Posts filed under ‘Public Policy / Political Economy’

Dynamic Competition

| Dick Langlois |

I was recently asked by a staffer of the UK House of Lords to contribute written testimony on an inquiry into “online platforms and the EU Digital Single Market.” They wanted to hear about the concept of dynamic competition, and they gave me a set of questions, which I answered in a rather abstract way. The testimony has now been published on Parliament’s website.

4 January 2016 at 2:14 pm Leave a comment

Incentives, Ideology, and Climate Change

| Peter Klein |

1484We’ve written before on the institutions of scientific research which, like other human activities, involves expenditures of scarce resources, has benefits and costs that can be evaluated on the margin, and is affected by the preferences, beliefs, and incentives of scientific personnel (1, 2, 3). This sounds trite, but the view persists, especially among mainstream journalists, that science is fundamentally different, that scientists are disinterested truth-seekers immune from institutional and organizational constraints. This is the default assumption about scientists working within the general consensus of their discipline. By contrast, critics of the consensus position, whether inside our outside the core discipline, are presumed to be motivated by ideology or private interest.

You don’t need to be Thomas Kuhn, Imre Lakatos, or any modern historian or philosopher of science to find this asymmetry puzzling. But it is the usual assumption in particular areas, most notably climate science. A good example is this recent New York Times piece by Justin Gillis, “Short Answers to Hard Questions About Climate Change.” In response to the question, “Why do people question climate change?” Gillis gives us ideology and private interests.

Most of the attacks on climate science are coming from libertarians and other political conservatives who do not like the policies that have been proposed to fight global warming. Instead of negotiating over those policies and trying to make them more subject to free-market principles, they have taken the approach of blocking them by trying to undermine the science.

This ideological position has been propped up by money from fossil-fuel interests, which have paid to create organizations, fund conferences and the like. The scientific arguments made by these groups usually involve cherry-picking data, such as focusing on short-term blips in the temperature record or in sea ice, while ignoring the long-term trends.

Ignore the saucy rhetoric (critics of the consensus view don’t just question the theory or evidence, they “attack climate science”), and note that for Gillis, opposition to the mainstream view is a puzzle to be explained, and the most likely candidates are ideology and special interests. Honest disagreement is ruled out (though earlier in the piece he recognizes the vast uncertainties involved in climate research). Why so many scientists, private and public organizations, firms, etc. support the mainstream position is not, in Gillis’s opinion, worth exploring. It’s Because Science. The fact that billions of dollars are flowing into climate research — a flow that would slow to a trickle if policymakers believed that man-made carbon emissions are not contributing to global warming — apparently has no effect on scientific practice. The fact that many climate-change proponents are, in general, ideologically predisposed to policies that impose greater government control over markets, that reduce industrial activity, that favor particular technologies and products over others is, again irrelevant.

Of course, I’m not claiming that climate scientists in or outside the mainstream consensus are fanatics or money-grubbers. I’m saying you can’t have it both ways. If ideology and private interests are relevant on one side of a debate, they’re relevant on the other side as well. Perhaps the ideology and private interests of New York Times writers blind them to this simple point.

2 December 2015 at 5:45 pm 1 comment

Patents for Institutional Innovation

| Dick Langlois |

I was fascinated to learn about the recent ballot proposal in Ohio to legalize marijuana by constitutional amendment. The unusual aspect of the proposal was that it would have come with a grant of a monopoly in commercial marijuana production to specific investors who owned suitable land. Because they stood to gain considerably from passing the proposal, these investors devoted resources to getting it passed, including professional canvassers, political strategists, and even a mascot with a head shaped like a marijuana bud. Basic Public Choice teaches that legislation benefiting many diffuse constituents is hard to pass because of transaction costs. In effect, the monopoly aspect of the Ohio proposal would have granted a patent to the investors, thus giving them the incentive to overcome the transaction costs of collective action. The proposal failed, and at the same time Ohio voters passed an amendment forbidding the use of ballot initiatives for personal gain. It is interesting nonetheless to think about the economics of such “patents” for institutional innovation.

4 November 2015 at 3:22 pm 1 comment

Are “Private” Universities Really Private?

| Peter Klein |

Jeffrey Selingo raises an important point about the distinction between “public” and “private” universities, but I disagree with his analysis and recommendation. Selingo points out that the elite private universities have huge endowments and land holdings, the income from which, because of the universities’ nonprofit status, is untaxed. He calls this an implicit subsidy, worth billions of dollars according to this study. “Such benefits account for $41,000 in hidden taxpayer subsidies per student annually, on average, at the top 10 wealthiest private universities. That’s more than three times the direct appropriations public universities in the same states as those schools get.”

I agree that the distinction between public and private universities is blurry, but not for the reasons Selingo gives. First, a tax break is not a “subsidy.” Second, there are many ways to measure the “private-ness” of an organization — not only budget, but also ownership and governance. In terms of governance, most US public universities look like crony capitalists. The University of Missouri’s Board of Curators consists of a handful of powerful local operatives, all political appointees (and all but one lawyers) and friends of the current and previous governors. At some levels, there is faculty governance, as there is at nominally private universities. In terms of budget, we don’t need to invent hidden subsidies, we need only look at the explicit ones. If we include federal research funding, the top private universities get a much larger share of their total operating budgets from government sources than do the mid-tier public research universities. (I recently read that Johns Hopkins gets 90% of its research budget from federal agencies, mostly NIH and NSF.) And of course federal student aid is relevant too.

So, what does it mean to be a “private” university?

