Posts filed under ‘Public Policy / Political Economy’
Two Interesting and Different Strategies for Tie-in
| Peter Lewin|
I have an all-in-one color printer, fax, scanner (Canon MX7600). It is pricey, but the real kicker is the cost of the toner. It uses 6 different cartridges. Some of them run out pretty frequently. Each costs around $20, basically for a small container of ink. When any one of the cartridges runs out the machine shuts down — though it could easily print black and white when one of the colors runs out. Also, and this is the interesting thing, when any toner cartridge runs out all of the other functions of the machine shut down — no outgoing faxes, no scanning — even though these have nothing to do with printing. This way I am inclined to replace the cartridge sooner rather than later. Annoying. I suspect this is deliberate and maybe not enough of a nuisance to be a selling point in the competition for consumers.
Very different: I am running out of my blood-pressure medicine. I have my own blood pressure machine, and as horrendously complicated as it is to use it, I have somehow managed to master the art. My blood pressure is normal while on the medication. I attempt to refill the prescription (which costs $12 without insurance — not even worth claiming). No refills left. The pharmacy calls the doctor. The doctor’s office calls me to make an appointment. For what? To get my blood pressure taken. I have my own machine. That is not good enough. We have to do it! My appointment is at 10:45. I see the nurse at 11:15, after filling out paperwork that I have filled out multiple times before. I see the doctor at 11:45. I leave the doctor’s office at 12:05 after he has sent in my refill prescription. I pay him $30 copay. The insurance pays him about $150 for an office visit. Do the math to see how much this $12 prescription cost me (include the opportunity cost of my time and the cost of the office visit — which is reflected in my insurance premium). This ability to tie-in the purchase of a prescribed medicine with the purchase of an office visit is a massive social cost that we all face. It is the result of the non-market delivery of health-care.
Are Ray-Guns “Idle Resources”?
| Peter Klein |
Several people have called to my attention this extraordinary interview in which Paul Krugman states his belief that a military buildup to fight a mythical alien invasion would pull the economy out of recession. I guess it would be more entertaining than paying people to dig holes in the ground and paying other people to dig them up. Were Krugman’s remarks tongue-in-cheek? Unlikely, as he seems to believe in a sort of old-school, 1950s-era, hydraulic Keynesianism, and hasn’t otherwise demonstrated a sense of humor.
Of course, as Bob Higgs has tirelessly demonstrated, World War II didn’t end the Great Depression, but that doesn’t stop this canard being trotted out every time someone wants to justify deficit spending. Notes Mary Theroux: “the Great Depression ended in 1946, when 10 million individuals were returned to the ranks of the unemployed, and federal spending plunged 40% in the aftermath of FDR’s death and the abandonment of the New Deal.” But the more fundamental point is that spending for spending’s sake does not increase economic well-being. To see why, we must challenge the core Keynesian concept of “idle resources,” the idea that, when the economy is away from “full employment,” the usual laws of microeconomics — resources are scarce, decision-makers face tradeoffs at the margin, costs are opportunity costs — don’t apply. As Brad Delong recently put it in one of his characteristically classy missives: during a recession, “[t]he full-employment world of Bastiat is very very far away.” Of course, Bastiat’s brilliant demonstration of hidden costs and the fallacy of spending one’s way into prosperity has nothing to do with “full employment,” a concept that isn’t even coherent, given that efficiency in resource employment makes sense only with regard to the subjective production plan of the entrepreneur (cf. Penrose, 1959; Kirzner, 1966).
W. H. Hutt’s powerful and underappreciated critique of Keynes, The Theory of Idle Resources (1939) — available for free download at Mises.org — attacks this core Keynesian concept. As Hutt explains, all resources have alternative uses, and even “idleness” is a use, in the sense that the resource owner prefers to hold the resource for a future, as-yet-unavailable or unimagined use — a real option, if you like. Dragooning such resources into some random use, outside the price mechanism, serves no productive purpose. Even outside the mythical world of “full employment,” there are no free lunches.
So put those ray-guns back into storage, boys. We may need them later.
