George Stigler (1982) on why the working class did not vote for the Green Party in the 2014 NZ election–part 1
01 Oct 2014 Leave a comment
George Stigler on the short rise and long fall of interpersonal comparisons of utility
25 Aug 2014 Leave a comment
George Stigler on do business owners maximise profits?
29 Jul 2014 Leave a comment
in applied price theory, Armen Alchian, entrepreneurship, George Stigler, survivor principle, theory of the firm Tags: george stigler, market selection, profit-maximisation
Entrepreneurs often do not know why they survived in competition. George Stigler in his autobiography told this wonderful story about how you could not get businessmen to admit in a survey that they maximise profits.
You go to their office and asked them: Do they maximise profits?
Their answer would be, of course, not. I am here to provide employment to my workers and put a small amount aside for the education of my children.
The surveyor would then ask them: if you do were to raise your prices, do you expect to increase your profits?
The businessman answers no.
The surveyor how would then ask them: if you were to cut your prices, do you expect to increase your profits?
The businessman answers no.
The survey would then ask: can you point to a time in the last 12-months where you substituted profit for some other objective?
At this point of time, you would be thrown out of their office as some sort of lunatic.
George Stigler on Thomas Malthus – with relevance to his modern day successors
18 Jul 2014 Leave a comment
How to refute the case for a minimum wage when genuinely calling for a smarter federal minimum wage
30 Jun 2014 1 Comment
in applied price theory, applied welfare economics, labour economics, minimum wage Tags: federalism, george stigler, minimum wage, monopsony
What if minimum wage rates could somehow be tied to specific locations as suggested by former White House economist Jared Bernstein puts it in an essay in the New York Times:
When we adjust a national minimum wage of $10.10 for regional differences, these are the amounts you’d need to have the same buying power: $11.94 in Washington, D.C., and $11.40 in California, but only $8.90 in Alabama and $9.08 in Kansas.
And of course, prices vary within states as well. In the New York City area, it would take $12.34 to meet the national buying power of $10.10; upstate around Buffalo, you’d need only $9.47. In the Los Angeles area, it would take $11.94; go up north a bit to Bakersfield, where prices are closer to the national average, and it’s $9.83.
To repeat what George Stigler said on the unsuitability of a nation-wide minimum wage in 1946 when there was monopsony, and therefore a small minimum wage increase is less likely to result in a reduction in employment:
If an employer has a significant degree of control over the wage rate he pays for a given quality of labour, a skilfully-set minimum wage may increase his employment and wage rate and, because the wage is brought closer to the value of the marginal product, at the same time increase aggregate output…
This arithmetic is quite valid but it is not very relevant to the question of a national minimum wage. The minimum wage which achieves these desirable ends has several requisites:
1. It must be chosen correctly… the optimum minimum wage can be set only if the demand and supply schedules are known over a considerable range…
2. The optimum wage varies with occupation (and, within an occupation, with the quality of worker).
3. The optimum wage varies among firms (and plants).
4. The optimum wage varies, often rapidly, through time.
A uniform national minimum wage, infrequently changed, is wholly unsuited to these diversities of conditions
A smarter federal minimum wage is a federal minimum wage of zero. Let each state and city set a minimum wage in accordance with its own economic conditions and the blackboard economics of monopsony and competition in the labour market.
As soon as you concede that there is not one single national labour market, other concessions must be made. This slippery slope includes that the monopsony power of employers might vary from state to state, city to city, and local labour market from local labour market.
Even a state or city minimum wage regulator would have to pretend to know an immense amount of information about the labour market with most of this information in a tacit form that cannot be summarised in statistics or other decision aids for regulators. As Hayek reminded in his classic in 1945 on The Use of Knowledge in Society:
the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form.
The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision.
It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot."
