Saturday, 23 August 2014

Interesting blog bits

  1. Carlos Vargas-Silva asks Are Migrants Good for the Economy?
    Two studies about the impact of migration on the UK economy have been published which – if media reports are to believed – appear to contradict one another. A closer reading of these reports, however, shows that in fact they come to very similar economic conclusions.
  2. Chris Dillow on Optimum Deaths
    What is the optimum number of migrant deaths? The answer is not zero.
  3. Tim Worstall points out What glories this capitalist free market thing hath wrought
    There’s nothing worse than being exploited by some running lackey pig dog of a capitalist, as Deirdre McCloskey reminds us.
  4. Joel Waldfogel on Piracy Undermining Content Creation: Loch Ness Monster or Black Swan?
    Theory and common sense dictate that piracy should threaten new product creation. If it costs money to bring new works to market, then a reduction in revenue – all else constant – should render some projects uneconomic. So compelling is this theory that the content industries share it with lawmakers at every opportunity. Robert Solow once quipped, “You see the computer age everywhere but in the productivity statistics.” So it has been with piracy and content creation: one can see a negative impact of piracy everywhere except in the evidence about content creation. Maybe until now.
  5. Ed Dolan on Universal Basic Income and Work Incentives: What Can Economic Theory Tell Us?
    Everywhere you look, it seems, people are talking about a Universal Basic Income (UBI)—a monthly cash benefit paid to every citizen that would replace the existing means-tested welfare system.
  6. Tim Harford on Monopoly is a bureaucrat’s friend but a democrat’s foe
    “It takes a heap of Harberger triangles to fill an Okun gap,” wrote James Tobin in 1977, four years before winning the Nobel Prize in economics. He meant that the big issue in economics was not battling against monopolists but preventing recessions and promoting recovery.
  7. Andrea Prat asks How can we measure media power?
    The potential for political influence is what most people think of when they talk about the power of the media. A new media power index, proposed in this column, aggregates power across all platforms and focuses not on markets but on voters. It measures not actual media influence but rather its potential. Using the index, the author finds that the four most powerful media companies in the US are television-based and the absolute value of the index is high. This indicates that most American voters receive their news from a small number of news sources, which creates the potential for large political influence.
  8. Gabriel M. Ahlfeldt, Stephen Redding, Daniel M. Sturm and Nikolaus Wolf on The economics of density: Evidence from the Berlin Wall
    Economic activity is highly unevenly distributed across space. Understanding what drives the agglomeration and dispersion is important for many economic and policy questions. This column describes a theoretical model of internal city structure incorporating agglomeration and dispersion and heterogeneity in local fundamentals. The authors use the division and reunification of Berlin as a natural experiment. Their findings show that both heterogeneity in locational fundamentals and agglomeration forces are important in shaping a city’s internal structure.

Friday, 22 August 2014

EconTalk this week

Terry Anderson, Distinguished Fellow at the Property and Environment Research Center (PERC) and Senior Fellow at the Hoover Institution, talks to EconTalk host Russ Roberts about free-market environmentalism, the dynamics of the Yellowstone ecosystem, and how property rights can protect natural resources.

A direct link to the audio is available here.

Should change the way we teach economics?

This is a question that Professor, and Nobel Prize winner, Alvin Roth was asked by a reporter from Brazil. The questions and Roth's answers follow:
1) Should the content of economics degrees change? Why? Why not?

I guess you mean should we change what we teach young economists, and of course the only answer is “of course!” What we teach young physicists and biologists and doctors and civil engineers changes as we learn more about those things, and economics is no different.

2) Has the criticism of economics been exaggerated after the 2008 crisis? To what extent is the current debate on content useful?

I think the 2008 crisis has been useful for pointing out that economics is, in many of its parts, still a very young science. For an analogy, think of medicine, which is the part of biology that we most often look to for advice, and is also a young science in many of its parts. Each year we worry that there might be an influenza epidemic due to whatever new strain of flu is observed in Asia that year, and each year vaccines are prepared, in an attempt to avert a disaster like the influenza pandemic of 1918. So far we've been lucky, but it’s not because we have a deep understanding of what could cause another epidemic or how to prevent it. But if another epidemic occurs, we’ll need to rely more on doctors and medicine, not less. So, while we need to understand epidemics better, that’s not a deep criticism of medicine, just an acknowledgement of some of its current limitations. Similarly for economic crises, and economics.

