Coase Quotation of the Day

The time has surely gone in which economists could analyze in great detail two individuals exchanging nuts for berries on the edge of the forest and then feel that their analysis of the process of exchange was complete, illuminating though this analysis may be in certain respects. The process of contracting needs to be studied in a real world setting. We would then learn of the problems that are encountered and of how they are overcome and we would certainly become aware of the richness of the institutional alternatives between which we have to choose.

From his Nobel acceptance speech.

Public Policy Reading List

Not our usual CSOC fare, but here’s the reading list for my upcoming Public Policy course at Grove City College.

TOPICREADING
Introduction to Public Policy        

The Economic Approach
Whaples: “Do Economists Agree on Anything? Yes!”  

Alston et al.: “Is There a Consensus Among Economists in the 1990’s?” (optional)  

Heyne: “Economics as a Way of Thinking”  

Peltzman: “Regulation and the Natural Progress of Opulence” (pp. 1-19)  

Sobel and Nesbit: “Automobile Safety Regulation and the Incentive to Drive Recklessly: Evidence from Nascar”    

Radford: “The Economic Organization of a POW Camp” (optional)
Austrian Political Economy              

Public Choice
Mises: “The Crisis of Interventionism” in Human Action (pp. 851-857)  

Higgs: “Regime Uncertainty: Why the Great Depression Lasted so Long and Why Prosperity Resumed after the War” (pp. 561-579)  

Bastiat: “A Petition”  

Yandle: “Bootleggers and Baptists: The Education of a Regulatory Economist”  

Tullock: “The Transitional Gains Trap”  

Khan: “Airline Deregulation”  

Holcombe: “The Coase Theorem, Applied to Markets and Government”

Leeson and Sobel: “Weathering Corruption” (optional)  

Stigler: “The Theory of Economic Regulation” (optional)
Labor: Minimum Wage                        

Labor: Discrimination
Leonard: “Eugenics and Economics in the Progressive Era” (pp. 212-215)  

Neumark: “The Effects of Minimum Wages on Employment”  

Bernstein and Schmitt: “The Impact of the Minimum Wage” (pp. 10-20)  

Rustici: “A Public Choice View of the Minimum Wage” (optional)  

Murphy: “Economists Debate the Minimum Wage” (optional)  

Doleac and Hansen: “The Unintended Consequences of ‘Ban the Box:’ Statistical Discrimination and Employment Outcomes when Criminal Histories are Hidden” (pp. 3-12, 16-30)  

Acemoglu and Angrist: “Consequences of Employment Protection? The Case of the Americans with Disabilities Act” (pp. 915-920, 948-950)  

de Jasay: “On the Economics of Protecting Employment”
Labor: Licensing          

Labor: Sweatshops
Kleiner: “Occupational Licensing”  

Carroll and Gaston: “Occupational Restrictions and the Quality of Service Received: Some Evidence” (optional)  

Svorny: “Physician Licensure: A New Approach to Examining the Role of Professional Interests” (optional)  

Powell and Zwolinksi: “The Ethical and Economic Case Against Sweatshop Labor: A Critical Assessment”  

Powell: “Meet the Old Sweatshops: Same as the New”
Market Failure: Education        

Market Failure: Healthcare        
Caplan and Glaeser debate “The Government Should Cut off all Funding to Colleges and Universities” (watch) 

Tooley: “Education without the State” (pp. 11-29)  

Epple et al.: “School Vouchers: A Survey of the Economic Literature” (optional)  

Akerlof: “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”  

Hemenway: “Propitious Selection in Insurance”  

Bond: “A Direct Test of the ‘Lemons’ Model: The Market for Used Pickup Trucks” (optional)
Firms: AntitrustFriedman: “Monopoly I: How to Lose Your Shirt” and “Monopoly II: “State Monopoly for Fun and Profit”  

Shenoy: “The Sources of Monopoly”  

Baker: “The Case for Antitrust Enforcement”  

Alchian and Kessel: “Competition, Monopoly, and the Pursuit of Money” (optional)    

Crandall and Winston: “Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence” (optional)  

Khan: “Amazon’s Antitrust Paradox” (optional)  

McAfee: “The Strategic Abuse of the Antitrust Laws”        

Henderson: “Why Predatory Pricing is Highly Unlikely”  

Boudreaux and DiLorenzo: “The Protectionist Roots of Antitrust” (optional)  

Armentano: “Antitrust Reform: Predatory Practices and the Competitive Process” (optional)
Firms: Entrepreneurship PolicyLerner: “The Future of Public Efforts to Boost Entrepreneurship and Venture Capital”    

Lucas et al.: “Visions of Entrepreneurship Policy”    
Paternalism: Nudging    


Paternalism: Price Ceilings      
Thaler and Sunstein: “Libertarian Paternalism”  

Thaler and Rizzo: “Should Policies Nudge People?”      

