Wednesday, 1 June 2016

Macro Musings podcast: George Selgin

From David Beckworth’s new podcast series, Macro Musings comes this audio of an interview with George Selgin.
My latest Macro Musings podcast is with George Selgin, director of the Cato Institute's Center for Monetary and Financial Alternatives. We discuss in depth Selgin's call for a a Productivity Norm, a nominal income target for central banks that would result in inflation moving inversely with expected productivity growth. That is, he would have central banks stabilize aggregate demand growth but allow more price level flexibility based on technological advances. Along the way we cover the difference between benign and malign deflation and look, examine some of the historical cases of deflation, and discuss the recent productivity surge of the late 1990s and early 2000s.

It was a great conversation with George. Those listeners wanting more information on his Productivity Norm target for central banks should check out the links below.

A more complete but readable discussion of the productivity norm idea is given in IEA's book "Less than Zero: the Case for a Falling Price Level in a Growing Economy" (pdf) by George Selgin

Do witchcraft beliefs halt economic progress?

An interesting, but not often asked question. And the answer may be yes.
Believing in witchcraft is a salient feature of daily life in many parts of the world. In worst-case scenarios, such beliefs lead to murder, and they may also cause destruction of property or societal ostracism of the accused witches. The first large-scale economics study to explore beliefs in witchcraft, broadly defined as the use of supernatural techniques to harm others or acquire wealth, links such beliefs to the erosion of social capital.

Where witchcraft beliefs are widespread, American University Economics Professor Boris Gershman found high levels of mistrust exist among people. Gershman also found a negative relationship between witchcraft beliefs and other metrics of social capital relied upon for a functioning society, including religious participation and charitable giving.

It's long been argued that witchcraft beliefs impede economic progress and disrupt social relations, and Gershman's statistical analysis supports that theory.
"Witchcraft beliefs are likely to erode trust and cooperation due to fears of witchcraft attacks and accusations. The evil eye leads to underinvestment and other forms of unproductive behavior due to the fear of destructive envy, where envy is likely to manifest in destruction and vandalism involving those who own wealth," Gershman said.
The research behind this is Boris Gershman, Witchcraft beliefs and the erosion of social capital: Evidence from Sub-Saharan Africa and beyond, Journal of Development Economics (2016).

A summary of the paper is available here.

Sunday, 29 May 2016

Condliffe Lecture: Department of Economics and Finance, University of Canterbury

2016 Lecture: Early Life and the Roots of Economic Inequality

Janet Currie
Henry Putnam Professor of Economics and Policy Affairs,
Chair, Department of Economics,
Director of the Center for Health and Wellbeing,
Princeton University.

When: Monday 4 July 2016, 5:30 – 6:30pm
Where: Undercroft 101 Seminar Room, Puaka – James Hight Building

In this lecture, Professor Currie will provide an overview of the literature highlightling the importance of early childhood, discuss how to compensate for early deprivation, and share examples of successful interventions.

RSVP: This is a free public lecture. Register online through UC Connect Eventbrite


In many industrial societies, increasing inequality has become a pressing social, political, and economic concern.  Yet the roots of adult economic inequality often lie early in life.  There is increasing evidence that adverse circumstances early in life, and even in utero, can leave lasting scars.  Yet at the same time we have learned a great deal about how to compensate for early deprivation and there are many examples of successful interventions.  Professor Currie will provide an overview of the literature highlighting the importance of early childhood and the fact that while children are fragile, they are also resilient.

About the speaker

Janet Currie is the Henry Putnam Professor of Economics and Public Affairs at Princeton University and the Director of Princeton’s Center for Health and Well Being.  She is a member of the Institute of Medicine, a fellow of the American Academy of Arts and Sciences, the American Academy of Political and Social Sciences, and the Econometric Society, as well as past Vice President of the American Economic Association and in-coming President of the Society of Labor Economists.  She is on the Board of Reviewing Editors of Science magazine and on the editorial board of the Quarterly Journal of Economics.

Her research focuses on the health and well-being of children including early intervention programs, expansions of public health insurance, public housing, and food and nutrition programs. Her current research focuses on socioeconomic differences in child health, environmental threats to children’s health, and the long term effects of poor health in early childhood.

Saturday, 28 May 2016

New Austrian Economics book series

There is a new Austrian Economics book series being edited by Per Bylund which is looking for book proposals and suggestions for authors.

Checkout the series web page at Agenda Publishing.

Series Description
This book series publishes new scholarship within the Austrian school of economics. Although considered outside of mainstream economics since the 1930s, the Austrian school has continued to thrive as an alternative position that traces back to the marginalist revolution.

