing. $87 million is the economic impact with no alternative use of public (and other) funds. Is it realistic to attribute this as a benefit?

That all costs are opportunity costs is stage one stuff, all economists know this. So not considering opportunity costs and comparing the campaign outcome with alternative uses of the money is big miss and I find myself wonder why the report did it. Or is it the only way they could put a positive spin on the campaign?

Just asking.

Football as a workers cooperative - or lack thereof 2

In a response to my previous post on Football as a workers cooperative - or lack thereof the always interesting Tim Worstall says, at The Pin Factory blog, But football clubs are already effectively owned by the players. Tim writes,

Football does, as we know, come in a number of different forms and codes. It also comes in a number of different organisational forms. The way that leagues are formed, franchises handed out, how teams are promoted and or relegated. And the effect, at least as I see it, is that large numbers of clubs that are supposedly capitalist in their form are in fact workers' cooperatives. Which makes an argument about why there aren't such workers' cooperatives a touch difficult: for I'm asserting that there are.

and

So far I agree except for the one point: that I think most clubs, European ones at least, are, in effect, workers' cooperatives. I agree entirely that in legal form they are not. There's a few fan cooperatives but no workers' ones. But pure legal form isn't quite, to my mind, the total definition. Of importance is to look at the flows of money. If the money flows as if an organisation were indeed a workers' cooperative then I'd be inclined to call it one even if the legal form wasn't so. And even a brief look at football club accounts shows that almost all of them make a loss almost all of the time. That's certainly not what we would imagine to be a defining feature of a seris of capitalist organisations. Further, the money all ends up in the pockets of the players.

Now why do I disagree with Tim? Why do I say there are no worker cooperatives in sport? The short answer I think is the definition of "ownership". For ownership you don't follow the money. The basic definition of ownership I'm using is that of Grossman and Hart ("The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration", Journal of Political Economy, 94: 691-719) who define the owner of an asset as the person who has residual rights of control over the asset; that is whoever can determine what is done with the asset, how it is used, by whom it is used, when they can use it etc - note that ownership is not defined in terms of income rights. Note, for completeness, that the legal scholar Oliver Wendell Holmes Jr. states that the rights of ownership are

[...] substantially the same as those incident to possession. Within the limits prescribed by policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one. (The Common Law, p193, (1963 edn.))

What is important for our purposes is that ownership is not defined with regard to income.

To see why income is not a feature of the definition of ownership ask yourself what would happen if I have the control rights over a piece of land which is currently being used to grow politicians. The profits from the sale of politicians, say $1000 per year, goes to Tim. He has the income rights. Now let us assume that Eric Crampton, the smart lad that he is, has worked out that as cabbages are smarter than politicians they are worth more. So profitable are cabbages that Eric would be willing to rent the land for $1200 per year. Eric makes this offer to Tim who thinks its great but can not doing anything about it because he does not have control right over the land. (One such right is the right to rent out the land.) I on the other hand can agree to the rental deal as I have the control rights over the land. I get to make the decision as I am the owner. As an aside note that this example shows why ownership and income rights normally go together: income rights give you the incentive to do things, control rights give you the ability to do things. For efficiency reasons you normally want both of these rights to be held together.

Another way to see why economists define ownership in terms of control right is to consider the fact shareholders of a firm have both control rights and income rights. Income rights meaning they get a part of the firm's profits. Now consider a manager at the firm who is on an incentive contract which says he will receive a (small) part of the firm's profits so that his interests are aligned with the shareholders. Both the shareholders and the manger have income rights (claims to part of the firm's profits) but only the shareholders are considered owners. This is because they hold the control rights.

Also in a workers cooperative payments to workers are normally roughly the same. Some worker cooperatives do require all staff to be paid the same wages while others have a limit on the range of pay offered. Such a limit is normally expressed as a ratio of the highest paid worker to the lowest paid, e.g. 3:1 or 4.5:1 or some such ratio. Also an owner's allocation of the "profits" of the firm will be proportionate to that owner's labour input, so for similar labour inputs, owners receive a similar allocation of "profits". Thus overall compensation is commonly roughly equal. Ricketts (1999: 20) explains the situation as ``[f]urther, to minimise antagonism a rough equality in the division of the residual will be necessary and this may conflict with outside opportunities. Those with high transfer earnings reflecting high productivity elsewhere will desert the co-operative. It is for these reasons that control of the firm by its labour force is usually found in circumstances which permit a high degree of common interest." Jossa (2009: 709-10) explains the basic issue in terms of the management of capitalistic versus co-operative firms: ``[g]iven the tendency of cooperatives to distribute their income equitably among all the members, it is difficult to deny that few cooperatives are in a position to pay the high salaries that able managers can expect to earn in capitalistic firms. Whenever a group of people resolve to work as a team-we may add-the member who outperforms the others in initiative and organizational skills will inevitably take the lead. The crux of the matter is that such a person has no incentive to establish a cooperative and share power and earnings with others. He or she will prefer to found a capitalistic firm, where he or she will hold all authority and, if sole owner, appropriate the whole of the surplus [references deleted]"

