Friday, 29 November 2013

Olympics don't pay

The fact that large sporting event don't pay has been mentioned on this blog, and other blogs, many times. Now British economist John Kay has joined those of us who have doubts about the economics of large sporting events with this piece on the costs of the 2012 London Olympics.

Kay writes that the principal relevant facts are these:
The first detailed specification of what was needed for London to host the games was drawn up in 2002 by Arup. The report by the engineering and planning consultancy put the cost at £1.8bn, much of it to be privately financed. An extended assessment was then commissioned by the Department of Culture, Media and Sport from PwC. The financial consultancy’s 2003 report estimated the total cost at £3.1bn, requiring a public subsidy of £1.3bn. The balance would be recovered from the private sector and from asset sales after the games. According to PwC’s risk assessment, the probability that the taxpayer would need to provide as much as £2bn was less than 5 per cent.
The budget had by 2007 increased to about £6.5bn. At Treasury insistence, a contingency allowance, mostly unspecific, of £2.8bn – more than the total original projected cost – was added. The costs of land acquisition and of the Olympic Village were mostly excluded in the belief that they would be recovered from property sales after the event.
But what, you may ask, of the claims that the games “within budget”?
The basis of the claim that the games came in “within budget” seems to be that a small part – currently £300m-£400m – of that £2.8bn contingency remains unspent. That was achieved, however, by excluding a number of additional unbudgeted expenditures from the calculation, as the National Audit Office has highlighted. There is likely to be little, if any, net recovery of the further costs of land and housing, which were due to be recouped from property sales.

The costs were grossly and persistently underestimated, and the financial contributions anticipated from private sources overestimated by very large amounts. Every year, to the present day, the expected cost rose and the likely revenues diminished. The cost of the games to public funds has proved to be about 10 times the original estimate.
Kay continues,
There is a halo effect; the sporting success of the Olympics fosters the mistaken belief that they were an economic success. Papers recently produced by government on the “economic benefits” must be an embarrassment to the many good people of the Government Economic Service, conflating incommensurable monetary amounts and confusing costs with benefits. At the same time, a curious puritanism requires politicians to pretend activities intended to make us feel good about ourselves are justified by their contribution to “the economy”. The Olympiad was a good party, which cost the British population about £200 per head.
Kay then makes the important point that false accounts of the past prevent us learning lessons for the future, of which, he argues, there are many.
The Olympics remind us that enthusiasts typically understate costs and overstate benefits. Consultants win work by pleasing clients, and they rarely please clients by pouring cold water on their pet schemes. We should waste no more public money on risk simulations such as those in the PwC report; the outcome in this case was one of these supposedly statistically impossible events that seem nevertheless to occur on a daily basis. Establishing an allowance for “optimism bias” is realistic, but offers little incentive to make careful projections in the first place. Money put in a budget for general contingencies is not money you are likely to see again.
Just when will governments, and taxpayers, learn that big sporting events, be it the Olympics or the rugby world cup or the America's cup, don't make economic sense. And thus taxpayer money spent on them is taxpayer money wasted.

An interview with Jeremy Adelman on Albert Hirschman

In this audio from Jeremy Adelman of Princeton University talks to Romesh Vaitilingam about his biography of the economist and social scientist Albert Hirschman. They discuss Hirschman’s ideas about economic development, ‘optimal’ crises and what is perhaps his most famous book among economists, "Exit, Voice and Loyalty". Adelman also speculates on what the citation would have said had Hirschman won the Nobel Prize – and explains why we should read Hirschman now.

Thursday, 28 November 2013

Use of the metaphor of the "invisible hand" 2

In the comments to the post Use of the metaphor of the "invisible hand" Owen refers us to the blog - Adam's Lost Legacy - of Scottish economist and Adam Smith scholar Gavin Kennedy. For anyone with an interest in Smith, and who hasn't?, Gavin's blog is a must read.

Gavin's view on the interpretation of the "invisible hand" is a little different from the one I was arguing. Now I see that Gavin has picked up on my comments and has commented on them at his blog.

Gavin explains his view in the following way:
I agree with Paul broadly on his critique of the popular modern economist’s idea of the “invisible hand”. I regard Paul’s treatment as a step or two forward in this debate, and praise him for taking it. In his subsequent comment to “Owen”, Paul kindly refers “Owen” to citations of my published assessments on the IH metaphor from 2008-2011.