Entrepreneurship in Africa
| Dick Langlois |
Inspired by Peter Lewin’s recent post on the beauty of Africa, I decided to hop on a plane to Peter’s native South Africa. I haven’t been to a wildlife park, though I have found myself twice down in caves, one containing fossils and one a disused gold mine. I also took in the Apartheid Museum, which seemed to me (as an outsider) to be extremely well done. It didn’t pull any punches but always appeared neutral, even analytical. For me, the museum’s story underscored the point that Walter Williams and others always used to argue while apartheid was going on: that the system required, and was implemented through, central planning and massive government intervention in markets. (Apparently they even had a wacky scheme to move people from their distant segregated homes to and from urban work using high-speed bullet trains.) I was struck by how similar the revolution here was to the contemporaneous one in Eastern Europe. It was a revolt by a middle class that was denied human and political rights — and also economic opportunity — by an increasingly inefficient and distortive state apparatus.
A couple of exhibits at the Apartheid Museum asserted that in the heyday of gold mining the British had “fixed the price of gold.” This price fixing forced the mine owners constantly to lower production costs, which they did by deskilling mining operations – using technology to break the process into simpler tasks (Ames and Rosenberg 1965) — in order to hire cheaper labor. By contrast, the mining museum suggested that there was plenty of skill-enhancing innovation as well, like pneumatic drills replacing the hammer and chisel, which reduced from eight hours to five minutes the time it took a worker to carve out a blasting hole.
Oddly, neither museum mentioned that gold was the monetary standard. (You know this already: it’s not that the “price of gold” was fixed; it’s that the value of the currency was defined in terms of units of gold.) This might sound like an economist’s carping. But I mention it because on this trip I also encountered the strange combination of task design and monetary economics in a strikingly different African context. I’m actually in south Africa not primarily for the tourism (at least in principle) but to visit Giampaolo Garzarelli and his Institutions and Political Economy Group at the University of the Witwatersrand and, as Peter Klein mentioned in an earlier post, to attend a conference on “Open Source, Innovation, and New Organizational Forms,” which took place on Monday. Joel West, another of the participants, has already blogged elsewhere about the conference. One paper, by an MA student from Kenya – Joel has already blogged about this as well – discussed an amazing phenomenon I had never heard about before: crowdsourcing in developing countries using mobile phones. A company called txteagle allows customers to outsource cognitive work by breaking tasks into small pieces, which pieces are then sent to participants via text message. (As phones have become cheaper they have become ubiquitous in the developing world.) For example, the participant could be asked to translate a phrase into his or her local language or to transcribe a voice snippet. The txteagle computers then aggregate the output and use redundancy and artificial intelligence to validate the results. The participant is paid for the task, via the same mobile phone, using M-Pesa, a system I first heard about only a couple of weeks ago. Interestingly, M-Pesa is itself a formalization of a spontaneous monetary system – think cigarettes at a prison camp – in which people without access to banks would save and transact in airtime minutes. The amount a participant can earn in this system is quite meaningful in the context of poor countries with high unemployment.
Rogoff on Leverage
| Peter Klein |
An important point from Ken Rogoff:
Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a “Great Recession.” But, in a “Great Contraction,” problem number one is too much debt. If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions.
For example, governments could facilitate the write-down of mortgages in exchange for a share of any future home-price appreciation. An analogous approach can be done for countries. For example, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one that is actually big enough to work), in exchange for higher payments in ten to fifteen years if Greek growth outperforms.
I don’t agree with all of the discussion, for example Rogoff’s call for price inflation to mitigate the burden on debtors, but this is a big advance over the vulgar Keynesianism that passes for analysis at the New York Times. (See also Peter L.’s post on Rumelt.) The main point is that a recession like the present one is structural, and has nothing do with shibboleths like “insufficient aggregate demand.” I wish Rogoff (here or in his important book with Carmen Reinhart) talked about credit expansion as the source of structural, sectoral imbalances that generate macroeconomic crises.
A Krugmanian Slasher Flick
| Peter Klein |
Paul Krugman is furious about the deficit-reduction plan reportedly agreed to yesterday, which Krugman says will “slash government spending,” introducing “big spending cuts” that “will depress the economy even further.” And yet, the deal apparently does not cut one penny of government expenditures, but simply increases them at a slower pace (over ten years) than originally projected by the CBO. Remember, in Washington-speak, “cut” means “reduction in the planned rate of increase.”