Clearly equal payment is not the case for football clubs. Some players earn a lot more than others. Given heterogeneity among playing talent there is large variation in earning potential. This acts as a disincentive to the formation of a worker cooperative, with its equality of payment, since those players with the greatest earning potential, the largest outside options, will transfer away from the cooperative to maximise their income stream. Differential payment schemes can occur, especially within partnerships, but they require that the individual employee productivities are sufficiently easy to measure so that a relatively objective method of productivity related pay is possible. Given the team production nature of team sports productivities are difficult, if not impossible, to estimate and thus payment by productivity is not feasible, which argues in favour of equality in payments. Thus a worker-owned team would have few, if any, star players, a handicap in the winner-takes-all world of professional sports.

The question of ownership comes down to who has the control rights and the "who" isn't the players. The money may end up in the pockets of the players but that just makes them very well paid employees, not owners. They don't have the control rights.

Note that if by capitalist Tim means profit making, I make no such assumptions. The owners of the clubs may be trying to maximise profits, or they may be trying to maximise their utility. For my argument it doesn't matter.

Are business schools to blame?

This video is of a presentation by Professor Peter G. Klein at the Mises Circle in Newport Beach, California in November 2009 on "Are Business Schools to Blame?" for the financial crisis.

Football as a workers cooperative - or lack thereof

Everyones third favourite Marxist, Chris Dillow, wants to discuss Football as Financial Economics while the not-so-Marxist Jim Rose asks Why are there so few workers co-ops? Is there a connection here?

For me, yes. Right now I should be working on a revise and resubmit on a paper in which, in its conclusion, I argue why there are no worker cooperatives in football and in fact in professional sport more generally. So for me its "Football as a workers cooperative - or lack thereof".

As Chris highlights football is a great subject for the application of economics, even the theory of the firm. When considering a football team we have a situation where human capital, talent at playing football, is the basis for the "firm" which we may think would favour ownership by the workers. When human capital is the major input into production ownership by, at least some of the workers, is common, e.g. partnerships in law and accounting etc. This was also true of pirates! The interesting thing for professional sports is that ownership by the human capital, i.e. the players, is extremely rare. This is, I would argue, because a worker-owned team would be at a disadvantage relative to a player-as-employee based team.

There are many forms of ownership of football teams, from teams having shareholders and being traded on the stock exchange, to teams being owned by an individual, but one form of ownership not seen (as far as I know -a counter example would be great!) is a labour (in this case, player) owned firm.

Heterogeneity among playing talent and thus earning potential acts as a disincentive to the formation of a worker cooperative, which involves (rough) equality in payment¹, since those players with the greatest earning potential, the largest outside options, will transfer away from the cooperative to maximise their income stream.² Differential payment schemes can occur, especially within partnerships, but they require that the individual employee productivities are sufficiently easy to measure so that a relatively objective method of productivity related pay is possible. Given the team production nature of team sports productivities are difficult, if not impossible, to estimate and thus payment by productivity is not feasible, which argues in favour of equality in payments. Thus a worker-owned team would have few, if any, star players, a handicap in the winner-takes-all world of professional sports.^{3, 4}

Another issue for a cooperative sports team is that while the star players may leave the team too soon, the "average players" may stay too long. The average players will have smaller outside options and thus less incentive to leave but as they are also owners of the team it would be more difficult to get rid of those who are not performing. It would be easier for an employee-based team to remove under performing players as they are not owners of the firm.