However, Paul makes a suggestion also made by my scholarly friend, Craig Smith, several times, including in his excellent book, Smith, C. 2006. “Adam Smith’s Political Philosophy: the invisible-hand and Spontaneous Order”, Oxford, Routledge. Craig is the Reviews Editor of the “Adam Smith Review” (International Adam Smith Society), and a co-editor (with Chris Berry and Maria Paganelli “Handbook on Adam Smith”, 2013, Oxford University Press. Neither Paul nor Craig fully agree with my interpretation of the significance to Adam Smith of his use of the “IH” metaphor, though they both are disturbed with modern interpretations of it to an extent.

Nevertheless, they present an alternative view to mine (argued on Lost Legacy since 2005). In their presentations they agree in effect: “The invisible hand idea … is a very convenient shorthand for Smith’s idea that human actions have unintended consequences; and that provided a few fundamental rules such as the principles of justice are followed, the self-serving actions of individuals can unintentionally produce a well-functioning and beneficial overall social order” (Paul) and: “generally the idea of social evolution through unintended consequences, which represents Smith’s chief legacy to the modern world” (Craig).

I am pleased to see that Paul and Craig both are further away from the post-Samuelson (1948) invention that conflates Smith’s use of self-interest as “selfishness” that “miraculousy” has the effect of creating a “public” benefit.

I can agree with Paul and Craig in so far as they reject the invention, which is a step forward. However, I do not think that they have shown that Smith used the IH metaphor “as Smith’s friend Adam Ferguson observed, the results of human action, not the product of human design”. The phrase was indeed used by Adam Ferguson, and in Smith’s case it is true that Smith also referred to ‘unintended consequences” in the (long) IH paragraph, but Smith's statement says: [The merchant who invests domestically] “generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it. By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. (WN IV.2.9: 456).

To argue from the above that the IH metaphor is about “unintended consequences I suggest misreads the sense of Smith’s paragraph. Smith Lectured on Rhetoric in Edinburgh and 1748 (privately sponsored public lectures) and at Glasgow University from 1751 to 1763 as a member of the Glasgow faculty and the Professor of Moral Philosophy). He was also fluent in Latin and Oxford English grammar. He was therefore most unlikely to make grammatical errors. He taught about the grammar of metaphors as figures of speech, for which we have student notes: Smith. [1762-3] 1983. “Lectures on Rhetoric and Belles Lettres”, Lectures 6, 7, 8 and 9. Oxford University Press.

Smith refers to the “objects” of metaphors, which in this case refers to the specified objects in each of the two cases in which he used the IH metaphor to “describe in a more striking and interesting manner” its “object”.

In the two (only) cases he mentioned, first in Moral Sentiments (the actions of the “proud and unfeeling Landlord” feeding his serfs, labourers, servants, and overseers, which was an absolute necessity – no food meant no labour!). It was that necessity that led the landlord to feed those employed on his estate – described by Smith that he was “led by an invisible hand”. In the second case, mentioned in Wealth Of Nations, the merchant who felt too insecure to send his capital abroad, hence he invested in “domestic revenue and employment”. It was the “merchant’s insecurity that led him to invest locally – described by Smith of him being “led by an invisible hand”.

In short, the IH metaphor refers to the motives of the landlord and merchant that LED them to act as they did. It was NOT the IH that separately intentionally led either of them to create the “unintentional consequences of their actions. The IH describes their actions. That is why the consequences of their actions were “unintentional”!

To argue otherwise makes no-sense of Smith’s use of the grammar of metaphors (still exactly the same as defined in today’s Oxford English Dictionary, 1983, as Smith described it in 1762-62).

Moreover, Paul and Craig imply a theological interpretation of his use of the IH metaphor – what, whomsoever, or whatever, leads an “IH” to cause the “unintentional outcomes”? (see Kennedy, “Adam Smith on Religion”, Handbook on Adam Smith, Oxford UP 2013, or shorter, earlier version, Kennedy, 2011. “The Hidden Adam Smith in his Alleged Theology” Journal of the History of Economics, no 3, 2011).

An action has motives which actions may have consequences, but unintended consequences do not have intentional motivated causes!
Perhaps the point I'm trying to get at is better said by James Otteson. When discussing Smith's essay on "Consideration Concerning the First Formation of Languages, and the Different Genius of Original and Compounded Languages" Otteson writes,
The reader, furthermore, would be correct to detect in this essay the early hints of an argument that Smith will later develop into perhaps his most powerful, what we will call the Invisible Hand Argument: individuals, when seeking to satisfy their own localized desires will tend to behave in ways that will also benefit other - even others they do not know and about whom they therefore have no particular concern, and without their intending to do so.
This Invisible Hand Argument would, I feel, be seen in Smith's work even if the actual references to the "invisible hand" were removed.