Imagine a scene from a Krugman-style slasher flick: the villain approaches the victim, and gives him a smaller hug than the victim was expecting! The audience gasps as the victim screams in terror and flees from the vicious attack.
Sovereign States Default, Repudiate; Sun Still Rises
| Peter Klein |
Frivolous commentary on the US debt crisis (like this) attributes to opponents of raising the debt ceiling the view that “defaults don’t matter.” Sensible people recognize, of course, that default (and even repudiation) are policy options that have benefits and costs, just as continuing to borrow and increasing the debt have benefits and costs. Reasonable people can disagree about the relevant magnitudes, but comparative institutional analysis is obviously the way to go here. (Unfortunately, most of the academic discussion has focused entirely on the possible short-term costs of default, with almost no attention paid to the almost certain long-term costs of continued borrowing.)
I’m a bit surprised no one has brought up William English’s 1996 AER paper, “Understanding the Costs of Sovereign Default: American State Debts in the 1840′s,” which provides very interesting evidence on US state defaults. It’s not a natural experiment, exactly, but does a nice job exploring the variety of default and repudiation practices among states that were otherwise pretty similar. Here’s the meat:
Between 1841 and 1843 eight states and one territory defaulted on their obligations, and by the end of the decade four states and one territory had repudiated all or part of their debts. These debts are properly seen as sovereign debts both because the United States Constitution precludes suits against states to enforce the payment of debts, and because most of the state debts were held by residents of other states and other countries (primarily Britain). . . .
In spite of the inability of the foreign creditors to impose direct sanctions, most U.S. states repaid their debts. It appears that states repaid in order to maintain their access to international capital markets, much like in reputational models. The states that repaid were able to borrow more in the years leading up to the Civil War. while those that did not repav were, for the most part, unable to do so. States that defaulted temporarily were able to regain access to the credit market by settling their old debts. More surprisingly, two states that repudiated a part of their debt were able to regain access to capital markets after servicing the remainder of their debt for a time.
Amazingly, the earth did not crash into the sun, nor did the citizens of the delinquent states experience locusts, boils, or Nancy Grace. Bond yields of course rose in the repudiating, defaulting, and partially defaulting states, but not to “catastrophic” levels. There were complex restructuring deals and other transactions to try to mitigate harms.
A recent CNBC story on Europe cited “the realization that sovereign risk, and particularly developed market sovereign risk exists, because most developed world sovereign was basically treated as entirely risk free,” quoting a principal at BlackRock Investment Institute. “With hindsight, we can say . . . that they have never been risk free, it’s just that we have been living in a quiet time over the last 20 years.” Doesn’t sound like Apocalypse to me.
Asset Sales and Financial Distress
| Peter Klein |
“What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom,” Adam Smith famously observed. I noted in an earlier post on raising the debt ceiling that restructuring US government securities is hardly the “nuclear” option it’s portrayed in the pundit world; bankrupt firms, like bankrupt families and firms, restructure their debt obligations all the time. The notion of T-Bills as a sort of sacred relic, to be once and forever “risk-free,” seems more like religion than economics to me.
But, more important, there is another option for entities struggling to make their interest payments: asset sales. Just in the last couple days Bob Murphy, David Friedman, and Steve Horwitz have made this point. Public discussion on the US debt crisis assumes that the only options for meeting US debt obligations are increasing taxes, cutting spending, or both. But asset sales are another viable option. There’s a huge literature on this in corporate finance (e.g., Shleifer and Vishny, 1992; Brown, James, and Mooradian, 1994; John and Ofek, 1995), exploring the benefits and costs of asset sales as a source of liquidity for financially distressed firms. Of course, selling assets under dire circumstances, at fire-sale prices, is far from a first-best option but, as this literature points out, often better than bankruptcy or liquidation. (One of the best-known results, from John and Ofek, is that asset sales tend to increase firm value when they result in an increase in focus. Would it really be so bad if the US government sold off some foreign treasuries and currency, the strategic petroleum reserve, its vast holdings of commercial land, and other elements of a highly diversified, and unaccountably bloated, portfolio?)
