05/02/2014 § 4 Comments
Paul Walker over at antidismal mentioned that he has a new article in the Journal of Economic Surveys on theories of the firm. There’s a pre-publication version on his University of Canterbury website. It’s highly recommended reading if you have any interest in why firms exist and what they do.
Titled ‘Contracts, entrepreneurs, market creation and judgement: the contemporary mainstream theory of the ﬁrm in perspective’, it reviews the standard theories and provides a bit of history and context for how they fit (or don’t) into mainstream economics theory. Essentially, if you assume perfect information and foresight, why do we need firms when we could all be individuals contracting amongst ourselves? The two reasons usually offered are principal-agent problems as a result of asymmetric information, and the incompleteness of contracts, which leads to the need for post-contract flexibility.
Walker also goes on to look at a few recent developments. One is the idea that firms are institutions whose objectives differ from those of the owners — a type of owner/management split that will be familiar to financial types. The other is a focus on the entrepreneur, familiar to Austrians (and Schumpeterians, if IIRC).
This is material I have to deal with reasonably often, but I know only bits and pieces of it. We are often thinking about why specific institutional arrangements have arisen, or what kind of information asymmetry or transaction cost we are facing and how to resolve it. Having a well-structured framework of the literature with commentary is really helpful.
I will gin up my Opinion-Inator for one point. I’m less convinced about entrepreneur-led theories of the firm. First, they fit with the same world-view (Weltanschauung) that focuses on great-man explanations of history, which I find insufficient. Secondly, entrepreneurs in the flesh are not as heroic as they are in theory. It is possible to rescue the Entrepreneur from this observation, but only by making a distinction between Entrepreneurs and ordinary business owners. That just seems like a ‘no true Scotsman‘ fallacy. And finally, even if the above criticisms didn’t hold, lots of firms in the current economy aren’t entrepreneur-led. They are massive bureaucracies. That needs explaining, which other theories do.
It is important to remember the legal fiction/arrangement that produces modern firms, the Limited Liability Company/Corporation. It is a device to limit the liability of individuals; it separates individuals from the full consequences of their actions. In a micro sense, it allows entrepreneurs and investors to take advantage of the upside of economic activity while protecting them from the downside. In a macro sense, the arrangement has fostered a good deal of investment and risk-taking and economic activity with widespread benefits. That protection is an important reason for people choosing to organise into legally distinct organisations.
Walker’s article includes this ‘nexus of contracts/legal fiction’ view of firms, as well as lots of others. It is a concise and readable survey that I’ll be using myself and recommending to others.
03/02/2014 § Leave a comment
While it is in vogue to talk about inequality, it would be better to focus on poverty. The inequality strategy is intended to reduce the ‘othering’ effect of poverty: the poor are those other people over there, who are different from us. However, it lets all of us non-poor, non-elite assume the stance of victim. We get to say that we, too, are suffering. In our heated houses and comfortable clothes, wondering what to eat from our full pantries.
The biggest mistake with the inequality strategy is that it activates our demands for fairness, which prompts people to make judgements about whether the poor are ‘deserving’. On the one hand are people arguing that it is inequitable for lots of children not to have enough to eat and two pairs of shoes, while on the other hand are people arguing that it is inequitable to take money from people who work hard and scrimp and save and give it to people who don’t. Two sets of judgements, two set of preferences, and no clear solution.
I was also dismayed to find that in some ways, it is actually more expensive to be poor than not poor. If you can’t afford the first month’s rent and security deposit you need in order to rent an apartment, you may get stuck in an overpriced residential motel. If you don’t have a kitchen or even a refrigerator and microwave, you will find yourself falling back on convenience store food, which—in addition to its nutritional deficits—is also alarmingly overpriced.