When Otteson goes on to talk about "What Smith Got Right" the first thing he mentions is Smith's model of spontaneous order. Otteson argues this is made up of several elements, one of which is "general welfare and the "invisible hand"". Otteson says,
Smith was under no illusion that people in their normal daily activities actually care about the general welfare. Luckily, however, people do not have to. The nature of the unintended system of order suggests that they will tend to conduce to the benefits of everyone concerned regardless - at least in the long run.
So I would argue that the "invisible hand" in a board sense, permeates Smith's works.

What's okay to buy and sell?

Aaron Ross Powell and Trevor Burrus talk with James Stacey Taylor, an Associate Professor of philosophy at the College of New Jersey and the author of Stakes and Kidneys: Why markets in human body parts are morally imperative and the forthcoming book Toxic Trade? An Unapologetic Defense of Universal Commodification, about what society thinks is okay to buy and sell. Buying and selling some things--like books, cars, or house--strike us as fine. But even the thought of trading money for things like love, babies, votes or organs makes many people uncomfortable or even angry.

If the above doesn't work try this link.

Allen's "The Institutional Revolution"

Volume 26, Issue 4 - December 2013 - of The Review of Austrian Economics continues a series of papers reviewing Doug Allen's recent book The Institutional Revolution: Measurement and the Economic Emergence of the Modern World, ... and what a set of reviewers: Deirdre N. McCloskey, Joel Mokyr and Richard N. Langlois, with a reply by Doug Allen.
A neo-institutionalism of measurement, without measurement: A comment on Douglas Allen’s The Institutional Revolution
Deirdre N. McCloskey Pages 363-373
In his elegant book Douglas Allen claims that an improvement in the measurement of Nature made for lower transaction costs and the Industrial Revolution. His argument is a typical example of neo-institutionalism in the style of Douglass North (1990) and North et al. (2009). A fall in a wedge of inefficiency is supposed to provide Good Incentives, and the modern world. But the elimination of wedges lead merely to Harberger Triangles of improved efficiency—not to the factor of 100 in properly measured real income per head, which is the Great Enrichment 1800 to the present to be explained. Allen does yeoman work in explaining some of the peculiarities of British public administration, such as the reliance on aristocratic honor and on the prize system in naval warfare. But he attributes to public administration an implausible effect on private incomes. The merging of power and plenty is mistaken. Further, the alleged increase in a modern ability to measure marginal products is implausible. Large modern enterprises face greater, not smaller, problems of assessing the contribution of individuals. Allen’s book on measurement does not measure, and the probable order of magnitude of the items he focuses on is too small to explain any but the details of administration.

The Institutional Revelation: A comment on Douglas W. Allen’s The Institutional Revolution
Joel Mokyr, José-Antonio Espín-Sánchez Pages 375-381
Institutions are a central topic in economic history. Allen’s work differs in that he is interested in institutions per se, not as a means to economic performance and prosperity. The purpose of this book is to explain the institutions of the premodern world and to show why they changed. His argument is that in a Principal-Agent situation, before the Industrial Revolution, it was harder for the Principal to attribute whether the failure of the project was due to acts of nature or some acts of the agent, hence the “strange” institutions. In a modern world, with a much improved monitoring technology, we can use more “efficient” institutions, hence the Institutional Revolution. Although innovative and interesting, the author over-stresses his argument. Much more than monitoring in a principal-agent relationship is needed to explain the Industrial Revolution and the changes in institutions associated with it.

The Institutional Revolution: A review essay
Richard N. Langlois Pages 383-395
This review essay discusses and appraises Douglas Allen’s The Institutional Revolution (2011) as a way of reflecting on the uses of the New Institutional Economics (NIE) in economic history. It praises and defends Allen’s method of asking “what economic problem were these institutions solving?” But it insists that such comparative-institutional analysis be imbedded within a deeper account of institutional change, one driven principally by changes – often endogenous changes – in the extent of the market and in relative scarcities. The essay supports its argument with a variety of examples of the NIE applied to economic history.