Adam Smith as a pioneering labour economist
21 Jun 2014 Leave a comment
in Adam Smith, health and safety, history of economic thought, human capital, labour economics, labour supply, occupational choice Tags: Adam Smith, Alfred Marshall, compensating differences, george stigler, human capital, The wealth of nations, wage determination
Adam Smith anticipated much of labour economics by basing it on his principle that individuals invest resources to earn the highest possible return. All uses of a resource must yield an equal rate of return adjusted for relative riskiness for otherwise reallocation would result.
The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality.
If in the same neighbourhood, there was any employment evidently either more or less advantageous than the rest, so many people would crowd into it in the one case, and so many would desert it in the other, that its advantages would soon return to the level of other employments.
Smith used this insight on be equality of returns to explain why wage rates differed. Workers care about the whole aspects of the job, not only the cash wage payment: it is the “whole advantages and disadvantages” of the job that is equated across jobs in a competitive market, not wage alone. Smith set out criteria that determined how wages compensated or were discounted for the different characteristics of specific jobs:
- the agreeableness or disagreeableness of the employments themselves: better for more enjoyable working conditions will lead an individual to accept lower wages for their labour. Likewise, unpleasant work will have a higher wage. Wages vary with the ease or hardship, the cleanliness or dirtiness, the honourableness or dishonourableness of a job.
- The easiness and cheapness, or the difficulty and expense of learning them: jobs that are difficult or time-intensive to learn will pay more. Those who invest the time are being compensated for their additional effort with higher wages. The opportunity cost of forgoing the time-spent in training will be compensated for through higher wages. The difference between the wages of skilled labour and common labour is founded upon this principle.
- The constancy or inconstancy of employment: workers who face only partial or inconsistent employment throughout the course of the year, such as seasonal workers of agriculture, must be paid more for their labour. Their wages carry them not only during times of employment, but also during times of unemployment.
- The small or great trust which must be reposed in those who exercise them: individuals who have high levels of responsibility in their jobs will be compensated with higher wages.
- The probability or improbability of success: this is an entrepreneurial element in wages. Employment where the chance of success is high will be paid lower than those who take more risks. If individuals were not compensated for risk, there would lack an incentive to seek employment that may not be successful.
The supply and demand for labour in different industries determines relative wages and the relative numbers of employees in different occupations. Individuals are willing to make a trade-off between less desirable occupations and increased income. Smith spoke of how these five circumstances listed above lead to considerable inequalities in the wages and profits.
George Stigler thought that the second greatest triumph of Adam Smith in his Wealth of Nations was his famous list of cost factors that generate apparent but not real differences in rates of wages and profits because of training, hardships, unemployment, risk and trust. This list was quoted almost verbatim by his successors down to this day and is the direct ancestor of both Alfred Marshall’s famous chapters on wages and of the modern theory of human capital.
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?
George Stigler on the Svengali influence of economists on public policy and politicians
13 Mar 2014 3 Comments
in economics, George Stigler Tags: george stigler, intellectuals
Some regard economists as rather too influential over public policy – politicians seem to fall under their (two-handed) spell. I found this out when strangers would walk up to me at parties and blame me for the latest economic reforms they did not like. They go into offensive mode without even introducing themselves or knowing my name.
George Stigler argued that ideas about economic reform needed to wait for a market.
Stigler contended that economists exert a minor and scarcely detectable independent influence on the societies in which they live. As is well known, Stigler in the 1970s toasted Milton Friedman at a dinner in his honour by saying: “Milton, if you hadn’t been born, it wouldn’t have made any difference.”
Stigler said that if Richard Cobden had spoken only Yiddish, and with a stammer, and Robert Peel had been a narrow, stupid man, England would have still have repealed the corn laws. It would still have moved towards free trade in grain as its agricultural classes declined and its manufacturing and commercial classes grew in the 1840s onwards because of the industrial revolution.
As Stigler noted, when their day comes, economists seem to be the leaders of public opinion. But when the views of economists are not so congenial to the current requirements of special interest groups, these economists are left to be the writers of letters to the editor in provincial newspapers.
These days, they would post an angry blog.
Utopia, you are standing in it! 
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