Perishing for Want of Wonder

ECON 101 has fallen on hard times. I won’t repeat all the rebuttals to this perspective that have been offered by sophisticated true believers or by master teachers of 101.

Instead, I simply wanted to share the approach I take. Each class period centers on a question about the social world that economics illuminates. My goal is to invoke a sense of awe and wonder at the power and beauty of economic reasoning.

Posting these here because I’m always open to new suggestions.

The Economic Approach I: Do seatbelt laws kill?
The Economic Approach II: Do economists agree?  
Foundations of Economics: Why should you thank your high school geometry teacher?
Economic Method: What’s the difference between a rock and a person?
Human Action: What did the Martian see at Grand Central Station?    
Opportunity Cost: Do hurricanes make the world a better place?    
Economic Goods: If your life depended on it, could you make an omelet?
Marginal Utility: Why do quarterbacks earn more than economics professors?
Direct Exchange: Should we “cut out the middleman”?
Direct Exchange: Are low wages exploitative?
Absolute Advantage: Whatever happened to Tasmania?
Comparative Advantage: Which state is the best for growing cars?
Property and Ownership: Where do the biggest oysters grow?
Indirect Exchange: Can you spare a smoke?
The Law of Demand I: In ten years, what should you remember from this class?
The Law of Demand II: Do sugar tariffs make us fat?
The Law of Supply: Why aren’t you a garbage collector?
Price Formation I: What is a price?
Price Formation II: How do prices turn enemies into friends?
Elasticity: Did Prohibition fail?
Market Changes I: What happens to ER visits when the price of water changes?
Market Changes II: What’s graphite got to do with peanut butter?
Market Changes III: How does Uber’s “surge pricing” make the world a safer place?
Factor Prices I: Will recycling paper save the trees?
Factor Prices II: What’s the deadliest job in America?
Profit and Loss I: What does it profit a main to gain the world and lose his soul?
Profit and Loss II: Is profit a four-letter word?
Cartel: What if I told you that airplane food used to be delicious?
Monopoly: Why does the DMV take forever?
Labor Unions: Who should we thank for high wages?
Price Ceilings I: Need an apartment? Search the obituaries!
Price Ceilings II: How do you conquer a city in three days (or less)?
Price Floors I: What happened to elevator operators?
Price Floors II: Why does Europe have “butter mountains”?
Taxes and Subsidies: Where did all the windows go?    
Regulation I: Will concussions doom the NFL? (And what’s the solution?)
Regulation II: Will MySpace ever lose its monopoly?
Regulation III: Who wants to be regulated?
Economics Everywhere: Where can economics take you?

Here’s a link to the syllabus itself.

Non-competes and labor vs. automation technology

We’ve discussed non-competes here before. Here’s my co-blogger, Caleb Fuller, making a common-sense point in a prior post:

Non-competes protect the investments that employers make in their employees…if [the employee] preferred the ability to swiftly switch to a rival employer, he could take lower wages in return for this perk.

Here’s a related passing thought of mine. The prompt is this paragraph in the White House’s commentary on a new Executive Order taking aim at non-compete agreements:

Barriers to competition are also driving down wages for workers. When there are only a few employers in town, workers have less opportunity to bargain for a higher wage and to demand dignity and respect in the workplace. In fact, research shows that industry consolidation is decreasing advertised wages by as much as 17%Tens of millions of Americans—including those working in construction and retail—are required to sign non-compete agreements as a condition of getting a job, which makes it harder for them to switch to better-paying options.

Do non-compete agreements really make it harder to switch to another job? On the surface, yes. But what is the impact of a free contracting environment on the investment employers are willing to make into their employees? And thereby, on wages, generally?

But what interests me is the even broader issue here: To what degree do non-competes change the way executives think about expanding their operational capacity, generally? What solution are they more likely to think of first, when it comes to the decision of whether to hire someone new or invest in a technology solution?

Banning non-competes means employers’ investment into workers is less protected, and the measure increases a company’s exposure to risk from loss of trade secrets. This is significant, and affects how companies think about hiring.

If I had more time, I’d research how wages and demand for labor differ in states where non-competes are illegal (CA, OK, ND) vs. other states. I’d probably start by looking at salespeople and sales agencies. In what regulatory environment are companies more likely to address capacity shortcomings with new hires vs. new technology? Is there some new technology that is more-or-less interchangeable at-cost with skilled labor of some kind? Can we compare this across regulatory environments?

Maybe that’s a thesis idea for some grad student somewhere.