In defence of the institutional revolution
Douglas W. Allen Pages 397-412
I defend my thesis laid out in The Institutional Revolution against the comments made by McCloskey, Espin and Mokyr, and Langlois, who all believe that the weight of the great institutional transition is too great for my theory of measurement, and who all quibble with some aspects of my historical analysis. I argue that some of the comments fail to fully appreciate the Coasean approach, and that most of the historical comments miss the mark. I begin with a short discussion of Coase, and then turn to each author in turn.

Is this really a good deal?

Not for the Scottish taxpayer. From the TVNZ website,
Infratil, the Wellington-based infrastructure investor, has sold its unprofitable Glasgow Prestwick Airport to the Scottish government for 1 British pound.

The transaction was completed over the weekend and will see the airport transferred to TS Prestwick Holdco, an entity wholly-owned by the Scottish Ministers, for a cash consideration of 1 pound.

The purchase price reflected the need for more investment, and the Scottish government is seeking a commercial partner to operate the airport on its behalf, it said in a statement yesterday.

"This acquisition secures continuity of service and we will now begin work with our local partners on developing our vision for the business so we can maximise its contribution to the local, regional and national economy," Deputy First Minister Nicola Sturgeon said.
I can't but help thinking that there is a message in the fact that someone will sell you an airport for one pound. If we think of the sale price of an asset as the present value of the future income stream for the asset then selling the asset for such a price should be a warning to the Scottish taxpayer. It is very unlikely that the taxpayer will ever see a reasonable return on their (forced) investment.

This looks like a bad deal for three related reasons: 1) Prestwick loses money, 2) it is not obvious what the new owners can do that Infratil didn't do to make it pay and 3) it is far from clear that politicians can run the airport better than a private operator. The very fact that a private buyer could not be found is a worrying signal as to the future prospects for the airport.

Wednesday, 27 November 2013

Libertarians and the poor

Philosopher Matt Zwolinski (Zwolinski is Associate Professor of Philosophy at the University of San Diego, and co-director of USD’s Institute for Law and Philosophy) discusses with Aaron Ross Powell and Trevor Burrus how libertarianism can help the least well-off.

Multitasking can be a problem

One thing theory tells us about multitasking is that you can get into trouble if some of the things you want people to do are easier to measure than other things. What you would expect is that the people will put more effort into the well measured things than the less well measured things. For example, teaching is harder to measure well than research so you would expect to see more effort placed on research than teaching in academia. And, by and large, you do.

But according to a new NBER working paper it's not just academics who respond to such incentives.

Testing the Theory of Multitasking: Evidence from a Natural Field Experiment in Chinese Factories
Fuhai Hong, Tanjim Hossain, John A. List, Migiwa Tanaka
NBER Working Paper No. 19660
Issued in November 2013
A well-recognized problem in the multitasking literature is that workers might substantially reduce their effort on tasks that produce unobservable outputs as they seek the salient rewards to observable outputs. Since the theory related to multitasking is decades ahead of the empirical evidence, the economic costs of standard incentive schemes under multitasking contexts remain largely unknown. This study provides empirical insights quantifying such effects using a field experiment in Chinese factories. Using more than 2200 data points across 126 workers, we find sharp evidence that workers do trade off the incented output (quantity) at the expense of the non-incented one (quality) as a result of a piece rate bonus scheme. Consistent with our theoretical model, treatment effects are much stronger for workers whose base salary structure is a flat wage compared to those under a piece rate base salary. While the incentives result in a large increase in quantity and a sharp decrease in quality for workers under a flat base salary, they result only in a small increase in quantity without affecting quality for workers under a piece rate base salary.

Tuesday, 26 November 2013

Excess demand?

From TVNZ,
Monty Python's reunion show sold out in just 43.5 seconds today.

EconTalk this week

Joel Mokyr of Northwestern University talks with EconTalk host Russ Roberts about the future of the American economy. Mokyr rejects the claims that the we are entering an area of stagnation or permanently lower economic growth. He argues that measured growth understates the impact on human welfare. Many of the most important discoveries are new products that are often poorly measured and not reflected in measures such as gross domestic product or income. The conversation closes with a discussion of the downsides of technology and why Mokyr remains optimistic about the future.

Monday, 25 November 2013

Use of the metaphor of the "invisible hand"

In the comments section to the previous post on the Foundations of a free society Owen writes,
Shame he mis-quotes Smith. AS never mentioned an invisible hand in reference to markets, in fact he only mentioned it once in Wealth of Nations. Also, AS notion of self-interest was appealing to others self-interest to gain what you wanted, ie mutual trade, nothing selfish about it. I'm not aware of any evidence that markets automatically lead to good outcomes for society, I do think they are the best allocative mechanism though (in most cases).
Butler is not quoting Smith and I'm sure that he is aware of the use Smith made of the term "invisible hand". To quote Butler,, at some length,
Adam Smith is famous for his ‘invisible hand’ idea. Most people take this to mean that our self-interested actions somehow produce an overall social benefit. Our hard bargaining, for
example, creates a market system that allocates resources with great efficiency.