Tabarrok: “Life-Saving Incentives: Consequences, Costs, and Solutions to the Organ Shortage”  

Stigler and Friedman: “Roofs or Ceilings?” (pp. 87-103)
Paternalism: Product and Safety Regulation        

Paternalism: Privacy       
Higgs: “Banning a Risky Product Cannot Improve Any Consumer’s Welfare”  

Leeson et al.: “Regulating Quack Medicine” (optional)  

Lenard and Rubin: “In Defense of Data: Information and the Costs of Privacy” (pp. 5-51)     

Tabarrok and Cowen: “The End of Asymmetric Information”  

Acquisti et al.: “The Economics of Privacy” (pp. 478-485)                    
Paternalism: Prohibition      


Paternalism: Welfare              
Wilson: “Against the Legalization of Drugs”  

Miron and Zwiebel: “The Economic Case Against Drug Prohibition”  

Thornton: “Alcohol Prohibition was a Failure” (optional)  

Tabarrok and Cowen: “Good Grapes and Bad Lobsters” (optional)  

Greene: “Naloxone ‘Moral Hazard’ Debate Pits Economists Against Physicians” (optional)

Porter: “The Myth of Welfare’s Corrupting Influence on the Poor”  

Buchanan: “The Samaritan’s Dilemma” (on mygcc)  

Pasour: “The Samaritan’s Dilemma and the Welfare State” 
International: Trade

International: Aid                
Irwin: “A Brief History of International Trade Policy”  

Krugman: “What do Undergrads Need to Know about Trade?”  

Leeson: “Two Cheers for Capitalism?”  

Sachs: “The Case for Aid”  

Leeson and Skarbek: “What Can Aid Do?”  

Leeson and Skarbek: “What Aid Can’t Do: Reply to Ranis”    
International: Immigration    
 

Innovation Policy        
Leeson and Gochenour: “The Economic Effects of International Labor Mobility” (on mygcc)

Borjas: “Yes, Immigration Hurts American Workers”  

Moser: “Patents and Innovation in Economic History”  

Olhausen: “The Case for a Strong Patent System”

Boldrin and Levine: “The Case Against Patents” (optional)
Social Issues: Family, Marriage, Adoption     Frankel and Miller: “The Inapplicability of Market Theory to Adoptions”    

Boudreaux: “A Modest Proposal to Deregulate Infant Adoptions” 
Social Issues: Crime, Punishment, Prisons, and Guns     Freeman: “Why do so Many Young American Men Commit Crimes and What Might We Do About It?”  

D’Amico: “The Prison in Economics: Private and Public Incarceration in Ancient Greece”  

Organizational Econ Exam Questions

Here are the questions from the take-home final in my “Seminar in Organizational Economics.”

One of my co-bloggers told me they were “hard.” 😉

Like the students, try your hand at four from the following eight.

  • Explain what Mises argued in the Socialist Calculation Debate. Then discuss how Hayek built on Mises’ argument. Next, explain the contribution of Coase (1937). Is Coase’s argument complementary to or incompatible with what the arguments of Mises and Hayek in the Socialist Calculation Debate? Defend your answer.
  • In this essay, answer the following questions. What are the three ways that transactions may be organized? Why are all real-world contracts incomplete? What are two solutions that transacting parties may use to overcome the problems posed by contractual incompleteness?
  • O. Williamson identifies two major “branches” within “transaction cost economics.” He writes (1985): “[There are] two branches of transaction cost economics: the governance branch and the measurement branch. The former is concerned mainly with organizing transactions in such a way as to facilitate efficient adaptations. The latter is concerned with the ways by which better to assure a closer correspondence between deeds and awards. To be sure, these are no independent. The difference in emphasis nevertheless real and needs to be highlighted.” Write an essay that answers the following questions. What explanation for vertical integration does each branch provide? Which branch have scholars suggested may be more important for explaining the organization of markets for consumer goods? Give one example of how consumer goods markets are organized to overcome a problem this branch identifies. A complete answer will make reference to seminal papers from each of these two “branches.”
  • Klein and Foss suggest (2005) that “the existence of the firm can thus be explained by a specific category of transaction costs, namely, those that close the market for entrepreneurial judgment.” Write an essay explaining what Klein and Foss mean by this sentence.
  • Keeping promises, both explicit and implicit, is crucial to appropriating gains from human interaction. Identify and describe three distinct mechanisms for securing commitment.
  • Our course took a “broad” view of organizational economics that allowed for exploration of many organizations beyond merely for-profit firms, including criminal organizations. Pick a real-world criminal organization and analyze one of the following questions. (a). How does it resolve disputes between its members in the absence of government courts? (b). How does it resolve disputes with other criminal organizations in the absence of government courts? (c.) Which party/parties own the organization’s assets and why? (d.) How are members of the organization compensated (piece rate, time rate, salary, profit-sharing, etc…) and why? (Note: This is likely the hardest question on the exam and I will grade it in light of that fact).
  • In this essay, describe the process of applied economic research on organizations. In your essay, answer the following questions: 1. What will a good research question ask? 2. On an Austrian approach, what, if anything in your paper may be empirically “tested”? 3. What is not subject to empirical verification / falsification (and why?) 4. When writing an applied paper, what do we mean by the words “exogenous” and “endogenous”?
  • Scholars like Demsetz and Alchian developed a nuanced understanding of how private property rights / ownership influence incentives. Hansmann agrees but adds an additional layer by arguing that who owns matters (in other words, transaction costs are positive). Why does it matter which party/parties own an organization? Provide an example of a real-world organization to support your argument. (Your example can be original or from a paper in class but be sure to cite any sources you use).

