Do enough businesses survive long enough for the inherent inequality of bargaining power between the bosses and the workers to emerge?
04 Jul 2014 Leave a comment
Karl Popper on utopian social engineering versus piecemeal social reforms
27 Jun 2014 Leave a comment
Economic Theory and the Meaning of Competition
22 Jun 2014 Leave a comment
in entrepreneurship, industrial organisation Tags: blackboard economics, competition is process, meaning of competition, monopoly, Paul J McNulty, perfect competition, Schumpeter, the market process
As it is, it is one of the great paradoxes of economic science that every act of competition on the part of a businessman is evidence, in economic theory, of some degree of monopoly power, while the concepts of monopoly and perfect competition have this important common feature: both are situations in which the possibility of any competitive behaviour has been ruled out by definition
Paul J McNulty, Economic Theory and the Meaning of Competition
"Pot Is the New Pizza" in Washington State – Hit & Run
20 Jun 2014 Leave a comment
in applied price theory, economics, economics of regulation, entrepreneurship, industrial organisation Tags: decriminalisation, grey markets, marijuana
Evan Cox left pizza delivery and now employs 50 people in Washington state in his pot delivery company:
Although it is legal to buy marijuana in Washington state, the person who delivers it could be guilty of a felony. That hasn’t stopped Winterlife from attracting competitors.
Mr Cox has registered as a business with the city and state, but he cannot open a bank account, thanks to federal rules.
In April, he paid $167,000 in sales tax to the Washington State Department of Revenue—in cash.
via Door-to-Door Dope Delivery: "Pot Is the New Pizza" in Washington State – Hit & Run : Reason.com.
The importance of bidding for the Olympics, losing that bid, but putting on a good show
18 Jun 2014 Leave a comment
in development economics, industrial organisation, international economics Tags: game theory, mega sports events, mega-events, Olympics, signalling
Both successful and unsuccessful bids to host the Olympics have a similar positive impact on exports according to Andrew Rose – no relation.
The Olympic effect on trade is from a signal that a country sends when bidding to host the games, rather than actually hosting the event.
A country that wishes to liberalise its trade may want to signal this by bidding to host a mega-event. It generates extra trade-related investment and creates a political atmosphere where back-sliding on trade liberalisation or the mega-event becomes difficult.
- Rome was awarded the 1960 games in 1955: the same year that Italy started to move towards currency convertibility, joined the UN, and began the negotiations that lead two years later to the Treaty of Rome and the creation of the European Economic Community.
- The Tokyo games of 1964 coincided with Japanese entry into the IMF and the OECD.
- Barcelona was awarded the 1992 games in 1986, the same year Spain joined the European economic community.
- The decision to award Korea the 1988 games coincided with Korea’s political liberalisation.
Many of the countries that are hosted the Olympic Games in recent years such as China have done so as part of showing to the world that they have made it and there’s no going back.
The trick then for the taxpayer is for your country’s bid to host the Olympics to come a close second without anyone knowing you really want to lose.
The trouble with treating the Olympic bid is all show to boost your image as an investment destination and a liberalising economy is your beard might actually win. Throwing a fight is never easy as many a boxer knows.
Ronald Coase on blackboard economics
16 Jun 2014 Leave a comment
in history of economic thought, industrial organisation, law and economics, Ronald Coase Tags: blackboard economics, methodology of economics
This neglect of other aspects of the system has been made easier by another feature of modern economic theory – the growing abstraction of the analysis, which does not seem to call for a detailed knowledge of the actual economic system or, at any rate, has managed to proceed without it.
Holmstrom and Tirole, writing on The Theory of the Firm in the recently published Handbook of Industrial Organization, conclude at the end of their article of 63 pages that "the evidence/theory ratio… is currently very low in this field". Peltzman has written a scathing review of the Handbook in which he points out how much of the discussion in it is theory without any empirical basis.
What is studied is a system which lives in the minds of economists but not on earth.
I have called the result "blackboard economics". The firm and the market appear by name but they lack any substance. The firm in mainstream economic theory has often been described as a "black box". And so it is.
This is very extraordinary given that most resources in a modern economic system are employed within firms, with how these resources are used dependent on administrative decisions and not directly on the operation of a market.
Consequently, the efficiency of the economic system depends to a very considerable extent on how these organisations conduct their affairs, particularly, of course, the modern corporation.
Even more surprising, given their interest in the pricing system, is the neglect of the market or more specifically the institutional arrangements which govern the process of exchange.
As these institutional arrangements determine to a large extent what is produced, what we have is a very incomplete theory.
Four years before his Nobel lecture, Coase was more specific:
Marginal cost pricing is a policy is largely without merit.
How then can one explain the widespread support that it has enjoyed in the economics profession?