Also to the degree that exit barriers are entry barriers a worker-owned organisation is at a disadvantage. Such an organisation could hinder rapid transfers between clubs. Problems with transfers could arise, for example, if the terms of the exit have to be negotiated with the remaining player-owners at the time of exit. Or the remaining owners may be unable or unwilling to buy out the exiting player - under a "right of first refusal" or "right of first offer" scheme - or any of them could veto an incoming replacement player-owner. Also there is the question of the value of a player's interest in the team as well as the question of the time period over which an agreed upon value would be paid. These costs make exit more difficult than it would be under an employment contract and thus tend to lock-in the player/owner to the team. Such lock-in is a disincentive to forming, or joining, a labour-owned firm, especially for the best players.⁵ Many of these problems can, to a degree, be contracted around but this imposes additional negotiation costs at the time of entry into the team, which again is a disincentive to forming an worker-owned team. Utilising a worker-owned organisation results in additional haggling costs, either ex ante or ex post, relative to a player-as-employee team.

Put simply, an employee can leave a organisation more quickly and easily than an owner and in the case of professional sports, transfers between teams, or at least a credible threat to transfer, are particularly valuable to the best players. Therefore a player-owned team would be at a competitive disadvantage compared to teams comprised of employee players.

What this suggests is that a labour-owned, human-capital only, firm with heterogeneous human capital, as in the football example, is likely to be unstable and thus a long lasting human-capital only firm which is labour owned will consist of homogeneous human capital, e.g. the pirate example. Thus the "types" of human capital in a firm is an important determinant of the organisational form the firm will take. This doesn’t mean you cannot have a firm which involves heterogeneous human capital but such a firm will require some “glue”, in the form of non-human capital of some kind, to remain viable. Given the importance of this glue to the firm, ownership of the firm by the owner of the non-human capital is likely. Hart (1995: 56) notes that such non-human capital could be as simple as “[ ... ] patents, client lists, files, existing contracts or the firm's name or reputation.” Or it could be a good location for carrying out the firm's business or a contract preventing the non-owner from working for competitors, etc

So overall we get two basic organisational forms for human-capital based firms: 1) a homogenous human capital firm which could be a labour owned firm and 2) a heterogeneous human capital firm which is owned by the owner of the "glue" that keeps the human capital in place.

Notes:

(1) Some worker cooperatives do require all staff to be paid the same wages while others have a limit on the range of pay offered. Such limit is normally expressed as a ratio of the highest paid worker to the lowest paid, e.g. 3:1 or 4.5:1. Also an owner's allocation of the "profits" of the firm will be proportionate to that owner's labour input, so for similar labour inputs, owners receive a similar allocation of  "profits". Thus overall compensation is commonly roughly equal.

(2) Ricketts (1999: 20) explains the problem as ``[f]urther, to minimise antagonism a rough equality in the division of the residual will be necessary and this may conflict with outside opportunities. Those with high transfer earnings reflecting high productivity elsewhere will desert the co-operative. It is for these reasons that control of the firm by its labour force is usually found in circumstances which permit a high degree of common interest." Jossa (2009: 709-10) explains the basic issue in terms of the management of capitalistic versus co-operative firms: ``[g]iven the tendency of cooperatives to distribute their income equitably among all the members, it is difficult to deny that few cooperatives are in a position to pay the high salaries that able managers can expect to earn in capitalistic firms. Whenever a group of people resolve to work as a team-we may add-the member who outperforms the others in initiative and organizational skills will inevitably take the lead. The crux of the matter is that such a person has no incentive to establish a cooperative and share power and earnings with others. He or she will prefer to found a capitalistic firm, where he or she will hold all authority and, if sole owner, appropriate the whole of the surplus [references deleted]

(3) Scully (2008) notes that there is a relationship between a team's finances and a team's success since better financed teams can buy the best players: ``[h]ow good a professional sports team is depends, of course, on the quality of its players. Because teams compete for better players by offering higher salaries, the quality of a team depends largely on how strong it is financially. The financially stronger teams will, on average, be the better teams."

(4) One way around he problem is to pay all players the amount necessary to retain the best player. But this implies paying most players more than their productivities and has obvious implications for the teams budget constraint. This would also aggravate the problem of non-performing average players-owners not wanting to leave the team.

(5) There are also problems such as those which could arise between the manager or coach and the player/owners in their roles as players and as owners. In addition to this there is the problem that if the players provide any financial capital the team needs themselves they risk being badly underdiversified. If the team goes bankrupt they lose not only their job but also (at least part of) their savings. Given the short time span that a player is likely to be a member of the team there is the issue of the return on any capital the player has invested in the team. To ensure a suitable post playing standard of living players are likely to place an emphasis on high returns on their investments.