The Austrian approach provides unique insight into market processes and offers a powerful framework for understanding major economic events such as the fall of socialist economies in the early 1990s and the financial crisis of 2007–08. Thanks to this promise, and to the limitations of mainstream economics, the Austrian tradition of social thought has recently attracted increasing interest from a new generation of economists, social scientists, and related scholars.

The series seeks to capture this renewed interest by publishing original research within the modern Austrian tradition: contributions that make new theoretical advances – building on the work of Mises, Hayek, Rothbard, Kirzner, Lachmann and others – or that offer fresh and novel applications of this work. The series publishes research that advances or relates to the Austrian tradition from scholars in economics, management, philosophy, political science, sociology, and related fields.

The series invites contributions from both new and established scholars and welcomes proposals ranging from multi-authored collections of essays to single-authored monographs. Junior scholars are especially encouraged to submit their work.

For further details, or to discuss submitting a proposal, please contact the series editor or publisher

Friday, 27 May 2016

Lobbyists are behind the rise in corporate profits

An interesting headline that comes from an article by James Bessen at the Harvard Business Review.

Corporate profits in the US are up. But is this good for society at large. May be yes, may be no. Economists have two hands!
First, higher profits create greater economic inequality. Rising aggregate profits correspond to a decline in labor’s share of output, contributing to stagnant wages. Also, greater profits for some corporations but not others may create greater wage inequality.
Second, the rise in profits might represent a decline in competition and, with that, a decline in economic dynamism. While a dynamic, competitive economy rewards innovative firms with high profits and punishes poor performers with low profits, sustained aggregate profits suggest, instead, that firms are able to get away with higher prices because competition is limited. Firms engage in political “rent seeking”—lobbying for regulations that provide them sheltered markets—rather than competing on innovation. If so, then high profits portend diminished productivity growth.
But there is a more optimistic narrative about the rise of profits. Perhaps profits are rising because firms are increasingly making profitable investments in new technology, in IT, or in their organizational capabilities. In this account, high profits represent increased economic dynamism.
So which is it? The answer matters.

Bessen writes,
In a new research paper, I tease apart the factors associated with the growth in corporate valuations relative to assets (Tobin’s Q) and the growth in operating margins. I account for the roles of R&D, spending on advertising and marketing, and on administrative costs, including IT. I also consider investments in lobbying, political campaign spending, and regulation; and I look for links between rising profits and industry concentration and stock volatility.

I find that investments in conventional capital assets like machinery and spending on R&D together account for a substantial part of the rise in valuations and profits, especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase.
He continues,
Much of this result is driven by the role of regulation, so it is important to understand the link between regulation and profits. Lobbying and political campaign spending can result in favorable regulatory changes, and several studies find the returns to these investments can be quite large. For example, one study finds that for each dollar spent lobbying for a tax break, firms received returns in excess of $220.
Which is why many economists want government kept out of business as much as possible. Light-handed regulation being best. It minimises the rents on offer.

A more interesting and less obvious question is how can regulation in general should be associated with higher profits? Isn't one big reason for regulation to keep profits down? Bessen explains,
Yet even regulations that impose costs might raise profits indirectly, since costs to incumbents are also entry barriers for prospective entrants. For example, one study found that pollution regulations served to reduce entry of new firms into some manufacturing industries.

Even when regulators try to reduce prices, firms can benefit. For example, in 1992 Congress passed the Cable Television Consumer Protection and Competition Act in response to high cable TV rates. Regulators expected cable prices to fall by 10%. Instead, however, cable companies changed their programming bundles, prices did not fall, and corporate valuations increased.
In short, regulators don't have the knowledge to fully predict the reactions of the firms they regulate and this can result in unintended consequences. Bessen goes on to say,
The pattern around the 1992 Cable Act is representative: I find that firms experiencing major regulatory change see their valuations rise 12% compared to closely matched control groups. Smaller regulatory changes are also associated with a subsequent rise in firm market values and profits.
So Bessen's research supports the view that political rent seeking is responsible for a significant portion of the rise in profits. Again this tells us we want to keep government and business as far away from each other as possible. The more governments interject themselves into the world of business the greater the opportunity for firms to influence government actions to the firm's advantage.

Bessen concludes by saying,
Two characteristics make these changes particularly worrisome. First, the link between regulation and profits is highly concentrated in a small number of politically influential industries. Among non-financial corporations, most of the effect is accounted for by just five industries: pharmaceuticals/chemicals, petroleum refining, transportation equipment/defense, utilities, and communications. These industries comprise, in effect, a “rent seeking sector.” Concentration of political influence among a narrow group of firms means that those firms may skew policy for the entire economy. For example, the pharmaceutical industry has actively stymied efforts to address problems of patent trolls that affect many other industries.

