Two minutes on the minimum wage

Professor David Neumark a very quick summary of the research into the effects of minimum wage policy.


To read Professor Neumark's 2018 Adam Smith Lecture on “How policymakers should think about the minimum wage” see here. Well worth the read.

The gender earnings gap in the gig economy

A new NBER working paper on the gender wage gap.

The Gender Earnings Gap in the Gig Economy: Evidence from over a Million Rideshare Drivers
by Cody Cook, Rebecca Diamond, Jonathan Hall, John A. List, Paul Oyer

Abstract:

The growth of the "gig" economy generates worker flexibility that, some have speculated, will favor women. We explore this by examining labor supply choices and earnings among more than a million rideshare drivers on Uber in the U.S. We document a roughly 7% gender earnings gap amongst drivers. We completely explain this gap and show that it can be entirely attributed to three factors: experience on the platform (learning-by-doing), preferences over where to work (driven largely by where drivers live and, to a lesser extent, safety), and preferences for driving speed. We do not find that men and women are differentially affected by a taste for specific hours, a return to within-week work intensity, or customer discrimination. Our results suggest that there is no reason to expect the "gig" economy to close gender differences. Even in the absence of discrimination and in flexible labor markets, women's relatively high opportunity cost of non-paid-work time and gender-based differences in preferences and constraints can sustain a gender pay gap.

Mike Munger interview about the sharing economy

From Free Thoughts comes this audio of an interview with Mike Munger about Tomorrow 3.0: Uberizing The Economy.

Mike Munger joins Aaron Owell and Trevor Burrus to discuss his new book Tomorrow 3.0: Transaction Costs and the Sharing Economy. They discuss the future of the sharing economy, the role of the middle man, and the fundamental economic concept of transaction costsc.

Firm boundaries and delegation

Interesting new NBER working paper on the relationship between the boundaries of the firm and delegation within the firm.

Come Together: Firm Boundaries and Delegation
Laura Alfaro, Nicholas Bloom, Paola Conconi, Harald Fadinger, Patrick Legros, Andrew Newman, Raffaella Sadun, John Van Reenen
NBER Working Paper No. 24603

Little is known theoretically, and even less empirically, about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which firms choose which suppliers to integrate and whether to delegate decisions to integrated suppliers. We test the predictions of the model using a novel dataset that combines measures of vertical integration and delegation for a large set of firms from many countries and industries. In line with the model's predictions, we obtain three main results: (i) integration and delegation co-vary positively; (ii) producers are more likely to integrate suppliers in input sectors with greater productivity variation (as the option value of integration is greater); and (iii) producers are more likely to integrate suppliers of more important inputs and to delegate decisions to them.

The world really has gone mad!!

Where is Richard Dawkins when you need him?!!

"Darwin's Plagiarisms: The Greatest Fraud in History: Introduction to the Inheritance Model of Creation and the New Evolution Theory"

DEIRDRE ROSE, The Ministry of Second Timothy, Inc.

This is a comparative study which evaluates two theories: The theory of evolution and the theory of creation. The purpose of the study is to facilitate the development of a new branch of science. The status of these two theories are as such: evolution is treated as fact, and creation is not considered science. This paper turns everything on its head. Evolution and creation are handled in a completely new and different way. The human life cycle is redefined, and the order of life processes rearranged. Evolution is now defined as the end of the biological process, not the beginning; and there is a place for creation in this new model using a conceptual metaphor taken from a software engineering paradigm known as object-oriented design. In the process of comparing these two theories, the author unveils the greatest fraud in history -- great because it has gone undetected for two centuries and is still being perpetuated today.

I wonder what biology journal will publish this?

George Schultz interview

From the Jamie Weinstein Show comes this interview with economist and former Secretary of State George P. Schultz.

Episode 58: George P. Schultz

In the latest episode of The Jamie Weinstein Show, from the Hoover Institution at Stanford University, the 97-year-old former Secretary of State George Schultz opens up on the prospects for peace on the Korean Peninsula, what made President Ronald Reagan a great leader, his career, and much more.

46 copies sold last year.

Today I received a note from my publisher telling me that The Theory of the Firm: An overview of the economic mainstream sold a total of 33 hardback copies and 13 e-book copies in 2017.

Not yet a millionaire, but we are getting there.

Many thanks to the 46 of you out there.

As for the rest of you ...... shame! Shame!!

"A Brief Prehistory of the Theory of the Firm" has been published .......

I think!

I say "I think" because its not like my publisher bothered to tell me the book has been published or anything, but because I just noticed that on their website they are giving May 8, 2018, as the publication date.