In fact, apart from a mention of the ‘invisible hand of Jupiter’ in The History of Astronomy, Smith uses the phrase just twice in his entire output and not really in the commonly presumed sense. The rich make work for the poor.

In The Theory of Moral Sentiments, Smith suggests that the hand of ‘Providence’ equalises economic rewards. The rich can eat no more than the poor. Their only use for most of the food produced by their land is to exchange it with others – those who supply the luxuries, the ‘baubles and trinkets’, that the rich demand. Thinking only of themselves, the rich provide employment to thousands:
The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.
The only mention of the invisible hand in The Wealth of Nations is in a passage about official monopolies that promote domestic industries over foreign trade. Smith notes that this induces people to commit more capital to home industries, and then slides into the point:
As every individual ... endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it.
By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
These two passages suggest to critics that Adam Smith’s real ‘invisible hand’ concept is far removed from the popular notion of it. In one, the happy outcome of self-interest is attributed to ‘Providence’. In the other, it is a side comment in a discussion about the export trade.

In fact, the critics read too narrowly. The invisible hand idea, as commonly understood, pervades Smith’s work, and would do so even if these two specific references had never existed. For the phrase is a very convenient shorthand for Smith’s idea that human actions have unintended consequences; and that provided a few fundamental rules such as the principles of justice are followed, the self-serving actions of individuals can unintentionally produce a well-functioning and beneficial overall social order.
Or as Craig Smith has point it,
It is the idea of the invisible hand, or more generally the idea of social evolution through unintended consequences, which represents Smith’s chief legacy to the modern world. The recognition that many of the most important human achievements are, as Smith’s friend Adam Ferguson observed, the results of human action, not the product of human design, is a profound lesson to us all. It is this observation which leads Smith to his deep scepticism towards ‘men of system’ who would organise humanity to achieve noble ends.
As to whether markets automatically lead to good outcomes for society, Butler is not claiming that they do and Smith never claimed that they do. What I think most economists would say is that markets lead to good outcomes for society more often than any alternative method of resource allocation. A system of rules are required to achieve this end - such as competition and a system of justice - but as long as these are in place then markets are a better bet to achieve good outcomes than "men of system".

I don't follow this argument

This article in the Guardian states,
Joffe [Michael Joffe, professor of economics at Imperial College, London] said university economics department were continuing to teach concepts that had been disproved. In one example he said the idea that companies suffer "dis-economies of scale" when they increase production beyond certain capacity was true in only a small number of firms.

The U-shaped curve shows that unit costs are high when production begins and become cheaper as economies of scale allow a company to spread costs over more units. Units become more expensive to produce after a factory reaches capacity.

Joffe said: "We ought to stop teaching the U shape as the typical relationship between costs and scale, for the simple reason that it is false."
What does this imply? Is Joffe really saying that he thinks all firms are natural monopolies? I think that is what Joffe's comment leads to. If firm's average cost curves are not U-shaped then I assume they are downward sloping over the relevant range and this implies that firms are natural monopolies. Now this may be true for some firms but I can't  see it as true in general. Is your local dairy really a natural monopoly?

Foundations of a free society

An interesting new book by Eamonn Butler published by the IEA in London. Butler makes the point that a free society is not a random collection of selfish individuals. It is something complex and organic, and based on deep values – not values that challenge other moral systems but values that make cooperation and social harmony possible. As Butler wrote in a previous book on Adam Smith,
He [Smith] realised that social harmony would emerge naturally as human beings struggled to find ways to live and work with each other. Freedom and self-interest need not lead to chaos, but – as if guided by an ‘invisible hand’ – would produce order and concord. They would also bring about the most efficient possible use of resources. As free people struck bargains with others – solely in order to better their own condition – the nation’s land, capital, skills, knowledge, time, enterprise and inventiveness would be drawn automatically and inevitably to the ends and purposes that people valued most highly. Thus the maintenance of a prospering social order did not require the continued supervision of kings and ministers. It would grow organically as a product of human nature. To grow best and to work most efficiently, however, it required an open, competitive marketplace, with free exchange and without coercion. It needed rules to maintain this openness, just as a fire-basket is needed to contain a fire. But those rules, the rules of justice and morality, are general and impersonal, quite unlike the specific and personal interventions of the mercantilist authorities.
And this is still a rather good summary of the basic argument in favour of a free society today. Butler argues that the essential foundations of a free society are freedom, property, trade, justice, toleration, moral rules, incentives, rights, and limited government. He also notes that none of us really lives in a free society, its a case of being more or less free and that we must be vigilant so we doesn't end up ambling down the Road to Serfdom.

