Richard Posner on constructive criticism in public policy
09 Jun 2014 Leave a comment
in organisational economics, Richard Posner Tags: Richard Posner
Managerial Econ: Thwarting Innovation in Sunscreen
03 Apr 2014 1 Comment
in applied welfare economics, economics of regulation, law and economics, organisational economics
One consequence of strict FDA rules on drug approvals is that it is really expensive to improve sunscreen.
The Washington Post has a new story titled “FDA review of new sunscreen ingredients has languished for years, frustrating advocates.”
Since 10,000 Americans die of melanoma every year, this delay has real consequences for consumers. How many people did the FDA kill this year?
Is there media bias?
20 Mar 2014 2 Comments
in industrial organisation, market efficiency, organisational economics, survivor principle Tags: Armen Alchian, competition, george stigler, media bias, survivor principle
A leading characteristic of media bias is that people agree on its existence, but disagree on its manifestation.
The print media is under dire threats to its existence at the moment. A newspaper that ignores what its readers want does so only at great peril.
Armen Alchian and George Stigler both argued that realised profits are the criterion by which the market process selects survivors: those who realise positive profits survive and will grow their market share; those who suffer losses will eventually disappear unless they improve themselves. The surviving media outlets will be those firms that anticipated or adapted fastest to the current and future demands of their readers and viewers.
Any media bias is likely to be slightly to the centre-left for the following reasons:
- Young women tend to be one of the most marginal groups of news consumers (i.e., they are the most willing to switch to activities besides reading or watching the news).
- Young women often make more of the consumption decisions for the household so advertisers will pay more to reach this group.
- Since young women tend to be more centre-left, on average, a news outlet may want to slant its coverage that way. Media sell space to advertisers and tailor the way they cover politics to gain more readers and viewers.
Puglisi and Snyder found that:
- Using endorsements of state-level initiatives and referendums, newspapers are located almost exactly with the median voter – the average voter – in their home states.
- Newspapers are moderate relative to interest groups and political parties.
- Although newspapers exhibit some variation in their ideological position, they tend to be much closer to the median voter than most interest groups.
- Newspapers appear to be more liberal than voters on social and cultural issues such as gay marriage, but tend to be more conservative on economic issues such as the minimum wage.
- On average, the news and editorial sections have almost identical partisan positions.
Positive profits accrue to media outlets that are better at serving their readers and viewers than their competitors. Their lesser rivals will lose money, exhaust their retained earnings and fail to attract further investor support.
There is no best practice on measuring media bias. The literature is too young. Milton Friedman put up robustness as his test. Hit the hypothesis with as many tests as possible with many different data sets.
Most studies using many different data sets and methodologies suggest that the media reflects the politics of the market they serve. Newspapers and TV stations are big businesses, and they increased readership, ratings and revenue by presenting factual and informative news with a dose of ‘infotainment’.
Competition forces news media outlets, just like any other firm, to cater to their customers’ preferences. Why did anyone think the media industry was any different from any other?
Academics and their bias against the market
19 Mar 2014 1 Comment
in F.A. Hayek, market efficiency, occupational choice, organisational economics, personnel economics Tags: academic bias, compensating differences, Hayek, intellectuals, Richard Posner, Robert Nozick, Schumpeter
The expansion of jobs for graduates from the 1960s onwards increased the choices for well-educated people more disposed to the market of working outside the teaching profession. Those left behind in academia were even more of the Leftist persuasion than earlier in the 20th century.
Dan Klein showed that in the hard sciences, there were 159 Democrats and 16 Republicans at UC-Berkley. Similar at Stanford. No registered Republicans in the sociology department and one each in the history and music departments. For UC-Berkeley, an overall Democrat:Republican ratio of 9.9:1. For Stanford, an overall D:R ratio of 7.6:1. Registered Democrats easily outnumber registered Republicans in most economics departments in the USA. The registered Democrat to Republican ratio in sociology departments is 44:1! For the humanities overall, only 10 to 1.
The left-wing bias of universities is no surprise, given Hayek’s 1948 analysis of intellectuals in light of opportunities available to people of varying talents:
- exceptionally intelligent people who favour the market tend to find opportunities for professional and financial success outside the universities in the business or professional world; and
- those who are highly intelligent but more ill-disposed toward the market are more likely to choose an academic career.
People are guided into different occupations based on their net agreeableness and disagreeableness including any personal distaste that they might have for different jobs and careers. There is growing evidence of the role of personality traits in occupational choice and career success.
The theories of occupational choice, compensating differentials and the division of labour suggest plenty of market opportunities both for caring people and for the more selfish rest of us:
- Personalities with a high degree of openness are strongly over-represented in creative, theoretical fields such as writing, the arts, and pure science, and under-represented in practical, detail-oriented fields such as business, police work and manual labour.
- High extraversion is over-represented in people-oriented fields like sales and business and under-represented in fields such as accounting and library work.
- High agreeableness is over-represented in caring fields like teaching, nursing, religion and counselling, and under-represented in pure science, engineering and law.
Schumpeter explained in Capitalism, Socialism, and Democracy that it is “the absence of direct responsibility for practical affairs” that distinguishes the academic intellectual from others “who wield the power of the spoken and the written word.”