So I want you all to start buying!

I've said it before, and I'll say it again,  its a great book, well worth buying for wives, husbands, girlfriends, boyfriends, mistresses, mothers-in-law, toy-boys, family, friends, pets, total strangers you meet in the street or any combinations of the above. Its great for Christmas, holiday reading, birthdays, Mother's day, Father's day, any day.

Honestly, I don't really care why you buy it, what's important is that you do buy it, preferably multiple copies, often!

You can buy here, here, here, here and here.

"The Value of Rationally Reconstructing Buchanan's Work" with Richard Wagner

On this episode of the Hayek Program Podcast, Jayme Lemke interviews Richard Wagner on James Buchanan's life and legacy, his experience studying with James Buchanan, and future directions in Virginia political economy.

Cover design for "A brief prehistory of the theory of the firm"

With a bit of luck it will be out in June, the Routledge webpage is now saying 15 May, but it can be pre-ordered from the publisher right now. Also available for pre-order here and here.

Thomas Sowell on his new book "Discrimination and Disparities"

Peter Robinson at Uncommon Knowledge of the Hoover Institution interviews Thomas Sowell about his new book Discrimination and Disparities.

Rich or poor, most people agree that wealth disparities exist. Thomas Sowell discusses the origins and impacts of those wealth disparities in his new book, Discrimination and Disparities in this episode of Uncommon Knowledge.

Sowell explains his issues with the relatively new legal standard of “disparate impact” and how it disregards the American legal principle of “burden of proof.” Sowell and Robinson discuss how economic outcomes vary greatly across individuals and groups and that concepts like “disparate impact” fail to take into account these variations.

They chat about the impact of nuclear families on the IQs of individuals, as studies have not only shown that children raised by two parents tend to have higher levels of intelligence but also that first-born and single children have even higher intelligence levels than those of younger siblings, indicating that the time and attention given by parents to their children greatly impacts the child’s future more than factors like race, environment, or genetics. Sowell talks about his book in which he wrote extensively about National Merit Scholarship finalists who more often than not were the first-born or only child in a family.

Sowell and Robinson go on to discuss historical instances of discrimination and how those instances affected economic and social issues within families, including discrimination created by housing laws in the Bay Area. They discuss unemployment rates, violence, the welfare state in regards to African American communities, and more.

Adam Smith's discovery of trade gravity

From the latest (Vol. 32 No. 2 Spring 2018) issue of the Journal of Economic Perspectives.

Retrospectives: Adam Smith's Discovery of Trade Gravity
Bruce Elmslie

The gravity equation is a current workhorse of empirical trade theory. It is generally acknowledged that this theory, which relates the extent of trade between countries to their respective sizes, distances, and relative trade barriers, was first developed by Jan Tinbergen in 1962. Acceptance of the gravity model as part of the discipline's core was limited by its scant theoretical foundation for the first 40 years of its existence. This paper finds that a theory of trade gravity was first developed by Adam Smith in The Wealth of Nations. Moreover, it is shown that Smith's statement of a proportional relation between economic size and distance came about as an application of his general theory of differential capital productivity in different economic sectors, and his elaboration of a theory of the gains from trade originated by David Hume. It is further shown that Smith had an explanation of the size of border affects in trade volumes, and a gravity theory of trade restrictions.

Something else for which Smith was ahead of his time.

Does fractional reserve banking endanger the economy? A debate

On April 16, 2018, two free market economists debated a topic that has long divided libertarians. Fractional reserve banking refers to banks' standard practice of keeping only a portion of their depositors' money on hand and loaning out the rest.

In The Mystery of Banking (1983), the anarcho-capitalist economist Murray Rothbard called fractional reserve banking "a shell game, a Ponzi scheme, a fraud in which fake warehouse receipts are issued and circulate as equivalent to the cash supposedly represented by the receipts." Other libertarian economists, such as Larry White and Steve Horwitz, have argued that the practice is perfectly defensible.

At The Soho Forum, a debate series in New York City that is sponsored by the Reason Foundation, Robert Murphy debated George Selgin over the following resolution: "Fractional Reserve banking poses a threat to the stability of market economies."

Murphy, a research assistant professor with the Free Market Institute at Texas Tech University, argued for the affirmative. He has a Ph.D. in economics from NYU has addiliations with the Institute for Energy Research, the Mises Institute, the Fraser Institute, and the Independent Institute. He has authored hundreds of articles and several books explaining economics to the layperson, including Choice: Cooperation, Enterprise, and Human Action.