I believe it is the result of economists using an approach which I have termed “blackboard economics.”
The policy under consideration is one which is implemented on the blackboard. All the information needed is assumed to be available and the teacher plays all the parts. He fixes prices, imposes taxes, and distributes subsidies (on the blackboard) to promote the general welfare.
But there is no counterpart to the teacher within the real economic system. There is no one who is entrusted with the task that is performed on the black- board.
In the back of the teacher’s mind (and sometimes in the front of it) there is, no doubt, the thought that in the real world the government would fill the role he plays. But there is no single entity within the government which regulates economic activity in detail, carefully adjusting what is done in one place to accord with what is done elsewhere.
Coase argued that marginal cost pricing is not only inefficient, but even inferior to average cost pricing due to:
(i) the fact that under marginal cost pricing, consumers are not forced to pay the full costs of the goods they purchase, leading to potentially inefficient consumption choices;
(ii) the lack of information necessary for the government to determine whether consumers would be willing to pay an amount sufficient to cover the total cost of the goods produced, and costly nature of attempts to make such estimates; and
(iii) the fact that the governmental subsidy necessary to ensure firm survival under a marginal cost pricing scheme will likely be financed through distortionary taxes, thereby creating or exacerbating a distortion in one market at the same time that it corrects a distortion in another.
The market process picks unusual winners
10 Jun 2014 Leave a comment
in entrepreneurship, industrial organisation, international economics, Public Choice, rentseeking Tags: picking winners
What World Bank consultant would risk his fee and return business on advising Egypt to specialise in the export of toilets to Italy? But Egypt’s largest single manufacturing export is toilets to Italy where it captured 93% of the market.
Kenya has a booming export business in cut flowers for men to buy for their wives. Kenya has 40% of the European markets for cut flowers. Nigeria has 84% of the Norwegian market for floating docks. The Philippines has 71% of the global market for electronic integrated circuits.
What development expert would have picked these winners? They’re far too far away from the conventional wisdom and the safe bets that are behind picking winners in government circles.
Picking winners by governments requires heroic assumptions not only about the information politicians and bureaucrats have about the present and their ability to predict the future, but also about their motivations and their ability to resist capture by special interests. The Economist explains:
None of these studies addresses a deeper problem with the way industrial policy tends to develop over time.
Earlier efforts have tended to degenerate into rent-seeking, lobbying and cosy deals between incumbent firms and bureaucrats, stifling innovation and the process of creative destruction.
The problem, of course, is that … industrial policy requires disinterested, benevolent policymakers who can do it well. Unfortunately, they do not yet have a recipe for how such policymakers can be created.
Policy is made by real people with political and personal motivations. What they come up with is unlikely to be as well designed as the ones in the models.
Good monopolies and bad price cuts
10 Jun 2014 Leave a comment
in industrial organisation, liberalism Tags: monopoly, progressivism
A surprising number of well-meaning people want to protect consumers from the scourge of lower prices. These abominations come from imports, new entry or cost reductions.
Richard Epstein talked about how progressives think they can tell the difference between a good monopoly and a bad monopoly.
There is one instance in which monopoly could arise in the free market – exclusive ownership of an essential input (Kirzner 1973):
Monopoly … in a market free of government obstacles to entry, means for us the position of a producer whose exclusive control over necessary inputs blocks competitive entry into the production of his product.
Monopoly thus does not refer to the position of a producer who, without any control over resources, happens to be the only producer of a particular product. This producer is fully subject to the competitive market process, since other entrepreneurs are entirely free to compete with him.
In all other cases, monopoly is the grant by government of an exclusive privilege to produce or sell a product (Rothbard 1962). This definition is from the common law as per Lord Coke:
A monopoly is an institution or allowance by the king, by his grant, commission, or otherwise . . . to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade.
The Social Possibilities of Economic Chivalry (1907)
10 Jun 2014 Leave a comment
in Alfred Marshall, entrepreneurship, industrial organisation Tags: moral hazard, The fatal conceit, The pretense to knowledge
A Government could print a good edition of Shakespeare’s works, but it could not get them written…
I am not urging that municipalities should avoid all such undertakings without exception. For, indeed, when a large use of rights of way, especially in public streets, is necessary, it is doubtless generally best to retain the ownership, if not also the management, of the inevitable monopoly in public hands.
I am only urging that every new extension of Governmental work in branches of production which need ceaseless creation and initiative is to be regarded as prima facie anti-social, because it retards the growth of that knowledge and those ideas which are incomparably the most important form of collective wealth.
How does a free press emerge through the market process?
10 Jun 2014 Leave a comment
in economic history, economics of media and culture, industrial organisation, market efficiency, survivor principle Tags: competition as a discovery process, Free press
For much of the 19th century U.S. newspapers were public relations tools funded by politicians. Information hostile to a paper’s political views were ignored or dismissed as sophistry. Newspaper independence was rare. Fraud and corruption in 19th century America approached today’s more corrupt developing nations.
