Empirical literature on the firm

From LearnIOE comes this video of Professor Peter Klein discussing the empirical literature on the firm.

The research literature on the economic theory of the firm has greatly expanded in the last several decades. But what is not as well known is that there is a growing empirical literature to go along with that theoretical body of work. In this video, Professor Peter Klein summarizes some of the empirical work that has been done so far and discusses its advantages and weaknesses. He hopes to inspire some of you to do additional empirical research in this area.

The year in review: from the IEA

From the IEA in London comes their annual review of the last year:

Find out in our round-up of 2019, who the IEA’s Director General Mark Littlewood, Associate Director Kate Andrews and Head of Lifestyle Economics Christopher Snowdon’s Person of the Year is, the trio’s Favourite Film of the Year is, their Political Moment of the Year and their Top Prediction for 2020

Glenn Loury interviews David Neumark about the minimum wage

From Bloggingheads.tv comes this interview of David Neumark by Glenn Loury about the effects of the minimum wage.

Renationalisation: back to the future?

The recently released Renationalisation: Back to the Future? by Julian Jessop and Len Shackleton is number 72 in the IEA's Current Controversies series.

The paper discusses the idea, common among a number of political parties in the UK, that some industries should be bought back into government ownership, that is, these industries should be renationalised.

A brief summary of its main points is:

Actual and perceived problems associated with privatised utilities have led to some public disenchantment with these businesses. Polls suggest that there is a popular majority for renationalising them, and there is some cross-party support for this.

Examination of these industries suggests grounds for concern over aspects of their recent operation. However, other criticisms are not substantiated, and there have been significant gains from privatisation which should not be ignored.

Many of the problems of these sectors are not intrinsic to private ownership but are the consequence of continued government intervention and regulatory failure. Some problems – such as the conflict between prices to consumers and cost to the taxpayer – would persist even in the event of renationalisation, and could get worse.

The record of post-war nationalisations was for the most part unhappy. The clamour for taking businesses back into state ownership ignores important lessons from that period, such as the instability of investment hen nationalised industries have to compete against other government priorities.

The cost of renationalisation would be considerable. The issue of compensation to private shareholders is being treated superficially: wider UK share ownership and the increased involvement of foreign investors would make it be much more difficult than in the past.

Foreign nationals would be in a strong position to challenge attempts to acquire assets at less than market value. Such attempts would damage the UK’s reputation for upholding property rights and could also lead to retaliatory measures against the UK’s own large stock of overseas investments.

Proposed new organisational arrangements for renationalised businesses are untested and may lead to continual politicisation, adversely affecting future performance.

It could be more sensible, where necessary, to strengthen the regulation of these businesses with a focus on reinforcing market mechanisms. The aim should be to reduce political interference and reduce disruption to business operations.

Notwithstanding political support for renationalisation from several parties, it seems unlikely that there will ever be complete consensus. Future governments might re-privatise, or threaten to re-privatise. The instability created by this sort of ping-pong would damage these industries’ performance, with consequent adverse effects for customers and taxpayers.

Remember that one way to think about privatisation is that it is a way for a government to commit to a policy of non-intervention in the operation of a firm. Selling a business maximises the "distance" between the government and the firm and increases the political cost to interference with the firm. Renationalisiating a firm reverses this process and makes government interference that much easier. Renationalisation minimises the "distance" between the firm and the government and thus makes political intervention that much cheaper for the government.

How can we make sense of the political realignment taking place in the United Kingdom?

From the IEA comes this audio of an interview of Steve Davies by Kate Andrews:

How can we make sense of the political realignment taking place in the United Kingdom?

In one of the very first Live from Lord North Street podcast episodes, the IEA’s Dr Stephen Davies discussed this topic with Kate Andrews. Having developed his political realignment theory for several years now, Steve offers in our podcast today an explanation the ongoing political realignment, particularly highlighted the UK’s general election. He discusses the triggers for change (including Brexit and the growing support for socialist ideas), the reshuffle of political structures, parties, voting blocs and redefinition of what it means to be on ‘the left’ and ‘the right’, both in the UK and abroad.