Decentralization and the Walmart Decision
| Peter Klein |
On Monday the US Supreme Court turned refused to hear the class-action discrimination suit against Walmart (technically, the Court denied to certify the plaintiffs as a single class for purposes of a class-action suit). I haven’t followed the case closely enough to have an opinion on the merits (or the role of sociologists). But a main legal issue in the case — whether Walmart’s policy of delegating hiring and promotion decisions to local managers makes the firm itself liable for illegal personnel behavior — raises important questions for organization theory.
According to the decision (no, I didn’t try to read all 42 pages):
Pay and promotion decisions at Wal-Mart are generally committed to local managers’ broad discretion, which is exercised “in a largely subjective manner.” . . . Local store managers may increase the wages of hourly employees (within limits) with only limited corporate oversight. As for salaried employees, such as store managers and their deputies, higher corporate authorities have discretion to set their pay within preestablished ranges.
Promotions work in a similar fashion. Wal-Mart permits store managers to apply their own subjective criteria when selecting candidates as “support managers,” which is the first step on the path to management. Admission to Wal-Mart’s management training program, however, does require that a candidate meet certain objective criteria,including an above-average performance rating, at least one year’s tenure in the applicant’s current position, and a willingness to relocate. But except for those requirements, regional and district managers have discretion to use their own judgment when selecting candidates for management training. Promotion to higher office — e.g., assistant manager, co-manager, or store manager — is similarly at the discretion of the employee’s superiors after prescribed objective factors are satisfied. (more…)
Mahoney and Pitelis Talk Public Entrepreneurship
| Peter Klein |
Here’s a podcast with my colleagues and good friends Joe Mahoney and Christos Pitelis on public entrepreneurship, part of an ongoing research project on public-private boundaries. Check it out!
Blessed Anonymity
| Peter Klein |
Critics of the market, from Marx and Karl Polanyi to Alasdair MacIntyre, John Gray, Robert Putnam, and some contemporary sociologists, decry the anonymity of commercial relations. Strong, local, community ties, they complain, are being displaced by long-distance, ad hoc, impersonal, weak ties. ”Increasingly,” writes anthropologist Stephen Gudeman, “we commoditize things, leisure, body parts, reproductive capacities, DNA, and social relationships. As people flock to cities, sell their hardwood trees, change clothing styles, and watch television, community . . . shrinks.” (Thanks to Virgil Storr for this and many other good references.)
One response is to invoke Mises’s idea that social cooperation under the division of labor is actually the foundation of community. “The fundamental facts that brought about cooperation, society, and civilization . . . are the facts that work performed under the division of labor is more productive than isolated work and that man’s reason is capable of recognizing this truth” (Human Action, p. 144). Writers like Thomas Sowell and Walter Williams argue, for example, that the growth of the market stymies racism and other forms of prejudice.
Last week’s Economist had an interesting piece on supermarkets that brought these arguments to light:
The nostalgics don’t even have their history right. A big research project at the universities of Surrey and Exeter is currently studying shopping in post-war England. For one thing, high streets were not as quaint as politicians think. As far back as 1939, chain stores and co-operative (ie, mutual) retail societies already controlled about half of the grocery market. It was middle class matrons, the sort who dressed up to go shopping, who missed the deference shown by traditional grocers. Supermarkets were often welcomed by younger and working-class women. A retired secretary interviewed by the project recalled, as a young bride, asking the butcher for a tiny amount of mince. “Oh, having a dinner party, madam?” he sneered. A woman who bought anything expensive or unusual risked disapproving gossip, spread by shop assistants. The project
found press advertisements promoting the anonymity of supermarkets, as well as their convenience.
Some of you will remember a scene from Woody Allen’s Bananas, which also illustrates this point nicely.
Upcoming Conferences
| Peter Klein |
- ISNIE, 16-18 June in Palo Alto. Registrations are closed but latecomers could try lobbying the Treasurer to accept a late payment — never mind, that’s me, don’t bother.
- “Open Source, Innovation, and New Organizational Forms,” 1 August in Johannesburg. “This first IPEG conference intends to explore new theoretical and empirical advances in open source organization: the interest is not just on voluntary Open Source Software production and its potential innovation implications, but also on such related ‘open source’ phenomena as collective invention, online collaboration (e.g., Wikipedia), online social networking (e.g., Facebook), open innovation, open science, open source biology, and open standards.” The conference website is not live as of this posting, but organizer Giampaolo Garzarelli can provide details. O&M’s Dick Langlois is a keynote speaker. 500-word abstracts are due 24 June.