3) What changes should be made?

One of the things we’re devoting more attention to at Stanford is the kind of economic engineering called market design, which pays attention to the detailed rules by which particular marketplaces operate, and to experimental economics, which gives us a tool to better understand how people behave in economic environments.

4) Has economics teaching become too wedded to scientific pretension? Was excessive faith invested in abstract mathematical models?

Abstract mathematical models are very useful, in combination with other kinds of investigation. A lot of my work is devoted to market design, and my colleagues and I build a lot of marketplaces that have some of their ancestry in abstract mathematical models (including some of those explored by the famous Brazilian economist Marilda Sotomayor, in whose honor there is a conference next week). Mathematical models are becoming increasingly important as we start to explore really big data sets, since not only do you need mathematical tools to test hypotheses on data, you need models to even suggest what hypotheses you should be testing. Theory and observation work best in combination…
On this last point one of the top economic theorists in the area of the theory of the firm and contract theory, Oliver Hart, has noted (and this would be my answer to Matt Nolan's recent Discussion Tuesday question),
Although theory may not be as prominent as it once was, it remains essential for understanding the (increasingly) complex world we live in. One cannot analyze the bewildering amount of data now available without the organizing framework that theory provides. I would also suggest that one cannot understand the extraordinary events that we have recently witnessed, such as the financial crisis, or make sensible policy recommendations in response to these events, without the organizing framework of theory.
So for those who seem to think data can do everything, and we should therefore stop teaching theory, I don't think so. Empirical work is only as good as the theory underlying it. So, no, running a million regressions and picking the one that confirms your prejudices isn't how you do good economics.

Thursday, 21 August 2014

Coase's view of the firm

An obituary of Ronald Coase appeared in the first issue of the new journal he helped set up, Man and the Economy. The piece is by Ning Wang, Coase's co-author of his last book "How China Became Capitalist". At one point Wang discusses Coase's 1937 paper "The Nature of the Firm". He notes that Coase asked a very simple question, if everything in a market economy is coordinated by the price mechanism, as claimed in standard economics textbooks, "Why does a firm emerge at all in a specialized exchange economy?" The answer we now know as transaction costs.
The answer was not that the firm performed some magic that the market could not. Rather, Coase found that using the market itself was not free. The costs of using the pricing mechanism, which have become known as transaction costs, give rise to the firm.
For his [Coase's] purpose, the discovery of transaction costs in the working of the market economy was sufficient as a novel explanation of the firm. For Coase, transaction costs were more an empirical finding than an analytical invention. Their nature and magnitude could only be unveiled through a cumulative interplay of empirical investigations and theoretical refinement. Attempts to elaborate the concept on purely analytical ground, without systematic empirical studies, would not bring much clarity.
A question that Coase's answer gave rise to is, what is the relationship between the market and the firm?
Coase’s explanation of the firm has led many to view the firm and the market as substitutes. Observing the ubiquity of firms in a market economy, Coase inferred that there must exist a cost of using the pricing mechanism. Otherwise, coordination among specialized agents could all be done through the market. From a static point of view, the firm and market present two competing mechanisms to organize business transactions, a choice later often referred to as "to make" versus "to buy" in the literature. In the real dynamic world, the firm and the market are the two main types of business organizations that make up the economy. They complement each other as well as substitute each other.
Seeing markets and firms as substitutes often results in economists seeing the creation of firms as an answer to market failure. But, I have often wondered, why is it we see market failure as giving rise to rises rather than "firm failure" giving rise to markets?
The rise of the firm in a market economy does not imply "market failure" or the triumph of "selective intervention" on the part of the firm. Selective intervention would require the firm (or its manager) to know ex ante its advantages relative to the market and to act accordingly. This information requirement is far too demanding to be met in reality even if the firm has the correct incentives to collect and act on the relevant information. Coase urged us to come to terms with the fact that no economic institution is perfect.
The impossibility of firms having the needed information for selective intervention has a Hayekian feel to it. Perhaps not too surprising given that Hayek as at the LSE during Coase's time there.

Also in the same issue of Man and the Economy is a two part interview between Wang and Coase. Part 1 having taken place on December 28 and 29, 2010 and Part 2 on May 4 and 5, 2013. Part 2 of the interview contains the following exchange:
Wang: Microeconomics is about demand and supply. Compared with classical economics, marginal analysis clearly offers a deeper understanding of consumer choice. But I don’t think it is equally powerful in explicating production, the supply side of the economy.