A brief summary of the book is:
  • Freedom creates prosperity. It unleashes human talent, invention and innovation, creating wealth where none existed before. Societies that have embraced freedom have made themselves rich. Those that have not have remained poor.
  • People in a free society do not become rich by exploiting others, as the elites of less-free countries do. They cannot become rich by making others poorer. They become rich only by providing others with what they want and making other people’s lives better.
  • The chief beneficiaries of the economic dynamism of free societies are the poor. Free societies are economically more equal than non-free societies. The poor in the most-free societies enjoy luxuries that were undreamed of just a few years ago, luxuries available only to the ruling elites of non-free countries.
  • International trade gives entrepreneurs new market opportunities and has helped lift more than a billion people out of abject poverty in the last twenty years. Freedom is truly one of the most benign and productive forces in human history.
  • Attempts by governments to equalise wealth or income are counter-productive. They destroy the incentives for hard work and enterprise and discourage people from building up the capital that boosts the productivity of the whole society.
  • A free society is a spontaneous society. It builds up from the actions of individuals, following the rules that promote peaceful cooperation. It is not imposed from above by political authorities.
  • Government has a very limited role in a free society. It exists to prevent harm being done to its citizens by maintaining and enforcing justice. It does not try to impose material equality and it does not prohibit activities just because some people consider them disagreeable or offensive. Leaders cannot plunder citizens for their own benefit, grant favours to their friends, or use their power against their enemies.
  • The government of a free society is constrained by the rule of law. Its laws apply to everyone equally. There must be due process of law in all cases, with fair trials and no lengthy detention without trial. People accused of offences must be treated as innocent until proved guilty, and individuals must not be harassed by being prosecuted several times for the same offence.
  • Tolerating other people’s ideas and lifestyles benefits society. Truth is not always obvious; it emerges in the battle of ideas. We cannot trust censors to suppress only wrong ideas. They may mistakenly suppress ideas and ways of acting that would greatly benefit society in the future.
  • Communications technology is making it more difficult for authoritarian governments to hide their actions from the rest of the world. As a result, more and more countries are opening up to trade and tourism, and new ideas are spreading. More people see the benefits of economic and social freedom, and are demanding them.

Saturday, 23 November 2013

Venezuelan inflation

Not a good look. Steve H. Hanke, Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University, has been writing on inflation in Venezuela over at the Cato Institute. Hanke writes,
Just how big of a problem is inflation in Venezuela? The implied annual inflation rate in Venezuela is actually now in the triple digits, coming in at a whopping 283%, as shown in the chart below.

What’s more, the implied monthly inflation rate has now ramped up to 36%, as shown in the chart below. That’s dangerously close to the hyperinflation threshold of 50% per month. This is due to an accelerating depreciation of the bolivar, reflecting Venezuelan’s deteriorating economic outlook.

For the record, official government data put Venezuela’s inflation rate at a mere 50%.

So how soon will it be before Venezuela becomes the new Zimbabwe?

EconTalk this week

Angus Deaton of Princeton University and author of the Great Escape talks with EconTalk host Russ Roberts about the book--the vast improvements in health and standard of living in recent times. Deaton surveys the improvements in life expectancy and income both in the developed and undeveloped world. Inequality of both health and wealth are discussed as well. The conversation closes with a discussion of foreign aid and what rich nations can do for the poor.