She also traced the development of attitudes towards poor people. The US War on Poverty started by President Johnson arose from the idea that government should do something to help the disadvantaged. The conservative backlash argued, instead, that people were not ‘disadvantaged’ — which is a social condition, and speaks of what is done to someone – but that ‘poverty arises from the twisted psychology of the poor themselves’. She continued,
pundits and politicians have bemoaned the character failings and bad habits of the poor for at least the past 50 years.
Of course, it has been going on much longer than that. I’m currently reading Emile Zola’s Germinal, a story about miners in a company town in the 1860s. The life of the miners is juxtaposed with that of the bourgeois investors, the Gregoires. Zola captures the attitude of the comfortable bourgeois towards the miners (source):
One must be charitable. They said themselves that their house was the house of God. Besides, they flattered themselves that they performed their charity with intelligence, and they were exercised by a constant fear lest they should be deceived, and so encourage vice. So they never gave money, never! Not ten sous, not two sous, for it is a well-known fact that as soon as a poor man gets two sous he drinks them. Their alms were, therefore, always in kind, especially in warm clothing, distributed during the winter to needy children.
In the meanwhile, M. Grégoire repeated aloud the reflections inspired by the sight of these starving ones.
“There is evil in this world, it is quite true; but, my good woman, it must also be said that workpeople are never prudent. Thus, instead of putting aside a few sous like our peasants, miners drink, get into debt, and end by not having enough to support their families.”
We are still having the same argument.
31/01/2014 § 3 Comments
Pattrick Smellie’s column yesterday highlighted that Brian Easton has a new publication on inequality. Easton’s work is based in part on the thorough MSD report by Bryan Perry, which was highlighted in comments early this week (h/t Mary). Apparently, Easton is less complimentary about the Rashbrooke book, which I’ve covered before (here, here, and here).
That was a link-o-licious paragraph.
Easton and Smellie picked up on something that also struck me about Perry’s analysis (this from Smellie):
Between the mid-1980s and mid-1990s, Rogernomics cut a swath through traditional, subsidised industries; income tax cuts and GST were instituted, which hit the poor rather than the rich; and then the Ruth Richardson welfare cuts of the early 1990s completed a sharp decline in equality.
“The trend after the mid-1990s is more ambiguous,” Easton said.
“The best interpretation is that the income distribution has remained at roughly the same level of inequality over the last two decades.”
The trend shows up in this graph of the Gini coefficient in New Zealand over time (Perry, Figure D.17):
The graph struck me for two reasons:
- Commentators often wring their hands about New Zealand falling behind the rest of the world on incomes, productivity, etc. A lot of that falling behind happened in the 1980s and 1990s, with less of it in this century. That is, we have fallen behind, rather than we are falling behind. Apparently, there’s a similar trend with inequality: it did increase, rather than it is increasing.
- The Occupy movement and commentary by Krugman, DeLong, Saez, etc. focus on the increase in inequality in the last 10 to 15 years, things like:
Yet the bulk of the rise in top income shares is in fact at the very top.
The experience in New Zealand appears to be different. It’s a reminder that we have our own economy with its own issues, and should be careful importing slogans and solutions from overseas.
28/01/2014 § 8 Comments
So…Labour made its big policy announcement. I guess I should comment on it.
Let’s focus on the $60 per week for babies. Here’s the case for such a payment:
Our society recognises that the first few years of life are crucial to later development — stuff happens or should happen in that period that can’t be undone or redone. This is, for example, your DOHaD (developmental origins of health and disease) hypothesis. We collectively decide that we want new individuals — babies — to have the best start they can. Maybe we want each one to reach his or her full potential, maybe we just calculate that an ounce of prevention costs less. Either way, the 2 million plus of us with work each put a little money into the pot for the 59,000 families with babies. We use government to organise the whole thing. Given that families are a key institution in society, we route the payment through families. Giving credence to what economists say, we provide families with money rather than things (food, clothing) because each family is best placed to decide what it needs.
But then there’s this detail about excluding families making more than $150,000. If the payment is essentially for the new individual, then why make it contingent on the family’s income? And furthermore, the exclusion would affect only 5% of families, so it has only a marginal impact on the total cost. The exclusion tells us that the payment isn’t just about society supporting new babies, it’s about supporting specific babies.