Coase: To understand production, we have to go back to Adam Smith’s division of labor. It serves well as a starting point, even though the modern economy today has become far more complicated.

Wang: This must be Smith’s most undeserving failure. Modern economics is built on Smith’s framework of the “invisible hand”. But it leaves no room for the division of labor.

Coase: Modern economics shows little interest in production. I am not sure production function tells us anything about production in the economy.

Wang: Adam Smith used the pin factory as an example to develop his analysis of the division of labor. Today, to investigate the division of labor, we can no longer afford to confine our focus to a single firm. Instead, we have to study the organizational structure of production.

Coase: That’s right. The firm remains the cell of the economy, but the intricate relations and constant interactions among the cells determine economic dynamism.
Coase and Wang (2011) also emphasises the importance of the division of labour,
Price theory is primarily concerned with resource allocation, with little to say about production and innovation. The study of the industrial structure of production offers a research program to bring the division of labor back to the center of economics, with direct implications for the study of innovation and entrepreneurship.
Interesting that even as late as 2013 Coase thought that standard economics still took little interest in the production side of the economy. Per Bylund made the same point a couple of years earlier,
[t]he theory of the firm has been a neglected area of study in mainstream economics. Despite Ronald Coase bringing the issue up for discussion in 1937, it was not on the research agenda until the 1970s. Even now, as both Coase and Oliver Williamson, the founder of and prominent scholar in the transaction cost-focusing analysis of firm organization, have received the Nobel Prize in economics, the area remains in the periphery of economic analysis (Bylund 2011: 189).
But the more interesting point is the emphasis Coase puts on the division of labour as the starting point of an analysis of production. The division of labour is often thought to be something Coase assumed to be of little importance to the theory of the firm. Clearly not.

  • Bylund, Per (2011). `Division of Labor and the Firm: An Austrian Attempt at Explaining the Firm in the Market', Quarterly Journal of Austrian Economics, 14(2): 188-215.
  • Coase, Ronald H. and Wang, Ning (2011) 'The Industrial Structure of Production: A Research Agenda for Innovation in an Entrepreneurial Economy', Entrepreneurship Research Journal, 1(2): Article 1.

Two interesting looking recent working papers

First a paper on Thomas Piketty's recent book:
The Rise and Fall of General Laws of Capitalism
Daron Acemogluy James A. Robinsonz

Thomas Piketty's recent book, Capital in the Twenty First Century, follows in the tradition of the great classical economists, Malthus, Ricardo and Marx, in formulating "general laws" to diagnose and predict the dynamics of inequality. We argue that all of these general laws are unhelpful as a guide to understand the past or predict the future, because they ignore the central role of political and economic institutions in shaping the evolution of technology and the distribution of resources in a society. Using the economic and political histories of South Africa and Sweden, we illustrate not only that the focus on the share of top incomes gives a misleading characterization of the key determinants of societal inequality, but also that inequality dynamics are closely linked to institutional factors and their endogenous evolution, much more than the forces emphasized in Piketty's book, such as the gap between the interest rate and the growth rate.
and then one on free banking and economic growth in Quebec:
Free Banking and Economic Growth in Lower Canada, 1817–1851
Mathieu Bedard and Vincent Geloso

Generally, the historical literature presents the period from 1817 to 1851 in Lower Canada (modern day Quebec) as one of negative economic growth. This period also coincides with the rise of free banking in the colony. In this paper we propose to study the effects of free banking on economic growth using theoretical and empirical validations to study the issue of whether or not economic growth was negative. First of all, using monetary identities, we propose that given the increase in the stock of money and the reduction in the general price level, there must have been a positive rate of economic growth during the period. We also provide complementary evidence drawn from wages that living standards were increasing. It was hence impossible for growth to have been negative. Secondly, we propose that the rise of privately issued paper money under free banking in the colony had the effect of mitigating the problem of the abundance of poor quality coins in circulation which resulted from legal tender legislation. It also had the effect of facilitating credit networks and exchange. We link this conclusion to the emergence of free banking which must have been an important contributing factor. Although we cannot perfectly quantity the effect of free banking on economic growth in Lower Canada, we can be certain that its effect on growth was clearly positive.

Sunday, 17 August 2014

Books on the firm

When thinking about the history of the theory of the firm, as we all do early on a Sunday morning, I've been thinking about which books are really important to the subject and thus are actually worth reading. Many of the major contributions to the theory of the firm have come in the form of journal articles. Economists are not big on writing books.