I suppose I’m just stating Fuller’s post another way.

Non-competes benefit workers.

Organizational Econ in Developing Contexts

From page 9 of P.T. Bauer’s From Subsistence to Exchange and Other Essays:

In Nigeria, for example, individual groundnut farmers may sell a few pounds of groundnuts at a time and operate 500 to 700 miles from the ports whence the groundnuts are shipped in consignments of thousands of tons. Imported consumer goods arrive in large consignments and are often bought in minute quantities. In Nigeria, matches arrive in consignments of several hundred cases, each case containing hundreds or thousands of boxes. The ultimate consumer may buy only part of a box. The sale of one box is at times a wholesale transaction; the buyer resells the contents in little bundles of ten matches, together with part of the striking surface of a box. Cheap imported scent arrives in large consignments: the ultimate consumer often does not buy even a small bottle but only two or three drops at a time, perhaps a dab on each shoulder of the garment. In some African countries smokers buy single cigarettes, or even a single inhaled drag of a cigarette.

To a Western audience it may seem as if sales of produce and purchases of consumer goods in such small quantities must be wasteful. This is not so. If consumers could not buy in these small quantities, they would either have to tie up their very limited capital in larger purchases or, more likely, would not be able to consume the products at all. The same considerations apply to a farmer’s sales of produce to an intermediary.

It is evident that in these conditions the task of collecting and bulking produce and of breaking bulk and physical distribution of merchandise involves much labor. What may be somewhat surprising is that a large part of this labor is self-employed. This is so because entry into small-scale trading is easy. In the absence of officially imposed obstacles such as restrictive licensing or official monopsonies, there are few if any institutional barriers, few administrative skills are needed, and little initial capital is required. The supply price of self-employed labor is low in the absence of more profitable opportunities. For these reasons small-scale operations are economic in many parts of the distribution system: large firms are at a disadvantage because their operations require more administrative and supervisory personnel, and these tend to be relatively expensive or ineffective in many poor countries. A multiplicity of small-scale traders in part represents the substitution of cheaper labor for more expensive labor.

Uncle Sam Plays Market

Due to the efforts of people like Marianna Mazzucato, it’s trendy to suggest not merely that government can play a role in innovation, but that it ought to take center stage.

Over at The Institute for Faith and Freedom, I question this increasingly conventional wisdom. Here’s a snippet:

It’s therefore unsurprising that the actual track record of Uncle Sam playing market is a dismal one. While it’s easy to fixate on the handful of success stories, the litany of government innovation failures should be enough to sober up even the most enthusiastic proponent of state-backed entrepreneurship. Harvard economist Josh Lerner documents these failures in his book, Boulevard of Broken Dreams, while my co-authors and I point to others in a recent paper. A meta-analysis of the literature reveals that private venture capital almost always outperforms public subsidies in generating innovation of lasting impact.

The title is a nod to Mises’ quote that, under market socialism, the mangers “play market as children play war, railroad, or school.” (See pgs. 702-703 of this edition of Human Action). Being subject to the market discipline of profit and loss is quite another matter, however.

For more on the “entrepreneurial state” hypothesis, see the recent, excellent book by Mingardi and McCloskey.

Covid Commentary

Economic voices have been conspicuously absent from discourse since the beginning of covid. Except for reasons of scientism, is there any reason epidemiologists and other health experts should have all the fun? We don’t think so. You don’t have to agree with everything economists say about covid to agree that they bring a unique and valuable perspective.

Here’s a compilation of economists on covid:

My co-blogger, Caleb, from the beginning of the pandemic:

“…the distinction between “essential” and “non-essential” businesses  ignores the fact that the social order is a highly complex system. In order to enjoy our remarkable standard of living, we rely on an extensive division of labor, which contains millions of goods, tasks and production processes. Interrupting this complex system at any point will certainly have ripple effects on supply chains throughout the economy—including for those businesses deemed “essential.” For example, hospitals require tens of thousands of products to operate optimally, and many of these products are produced by “non-essential” businesses. Related, someone who loses their income because their “non-essential” business was shuttered will find themselves less capable of buying “essentials” such as food or medicine.”