Refs.:

• Hart, Oliver D. (1995).  Firms, Contracts, and Financial Structure, Oxford: Oxford University Press.
• Jossa, Bruno (2009). `Alchian and Demsetz's Critique of the Cooperative Firm Thirty-Seven Years After', Metroeconomica, 60(4) November: 686-714.
• Ricketts, Martin (1999).  The Many Ways of Governance: Perspectives on the control of the firm, The Social Affairs Unit, London.
• Scully, Gerald W. (2008). `Sports'. In David R. Henderson (ed.), Concise Encyclopedia of Economics, 2nd edn., available from http://www.econlib.org/library/Enc/Sports.html

EconTalk this week

John Christy, Distinguished Professor of Atmospheric Science and Director of the Earth System Science Center at the University of Alabama in Huntsville, and Kerry Emanuel, Cecil & Ida Green Professor of Atmospheric Science, Massachusetts Institute of Technology, talk with EconTalk host Russ Roberts about climate change. Topics discussed include what we know and don't know about global warming, trends in extreme weather such as hurricanes, rising sea level, the likely change in temperature in the next hundred years. Both scientists also give their perspective on what policies might be put in place to reduce risk from climate change. This episode was recorded before a live audience at the College of Business Administration at the University of Alabama in Huntsville.

A direct link to the audio is available here.

Another example of the law of unintended consequences

One of the more obvious problems with economic regulation is the law of unintended consequences. You can end up with results that are the opposite of those intended. What happens when product liability is strengthen in a world where production is vertical and crosses jurisdictional lines? If goods are produced by an upstream national or international firm and improved or distributed by local firms downstream does a strengthening of product liability have unintended consequences on product sales and consumer safety? This question is asked in a new NBER working paper, Unintended Consequences of Products Liability: Evidence from the Pharmaceutical Market by Eric Helland, Darius Lakdawalla, Anup Malani and Seth A. Seabury. The paper's abstract reads,

In a complex economy, production is vertical and crosses jurisdictional lines. Goods are often produced by an upstream national or global firm and improved or distributed by local firms downstream. In this context, heightened products liability may have unintended consequences on product sales and consumer safety. Conventional wisdom holds that an increase in tort liability on the upstream firm will cause that firm to (weakly) increase investment in safety or disclosure. However, this may fail in the real-world, where upstream firms operate in many jurisdictions, so that the actions of a single jurisdiction may not be significant enough to influence upstream firm behavior. Even worse, if liability is shared between upstream and downstream firms, higher upstream liability may mechanically decrease liability of the downstream distributor and encourage more reckless behavior by the downstream firm. In this manner, higher upstream liability may perversely increase the sales of a risky good. We demonstrate this phenomenon in the context of the pharmaceutical market. We show that higher products liability on upstream pharmaceutical manufacturers reduces the liability faced by downstream doctors, who respond by prescribing more drugs than before.

So when liability is increased on the upstream firm we can see greater risks being taken by the downstream firm and an increase in the sales of a risky good, which it seems fair to assume is not the intended outcome of an increase in product liability.

Selling a kidney: would the option necessarily be beneficial?

This is the question asked by Timothy Taylor at this blog Conversable Economist. Important here is the claim, popular among economists, that offering people an additional option--in this case to sell a kidney--must make the people better off, because they don't need to choose the option, but if they wish to do so, they can. That is to say, the basic idea that trade is voluntary.

Taylor is responding to an argument by Simon Rippon against this idea,

[...] that when an option is available, at least some people will find themselves under social pressure to select that option, or will be held responsible for failing to choose it. "For example, imagine a cashier at a rural filling station that is potentially vulnerable to an overnight robbery. It may be better for the cashier to have no key to the safe (and to have a prominent sign displaying that information) than for the cashier to have the key which gives him the option to open it. Possession of the key would make the cashier vulnerable to threats, and the filling station worth robbing."If selling a kidney was a legal option, Rippon argues:

"This means that even if you have no possessions to sell and cannot find a job, nobody can reasonably criticise you for, say, failing to sell a kidney to pay your rent. If a free market in organs was permitted and became widespread, then it is reasonable to assume that your organs would soon enough become economic resources like any other, in the context of the market. Selling your organs would become something that is simply expected of you as and when financial need arises. ...

We should ask questions such as the following: Would those in poverty be eligible for bankruptcy protection, or for public assistance, if they have an organ that they choose not to sell? Could they be legally forced to sell an organ to pay taxes, paternity bills or rent? How would society view someone who asks for charitable assistance to meet her basic needs, if she could easily sell a healthy ‘excess’ organ to meet them? ... Wherever there is great value in not being put under social or legal pressure to sell something as a result of economic forces, we should think carefully about whether it is right to permit a market and to thereby impose the option on everyone to sell it."