- “Achieving Coexistence of Biotech, Conventional & Organic Foods in the Marketplace,” 26-28 October in Vancouver. Speakers include FAO Deputy Director General Ann Tutweiler and Canadian Ag Minister Gerry Ritz. Coexistence conferences have been held every other year since 2003; the first 3 conferences came out of EU Commission efforts, the next was in Australia, and this one is the first to be held in North America. A co-organizer tells me “we hope to bring a more ‘practical’ view of coexistence than is commonly held in Europe.”
The Treasury Bill as Myth and Symbol
| Peter Klein |
My father was a historian and helped organize local events to commemorate the bicentennials of the Declaration of Independence in 1976 and Constitution in 1987. I particularly remember the Freedom Train, a traveling exhibit housing memorabilia such as original copies of the Declaration, Constitution, Louisiana Purchase, and (I learn from Wikipedia, though I don’t remember these) Judy Garland’s dress from the Wizard of Oz and Joe Frazier’s boxing trunks.
Several years later, my Dad gave a conference paper (unfortunately unpublished) on “The Constitution as Myth and Symbol.” He noted that for many Americans, the founding documents, along with the Liberty Bell, Independence Hall, images of George Washington and Betsy Ross, etc., play the same kind of role as a Britain’s crown jewels, the Bastille, or Lenin’s tomb. The Constitution is important, in other words, not only for its text — some would argue the text is largely ignored today anyway — but for its symbolic value. It represents a particular myth of the American founding, usually associated with reason and noble ideals (Bernard Bailyn, Ayn Rand, Schoolhouse Rock) but occasionally with power or material self-interest (Charles Beard, Bertell Ollman).
In following the debates over raising the US debt ceiling I”m struck by the frequent claim that defaulting on public debt is unthinkable because of the “signal” that would send. If you can’t rely on the T-Bill, what can you rely on? Debt instruments backed by the “full faith and credit of the United States” are supposed to be risk-free, almost magically so, somehow transcending the vagaries of ordinary debt markets. The Treasury Bill, in other words, has become a myth and symbol, just like the Constitution.
I find this line of reasoning unpersuasive. A T-bill is a bond, just like any other bond. Corporations, municipalities, and other issuers default on bonds all the time, and the results are hardly catastrophic. Financial markets have been restructuring debt for many centuries, and they’ve gotten pretty good at it. From the discussion regarding T-bills you’d think no one had ever heard of default risk premia before. (Interestingly, this seems to be a case of American exceptionalism; people aren’t particularly happy about Greek, Irish, and Portuguese defaults but no one thinks the world will end because of them.) So, isn’t it time to de-mythologize all this? Treasuries are bonds just like any other bonds. There’s nothing magic, mythical, or sacred about them. A default on US government debt is no more or less radical than a default on any other kind of debt.
The Organizational Structure of Al Qaeda
| Peter Klein |
Speaking of organizational structure, here’s former O&M guest blogger Craig Pirrong on Al Qaeda:
There is a concerted effort underway to portray Bin Laden as exerting operational control over Al Qaeda, based on material collected during the raid on his compound. Color me skeptical.
First, it’s hard to imagine how he could exercise any control at anything but the broadest strategic and conceptual level while he was relying on couriers to communicate with subordinates. Second, this hierarchical model is contrary to virtually all that has been written about Al Qaeda going back to its early days: the organization has been consistently portrayed as networked and distributed rather than hierarchical. Indeed, the conventional characterization of Al Qaeda represents it as more of a franchise operation in which the franchisees have considerable autonomy.
But let’s assume for a moment that the organization was hierarchical, and that operational elements required direction and approval from Bin Laden to implement any attack. If that’s true, we may have actually done ourselves a disservice by killing Osama. For it would be almost trivially simple to get inside AQ’s OODA (“observe, orient, decide, and act”) loop and disrupt and destroy its operations. Even if we didn’t know what AQ was up to, we could disrupt their plans just by mixing (randomizing) our strategies, by unexpectedly changing up the way we do things. If response to such changes required the locals carrying out missions to report back to OBL via a painfully slow communications system, await a decision, and wait for the decision to be couriered back, they would be unable to do anything serious. In this case, killing OBL would free the locals to be more flexible and responsive — and hence more dangerous. It would permit AQ to become more of a network, less predictable, and more able to adapt to our moves.