But what books are worth reading to get an understanding of the contemporary (post-1970) mainstream theory of the firm? Well here's my list.

Two books which contain the classics on which most of the contemporary theories are based are:
  1. Knight, Frank H. (1921). Risk, Uncertainty and Profit, Boston: Houghton Mifflin Company. This is a book that is getting an increasing amount of attention. Albeit very late in the piece
  2. Oliver E. Williamson and Sidney G. Winter (eds.) (1993). The Nature of the Firm: Origins, Evolution, and Development, New York, Oxford: Oxford University Press. This includes a reprint of Coase's 1937 classic "The Nature of the Firm". It also includes reprints of Coase's three essays on the Origin, Meaning and Influence of his 1937 paper as well as his Noble Lecture: "The Institutional Structure of Production".
When it comes to the important books that the classics gave rise to, there are a few. An obvious place to start is with three books by Oliver Williamson. These develop the transaction cost approach to the firm:
  1. Williamson, Oliver E. (1975). Markets and Hierarchies: Analysis and Antitrust Implications, New York: The Free Press.
  2. Williamson, Oliver E. (1985). The Economic Institutions of Capitalism, New York: The Free Press.
  3. Williamson, Oliver E. (1996). The Mechanisms of Governance, Oxford: Oxford University Press.
To cover the property rights approach to the firm there is:
  1. Hart, Oliver D. (1995). Firms, Contracts, and Financial Structure, Oxford: Oxford University Press.
As to the reasons for, and the shortcomings of, different forms of ownership of firms see Henry Hansmann's book:
  1. Hansmann, Henry (1996). The Ownership of Enterprise, Cambridge, Mass.: Harvard University Press.
A number of interesting essays appear in this book by Harold Demsetz:
  1. Demsetz, Harold (1995). The Economics of the Business Firm: Seven Critical Commentaries, Cambridge: Cambridge University Press.
Two recent books that may have influence in the future due to their integration of the theory of the entrepreneur with the theory of the firm are:
  1. Spulber, Daniel F. (2009). The Theory of the Firm: Microeconomics with Endogenous Entrepreneurs, Firms, Markets, and Organizations, Cambridge: Cambridge University Press.
  2. Foss, Nicolai J. and Peter G. Klein (2012). Organizing Entrepreneurial Judgment: A New Approach to the Firm, Cambridge: Cambridge University Press.
I'm sure there are a few others I have missed.

Saturday, 16 August 2014

Payday lending

Payday lending is controversial all around the world including New Zealand. But the quality of debate on the issue often isn't that high. At the Bleeding Heart Libertarians blog philosopher Matt Zwolinski improves things by noting 5 Points about the Morality of Payday Lending:
Here are five of the most important points I’ve found to bear in mind when thinking about the morality of payday loans.
  1. If payday lending is so profitable, why isn’t everybody doing it? This is a good question to ask yourself anytime you hear a story about some company earning unusually high profits off the back of a vulnerable population. If investors could earn a 200% rate of return by investing in new payday lending operations, why are smart investors wasting their time and money with anything else? Perhaps there’s something more to the picture that we’re not seeing?
  2. Payday lending is not that profitable. Well, we don’t have to guess. People have studied this. And according to one study, the average profit earned by payday lenders was just 7.63%. By way of comparison, the same study reports that the average Starbucks franchise earns about 9% profit. So, if that 400% APR isn’t translating into sky-high profits for payday lenders, where exactly is it going?
  3. Payday loans are short term loans. An Uber ride from downtown San Diego to La Jolla costs about $25. I think that’s a pretty reasonable price. But suppose I told you that the rate Uber charges to drive you 12.5 miles in San Diego would translate into a $6,000 trip from San Diego to Boston! Outrageous! Exploitative! Except, nobody uses Uber that way. And almost nobody uses payday lenders to take out loans that are appropriately characterized by an annual percentage rate. Payday loans are short term loans. They’re like an Uber ride to your local pub. Thinking about their fees in the same terms you’d use to think about the 30 year mortgage on your home gives us a very misleading picture of how much revenue payday lenders are bringing in.
  4. Being a payday lender is expensive. So payday lenders aren’t earning as much as we think. But they’re also spending a lot more than we think. Payday lenders, unlike banks, keep long hours. That costs money. They also have a relatively high store density. That costs money, too. Finally, think about this. Payday lenders are lending to people who have a hard time getting credit elsewhere. Why do they have a hard time getting credit elsewhere? Because they have very bad credit. What does that mean for payday lenders? It means that sizeable portion of the loans they extend are going to default. And that costs money.
  5. Bans on “usury” only make things worse. So, at the end of the day, payday lenders charge a high rate to their customers because that’s what it takes to cover their costs. That means if we try to artificially lower their rates by legal bans on “usury,” we’re going to make it impossible for them to cover their costs. And when businesses can’t cover their costs, they shut down. Question: who does that help? The who were forced by poverty and desperate circumstances to utilize the services of payday lenders are still poor, and still desperate. All you’ve done is taken away from them the least bad option they had. It’s a good thing to be concerned with the plight of the poor. It’s a good thing to want to do something to help. But it’s important to make sure that the thing you’re doing actually helps, rather than hurts.

