From Sam Peltzman’s (1991) review of the handbook of industrial organisation
22 Oct 2014 Leave a comment
Hayek on the central role of personal disappointment in economic progress
20 Oct 2014 Leave a comment
in applied price theory, entrepreneurship, F.A. Hayek, industrial organisation, survivor principle Tags: competition as a discovery procedure, FA Hayek, market process, profit and loss
HT: David Henderson
Why does France have so many 49-employee companies?
20 Oct 2014 Leave a comment
in applied price theory, entrepreneurship, labour economics Tags: France, labour regulation, size contigent regulation
France has 2.4 times as many companies with 49 employees as with 50. Under French labour law, once a company has at least 50 employees, management must create three worker councils, introduce profit sharing, and submit restructuring plans to the councils if the company decides to fire workers for economic reasons. The 3,200 page Code du Travail dictates everything from job classifications to the ability to fire workers.
It is unlawful in France to lay workers off to improve the profitability of the company. Michelin laid 451 workers off in 1999, announced an increased profit 2 months soon after. It was successfully sued for €10 million in the Labour Court on the grounds that economic layoffs are justified to preserve the competitiveness of a firm or of the group to which it belongs, but not in order to improve it.
Participants in the French version of the television show Survivors sued the producers for redundancy pay when they were voted off the show by the tribal council.
When entrepreneurs and managers are confronted with laws that introduces a cost of acquiring a size that is beyond a certain threshold such as 49 employees, some will choose to stay below the threshold and stay at an inefficiently small size. The more talented managers are not running the larger firms because of this barrier to growth.
In Firm Size Distortions and the Productivity Distribution: Evidence from France, Luis Garicano, Claire LeLarge, and John Van Reenen found that the cost of the French labour regulations is approximately equivalent to a 5-10% increase in wages. The main losers from the French regulation from this misallocation of managerial talent are workers (and to a lesser extent large firms) and the main winners are small firms.
Piketty on inequality: views of the IGM economic experts
16 Oct 2014 Leave a comment
in applied price theory, applied welfare economics, comparative institutional analysis, constitutional political economy, discrimination, economic growth, entrepreneurship, gender, human capital, income redistribution, industrial organisation, labour economics, Marxist economics, Rawls and Nozick Tags: Daron Acemoglu, James Robinson, Piketty, poverty and inequality, The Great Enrichment
Question: The most powerful force pushing towards greater wealth inequality in the US since the 1970s is the gap between the after-tax return on capital and the economic growth rate?
Daron Acemoglu and James Robinson have a simple explanation for why Piketty is wrong:
But like Marx, Piketty goes wrong for a very simple reason. The quest for general laws of capitalism or any economic system is misguided because it is a-institutional.
It ignores that it is the institutions and the political equilibrium of a society that determine how technology evolves, how markets function, and how the gains from various different economic arrangements are distributed.
Despite his erudition, ambition, and creativity, Marx was ultimately led astray because of his disregard of institutions and politics. The same is true of Piketty.
Rational Criminals and Profit-Maximizing Police
15 Oct 2014 Leave a comment
in David Friedman, economics of crime, entrepreneurship, law and economics Tags: David Friedman, economics of crime, Gary Becker
Speaking of natural monopolies and predatory entry – Netscape is 20 years old today!
15 Oct 2014 Leave a comment
in entrepreneurship, industrial organisation, law and economics Tags: browser wars, law and economics, Microsoft anti-trust trial, Richard McKenzie, Robert Bork, scourge of lower prices, William Shugart
You show your age when you remember that people used to pay $49 to download the Netscape Navigator browser.
Yes,people used to pay for browsers until nasty Microsoft came along in act of predatory entry started giving its Internet browser away from free in the hope of monopolising the market once Netscape went out of business when it would jack its price up again to recoup the intervening losses.
After the first browser war, the usage share of Netscape had fallen from over 90 percent in the mid-1990s to less than one percent by the end of 2006.
During the 1990s, Microsoft competitors — Netscape, IBM, Sun Microsystems, WordPerfect, Oracle, and others —pressed the Justice Department to sue Microsoft for tying Internet Explorer to Windows even though only one of them, Netscape, had a browser.