I too doubt this emerging meme on OBL as operational figure, perhaps for somewhat different reasons: I assume that any official information about the operation and its significance is primarily propaganda, not transparent disclosure. Naturally the Administration would want to exaggerate the significance of Bin Laden’s, um, “retirement.”
Who Benefits from Coups?
| Peter Klein |
Not surprisingly — private interests:
Coups, Corporations, and Classified Information
Arindrajit Dube, Ethan Kaplan, Suresh Naidu
NBER Working Paper No. 16952, April 2011We estimate the impact of coups and top-secret coup authorizations on asset prices of partially nationalized multinational companies that stood to benefit from US-backed coups. Stock returns of highly exposed firms reacted to coup authorizations classified as top-secret. The average cumulative abnormal return to a coup authorization was 9% over 4 days for a fully nationalized company, rising to more than 13% over sixteen days. Pre-coup authorizations accounted for a larger share of stock price increases than the actual coup events themselves.There is no effect in the case of the widely publicized, poorly executed Cuban operations, consistent with abnormal returns to coup authorizations reflecting credible private information. We also introduce two new intuitive and easy to implement nonparametric tests that do not rely on asymptotic justifications.
In what can only be a pure coincidence, the following item appeared just below the NBER paper in my RSS reader: “Halliburton Profit More Than Doubles.”
4 Percent Project
| Peter Klein |
On the way back from Brazil I will stop in Dallas to speak on entrepreneurship at a conference on economic growth, The 4 Percent Project, sponsored by the newly formed George W. Bush Presidential Center. The main speakers include four Nobel Laureates (Becker, Lucas, Scholes, Prescott), Ed Lazear, Allan Meltzer, Meg Whitman, Art Laffer, and W himself. I’m on a breakout panel with Bob Litan, Maria Minniti, and Jeff Friedman. The conference is the brainchild of O&M friend John Chapman, and should be quite an event!
CORS Lecture and Mises Brazil
| Peter Klein |
O&Mers in Brazil, come see me at two events this week. Thursday, 7 April, I will deliver the inaugural CORS Lecture at the University of São Paulo on “Entrepreneurship, Strategy, and Public Policy.” CORS, the Center for Organization Studies, is a new institute organized by O&M friends Sylvia Saes and Decio Zylbersztajn and involving many scholars familiar to O&M readers. The lecture is co-sponsored by the Mises Institute Brazil, my main host for the trip, and I will speak at the Institute’s Second Conference on Austrian Economics 9-10 April in Porto Alegre, along with Hans-Hermann Hoppe, Robert Murphy, Guido Hülsmann, Gabriel Zanotti, Ubiratan Iorio, Antony Mueller, Fabio Barbieri, and Dalton Gardimam. I’ll give one talk on entrepreneurship and another on networks. I would love to see you at one of these events!
If You’re Not a Cynic Yet, this Might Help…
| Lasse Lien |
Revolving Door Lobbyists
Jordi Blanes i Vidal, Mirko Draca, Christian Fons-Rosen.Abstract: Washington’s “revolving door” — the movement from government service into the lobbying industry — is regarded as a major concern for policy-making. We study how ex-government staffers benefit from the personal connections acquired during their public service. Lobbyists with experience in the office of a US Senator suffer a 24% drop in generated revenue when that Senator leaves office. The effect is immediate, discontinuous around the exit period and long-lasting. Consistent with the notion that lobbyists sell access to powerful politicians, the drop in revenue is increasing in the seniority of and committee assignments power held by the exiting politician.
By See the full paper here.
Creative Destruction in Popular Culture
| Peter Klein |
Thanks to Thomas B. for forwarding links to US Sen. Rand Paul’s Monday-night appearance on the Daily Show (part 1, part 2, part 3). At the start of part 3, while discussing government bailouts, Paul uses the words “creative destruction,” and Jon Stewart bursts out laughing, apparently hearing the term for the first time. I guess Schumpeter is not as culturally relevant as I thought!