Just for fun: Marx on the firm

That Marx didn't much like markets is obvious enough, but what of firms? On the positive side Marx preferred the deliberate order of the firm to the anarchy of the market. After all he wanted to run the entire economy like a firm. This view that the firm can be seen as an organisational alternative to the market anticipated Coase in this regard. But on the other hand he saw the firm as the key locus where labour exploitation ad alienation was perpetrated and he has "issues" with the detailed division of labour that capitalism introduced. His model of communism, to be realised after single-firm socialism, was meant to overcome the depressing human condition existing in the capitalist firm.
Besides being a political proposal, single-firm socialism was, according to Marx, a historical necessity imposed by the development of productive forces. The firm’s greater efficiency (relatively to markets) had already been evinced by the growth in firms’ size during capitalism, and productive forces exerted strong pressure for their further growth. By eliminating private property, socialism did nothing other than complete an inevitable process of concentration, whose onset was 'scientifically guaranteed' by historical materialism (Pagano 2012: 42).
For Marx single-firm socialism’ would supersede the dualism of capitalism, under which firms and markets coexisted, and enable the greater development of the productive forces. The limitations of the market sprang from what Marx saw as its nature as a decentralised coordination mechanism dealing with the, often inconsistent, decisions made by buyers and sellers. This negative view of the market lead Marx to argue for the extension of firm-type organisation to society as a whole.
The extension of the planned organization of production of the capitalist factory would complete a process already ongoing in the historical dynamics of capitalism whereby productive forces tended constantly to increase the size of firms. Socialism was the final outcome of this tendency of the productive forces to shift production relations within the firm. The scientific certainty of the advent of socialism was, for Marx, inherent in the tendency of the productive forces to influence production relations. The extension of the authoritarian world of the capitalist firm to the whole of society was necessary to reap the benefits of a planned coordination made more and more necessary by the increasing interdependence among the production sectors (Pagano 2012: 43).
Even if firms are better than markets, firms are not all good. For Marx capitalism produced a very detailed and hierarchical division of labour. This was one of his major criticisms of capitalism. The capitalist-owned firm is a structure that involved a massive deskilling of workers and made labour alienated and painfully homogeneous. But, in the short term at least, socialism could do little about this:
[ ... ] in the early stage of socialism, planning could be made on an objective basis because, according to Marx, capitalism had eliminated the possibility of subjective preferences among repetitive and simple tasks. These conditions suggested, for the first phase of a socialist society, a form of authoritarian planning based on the theory of labour value that ignored the subjective preferences for different kinds of work (Pagano 2012: 43).
Over the longer term, of course, all this would change and
[ ... ] work would entirely match the preferences and development of individuals [ ... ] (Pagano 2012: 43).
Such an idea was constantly present in Marx’s critique of capitalism but its implications were postponed to a distant future.

Interestingly Marx, unlike Coase, saw costs in using the market but assumed that the firm could be used at basically zero cost.
In some respects, Marx made a mistake mirroring orthodox economics when he assumed that, while the costs of market coordination were very high, the costs of firm-type coordination were negligible, with the consequence that all the economic transactions could be coordinated at zero costs by centralized planning (Pagano 2012: 44).
The standard neoclassical model assumes that transactions costs are zero and thus there is no need for firms while Marx assumed that management coasts are zero and thus there is no need for markets. Coase's argument is that both firms and markets come with costs and it is the comparison of these costs that determined the boundaries of the firm.

  • Pagano. Ugo (2012). `Marx'. In Michael Dietrich and Jackie Krafft (eds.) Handbook on the Economics and Theory of the Firm (pp. 42-8), Cheltenham: Edward Elgar.

Thursday, 14 November 2013

EconTalk this week

Edmund Phelps of Columbia University, Nobel Laureate in economics, and author of Mass Flourishing talks with EconTalk host Russ Roberts about the ideas in the book. Phelps argues that human flourishing requires challenges, struggles, and success and goes beyond material prosperity. He argues that in recent decades, policy has discouraged innovation and mass flourishing resulting in a slow-down in growth rates. Phelps emphasizes the non-material benefits of economic growth and the importance of small innovations over big inventions as key to that growth.

Thursday, 7 November 2013

EconTalk for 4 weeks

Cliff Winston of the Brookings Institution talks with EconTalk host Russ Roberts about his recent article in the Journal of Economic Literature on the U.S. transportation system. Winston argues that the while the United States has a very good transportation system overall, it is extremely expensive and poorly organized. What is needed, Winston argues, is not more money, but to spend the money already allocated more wisely. He discusses the evolution of the U.S. transportation system, government's role in transportation, dramatic innovations that might transform aviation and driving, and the potential for privatizing airports and roads.

Guillermo Calvo of Columbia University and the National Bureau of Economic Research talks with EconTalk host Russ Roberts about the nature of macroeconomic crises and what we have learned or should have learned in the aftermath of the most recent one. Based loosely on his recent paper, "Puzzling Over the Anatomy of Crises," Calvo discusses a wide array of issues related to macroeconomics and the role of financial instability in economy-wide crises. Topics include the role of money, the problem of short-term lending in the financial sector, the black-box approach of modern macroeconomic theory and the forgotten economists we might want to reconsider.