These are interesting arguments but do they not apply to any number of things we already allow to be traded, eg in the US blood, tissues, sperm and eggs? Do these bad things happen in these other markets? If not, why are kidneys different? If so how are they dealt with in these other markets? Surely the question is one of balancing the costs and benefits of allowing trade, not just pointing to a few possible bad outcomes and banning trade on that basis.

Taylor makes two points in the conclusion to his post,

First, at present, the main source of kidney donations is people who die unexpectedly, with a few voluntary donors. In the meantime, thousands of Americans die every year awaiting a kidney transplant. I can easily imagine that a substantial group of healthy people might not be willing to donate a kidney for free, but would be willing to do so for substantial compensation, and encouraging transplants from healthy donors could save thousands of lives. Second, it troubles me that we often expect the donors of kidneys and blood to act out of sheer altruism, but we have no such expectation of any of the other participants in an organ transplant, like the health care providers or the hospital.

The puzzling pervasiveness of dysfunctional banking

In this interesting audio from VoxEU.org Charles Calomiris talks to Romesh Vaitilingam about Calomiris's recent book, co-authored with Stephen Haber, ‘Fragile by Design: The Political Origins of Banking Crises and Scarce Credit’. They discuss how politics inevitably intrudes into bank regulation and why banking systems are unstable in some countries but not in others. Calomiris also presents his analysis of the political and banking history of the UK and how the well-being of banking systems depends on complex bargains and coalitions between politicians, bankers and other stakeholders.

Open in a pop-up window.

It appears Alfred Marshall is not guilty after all

One of the strangest things about basic microeconomics is that we write demand curves in the form,
q=D(p) that is, quantity demanded is a function of price,

but we draw them in the form,

The diagram is wrong, as any mathematician will tell you, since given the way the function is written, quantity demanded should be on the vertical axis.

This oddity I always thought was due to Alfred Marshall, which I found a bit odd since Marshall was trained as a mathematician and thus would know perfectly well how to graph a function.

But now I have, belatedly, discovered that Marshall may not be to blame for starting this habit of drawing after all.

In an essay "The influence of German economics on the work of Menger and Marshall" Eric W. Streissler writes,

The "peculiar curve" is Rau's demand curve, which is published in his later (not earlier) editions-to be more precise, from the fourth edition of 1841 onwards. Cournot has presented the first demand curve in the history of economics in 1838; Rau's was the second, only three years later. But Cournot posits his curve without explanation, i.e., quasi-axiomatically, Rau presents a derivation of it, the typical German derivation: individuals differ in their preferences or, more precisely, in their willingness and ability to pay. (His curve assumes each individual buying one unit of a commodity, the typical case for reservation analysis and thus for "price bounds.") But what is more interesting in relation to Marshall: Rau's demand curve alone is drawn exactly like Marshall's, with price on the vertical axis; Cournot's (or Mangoldt's) demand curves are drawn the other way round with prices measured horizontally.(Emphasis added)

The Rau mentioned is Karl Heinrich Rau and the book is Grundsatze der Volkswirthschaftslehre, 1st ed. 1826, 4th ed. 1841.

Ref.:

• Streissler, Eric W. (1990). 'The influence of German economics on the work of Menger and Marshall'. In Bruce J. Caldwell (ed.), Carl Menger and his legacy in economics, Durham: Duke University Press.

Benjamin Powell book panel: Out of Poverty: Sweatshops in the Global Economy

The video below is of a panel discussion hosted by the F. A. Hayek Program for Advanced Study in Philosophy, Politics and Economics at the Mercatus Center on Benjamin Powell's new book, Out of Poverty: Sweatshops in the Global Economy. The panel is made up of its chair, Peter Boettke, and commenters, Matthew Yglesias and Megan McArdle.

Powell's book provides a defence of third-world sweatshops. It explains how these sweatshops provide the best available opportunity to workers and how they play an important role in the process of development that eventually leads to better wages and working conditions.


A direct link to the video is available here.

EconTalk this week

Jeffrey Sachs of Columbia University and the Millennium Villages Project talks with EconTalk host about poverty in Africa and the efforts of the Millennium Villages Project to fight hunger, disease, and illiteracy. The project tries to achieve the Millennium Development Goals in a set of poor African villages using an integrated strategy fighting hunger, poverty, and disease. In this lively conversation, Sachs argues that this approach has achieved great success so far and responds to criticisms from development economists and Nina Munk in her recent EconTalk interview.