The show had some interesting moments, but I found the discussions (in the parts I watched) pretty shallow. Stewart was grilling Paul on his “free-market” views, focusing on health, safety, and environmental regulation. Both Paul and Stewart took the milquetoast position that sure, some of this type of regulation is needed, but it shouldn’t be “too much.” They didn’t get into a serious discussion of theory or evidence, however, or explore specific trade-offs. There are huge political economy and public-choice literatures on the FDA, EPA, OSHA, etc., showing that these organizations are easily captured, tend to retard innovation, fail to weigh marginal benefits and costs, and so on. The Journal of Law and Economics under Coase’s leadership made its bones on these kinds of studies in the 1970s. The FDA has been a particular target. The Stewart view also ignores comparative institutional analysis — e.g., the role of private ordering (third-party certification, reputation, etc. ) in the protection of health and safety.
At least Paul didn’t say he intended to become the best Senator, horseman, and lover in all Washington!
Freedom to Trade and the Competitive Process
| Dick Langlois |
That’s the promising-sounding title of a new NBER Working Paper by Aaron Edlin and Joseph Farrell. Unfortunately, the argument turns out, in my opinion, to be extraordinarily wrongheaded. Here is the abstract.
Although antitrust courts sometimes stress the competitive process, they have not deeply explored what that process is. Inspired by the theory of the core, we explore the idea that the competitive process is the process of sellers and buyers forming improving coalitions. Much of antitrust can be seen as prohibiting firms’ attempts to restrain improving trade between their rivals and customers. In this way, antitrust protects firms’ and customers’ freedom to trade to their mutual betterment.
The promising part is that they talk explicitly about the competitive process.
The freedom-to-trade perspective . . . stresses the freedom of buyers and sellers to change their trading partners whenever that is mutually beneficial. The aspect of the competitive process that we study here is buyers and sellers exercising this freedom and forming improving coalitions (i.e., new configurations of trading partners). In a highly competitive market a seller who does not give its customers good deals will find that rivals offer better deals to attract these customers. The process of firms fighting over customers and offering them better and better deals raises consumers’ utility skyward. This competitive process is closely aligned with what Schumpeter called creative destruction.
As anyone who has read Schumpeter knows, of course, this is not even close to what he actually meant by creative destruction. (more…)
Is Counterfeiting Good for Business?
| Peter Klein |
Sometimes, according to Yi Qian in a new NBER Working Paper, “Counterfeiters: Foes or Friends?” In some cases, counterfeiting constitutes advertising that increases sales of the original product. It makes sense; how many buyers of faux Rolex watches or Gucci purses would have bought the authentic items if the fakes were banned? I suppose there’s a negative externality (more fakes means less exclusivity means a lower equilibrium price) that must be taken into account as well. An interesting analysis, in any case. Applications to digital media are left as an exercise for the reader.
Counterfeiters: Foes or Friends?
Yi Qian
NBER Working Paper No. 16785
Issued in February 2011This paper combines a natural policy experiment and randomized lab experiments to estimate the differential impacts of counterfeiting on the sales and purchase intent of branded products of various quality levels. I collect new product-line level panel data from Chinese shoe companies from 1993-2004. Exploiting the discontinuity of government enforcement efforts for the footwear sector in 1995 and the differences in authentic companies’ relationships with the government, I identify heterogeneous effects of counterfeit entry on sales of authentic products of three quality tiers. In particular, counterfeits have both advertising effects for the brand and substitution effects for authentic products. The advertising effect dominates substitution effect for high-end authentic product sales, and the substitution effect outweighs advertising effect for low-end product sales. The positive effect of counterfeits is most pronounced for the high-fashion products (such as women’s high-leg boots) and for the high-end shoes of the brands that were not yet well-known at the time of the entry by counterfeiters. I provide a theoretical framework to generalize such impacts due to counterfeits. Analogous heterogeneous effects of counterfeiting on consumer purchase intent for branded products of three quality tiers are also discovered in lab experiments. Responses in the lab allude to the fact that counterfeits could increase brand awareness as well as steal business.
Recent Comments