Doug Allen on a meta-analysis of the (economics) covid literature. His abstract:

An examination of over 80 Covid-19 studies reveals that many relied on assumptions that were false, and which tended to over-estimate the benefits and underestimate the costs of lockdown. As a result, most of the early cost/benefit studies arrived at conclusions that were refuted later by data, and which rendered their cost/benefit findings incorrect. Research done over the past six months has shown that lockdowns have had, at best, a marginal effect on the number of Covid-19 deaths. Generally speaking, the ineffectiveness of lockdown stems from voluntary changes in behavior. Lockdown jurisdictions were not able to prevent noncompliance, and non-lockdown jurisdictions benefited from voluntary changes in behavior that mimicked lockdowns. The limited effectiveness of lockdowns explains why, after one year, the unconditional cumulative deaths per million, and the pattern of daily deaths per million, is not negatively correlated with the stringency of lockdown across countries. Using a cost/benefit method proposed by Professor Bryan Caplan, and using two extreme assumptions of lockdown effectiveness, the cost/benefit ratio of lockdowns in Canada, in terms of life-years saved, is between 3.6–282. That is, it is possible that lockdown will go down as one of the greatest peacetime policy failures in Canada’s history.

Bryan Caplan on the aforementioned cost-benefit calculus. He writes:

Casual readers will be tempted to declare that the cure has been much worse than the disease.  The right cost-benefit comparison, however, is not to weigh the cost of prevention against the harm endured.  The right cost-benefit comparison is to weigh the cost of prevention against the harm prevented.  You have to ask yourself: If normal life had continued unabated since March, how many additional life-years would have been lost?  I can believe that the number would have been double what we observed, even though no country on Earth has done so poorly.  With effort, I can imagine that the number would have been triple what we observed.  There’s a tiny chance it could have been five times worse.  But fifteen times?  No way.

Peter Leeson and Louis Rouanet on the use and abuse of “externalities.” From their conclusion:

COVID-19 externalities are less prevalent in the absence of government intervention and less
costly to society than is often supposed. That is so for three reasons. (1) Unlike externality-creating behaviors in many classical externality contexts, such behaviors are often self-limiting in the context of COVID-19. (2) In market economies, behaviors that may create COVID externalities typically occur at sites that are owned privately and visited voluntarily. Owners have powerful incentives to regulate such behaviors at their sites, and visitors face residual infection risk contractually.

David Henderson in dialogue with Justin Wolfers.

Robert Higgs and Don Boudreaux on the Higgs Ratchet. They write:

We should be thinking seriously about where all our emergency actions will leave us in the long run. Will the quarantine of millions of people become a precedent? Will broad-scale distributions to the general population without a means test become an enduring public demand even when normal times return? Will the Fed’s exchange of trillions of dollars for rotten securities become a lasting feature of its monetary policy?

Ben Powell on getting out of the way of entrepreneurs.

This is just a sampler, but it does demonstrate the shift in perspective that accompanies a focus on basic economic concepts like trade-offs and off-setting behavior.

150 Years of the Austrian School

Econlib just published a brief reflective piece I wrote on the history of the Austrian school.

A few more notes…

Nicholas Cachanosky offers some reflections here.

Larry White shrinks history. Along the same lines, Carl Menger’s grandson is an emeritus professor of chemistry at Emory.

As for organizations, Nicolai Foss wrote in 1994: “More than one commentator has observed that a distinct theory of the firm is conspicuously missing from the main body of Austrian economics (e.g., Langlois 1991, p. 2; Minkler 1991, p. 8). As two Austrian economists observed some years ago: “there is no subjectivist or Austrian theory of the firm” (O’Driscoll and Rizzo 1985, p. 123). That is still the situation.

Foss himself and Klein have gone to great lengths to address this situation.

Here’s to another 150 years of the Austrian school.

Organizational Economics Syllabus

This fall, I’m pleased to be teaching a seminar course in organizational economics.

Here’s the syllabus. If you have suggestions for future readings, send me an email!

Our general approach will be to explain organizational form and function in terms of minimizing transaction costs, as explained by Doug Allen here. (Yes, yes, persistent organizations will minimize the sum of transaction costs and production costs–but starting with TC’s feels more operationalizable to me). At the same time, we want to be sensitive to issues of process and evolution, as explained by Dick Langlois here.

We’ll be taking a very expansive approach from a topic perspective, not merely focusing on the for-profit firm (nothing wrong with that!). Bob Gibbons writes:

Moving beyond business firms, we also hope to see much more research on different organizational forms. Legislatures, government bureaus and departments, courts, political parties, clubs, cooperatives, mutuals, family firms, state-owned enterprises, charities and not-for-profits, hospitals, universities, and schools—all raise interesting organizational issues and deserve more attention than they have received.

My course will look at several of these–not to mention criminal organizations!