Suicide and property rights in India

There is an interesting but troubling result in a new NBER working paper on Suicide and Property Rights in India by Siwan Anderson and Garance Genicot. The abstract reads,

This paper studies the impact of female property rights on male and female suicide rates in India. Using state level variation in legal changes to women's property rights, we show that better property rights for women are associated with a decrease in the difference between female and male suicide rates, but an increase in both male and female suicides. We conjecture that increasing female property rights increased conflict within household and this increased conflict resulted in more suicides among both men and women in India. Using individual level data on domestic violence we find evidence that increased property rights for women did increase the incidence of wife beating in India. A model of intra-household bargaining with asymmetric information and costly conflict is consistent with these findings.

Increasing property rights for women is a good thing but increasing the suicide rate for both men and women is the bad thing. An increase in domestic violence is also, clearly, a bad thing. How to deal with the trade-offs here is not obvious. As Anderson and Genicot write,

To be sure, this paper is not suggesting that improving female property rights is undesirable. Until recently, women have been excluded from land rights in many societies and their ability to inherit property has largely been restricted. A growing body of empirical evidence shows that improving women’s asset ownership, relative income, or ability to control land impacts the intra-household allocation of resources towards children (among others Lundberg et al. 1997, Duflo and Udry 2004, Bobonis 2009). That improvements in women’s relative position in the household can be desirable, not only on equity, but also on efficiency grounds is a frequent justification for policies targeting women, such as microcredit and conditional cash transfers. Moreover, there is evidence that making inheritance laws more egalitarian between sons and daughters has had desirable consequences in India. For example, Roy (2010) and Deininger, Goyal, and Nagarajan (2013) show that the legal changes to women’s property rights that we consider here increased daughters’ likelihood to inherit land, women’s age at marriage and the educational attainment of daughters.

Our model predicts that women’s expected welfare rises due to increased female property rights. When wives contribute a greater proportion of the total family wealth, they do no longer accept any allocation offered by their husbands. Women expect, and are more likely to get, a more equitable share of consumption. However, as a consequence of these higher expectations, conflict within the household can rise and result in higher suicide rates for both men and women.

When considering the policy implications of their results Anderson and Genicot note that they are certainly not recommending that inheritance rights be kept unequal between men and women. Clearly their paper highlights some of the negative implications of women empowerment but they also point out that they do expect that women are made ex-ante better off by more equitable property rights. Anderson and Genicot suggest that other policies should be enacted to help deal with the negative aspects of the increase in female property rights. They suggest that policies that decrease the cost of conflict by easing separations for example can help. Referring to US evidence Anderson and Genicot point out that that states that adopted more liberal laws permitting "unilateral divorce" reported a 8 to 16 percent decline in female suicide and roughly a 30 percent decline in domestic violence for both men and women, and a 10 percent decline in females murdered by their partners. Anderson and Genicot note that in India, the Marriage Laws (Amendment) Bill in 2012 made divorce proceedings for unhappy couples easier and women-friendly, but stigma as well as norms in terms of child custody and alimony still make separation extremely hard in practise.

Armen Alchian, behavioural economics and the firm

There is a new working paper out by Geoffrey A. Manne and Todd J. Zywicki on Uncertainty, Evolution, and Behavioral Economic Theory. The abstract for the paper is,

Armen Alchian was one of the great economists of the twentieth century, and his 1950 paper, Uncertainty, Evolution, and Economic Theory, one of the most important contributions to the economic literature. Anticipating modern behavioral economics, Alchian explains that firms most decidedly do not – cannot – actually operate as rational profit maximizers. Nevertheless, economists can make useful predictions even in a world of uncertainty and incomplete information because market environments “adopt” those firms that best fit their environments, permitting them to be modeled as if they behave rationally. This insight has important and under-appreciated implications for the debate today over the usefulness of behavioral economics.

Alchian’s explanation of the role of market forces in shaping outcomes poses a serious challenge to behavioralists’ claims. While Alchian’s (and our) conclusions are borne out of the same realization that uncertainty pervades economic decision making that preoccupies the behavioralists, his work suggests a very different conclusion: The evolutionary pressures identified by Alchian may have led to seemingly inefficient firms and other institutions that, in actuality, constrain the effects of bias by market participants. In other words, the very “defects” of profitable firms — from conservatism to excessive bureaucracy to agency costs — may actually support their relative efficiency and effectiveness, even if they appear problematic, costly or inefficient. In fact, their very persistence argues strongly for that conclusion.