Are foreign takeovers getting domestic cherries or lemons?

The concerns of economic nationalists - read NZ First, the Conservatives, Labour etc in the case of New Zealand - about foreign takeovers of assets, including land, are rooted in the idea that foreign enterprises extract the most valuable assets from top performing domestic firms. This argument puts to one-side for now the ever present xenophobia which underlies much of the anti-foreign investment rhetoric in New Zealand. Practical concerns about economic efficiency of cross-border mergers and acquisitions markets hinge on whether takeovers transfer underperforming domestic economic resources toward more productive uses at foreign enterprises. How then to reconcile these concerns when forming policies about cross-border activity? Well in a new column at Farid Toubal , Bruce Blonigen, Lionel Fontagné and Nicholas Sly argue it’s all in the timing.

One of the big questions about foreign investment is are the foreign firms picking cherries or choosing lemons?
For many years the evidence about targets of foreign acquisitions has been mixed. Some theories and data suggest that ‘lemons’ – domestic firms with relatively weak performance – are the most likely targets of foreign acquisition. Yet more recent empirical studies have pointed to ‘cherries’ as the most likely targets for takeover by foreign firms. The disagreement about which type of domestic firms – cherries or lemons – are pursued by foreign enterprises made it difficult to answer policy makers’ question about which of their assets, economic networks, and production possibilities were suddenly in the hands of foreign ownership.

The doubt over which types of firms were being acquired also raises concerns about the efficiency of international merger and acquisition (M&A) markets. Ideally, market transactions should transfer resources toward their most efficient use. The same holds for M&A markets, which should transfer the assets of lesser performing firms to enterprises that can make better use of them. If domestic firms are high performing cherries, it is not evident that a transfer of ownership of their resources to a foreign enterprise is optimal; being a cherry implies that a domestic firm is already using its resources effectively. Poor performing lemons might seem to fit the bill. Yet the question remains open as to why a foreign enterprise would choose to enter a market using resources that even a domestic firm – which had more familiarity with resident consumers, regulations, and distribution networks – could not use profitably.
Blonigen, Fontagne, Sly, and Toubal argue its all in the timing.
In Blonigen, Fontagne, Sly, and Toubal (2014), we show that the conundrum over whether domestic cherries or lemons are targets of acquisition can be resolved by considering not only the types of assets that foreign acquirers seek, but also the timing of takeovers. Indeed, foreign firms seek domestic targets that are historically high performing. In fact, when we look at foreign acquisitions that occur in the French manufacturing sector over the last decade, we find that even the least productive domestic target outperforms the typical firm in its sector in the years prior to acquisition. See Figure 1 below, which takes advantage of detailed administrative data from France to illustrate systematic changes in firm characteristics as they transition from domestic to multinational status. We plot total factor productivity (TFP) for all manufacturing firms that are acquired by foreign owners between 1999 and 2006 relative to sector and year averages, from three years prior to the acquisition to four years after the firm is acquired. The middle line shows the relative detrended TFP for the average French firm acquired by a foreign owner, whereas the lines above and below show the relative detrended TFP for the 95th and 5th percentiles, respectively. In the years prior to acquisition, domestic targets of foreign acquisition do appear to be ‘cherries.’ They have all a TFP that is above industry-year average.

Figure 1.