10 April 2015 at 9:01 am 6 comments

Kealey and Ricketts on Science as a Contribution Good

| Peter Klein |

Two of my favorite writers on the economic organization of science, Terence Kealey and Martin Ricketts, have produced a recent paper on science as a “contribution good.” A contribution good is like a club good in that it is non-rivalrous but at least partly excludable. Here, the excludability is soft and tacit, resulting not from fixed barriers like membership fees, but from the inherent cognitive difficulty in processing the information. To join the club, one must be able to understand the science. And, as with Mancur Olson’s famous model, consumption is tied to contribution — to make full use of the science, the user must first master the underlying material, which typically involves becoming a scientist, and hence contributing to the science itself.

Kealey and Ricketts provide a formal model of contribution goods and describe some conditions favoring their production. In their approach, the key issue isn’t free-riding, but critical mass (what they call the “visible college,” as distinguished from additional contributions from the “invisible college”).

The paper is in the July 2014 issue of Research Policy and appears to be open-access, at least for the moment.

Modelling science as a contribution good
Terence Kealey, Martin Ricketts

The non-rivalness of scientific knowledge has traditionally underpinned its status as a public good. In contrast we model science as a contribution game in which spillovers differentially benefit contributors over non-contributors. This turns the game of science from a prisoner’s dilemma into a game of ‘pure coordination’, and from a ‘public good’ into a ‘contribution good’. It redirects attention from the ‘free riding’ problem to the ‘critical mass’ problem. The ‘contribution good’ specification suggests several areas for further research in the new economics of science and provides a modified analytical framework for approaching public policy.

9 April 2015 at 9:23 am 2 comments

Microeconomics of War

| Peter Klein |

The old Keynesian idea that war is good for the economy is not taken seriously by anyone outside the New York Times op-ed page. But much of the discussion still focuses on macroeconomic effects (on aggregate demand, labor-force mobilization, etc.). The more important effects, as we’ve often discussed on these pages, are microeconomic — namely, resources are reallocated from higher-valued, civilian and commercial uses, to lower-valued, military and governmental uses. There are huge distortions to capital, labor, and product markets, and even technological innovation — often seen as a benefit of wars, hot and cold — is hampered.

A new NBER paper by Zorina Khan looks carefully at the microeconomic effects of the US Civil War and finds substantial resource misallocation. Perhaps the most significant finding relates to entrepreneurial opportunity — individuals who would otherwise create significant economic value through establishing and running firms, developing new products and services, and otherwise improving the quality of life are instead motivated to pursue government military contracts (a point emphasized in the materials linked above). Here is the abstract (I don’t see an ungated version, but please share in the comments if you find one):

The Impact of War on Resource Allocation: ‘Creative Destruction’ and the American Civil War
B. Zorina Khan
NBER Working Paper No. 20944, February 2015

What is the effect of wars on industrialization, technology and commercial activity? In economic terms, such events as wars comprise a large exogenous shock to labor and capital markets, aggregate demand, the distribution of expenditures, and the rate and direction of technological innovation. In addition, if private individuals are extremely responsive to changes in incentives, wars can effect substantial changes in the allocation of resources, even within a decentralized structure with little federal control and a low rate of labor participation in the military. This paper examines war-time resource reallocation in terms of occupation, geographical mobility, and the commercialization of inventions during the American Civil War. The empirical evidence shows the war resulted in a significant temporary misallocation of resources, by reducing geographical mobility, and by creating incentives for individuals with high opportunity cost to switch into the market for military technologies, while decreasing financial returns to inventors. However, the end of armed conflict led to a rapid period of catching up, suggesting that the war did not lead to a permanent misallocation of inputs, and did not long inhibit the capacity for future technological progress.

10 February 2015 at 11:16 am 1 comment

Two Interesting NBER Papers

| Peter Klein |

A couple of recent NBER papers of interest to O&Mers, one from Doug Irwin, another from Luis Garicano and Esteban Rossi-Hansberg:

Adam Smith’s “Tolerable Administration of Justice” and the Wealth of Nations
Douglas A. Irwin
NBER Working Paper No. 20636, October 2014

In the Wealth of Nations, Adam Smith argues that a country’s national income depends on its labor productivity, which in turn hinges on the division of labor. But why are some countries able to take advantage of the division of labor and become rich, while others fail to do so and remain poor? Smith’s answer, in an important but neglected theme of his work, is the security of property rights that enable individuals to “secure the fruits of their own labor” and allow the division of labor to occur. Countries that can establish a “tolerable administration of justice” to secure property rights and allow investment and exchange to take place will see economic progress take place. Smith’s emphasis on a country’s “institutions” in determining its relative income has been supported by recent empirical work on economic development.

Knowledge-based Hierarchies: Using Organizations to Understand the Economy
Luis Garicano, Esteban Rossi-Hansberg
NBER Working Paper No. 20607, October 2014

We argue that incorporating the decision of how to organize the acquisition, use, and communication of knowledge into economic models is essential to understand a wide variety of economic phenomena. We survey the literature that has used knowledge-based hierarchies to study issues like the evolution of wage inequality, the growth and productivity of firms, economic development, the gains from international trade, as well as offshoring and the formation of international production teams, among many others. We also review the nascent empirical literature that has, so far, confirmed the importance of organizational decisions and many of its more salient implications.

Update: See also Irwin’s article in Monday’s WSJ: “The Ultimate Global Antipoverty Program.”

3 November 2014 at 12:45 pm Leave a comment

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
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