Patents: good or bad

This podcast from Words and Numbers discusses the advantages and disadvantages of patents. The patents discussion starts around 12 minutes.

One of the few enumerated powers that the Founders granted to the federal government was the power to issue patents.

Patents are a compromise between two conflicting goals. On the one hand, we want to avoid the creation of government-protected monopolies because monopolies stifle innovation. On the other, we want entrepreneurs to have an incentive to innovate. And one way to incentivize entrepreneurs is to grant monopoly protection for their inventions.

Patent law is an attempt to balance these two conflicting goals, but the balance presents trade offs. Weaker patent laws mean cheaper goods today but a lesser variety of goods tomorrow; stronger patent laws mean more expensive goods today but a greater variety of goods tomorrow.

Daron Acemoglu on the struggle between state and society

From Conversations with Tyler comes this interview of Daron Acemoglu by Tyler Cowen.

What determines the economic, social, and political trajectories of nations? Why were settlers in colonies like Jamestown and Australia able to escape the extractive systems desired by their British masters, while colonial subjects in Barbados and Jamaica were not? In his latest book, Daron Acemoglu elevates the power of institutions over theories centering on human capital, culture, or geography. Institutions help strike the balance of power in the constant struggle between state and society, creating a ‘narrow corridor’ through which liberty and prosperity is achieved.

The case for classical liberalism

The Case for Classical Liberalism
Why classical liberals are right but always lose

Classical liberals want freedom, toleration and economic prosperity under the rule of law. Critics would argue they've got human nature all wrong. Some think Classical Liberalism is making a comeback, others think it's out to stay.

The Speaker
Director of the Institute of Economic Affairs Mark Littlewood makes a case for why classical liberals are always right and wonders why do they always lose?

Watch more videos on iai.tv

Do libertarians know how to communicate libertarian ideas?

From the Cato Daily Podcast comes this audio talking about, Disagreeing Productively

What's the audience for libertarian ideas? Do libertarians know how to communicate them? Jennifer Thompson directs the Center for the Study of Liberty in Indianapolis.

Cato daily podcast on hate speech

From the Cato Daily Podcast comes this audio discussing the question, Is a ban on hate speech a solution to any actual problem?

Latest Blogwatch column

My Blogwatch column from the latest issue (Issue 65, August 2019) of the NZAE magazine Asymmetric Information

Latest Blogwatch column

My Blogwatch column from the latest issue (Issue 64, April 2019) of the NZAE magazine Asymmetric Information

101 great liberal thinkers

From IEA Conversations comes this audio in which Eamonn Butler talks about his new book School of Thought: 101 Great Liberal Thinkers

Economic calculation under socialism

From AIERvideo comes this video on economic calculation under socialism.

Let's assume socialist central planners have the best intentions. How will they decide what to produce, where to produce it, how to produce it, and for whom? These questions by Mises kicked off the "Socialist Calculation Debate".

The march of history: Mises vs. Marx - the definitive capitalism vs. socialism rap battle

The representative firm

Marshall's idea of  'representative firm' was created to reconcile his dynamic view of individual firms with the static view of industries. But this idea was somewhat nebulous and did not last very long in the economics literature. Marshall first wrote about the representative firm in his Principles of Economics published in 1890 but the idea was driven out of the literature by 1928, when it was replaced by A. C. Pigou's idea of the `equilibrium firm'.

Representative Firm by Paul Walker on Scribd

Becker versus Coase on consumer behaviour

From the Free to Choose Network comes this video of Gary Becker and Ronald Coase talking consumer behaviour. Half an hour very well spent.

Is the economic theory of utility a useful way of understanding consumer behaviour? Ronald Coase and Gary Becker, Nobel Economists at the University of Chicago, explain and discuss the theory of rational maximizing utility. They describe how consumers rank preferences and then attempt to choose the highest preference according to their resources, and they discuss whether firms and households operate with similar principals. They consider whether it is necessary to even have utility theory, and whether economists have been misled on this subject.