The Artist as Entrepreneur

In the Review of Austrian Economics, my graduate student, Rania Al-Bawwab, and I develop a theory of Renaissance art market organization.

Here’s the abstract:

We develop a theory of the supply side of art markets building on Kirzner’s understanding of entrepreneurship as alertness to profit opportunities. Whereas Kirzner’s entrepreneur is alert to the existence of resource misallocation, the artistic genius is alert to the opportunity of producing aesthetic value out of mundane objects and resources with no such value of their own. Our theory produces an important empirical implication: when market conditions are such that most art is “high art,” the artist will perform both functions, alertness to artistic value and alertness to profit opportunities. Instead, when most art is “low art,” the two functions will belong to distinct individuals. To substantiate our theoretical arguments, we discuss their relevance to the markets for paintings in Renaissance Italy and contemporary visual art.

More on the paper here.

Specialization and the firm in Renaissance Italian art

A new draft of my paper on the organization of the production of Renaissance frescoes and altarpieces is available at SocArXiv.

Here’s a passage from the introduction that summarizes the argument of the manusript:

This paper develops a theory of ownership and specialization on the supply side of the market for Renaissance paintings. This theory explains several features of the economic lives of master painters in Renaissance Italy. First, it sheds light on the propensity of artists to assume residual claimancy over their paintings, own the workshop that produced them, and bear liability over their quality vis-à-vis patrons. Allocating residual claimancy to the artist—as opposed to any of the many other specialized artisans involved in the fulfillment of commissions—economized on the costs of ensuring the performance of tasks that were both more expensive to monitor and more consequential to the ultimate value of the painting. Second, the theory accounts for the division of labor in the production of Renaissance paintings. It explains why even the most talented artists did not fully exploit their comparative advantage and instead performed some more mundane tasks as well. Finally, it provides a rationale for the master painters’ choice of how to allocate the remaining tasks between employees of the bottega and independent contractors. According to our theory, the equilibrium degree of specialization by the artist and the boundaries of his firm are determined by a trade-off between the benefits of specialization, the costs of delegation to a subordinate, and those of delegation to an independent contractor.

DuckDuckGo Can’t Exist

As I noted recently, commitment problems are the stuff of life. And according to some, that means the internet can’t satisfy our preferences. We want more privacy, the argument goes. But unlike demands in “regular” markets, this one won’t be satisfied.

Why? Profit-maximizing firms always have an incentive to collect more consumer information–regardless of consumer preferences. A “goody two-shoes” firm might refrain from collecting our info, but they’d only lose out to their less scrupulous rivals who make money from selling our data to advertisers. (Note: It’s not really “our” data in the first place, but that’s a discussion for another time). For some, markets might provide safety in the workplace or unadulterated food, but privacy on the internet is beyond reach.

Chris Hoofnagle, in The North Carolina Journal of Law and Technology, expresses this argument. For Hoofnagle, the attempt to provide privacy is a prisoner’s dilemma that results in a “race to the bottom” vis-a-vis privacy. According to this perspective, firms that offer privacy-protective services are unicorns. They don’t exist. Hoofnagle:

I think we will eventually come to a consensus that self-regulation will fail to protect privacy for the same reasons that it failed to ensure quality food and drugs. Self-regulation shields companies from accountability and encourages a race to the bottom. It gives little incentive to design products with privacy in mind.

Examine this highly deterministic view in vain for any sign of an entrepreneur who can devise solutions to this problem. In my opinion, positions like this stop the analysis short. Where is the endogenously emergent institutional solution–introduced by the very profit-seeking entrepreneurs maligned in this paper–which will solve this conundrum?

One way out is for firms to use hostages. Expensive signage and reputation make ideal hostages. Should a firm renege on its commitment to quality (i.e. privacy), it will never recoup the substantial investments it made in promising to maintain quality.

That’s exactly what DuckDuckGo did starting in 2008. The company spent millions of dollars on expensive billboards, which they plastered all over Silicon Valley. DDG’s privacy-protectiveness was literally it’s sole differentiator relative to much larger search engines like Google. And the only way it can stay afloat is by keeping the promise to safeguard user privacy.

This seemingly simple solution demonstrates the power of institutional solutions to break out of prisoner’s dilemmas, enabling parties to seize the gains from exchange that defection/opportunism would seemingly destroy.

Of course, the fact that DDG is tiny suggests consumers don’t really value privacy all that much, but that too is a topic for another day.

DuckDuckGo Challenges Google on Privacy (With a Billboard) | WIRED