In Part I, we offer a short summary of Uncertainty, Evolution, and Economic Theory. In Part II, we explain the implications of Alchian’s paper for behavioral economics. Part III looks at some findings from experimental economics, and the banking industry in particular, to demonstrate how biases are constrained by firms and other institutions – in ways often misunderstood by behavioral economists. In Part IV, we consider what Alchian’s model means for government regulation (with special emphasis on antitrust and consumer protection regulation).

Some behavioural economists have argued that models which assume rationality and self-interest on behalf of market participants are of little value when it comes to predicting future behaviour. The Manne and Zywicki paper argues against this conclusion. Manne and Zywicki point out that Armen Alchian's model, detailed in Uncertainty, Evolution, and Economic Theory, helps to explain why this is so: evolutionary pressures of the marketplace select those most fit for survival under given conditions, which often means those best at constraining the behavioural biases behavioural economics love so much. Manne and Zywicki also note that this implies that seemingly inefficient market and firm structures may exist to ameliorate these biases and thus confer unappreciated efficiency. They then argue that with this point in mind, regulators should be wary of making the leap from diagnosing biases in a laboratory to intervening in the marketplace.

Government size and economic growth

The theoretical literature on economic growth offers support for both positive and negative effects of government size on economic growth. There are core areas of government which are said to help growth - e.g. provision of public goods such as infrastructure, rule of law, and protection of property rights - while there are also arguments outlining detrimental effects for growth arsing from the size of government. These occur via mechanisms such as the distortionary effects of high taxes and public borrowing, diminishing returns to public capital, rent-seeking activities and bureaucratic inefficiencies. Such negative effects are said to become more prevalent as the size of government increases.

Such ideas have been formalised in the endogenous growth literature as a non-monotonic relationship between growth and the increasingly distortionary effect of the rising tax rates which are required to fund ever larger government expenditure. In one such model, due to Robert Barro, when government is relatively small growth rises with increases in productive government services, as the positive effects of more public goods dominates, but beyond some critical point the disincentive effects of higher taxes on savings and investment reduce the growth rate. If the non-linear hypothesis is valid and the effect of government spending on long-run economic growth does vary with its size this would offer clearer guidelines on the appropriate fiscal policy prescription for a country of a particular government size. Furthermore, implicit in the non-linear hypothesis is the existence of some optimal size of government which would maximise economic growth.

There is a new paper - The Effect of Government Spending on Economic Growth: Testing the Non-Linear Hypothesis by Tamoya Christie - in the Bulletin of Economic Research which examines the relationship between government size and long-run economic growth. The paper explicitly accounts for the likelihood of a non-linear effect. It contributes to the literature in a number of ways.

First, in terms of methodology, the paper makes improvements to previous empirical studies by applying threshold analysis (Hansen, 2000) to a panel of countries. This technique has been widely used as the preferred method to identify threshold effects (Khan and Senhadji, 2001; Adam and Bevan, 2005; Chen and Lee, 2005; Falvey et al., 2006; Haque and Kneller, 2009), particularly when the variable of interest is observable, but the position of the threshold is not known. The methodology uses a sample-splitting framework and follows an objective strategy for identifying and testing changes in the slope. One important advantage of threshold analysis is that it avoids the ad hoc, subjective pre-selection of threshold values – a major critique of previous studies. In addition, the generalized method of moments (GMM) dynamic panel technique is applied to address potential endogeneity of government expenditure, which is measured as a share of GDP. Second, with respect to data, the study employs an updated dataset with a broad cross-section of countries over a long time span. Pulling data from the IMF's Government Finance Statistics (GFS), the sample contains 136 countries over the period 1971–2005. Most important, this data source offers a more comprehensive measure of government size by using total government expenditure (excluding interest payments) as opposed to government consumption expenditure as the proxy. The consumption measure, though widely used in empirical studies, does not include public capital formation and so cannot fully capture the productivity-enhancing effects of government services. Moreover, the GFS data contain sectoral decompositions of government spending, which facilitates isolating productive elements of government spending from the total.

Likely the most interesting result of the paper is that it finds evidence in support of Barro's non-linear hypothesis. For total government spending above 33 percent of GDP, there is a strong negative effect on growth. However for governments of a size less than this level the negative effects are much smaller and even becomes positive when productive government spending is singled out. The paper's findings also suggest that the level of economic development and the quality of government present additional sources of potential non-linearities.