Roger Bootle: Europe is a complete disaster – Britain must leave

Economist & author Roger Bootle talks to Merryn Somerset Webb about Europe’s economic disaster, & should Britain pull out.

There are two books you should take advantage of this offer to buy

"The Theory of the Firm: An overview of the economic mainstream"
https://www.routledge.com/The-Theory-of-the-Firm-An-overview-of-the-economic-mainstream/Walker/p/book/9781138191532

and

"A Brief Prehistory of the Theory of the Firm"
https://www.routledge.com/A-Brief-Prehistory-of-the-Theory-of-the-Firm/Walker/p/book/9781138488267

Is the Phillips Curve Still a Useful Guide for Policymakers?

Morgan Foy writes in the September 2019 issue of the NBER Digest on the question, Is the Phillips Curve Still a Useful Guide for Policymakers?

The Phillips curve, named for the New Zealand economist A.W. Phillips, who reported in the late 1950s that wages rose more rapidly when the unemployment rate was low, posits a trade-off between inflation and unemployment. When unemployment is low, and the labor market is tight, there is greater upward pressure on wages and, through labor costs, on prices.

The conceptual foundations of this relationship have been a subject of active debate, but for many decades, the relationship seemed well-supported by U.S. data. In the last two decades, however, the U.S. inflation rate has not been particularly high, even during periods of low unemployment. The recent data have led many to wonder whether the Phillips curve has weakened or disappeared. In Prospects for Inflation in a High Pressure Economy: Is the Phillips Curve Dead or Is It Just Hibernating? (NBER Working Paper No. 25792) Peter Hooper, Frederic S. Mishkin, and Amir Sufi examine why the Phillips curve relationship has not been evident in recent aggregate data for the United States.

The researchers study both inflation in consumer prices and inflation in wages. They test for a "price" Phillips curve using data on annual costs of goods and services, and for a "wage" Phillips curve using hourly earnings data. They allow for different relationships between inflation and unemployment in tight and in slack labor markets. Using a simple model that assumes a linear relationship between inflation and unemployment, and data from 1961 to 2018, they estimate that a one percentage point drop in the unemployment rate increased inflation by a mere 0.14 percentage points. However, when they allow for different effects of unemployment changes in tight and slack labor markets, they find that the estimated effect of a 1 percentage point unemployment decline on the inflation rate is about -0.32 percentage points when the unemployment rate is 1 percentage point below the natural rate, and -0.12 when it is 1 percentage point above it.

When examining data only from 1988 to 2018, the researchers see less evidence for a robust price Phillips curve. The linear and nonlinear slopes are both close to zero, consistent with the common view that the Phillips curve is flattening. However, the wage Phillips curve is much more resilient and is still quite evident in this time period.

The study points out that in the last three decades, the Great Recession notwithstanding, there has been less variability in the national economy than in prior decades, which makes it harder to detect the impact of unemployment on inflation. In addition, the Federal Reserve has tried to avoid labor market overheating as a way to stabilize inflation, thereby "anchoring" inflation expectations at a 2 percent inflation level and reducing the effect of unemployment fluctuations on price movements.

The researchers observe that state- and city-level data provide more variability in unemployment rates and are less influenced by federal monetary policy than the national figures. Therefore, they explore the relationship between unemployment and inflation at this level. They find a strong negative relationship between the unemployment rate's deviation from the state average and the rate of wage inflation. They also find evidence of a nonlinear price Phillips curve in city-level data.

The researchers point out that the relationship between inflation and the unemployment rate is a key input to the design of monetary policy. They note that the unemployment rate in the U.S. economy is currently near record lows, and they caution that they cannot predict whether inflation will rise in the coming years. However, they conclude that "Evidence that the price Phillips curve has been dormant for the past several decades does not necessarily mean that it is dead... it could be hibernating, and there is a risk of the Phillips curve waking up, with inflationary pressures rising in the face of an overheating labor market."