Schumpeter and Robert Nozick argued that intellectuals were bitter that the skills so well-rewarded at school and at university with top grades were less well-rewarded in the market.
- For Nozick, the intellectual wants the whole society to be a school writ large, to be like the environment where he or she did so well and was so well appreciated.
- For Schumpeter, the intellectual’s main chance of asserting himself lies in his actual or potential nuisance value.
Richard Posner also had little time for academics who say they speak truth to power:
- The individuals who do so do it with the quality of a risk-free lark.
- Academics, far from being marginalized outsiders, are insiders with the security of well-paid jobs from which they can be fired with difficulty.
- Academics flatter themselves that they are lonely, independent seekers of truth, living at the edge.
- Most academics take no risks in expressing conventional left-leaning (or politically correct) views to the public, which is part of the reason they are not regarded with much seriousness by the general public.
Why are there so few workers’ co-ops?
19 Mar 2014 6 Comments
in Austrian economics, industrial organisation, labour economics, managerial economics, organisational economics, theory of the firm Tags: adverse selection, cooperative ownership, Jon Elster, kibbutzim, moral hazard, Ran Abramitzky, Robert Nozick, worker ownership
If workers’ cooperatives are so efficient, why are there so few cooperatives? Workers’ cooperatives should be able to slowly undercut other firms on price because they do not have to pay a profit to the capitalists.
Building societies, credit unions and some life insurance companies were mutually owned by their customers for a long time, but recently fell out of favour because of a growing lack of competitiveness and under-capitalisation.
Cooperatives are not economically viable because of intrinsic difficulties of entrepreneurship and management. And most workers prefer to work in firms for a wage rather than wait for the co-op to start up and hopefully break even before they get their first pay cheque. That could be a slow train coming.
The kibbutzim are Israeli agricultural communities initially organized on socialist lines, mostly between the 1910s and 1950s. The kibbutz is an example of voluntary socialism. The founders of kibbutzim were socialist idealists wanting to create a new human being.
Robert Nozick pointed out that few people actually join a kibbutz. Six per cent is the maximum proportion of any population who would voluntarily choose to live in these socialist communities. More recently, 2.6% of the Israeli population live on a kibbutz.
Originally, most kibbutzim followed strict socialist policies forbidding private property; they also required near-total equality of income regardless of differences in productivity, and in some cases, even abandoned the specialisation of labour. Kibbutzim are communities whose aim is equal sharing.
Kibbutzim were expected to fail because of moral hazard and adverse selection. Other organisations subject to adverse selection and moral hazard are professional partnerships, co-operatives, and labour-managed firms because they are all based on revenue sharing.
Kibbutzim have persisted for most of the twentieth century and are one of the largest communal movements in history. About 40% are still run on communist principles. Why is this so?
The kibbutz movement was founded by individuals who can be regarded as ex-ante homogeneous in their ability and potential income, and who came to a new land full of uncertainties. They were young unattached individuals who share a comparatively long period of social, ideological, and vocational training.
An even more durable example of voluntary collectivist living is Catholic monasteries and convents, but notice that these too were founded on a realization that close family ties are inimical to communal order.
Kibbutz founders wanted insurance, but their founders realised that members who would turn out to have high abilities might leave the Kibbutz.
- The founders of the kibbutzim decided to abolish all private property and to own all wealth commonly, which served as a lock-in device.
- Like monasteries and convents, kibbutzim deter members from fleeing through this communal ownership of property. You leave with the shirt on your back!
Kibbutzim also put prospective members through lengthy trial periods to make sure they are made of the right stuff. Those raised on a kibbutz tend to have learned kibbutz-specific skills, such as agronomy, which also makes exit to the outside world even more difficult.
Kibbutzim are similar to law firms, medical and business partnerships that pool income for risk sharing purposes.
Mutual monitoring and peer pressure replace direct monetary incentives in mitigating moral hazard in a kibbutz (and in monasteries and convents) in the same way as in professional partnerships, cooperatives, and labour-managed firms with pooled assets and the option of exit.
The trade-off between insurance and adverse selection determines the level of equality within a kibbutz and its size, as with any other professional partnership:
- Kibbutz vary in size from less than a hundred to over a thousand, but most have between 400 and 600 members, with an average of 441 members.
- Kibbutz size is limited by the savings on income insurance no longer offsetting the costs of moral hazard and other transaction costs as the Coasian firm grows in size.
Ran Abramitzky writes with great insight on the economics of the kibbutzim. He is writing a book The Mystery of the Kibbutz: How Socialism Succeeded. He found that high-ability individuals are more likely to leave a kibbutz. The brain drain would be worse if kibbutzim didn’t make it so costly to exit. Is this a familiar theme of socialism?
Many hybrid organisations exist in the market, ranging from joint ventures and agricultural seller and supermarket buyer co-ops to labour-owned firms such as in most of the professions.
But rarely do we find real life existing cooperatives with all workers and only workers having equal ownership rights. As Jon Elster noted, there are often non-working owners, non-owning workers and unequal distribution of shares in real life workers’ co-ops. All other types of co-ops and professional partnership share this feature.
Utopia, you are standing in it! 
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