Selgin, who opposed the resolution, is a senior fellow and director of the Center for Monetary and Financial Alternatives at the Cato Institute and professor emeritus of economics at the University of Georgia. His research covers a broad range of topics within the field of monetary economics, including monetary history, macroeconomic theory, and the history of monetary thought. He is the author of The Theory of Free Banking, Bank Deregulation and Monetary Order, Less Than Zero: The Case for a Falling Price Level in a Growing Economy, and most recently Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage.

The Soho Forum runs Oxford-style debates, in which the audience votes on the resolution at the beginning and end of the event. The side that gains more ground is victorious. ​In this case, Selgin won by convincing 14 percent of the audience to switch over to his side.

Lightships and public goods

From the Economics Detective comes this interview with Vincent Geloso in which he discusses his work with Rosolino Candela on lightships and their importance in economics.

The abstract of their paper reads:

What role does government play in the provision of public goods? Economists have used the lighthouse as an empirical example to illustrate the extent to which the private provision of public goods is possible. This inquiry, however, has neglected the private provision of lightships. We investigate the private operation of the world’s first modern lightship, established in 1731 on the banks of the Thames estuary going in and out of London. First, we show that the Nore lightship was able to operate profitably and without government enforcement in the collection of payment for lighting services. Second, we show how private efforts to build lightships were crowded out by Trinity House, the public authority responsible for the maintaining and establishing lighthouses in England and Wales. By including lightships into the broader lighthouse market, we argue that the provision of lighting services exemplifies not a market failure, but a government failure.

Economists who changed the world

In this audio from the BBC History Extra magazine Linda Yueh discusses her new book, The Great Economists, which explores the work and legacy of some of history’s greatest economic thinkers, and reveals some of the lessons they might offer for us today


An interesting podcast, even if I'm not sure I would entirely agree with some of Yueh's discussion and interpretation of the writers she considers. On the other hand Tyler Cowen is quoted as saying, about the book, "The best place to start to learn about the very greatest economists of all time".

On C-span Chris Coyne discusses police militarisation and state surveillance

Chris Coyne discussed his book, Tyranny Comes Home: The Domestic Fate of U.S. Militarism on C-span.

Thomas Sowell and Samuel Bowles on Marx

From Thomas Sowell's book "On Classical Economics":

Not everybody judges Marx quite so harshly. In a recent article on "Marx and modern microeconomics", at VoxEU.org, Samuel Bowles argues that Marx has, in fact, contributed something significate to modern microeconomics,

Few economists doubt that Marx flunked economics, a judgement mostly based on his labour theory of value. But this column argues that Marx’s representation of the power relationship between capital and labour in the firm is an essential insight for understanding and improving modern capitalism. Indeed, this insight is incorporated into standard principal–agent models of labour and credit markets.

If the rejection of Marx is primarily about the labour theory of value then would we not also have to flunk Adam Smith? We don't so there must be more than this going on.

Bowles goes on to say,

But Marx chose to study a more challenging question: how could the domination of labour by capital take place in a private, perfectly competitive, economy governed by a liberal state? His answer was based on what seems a strikingly modern principal–agent representation of the employer–employee relationship, arising from a conflict of interest over the amount of labour effort performed that could be resolved in an enforceable contract.

In a sense, Bowles is wrong about the perfectly competitive model. Since this model is one of zero transaction costs there are no firms and the production environment is one without principal-agent problems. Firms and principal-agent issues only arise in a world of positive transaction costs.

Bowles continues by saying,

The final step in Marx’s explanation of domination in a liberal capitalist economy was the process of accumulation and technical change that supports a permanent “reserve army" (ibid) of the unemployed, and which provides the basis of the employer’s labour discipline strategy. The private ownership of the means of production conveys the right to exclude others from use of the firm’s assets, and therefore the owners of firms have a powerful threat to induce workers to supply the effort that could not be secured by contract: work hard, or join the "reserve army".

and

Marx did not explain why the labour contract was incomplete. He assumed this was an uncontroversial empirical observation and used it as the starting point for his economic theory.

Further on Bowles writes,

Just as Mendel underpinned Darwin, a more complete understanding of the incomplete labour contract developed in the twentieth century, but did not overturn Marx’s conclusions. Like Marx, Ronald Coase (1937) stressed the central role of authority in the firm’s contractual relations:

“[N]ote the character of the contract into which a factor enters that is employed within a firm ...[T]he factor ... for certain remuneration agrees to obey the directions of the entrepreneur.”