Yet despite the high performance of target firms observed several years prior to acquisition, Figure 1 shows that, prior to acquisition, targets realize significant productivity losses relative to other firms in their sector. The losses in productivity are so severe that by the time they are acquired, targets of foreign acquisition no longer appear to be cherries; on average they are indistinguishable from the typical firm from their sector. Put differently, in the years leading up to acquisition domestic targets are underperforming relative other firms in their industry. In these years, targets do look like ‘lemons.’

Rather than targets of foreign acquisition being characterized purely as top performers or underperformers in the market place, foreign enterprises seek out domestic firms that were previously the stars of their industries but then suffered a recent series of negative shocks. Hence, the targets of foreign takeovers are ‘Cherries for Sale.’

This timing of cross-border acquisition activity is quite intuitive. Foreign enterprises seek out targets that have the best and most valuable assets. And not surprisingly, it is the most productive target firms that had the largest incentives to invest in developing such assets. However, foreign enterprises can only offer viable takeover bids once the domestic firm has suffered a turn in fate, and is underutilizing it valuable assets. In this case it is better for the domestic firm to sell its assets to a foreign acquirer that can make better use of them.
So what is the upshot of all of this?
This timing of takeover activity implies that policy makers should have fewer concerns about relinquishing national ownership of its domestic enterprises, as the ‘Cherries for Sale’ are no longer the best and most valuable economic agents within their economic sectors. The observed timing of takeover activity also suggests the efficiency of cross-border M&A markets. Cross-border acquisitions appear to transfer productive assets, technologies, and distribution networks toward enterprises that can make better use of these valuable resources.
So foreign ownership may be good for you after all. The assets being bought by the foreign companies are those not preforming well under their current owners and the foreign owners can make better use of those assets. This is a gain for the local economy.

  • Blonigen, B A, L Fontagne, N Sly, and F Toubal, “Cherries for Sale: The Incidence and Timing of Cross-Border M&A”, Journal of International Economics, 2014, forthcoming.

Friday, 15 August 2014

Is the division of labour a form of enslavement?

Or so asks Timothy Taylor at the Conversable Economist blog. Taylor writes,
The idea that an economy functions through a division of labor, in which we each focus and specialize in certain tasks and then participate in a market to obtain the goods and services we want to consume, is fundamental to economic analysis. Indeed, the very first chapter of Adam Smith's 1776 classic The Wealth of Nations is titled "Of the Division of Labor," and offers the famous example of how dividing up the tasks involved in making a pin is what makes a pin factory so much more productive than an individual who is making pins.
While Smith opens "An Inquiry into the Nature and Causes of The Wealth of Nations" with a discussion of the division of labour at the microeconomic (pin factory) level he quickly moves the analysis to the market level. When discussing Smith’s approach to the division of labour McNulty (1984: 237-8) comments,
“[h]aving conceptualized division of labor in terms of the organization of work within the enterprise, however, Smith subsequently failed to develop or even to pursue systematically that line of analysis. His ideas on the division of labor could, for example, have led him toward an analysis of task assignment, management, or organization. Such an intra-firm approach would have foreshadowed the much later−indeed, quite recent−efforts in this direction by Herbert Simon, Oliver Williamson, Harvey Leibenstein, and others, a body of work which Leibenstein calls “micromicroeconomics”. [ ...] But, instead, Smith quickly turned his attention away from the internal organization of the enterprise, and outward toward the market and the realm of exchange, perhaps because he found therein both the source of division of labor, in the “propensity in human nature truck, barter and exchange” and its effective limits”.
Taylor then moves on to point out that Karl Marx saw a downside to the division of labour.
But what if the division of labor, with its emphasis on focusing on a particular narrow job, runs fundamentally counter to something in the human spirit? Karl Marx raised this possibility in The German Ideology (1846 Section 1, "Idealism and Materialism," subsection on "Private Property and Communism"). Marx wrote:
“Further, the division of labor implies the contradiction between the interest of the separate individual or the individual family and the communal interest of all individuals who have intercourse with one another. … The division of labor offers us the first example of how, as long as man remains in natural society, that is, as long as a cleavage exists between the particular and the common interest, as long, therefore, as activity is not voluntarily, but naturally, divided, man's own deed becomes an alien power opposed to him, which enslaves him instead of being controlled by him. For as soon as the distribution of labor comes into being, each man has a particular, exclusive sphere of activity, which is forced upon him and from which he cannot escape. He is a hunter, a fisherman, a shepherd, or a critical critic, and must remain so if he does not want to lose his means of livelihood; while in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticism after dinner, just as I have a mind, without ever becoming hunter fisherman, shepherd or critic. This fixation of social activity, this consolidation of what we ourselves produce into an objective power above us, growing out of our control, thwarting our expectations, bringing to naught our calculations, is one of the chief factors in historical development up till now.
But Marx was not alone in seeing a bad side to the division of labour. Smith himself wrote,
In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.
So, like all of economics we see here that there is a trade-off involved with the division of labour. In this case it is between the effects of the division of labour on the worker who can become trapped in the grip of the mind numbing tedium of specialisation versus the real income increasing effects of the division of labour.