Second, while political rent seeking is nothing new, the outsize effect of political rent seeking on profits and firm values is a recent development, largely occurring since 2000. Over the last 15 years, political campaign spending by firm PACs has increased more than thirtyfold and the Regdata index of regulation has increased by nearly 50% for public firms. However much political rent seeking has affected economic dynamism and inequality so far, the effect is likely to be greater in the near future.
The only way you can hope to, at least, limit business influence is to create a system whereby the payoffs to influence are small because governments interfere little. The irony of having lots of regulation is that you make rent seeking profitable, and firms go where the profits are. Lots of regulation can result in lots of lobbying since there are lots of  rents to be had.

Of course firms are not the only groups that can gain by influencing governments and regulators. Trade unions or consumer groups or environmental groups or churches, or health groups or universities or ..... all can gain by trying to influence governments in ways that help that particular group. If there are rents on offer then they are available to all.

Thursday, 26 May 2016

Incentives matter: tobacco file

One of the great things about prices is that they provide incentives.

The graph above shows the effects of the introduction of a tax on tobacco. Prior to the law’s enactment in 2009, the tax rates on roll-your-own tobacco and pipe tobacco were the same. One effect of the new law was to make the tax rate on roll-your-own tobacco over US$20 per pound higher than the tax on pipe tobacco.

You can see what happened. Consumers, not very surprisingly, substitute from the dearer product to the cheaper product, changing the demand for both products, and in this case potentially undoing some of the public health benefits the tax was intended to encourage. How did politicians not see this coming?

HT: Marginal Revolution.

Wednesday, 25 May 2016

"The Theory of the Firm: An overview of the economic mainstream" web page

There is now a web page for the forthcoming book,

The Theory of the Firm: An overview of the economic mainstream

The page gives a brief overview of the the book, it outlines the table of contents, has a pdf copy of the introduction available and notes booksellers websites where the book can be pre-ordered.

And that last bit of information is the important bit. Its a great book, well worth buying for wives, husbands, girlfriends, boyfriends,  mistresses, mother-in-laws, toyboys, family, friends, pets, total strangers you meet in the street, or any combinations of the above. Its great for birthdays, Christmas, holiday reading, Mother's day, Father's day, any day.

Honestly I don't really care why you buy it, what's important is that you buy, multiple copies, often! You really don't want to see an struggling economist die in abject poverty.

No, really you don't!

Sunday, 22 May 2016

Plato, the division of labour and production

The well known historian of economic thought James Bonar makes an interesting point about Plato's views on production, namely that the division of labour drives the organisation of production. Bonar writes,
"Plato's conception of Production is in close connection with this view of Wealth. It is important not that men should have as many wants as possible, and satisfy them all, but that they should find out what their special work is in the world and do it. He illustrates this doctrine in various passages of the Republic, and especially in the clearest of his economic analyses, the account of Division of Labour in the Second Book. A State, he there says, is formed because the individual is not able to supply all his wants by himself, but only when he makes common cause with other men, and devotes himself to one single industry for the common good, on the understanding that the rest are doing the same. Thus arise the separate trades of farming, building, weaving, and shoemaking ; and this division of labour is best for the following reasons : Men and women are not all born alike, but with special powers fitting them for special work. Second, by attention to one occupation alone men will do much better work than when attempting several. Third, because time is saved and opportunities (of season, etc.) are more promptly utilized. In this way articles are made in greater number, of better quality, and with greater ease, than when each man is a Jack-of-all-trades" (Bonar 1992: 14-5).
Here the State just means a city or society. Plato gives a different origin for the state in the sense of central government.

It is interesting to note, first, that Plato was clearly aware of the idea of the division of labour and the advantages that follow from it. This was 2000 years before Adam Smith. Next the division of labour gives rise to different industries, and we might infer different "firms": building, weaving, shoemaking etc. We also see the idea that the division of labour gives rise to interdependence. A man "devotes himself to one single industry for the common good, on the understanding that the rest are doing the same". So, roughly, everybody gains as long as everybody specialises. And this must give rise to trade where you trade whatever you produce for all the other things you want.

So here we see production being driven and organised in response to the division of labour. One can expand on this point by arguing that a firm is an entrepreneurial response that allows the entrepreneur to create a greater division of labour within the firm than is possible across the market.

  • Bonar, James (1992). Philosophy and Political Economy, New Brunswick: Transaction Publishers. Original publication 1893.