Indeed, Coase defined the firm by its political structure:

“If a workman moves from department Y to department X, he does not go because of a change in prices but because he is ordered to do so ... the distinguishing mark of the firm is the suppression of the price mechanism.” (ibid)

Herbert Simon provided the first Coasean model of the firm (Simon 1951). He represented the employment contract as an exchange in which the employees transfer control rights over their work tasks to the employer, in return for a wage. Simon stressed the advantage to the employer of this arrangement, because there was unavoidable uncertainty about the tasks that would be required over the course of the contract. Therefore there was a high cost of agreeing to a complete contractual specification of the activities to be performed. Simon did not know that he was modelling exactly the incomplete contract for labour that was the fulcrum of Marx’s economic theory.

Coase or Simon did not directly explain why control rights confer power. As an empirical matter, the firm appears to be a political institution in the sense that some members of the firm routinely give commands with the expectation that they will be obeyed, while others are constrained to follow these commands. If we say that the manager has the right to decide what the worker will do, this means only that the manager has the legitimate authority, not the power to secure compliance. Given that, in a liberal society, the manager is restricted in the kinds of punishment that can be inflicted, and given that the employee is free to leave, it is a puzzle that orders are typically obeyed.

Noticing this, Armen Alchian and Harold Demsetz challenged the Coasean idea that the firm is a mini “command economy”, suggesting that the employment contract is no different in this respect from other contracts:

“The firm ... has no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting between any two people ... Wherein then is the relationship between a grocer and his employee different from that between a grocer and his customer?” (Alchian and Demsetz 1972)

Oliver Hart (1989) responded:

'[T]he reason that an employee is likely to be more responsive to what his employer wants than a grocer is that the employer ... can deprive the employee of the assets he works with and hire another employee to work with these assets, while the customer can only deprive the grocer of his customer and as long as the customer is small, it is presumably not very difficult for the grocer to find another customer."

In a footnote in his book "Firms, Contracts, and Financial Structure" Oliver Hart does note that,

Given its concern with power, the approach proposed in this book has something in common with Marxian theories of the capitalist-worker relationship [...]

But what is not clear is that the development of the incomplete contracts approach to the theory of the firm by Grossman-Hart-Moore owes anything directly to the Marxian theories. The connection between them seems to have been noted after the fact rather than being a driving force.

When discussing the why in the property rights theory firms rather than workers own the nonhuman assets used in production Bengt Holmstrom argues that one reason is that by putting the nonhumans assets under the control of the firm, those running the firm have the maximum power to decide how the firm is organised and run. He notes that Marx would have agreed with this, but Holmstrom disagrees with Marx about the purpose of the firm's concentration of power.

This brings me back to Sowell's point that a contribution depends not just on what is offered but also on what is accepted, and I'm not convinced that Marx's ideas were accepted in the sense that they actually drove the development of the property rights approach to the firm.

So I'm thinking that Sowell, rather than Bowles, is right in his assessment of Marx.

Abby Hall on the boomerang effect and the militarisation of the US domestic police force

From the Economic Rockstar comes this interview with Abby Hall on the militarisation of the US domestic police force.

Abby Hall is an Assistant Professor in Economics at the University of Tampa in Tampa, Florida and a Research Fellow with the Independent Institute.

She earned her PhD in Economics from George Mason University in Fairfax, Virginia in 2015.

Her broader research interests include Austrian Economics, Political Economy and Public Choice, and Peace Economics, and Institutions and Economic Development.

Her work includes topics surrounding the U.S. military and national defense, including, domestic police militarization, arm sales, weapons as foreign aid, the cost of military mobilization, and the political economy of military technology.

She is currently researching how foreign intervention adversely impacts domestic political, social, and other institutions.

You can find Abby’s research, writings and other information on her website at www.abigailrhall.com.

Are there limits to free speech?

In this audio from the IEA Kate Andrews and Steve Davies discuss the limits to free speech.

Are there limits to free speech - and if so, where should they be set?

In this week’s podcast, Dr Steve Davies, Head of Education at the IEA and News Editor Kate Andrews examine this question.

They take a look at free speech on social media, and at universities, where issues like ‘safe spaces’ and ‘no platforming’ are increasingly controversial.

Yet, the situation is rather more complex than it might seem.

Though, Steve argues, speech should be as free as possible - private institutions and private individuals also have a right to determine what speech they permit on their own property. And public funding of institutions can also complicate matters.

Dave Rubin interviews Thomas Sowell

Dr. Thomas Sowell (Economist and Author) joins Dave to discuss his new book “Discrimination & Disparities.” They dive into Dr. Sowell’s Marxist past, free speech on college campuses, the role of government, minimum wage laws, his experience as a black conservative, debunking systemic racism, and more.