So then we get into a debate about which babies deserve support. It turns the policy from baby-focused to family-focused. Labour has determined that some families need support, well, actually, that 95% of families need support. And that’s where they lose me.
I definitely see the need-based case for providing extra money to the one-quarter of children in poverty. We could increase the scope even more to include the near-poor. But when we increase it half or three-quarters or 95% of families, we aren’t talking about needs any more. In no plausible way can we argue that 95% of New Zealand families are needy. They may be ‘struggling’, in the sense that we can all find ways to spend our entire incomes and then a bit more. But needy?
And so the policy looks like a giveaway to the middle class, dressed up in concerns about kids and poverty. It’s a great ploy — voters (who are mostly middle class) can feel like they are doing something for barefoot urchins while getting paid themselves. The pay-off is psychological AND financial. That makes it good politics.
27/01/2014 § Leave a comment
My family has a little place — a cabin, a crib, a bach — near Lake Dunstan in Central Otago. I can walk to the lake in 5 minutes and see it from the property if I stand in the right place. The area is beautiful in an arid, unforgiving way. The lake is warm as South Island lakes go, and supports a lot of boating and swimming in the summer months.
The lake is artificial, the result of the Clyde Dam, built in the early 1990s. Underneath the lake are the old Bannockburn bridge, parts of the town of Cromwell, farms, and a rapids called the Cromwell Gap. In an emotive piece in the December 2013 New Zealand Geographic, Dave Hansford quotes a kayaker who once shot the Cromwell Gap. The kayaker describes how rising to the challenge was a life-changing experience.
Fair enough — he got something out of the rivers as they were before the dam. But my family gets a lot out the lake as it is. So, in response to Hansford, here is my equally emotional (and deliberately parallel) response to the imagined destruction of the Clyde Dam:
Bill Kaye-Blake has lost a lot of water from his life, a whole hydro-lake’s worth of water. For him, it is — or was — a place he went to find tranquillity while reconnecting with his loved ones. Where currently thunders the dangerous Cromwell Gap, says the former Lincoln University student and lecturer and ardent advocate for lake recreation, “there was a thing called Lake Dunstan, and this is where the Clutha and Kawarau arms of the lake met. It used to be a tourist attraction, it was such a big wide lake. Now it’s fallen 80 metres in depth.
“We used to sit on the shingle beaches in the shade of willows and think, ‘how lovely that our children have a safe place to swim and grow to love the water’. It was a central experience in their growing up, in their Kiwi childhoods. There might be 10 to 20 motorboats lined up along the shore, with parents teaching kids how to kayak and swim and waterski. On a hot day, there would be hundreds of people enjoying the lake at the different swimming coves and boat ramps. But that experience is now no longer available to anybody. The last waterskier was in the year before they dynamited the dam.”
Change leads to winners and losers. Focusing on the negatives may get you published in New Zealand Geographic, but it is only half the story. Probably less than half.
24/01/2014 § Leave a comment
The big political news yesterday was the announcement by National of a new education policy. It will put in place a few experts — super-principals and super-teachers — to oversee and guide schools and regular principals and teachers. And, it will pay them a premium.
The usual economic models I use don’t seem to apply here. This is more about management, for which I have no ready models. If I fall back on thinking about incentives, I don’t see anything in here that changes the incentives for teachers. In fact, it creates incentives for the incoming managers to (a) overstate the deficiencies of the existing situation, and (b) institute new policies and procedures so as to be seen to be doing something. But I don’t have a great economic insight for you, sorry.
I do know a little about the education system, though, and it seems like this policy is solving the wrong problem, or a problem that does not exist. Education in New Zealand is generally good. Overall, students fare well on standardised exams and international rankings. They are able to go to overseas universities and do well. On average and in the main, education is on par with the rest of the developed world.