Don Boudreaux of George Mason University and Cafe Hayek talks with EconTalk host Russ Roberts about the intellectual legacy of Ronald Coase. The conversation centers on Coase's four most important academic articles. Most of the discussion is on two of those articles, "The Nature of the Firm," which continues to influence how economists think of firms and transaction costs, and "The Problem of Social Cost," Coase's pathbreaking work on externalities.

John Ralston Saul, author and head of PEN International, speaks with EconTalk host Russ Roberts about his book, Voltaire's Bastards, and the role of reason in the modern world. Saul argues that the illegitimate offspring of the champions of reason have led to serious problems in the modern world. Reason, while powerful and useful, says Saul, should not be put on a pedestal above other values including morality and common-sense. Saul argues that the worship of reason has corrupted public policy and education while empowering technocrats and the elites in dangerous and unhealthy ways.

The law of unintended consequences - child labour

The NBER has released a new working paper on the Perverse Consequences of Well Intentioned Regulation: Evidence from India's Child Labor Ban by Prashant Bharadwaj, Leah K. Lakdawala and Nicholas Li. The abstract reads,
While bans against child labor are a common policy tool, there is very little empirical evidence validating their effectiveness. In this paper, we examine the consequences of India’s landmark legislation against child labor, the Child Labor (Prohibition and Regulation) Act of 1986. Using data from employment surveys conducted before and after the ban, and using age restrictions that determined who the ban applied to, we show that child wages decrease and child labor increases after the ban. These results are consistent with a theoretical model building on the seminal work of Basu and Van (1998) and Basu (2005), where families use child labor to reach subsistence constraints and where child wages decrease in response to bans, leading poor families to utilize more child labor. The increase in child labor comes at the expense of reduced school enrollment. We also examine the effects of the ban at the household level. Using linked consumption and expenditure data, we find that along various margins of household expenditure, consumption, calorie intake and asset holdings, households are worse off after the ban.
No matter how well intended regulations may be you have to ask what do they actually achieve? Often the outcomes are very different from those intended.

Monday, 4 November 2013

What is the case for paid maternity leave?

Not much of one it would appear.

There is a new NBER working paper out which asks, What Is the Case for Paid Maternity Leave? The paper is by Gordon B. Dahl, Katrine V. Løken, Magne Mogstad, and Kari Vea Salvanes and its abstract reads,
Paid maternity leave has gained greater salience in the past few decades as mothers have increasingly entered the workforce. Indeed, the median number of weeks of paid leave to mothers among OECD countries was 14 in 1980, but had risen to 42 by 2011. We assess the case for paid maternity leave, focusing on parents' responses to a series of policy reforms in Norway which expanded paid leave from 18 to 35 weeks (without changing the length of job protection). Our first empirical result is that none of the reforms seem to crowd out unpaid leave. Each reform increases the amount of time spent at home versus work by roughly the increased number of weeks allowed. Since income replacement was 100% for most women, the reforms caused an increase in mother's time spent at home after birth, without a reduction in family income. Our second set of empirical results reveals the expansions had little effect on a wide variety of outcomes, including children's school outcomes, parental earnings and participation in the labor market in the short or long run, completed fertility, marriage or divorce. Not only is there no evidence that each expansion in isolation had economically significant effects, but this null result holds even if we cumulate our estimates across all expansions from 18 to 35 weeks. Our third finding is that paid maternity leave is regressive in the sense that eligible mothers have higher family incomes compared to ineligible mothers or childless individuals. Within the group of eligibles, the program also pays higher amounts to mothers in wealthier families. Since there was no crowd out of unpaid leave, the extra leave benefits amounted to a pure leisure transfer, primarily to middle and upper income families. Finally, we investigate the financial costs of the extensions in paid maternity leave. We find these reforms had little impact on parents' future tax payments and benefit receipt. As a result, the large increases in public spending on maternity leave imply a considerable increase in taxes, at a cost to economic efficiency. Taken together, our findings suggest the generous extensions to paid leave were costly, had no measurable effect on outcomes and regressive redistribution properties. In a time of harsh budget realities, our findings have important implications for countries that are considering future expansions or contractions in the duration of paid leave. (Emphasis added.)
But will supporters of greater maternity leave take any notice of such research, no matter how harsh the budget realities.