Incentives matter: colonisation file

From A Licence to Trade: A History of the English Chartered Companies by Percival Griffiths, London: Ernest Benn Limited, 1974, p.215.

It is interesting to note that the two Companies organized initially by philanthropists rather than businessmen-the Sierra Leone Company and the New Zealand Company-were badly managed and were a financial failure though they served a useful purpose. The other two companies were efficiently run on business methods.

Winston Peters attacks property rights ...... again

From The Press,

Restoration of the Christ Church Cathedral could be a condition of any post-election coalition deal, New Zealand First leader Winston Peters says.

But Winston you don't own the Cathedral. The decision about restoration of it is up to its owners, the Anglican Church, not you. The control rights over the Cathedral are in the hands of the Anglican Church, that's what ownership means.

Peters, who was visiting Christchurch yesterday, called for government intervention and funding for the restoration of the earthquake-damaged landmark.

There is not basis for government intervention. There is no "market failure" requiring government intervention here, its not a public good, there are no externality issues. In short there is no problem that requires government intervention to "fix".

And Winston why should the New Zealand taxpayer have their money wasted on a vote buying scheme for you? The government has better things to do with taxpayer money than buy you a few votes from the anti-property rights, anti-demolition crowd.

The Press continues,

I am seriously committed to this project. It means much more than just the cathedral."

Peters was "very, very confident" a deal could be reached.

Well no. The Anglican Church has made its decision and as they are the owners it is their decision to make, not yours.

Later in the article it says,

Peters said the Government should intervene to restore the cathedral because it was such a significant building.

No, what the government should be doing is supporting property rights and staying out of the whole issues as its nothing to do with them.

This is a huge icon building and critical as a statement of central government belief in the city. We should be intervening because it can be restored and it should be restored.

Who's "we" Batman? "We" should just let the owners of the building decide what they want to do with their property.

The article goes on to quote Peters as saying,

"[The] Government can find all sorts of money for all sorts of projects, including $45 million for the Novopay debacle. This present Government is prepared to put $42m a year into Auckland casino. The cathedral would be less money for far less time."

So the fact that a government does one really stupid thing means it should do lots of really stupid things! Great logic.

Still later the article notes that an

Anglican church spokesman Jayson Rhodes said Peters' comments suggested "the cathedral be taken off the Anglican church".

Exactly! Peters wants to usurp the Church's property rights over the Cathedral.

A thing of very great practical utility

In his 1902 Presidential Address to Section F of the British Association Edwin Cannan argued that economic theory is "a thing of very great practical utility". But what did he mean? Utility to whom, doing what? He said that

I do not mean to argue that a knowledge of economic theory will enable a man to conduct his private business with success. [...] But economic theory does not tell a man the exact moment to leave off the production of one thing and begin that of another; it does not tell him the precise moment when prices have reached the bottom or the top. It is, perhaps, rather likely to make him expect the inevitable to arrive far sooner than it actually does, and to make him underrate, not the foresight, but the want of foresight of the rest of the world.

The practical usefulness of economic theory is not in private business but in politics, and I for one regret the disappearance of the old name " political economy," in which that truth was recognised.

Such views would leave Cannon very confused and depressed if he was to return to New Zealand today. For a start given that economic theory is of little use to business he would be confused as to why most economics departments in this country are in business schools or the like. I'm sure he would expect them to be in with the other social sciences as it is with the LSE at which he taught for 30 years.

As to the usefulness of economics in politics I feel he would be depressed by the use of economics by politicians. Or more correctly the misuse of economics in politics.The relationship between economics and politics seems to amount to little more than the simple fact that good economics is bad politics. No matter what your favoured policies are they will be unpopular with enough voters to make sure they are never implemented. Which raises the question if all "good economic policies" are unpopular can we ever get anyone's version of good policy implemented? Does politics gut all economic policy, no matter whether "left" or "right", of all serious content? Are we doomed by the populist nature of politics to get crap economic policy no matter how we define good policy?

Also given that we are, unfortunately, in an election year, we need to take notice of the fact that whoever wins the next election the ability for them to be able to comprise on policies just to get a coalition together so that they can govern may be good politics, but it can also lead to to some very bad economics. Coordination of different areas of economic policy is important if they are not to end up working at odds with each other. Which means trading off one aspect of economic policy against another leads to bad policy. Unfortunately bad politics always beats good economics.Which I'm sure what not what Cannan would have hoped for.

Who didn't see this coming?

From the Irish Times