The demise of Netscape was a central premise of Microsoft’s antitrust trial, where the Court ruled that Microsoft’s bundling of Internet Explorer with the Windows operating system was a monopolistic and illegal business practice.
After losing on appeal , the Department of Justice announced in September 2001 that it was no longer seek to break up Microsoft and would instead seek a lesser antitrust penalty. Microsoft decided to draft a settlement proposal allowing PC manufacturers to adopt non-Microsoft software.
As William Shughart and Richard McKenzie observed:
Microsoft’s critics have advanced a number of economic theories to explain why the firm’s behaviour has violated the antitrust laws.
None of those critics has articulated why or how consumers have been harmed in the process.
Instead, the furious attacks on Microsoft have focused on the injuries supposedly suffered by rivals (on account of Microsoft’s pricing and product-development strategies) and by computer manufacturers and Internet service providers (on account of Microsoft’s “exclusionary contracts”).
Before former Judge Robert Bork became a lobbyist for Microsoft’s rivals, he said in The Antitrust Paradox:
Modern antitrust has so decayed that the policy is no longer intellectually respectable.
Some of it is not respectable as law; more of it is not respectable as economics; and … because it pretends to one objective while frequently accomplishing its opposite … a great deal of antitrust is not even respectable as politics.
A simple rule for a complex world: the moment that evidence is tended to a court about what happened to the competitors in a lawsuit under competition law, that court must dismiss the suit out of hand.
Too many lawsuits under competition law are designed to protect the consumer from the scourge of lower prices!
The best proof that a merger or other business practice is pro-consumer is the rival firms in that market are against it. Why would a firm be against a merger or other business practice that raises the prices of their business rivals?
HT: HistoricalPics
A tale of two cities – Hong Kong’s and Singapore’s different paths to prosperity
13 Oct 2014 Leave a comment
in development economics, entrepreneurship, industrial organisation Tags: Alywn Young, development economics, Hong Kong, industry policy, industry targeting, rent seeking, Singapore, tale of two cities, tyranny of numbers
Hong Kong and Singapore had different paths to prosperity. Alywn Young found that Hong Kong had made real productivity gains, but Singapore grew by a massive dose of savings and investment, including foreign investment.
For most of the post-war era, the Hong Kong government adopted a policy of minimal intervention. the government of Singapore has pursued maximalist policies involving widespread state participation in economic activity and aggressive industry targeting policies.
The share of investment in Singapore’s GDP rose from 9% in 1960 to 43% in 1984, while Hong Kong’s remained steady at about 20%. Productivity growth in the aggregate non-agricultural economy was a miserable -0.3% in Singapore and 2.3% in Hong Kong.
What does this mean in practical terms? Real consumption, real consumer spending, per capita in Hong Kong is 20% or more higher than in Singapore!
Hong Kong actually enjoyed their prosperity. Robert Barro explains this in a comment on Young’s paper:
In 1985, when Singapore’s per capita real GDP was 102% of Hong Kong’s, the consumption was only 70% of Hong Kong’s. To put it another way, Hong Kong’s per capita real consumption grew by 5.9% per year from 1960 to 1985, about the same as for GDP, whereas Singapore’s grew by only 2.8% per year, much less than GDP.
In terms of output per capita and output per worker, the growth of Hong Kong and Singapore are equally impressive. Hong Kong does much better in terms of productivity growth.
Hong Kong did not require as rapid capital accumulation as Singapore. Since capital accumulation is financed either by domestic saving or foreign saving, people in Hong Kong can afford to save less or borrow less from foreign economies. Saving less now means more consumption now.
In the case of Hong Kong, their living standards are far superior to Singapore’s. The government of Singapore wasted a good 20 to 30% of national income on industry targeting and compulsory savings.
Hong Kong experienced rapid total productivity growth, while Singapore experienced no improvement whatsoever in total productivity during its East Asian Tiger years. Young (1992, 1994, 1995) demonstrated that from 1967 onward total factor productivity growth in Singapore was next to nil, and for significant parts of the period most likely negative. Only productivity allows a nation to support and enjoy high wages.
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