The newspaper industry underwent fundamental changes between 1870 and 1920 as the press became more informative and less partisan.
– 11 per cent of urban dailies were independent in 1870,
– 62 per cent were in 1920.
The rise of the informative press was the result of increased scale and competitiveness in the newspaper industry caused by technological progress in the newsprint and newspaper industries.
• From 1870 to 1920, when corruption appears to have declined significantly within the United States, the press became more informative, less partisan, and expanded circulation considerably.
• By the 1920s, the partisan papers no longer coupled allegations of the corruption of their party members with condemnation of the character of the person making the charge.
A reasonable hypothesis is rise of the informative press was one of the reasons why the corruption of the Gilded Age was sharply reduced during the Progressive Era.
A supply-side model suggesting that newspapers weigh the rewards of bias—politicians’ bribes or personal pleasure—against the cost of bias—lost circulation from providing faulty news.
The key predictions of the model are that, as the size of the market for newspapers rises, and as the marginal cost of producing a paper falls, newspapers will become less biased and invest more in gathering information.
Corruption declined because media proprietors discovered that they could maintain and boost circulation by exposing it. An independent press which kept a watchful eye over government and business was a spontaneous order that was a by-product of rising incomes and literacy of readers.
Politicians did not help the process along. Technological innovations and increased city populations caused a huge increase in scale.
Newspapers become big businesses; they increased readership and revenue by presenting factual and informative news. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, it is from their high regard to their own interest.
Following these incentives, newspapers changed from political tools to impartial reporting. Those newspapers that did not did not survive in competition.
HT: The Rise of the Fourth Estate: How Newspapers Became Informative and Why It Mattered by Matthew Gentzkow, Edward L. Glaeser, and Claudia Goldin in Corruption and Reform: Lessons from America’s Economic History (2006).
Hollywood economics
04 Jun 2014 Leave a comment
in applied price theory, industrial organisation, survivor principle Tags: global subsidy markets, Hollywood economics
Peter Jackson and the rest of the New Zealand film industry recently received a large increase in tax breaks and subsidies to stay competitive in the global subsidy market that is film production. But for the increased subsidy, the New Zealand film industry would have suffered from runaway productions. Whether that race to the bottom is a game worth playing is for another time.
The Directors Guild of America and the Screen Actors Guild of America define runaway productions as motion picture productions or television shows that are
intended for initial release/exhibition or television broadcast in the US, but are actually filmed in another country.
One foreign shore for these runaway productions is New Zealand. New Zealand is a major beneficiary from the growth in internationally mobile cultural productions.
Runaways can be creative runaways because of script requirements or settings that cannot be duplicated or because the preferences of the actors or director.
An economic runaway goes abroad to reduce costs. The concerns of the Screen Actors Guild about runaway productions date back to the 1950s.
Consumer demand is an important driver of the globalisation of film production both in terms of expected quality of productions and a willingness to patronise individual films and television shows.
Film and television is part of a much larger, highly competitive and price-sensitive leisure and entertainment market.
Film producers learnt right from the start that audiences demanded novelty and innovation – they wanted to be surprised again and again. Short films evolved into full-length feature films with complex narratives. Sound, colour, spectacle, and endless special effects and increasingly sophisticated distribution and exhibition networks were required to stay ahead.
Film-going choices are driven to a high degree by a demand for novelty and a taste for uncertainty. Audiences take a chance on a film they may not know much about, which is a large part of the experience sought.
The first law of Hollywood economics is ‘nobody knows anything’. Extreme uncertainty is pervasive in film and television show production.
Every film and show is a unique product. In the film industry, the uniqueness of each film means product innovation is both rapid and thoroughly unpredictable.
Many famous films and shows succeeded because the producers made something that audiences did not know they wanted to see.
Their success surprised everyone, including the producers. Star Wars, Rocky, National Lampoon’s Animal House, The Blair Witch Project, The Gods Must Be Crazy, My Big Fat Greek Wedding, The Godfather, Fawlty Towers and Seinfeld are all examples.
Big budgets do not guarantee a profit; star power and large marketing budgets do not reduce ‘the terror of the box office’ and the films involving stars often run over budget.
There is no typical movie – industry profits depend disproportionately on rare blockbusters, and there are many dogs – 78 per cent of films are unprofitable. Steven Bonars explains it well:
In 2000 the average top 1% film earned 100 times as much and the average top 10% film earned 50 times as much as the median film.
Today these box office ratios are about 1400:1 and 550:1 for movies in the top 1% and 10% respectively.
Utopia, you are standing in it! 
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