And even if we accept that the division of labour can create problems, a world without it - ie a world with total self-sufficiency - would create its own set of problems, which I would argue would be worse. So being a "slave" to specialisation is better than being a "slave" to self-sufficiency.

  • McNulty, Paul J. (1984). ‘On the Nature and Theory of Economic Organization: the Role of the Firm Reconsidered’, History of Political Economy, 16(2) Summer: 233-53.

Thursday, 14 August 2014

Interesting blog bits

  1. Timothy Taylor on Characteristics of U.S. Minimum Wage Workers
    Set aside for a few heartbeats the vexed question of just how a minimum wage would affect employment, and focus on a more basic set of facts: What are some characteristics of U.S. workers who receive the minimum wage? The statistics here are from a short March 2014 report from the U.S. Bureau of Labor Statistics, "Characteristics of Minimum Wage Workers, 2013." Of course, the facts about who is receiving the minimum wage also reveal who will be most directly affected by any changes.
  2. Chris Dillow on Economists and the Public
    In a comment here, I propose the creation of a new job, or jobs - professors for the public understanding of economics, analogous to the professorships at Bristol and Oxford which do the same for science.
  3. Ben Jones asks Should Philosophers Avoid Politics?
    In a recent blog post and article, Bas van der Vossen makes a straightforward argument for why political philosophers should stay out of politics: (1) professionals have a prima facie moral duty to make a reasonable effort to avoid activities that predictably make them worse at their tasks (the principle of “responsible professionalism” or RP), (2) the task of political philosophers is to seek the truth about politics, (3) engaging in politics predictably makes us worse at seeking the truth about politics, and (4) therefore political philosophers have a prima facie moral duty to avoid engaging in politics.
  4. Kristian Niemietz argues that Brick shortages come and go. Planning restrictions are the real obstacle to house building
    An unexpected increase in construction (from an extremely low base) has left building materials, especially bricks, in short supply, leading to a sudden surge in prices. Anti-development activists are having a field day, because this turn of events has provided them with a convenient excuse to explain away the negative effects of their obstructionism. A shortage of bricks, not Nimbyism, is causing the housing crisis, or so we are told.
  5. Peter Klein on Making Money from Behavioral Social Science?
    Longtime readers of this blog expect skepticism about behavioral social science. One of my issues is the assumed, but unexplored, assumption that private actors and market institutions cannot deal with behavioral anomalies, and therefore government intervention is necessary to make people act “rationally.”
  6. Tim Worstall argues The NY Times Is Wrong; There Is No Case For High-Speed Rail
    I always find it slightly odd that left liberals are so in love with a 19th century technology such as the railroads. They’re most certainly not in favour of 19th century science nor moral attitudes so what is it about rail that so excites them? But other than that mystification they’ve missed a very important point. There simply is no case for high-speed rail in the US.
  7. Kaoru Hosono and Daisuke Miyakawa on Natural disasters, firm activity, and damage to banks
    Natural disasters affect firm activities both directly and indirectly. One prominent indirect effect is on firms’ transaction partners, in particular – their banks. This column shows how damage to banks affects firm activities, such as capital investment and exports, using as a natural experiment Japan’s 1995 Kobe earthquake. Bank damage has a significant and negative impact on both firm investment and on exports but this effect does not last very long.
  8. Joseph E. Aldy and Seamus J. Smyth on Heterogeneity in the value of life
    Increasing longevity yields large economic benefits. However, public policies do not take into account the heterogeneity in these benefits across the population. This column presents simulated experimental findings about the heterogeneity in the value of statistical life. There is heterogeneity over the life-cycle, as well as prominent ‘black-white’ and ‘female-male’ gaps in the value of life, driven by differences in the labour income across these groups. The findings suggest that one-size-fits-all policies would not correctly reflect the individual willingness to pay to reduce mortality risk.