Whether warehousing kids for 13 years is actually good for their development as creative human beings, that’s another argument, but we’ll skip it here.
Despite the good average performance, the country has two problems:
- the long, fat tail of low performance, which correlates with race and poverty
- lack of public resources for top students, to help them achieve their potentials.
The first problem is that some kids in some communities are disadvantaged in all kinds of ways, and that shows up in school results. Improving their performance is partly about the schools themselves, and partly about helping the communities and families overcome the disadvantages. It also involves some reflection on why the disadvantage is there and continues, which is a massive social conversation that the inequality campaigners are attempting to have (but, in my opinion, going about the wrong way).
The second problem comes out of the drive for standards. If teachers are given incentives to lift kids to some arbitrary level, they will work towards it. Any kids who naturally get there will be ignored, because teachers aren’t paid to help them excel. This imposes costs on the families and communities, who have to pay for all the extracurricular stuff that helps the kids excel, or move them to the expensive schools that offer more options. It also creates losses for individuals and societies, who aren’t as creative and inventive as they could have been.
The new policy addresses neither problem. Creating a national system of administrators and consultants (which is what the policy seems to do) isn’t necessary. We need targeted intervention to help the poorest performing kids, and we need a shift in focus and policy to create incentives for teachers to nurture the best and brightest.
23/01/2014 § Leave a comment
And so a new year begins. Okay, we’re almost a month in, but this is the week that New Zealand really comes back from summer holidays (and even now there are a few empty chairs in the office). That means it is time for looking ahead to what we can accomplish this year.
Rod Oram, one of the country’s leading economics commentators, has given his views in the Sunday Star Times (19 January — behind paywall so no link). He starts by reflecting the current consensus — New Zealand is poised for growth, ready for a ripper of a year in 2014. Both IMF and NZIER are forecasting growth over 3%, versus an average of 2.2% in developed countries. Also, the growth is expected to be broad-based, which is generally good for the economy.
But that’s not enough. No, no. Oram warns us, frets about it, looks for the sow’s ear in the silk purse (what? moving on…).
He wants us to do more. We can’t waste this opportunity. Growth, schmoth — what we need is innovation! and new thinking! and initiatives! and transformational change! That extra economic activity is just the platform for even more better growth.
I’m being a bit mean, but I’m on my way to making a point. Well, four:
- I’ve been here since 2000. A succession of commentators, governments, bureaucrats and others have been exhorting us to transform and innovate. My colleagues tell me it’s been going on longer than that (we really need to put together a list of the initiatives that have come and gone while the country has quietly gone about its business). This isn’t a galley, where you beat the drum faster and the slaves pull harder. Innovation is just a slogan — it needs to be backed up by concrete ideas about who and how and when and what.
- We are, apparently, starting to hit up against constraints: ‘There is abundant evidence of our constraints…. Capacity utilisation is already at 90.2 per cent….’ Innovation and transformation require resources. There has to be mental capacity for thinking and planning, and people and money to work on changes until they bear fruit. Resource constraints are good for pushing people into innovation — how do we work around our limits? — but that kind of innovation tends to be incremental.
- Oram points to the Treasury estimate that ‘our current account deficit would expand to 6.5 per cent of GDP, adding to our indebtedness to our international creditors.’ The thing about these debts is that they are largely private. They are the result of individuals making decisions about how to spend or invest their incomes, and about overseas creditors deciding that we are worth the risk. What should we do about it? Why should we do anything? Do I really think I’m a better judge of all those individual transactions than the people actually making them?
- Oram is worrying about 2016 (‘Our growth rate will drift back to about 2.5 per cent in the year ending March 2016′). The business owners I talked with over the summer are worried about now, and this quarter, and getting through this financial year. It’s been a hard few years for a lot of people. Yes, yes, planning for the future is important, but enjoying the good times is key to keeping sane.
So this year, I’m not going to fret. Innovate if you want, relax if you don’t. And laissez les bons temps rouler.