Dispelling Misconceptions about Economics

That’s the title of a recent paper in the Journal of Economic Psychology.

Here’s the abstract:

Some popular views about the workings of the economy are completely at odds with solid empirical evidence and congruent theoretical explanations and therefore can be qualified as misconceptions. Such beliefs lead to support for harmful policies. Cognitive biases may contribute to explaining why misconceptions persist even when scientific information is provided to people. We conduct two experimental studies to investigate, for the first time in economics, whether presenting information in a refutational way affects people’s beliefs about an important socio-economic issue on which expert consensus is very strong: the harmful effects of rent controls. In the laboratory (Study 1) both our refutational and non-refutational messages induce a belief change in the direction of expert knowledge. The refutational message, however, does not improve significantly on the non-refutational one. In the field (Study 2), where participants are college students receiving economic training, the refutational text improves, subject to some caveats, on standard instruction but not on the non-refutational message. The main overall implications of our results are that providing information moderately reduces the misconception, but does not eliminate it, and that the refutational approach does not work better than providing the same information in a non-refutational manner.

The paper’s results don’t bode well for my book’s prospects of winning friends and influencing people.

Incidentally, the paper zeroes in on rent control for the same reason I chose it for my book: Economists agree it’s destructive.

I’m reminded of a comment Bryan Caplan made in PhD micro during grad school. Something like: “All the studies show it’s near-impossible to teach the economic way of thinking. We’re going to try anyway. None of the studies were on me.”

Gordon on No Free Lunch

David Gordon has supplied a very kind review of No Free Lunch.

He writes:

Caleb Fuller, an economist who teaches at Grove City College, thinks that many people have a mistaken conception of economics. It is, they think, a dull and dry subject, the “dismal science,” of primary interest to specialists. Fuller disagrees. He says that “economics changed my life” (p. 11; all page references are to the Amazon Kindle edition), and in this wonderful short book, which can be read in an hour or so, he conveys his infectious enthusiasm for it.

What is the reason for his enthusiasm? Fuller says that he can provide readers with “a pair of eyeglasses that can extend our vision beyond where we’re accustomed to looking” (p. 12), and this is the “opportunity cost lens.” (One wonders how a pair of eyeglasses can be at the same time a lens, but this is a quibble.) By using this lens properly, readers will be able to unmask six common fallacies that exercise a malign influence on current thought. In carrying out his project, he follows Frédéric Bastiat and Henry Hazlitt, and he is a worthy successor of them, whom he calls “economics’ greatest communicators” (p. 12).

Before closing with a little price theory puzzle:

No Free Lunch is an ideal book for introductory economics classes and for anyone who wants to understand how the free market works. It would be a good test to see if you understand the book to explain why the lesson summarized in the book’s title is consistent with the fact that the book is, at least as of this writing, available on Amazon Kindle for free.

P.S. David, I’ll work on my grasp of “pair” and “lens.”

Organizational Economics Reading List

Here’s the reading list for the undergraduate seminar in Organizational Economics that I taught this semester.

Method and the Firm    1. Leeson: “Economics is Not Statistics (and Vice Versa)”  

2. Langlois: “The Institutional Approach to Economic History: Connecting the Two Strands”  

3. Coase: “The Nature of the Firm”  

4. Allen: “Transaction Costs”
Transaction Cost Economics  5. Klein et al.: “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process”    

6. Klein and Shelanski: “Empirical Research in Transaction Cost Economics: A Review and Assessment” (optional)
Measurement  7. Barzel: “Measurement Costs and the Organization of Markets”  

8. Alchian and Demsetz: “Production, Information Costs, and Economic Organization” (optional)
Agency  9. Manne: “Mergers and the Market for Corporate Control”  

10. Silverman and Ingram: “Asset Ownership and Incentives in Early Shareholder Capitalism: Liverpool Shipping in the Eighteenth Century”
Labor Contracts11. Chisholm: “Profit-Sharing versus Fixed-Payment Contracts: Evidence from the Motion Pictures Industry”
Ownership  

If time permits: Austrian Perspectives on the Firm    
12. Hansmann: “Ownership of the Firm”  

13. Klein: “Economic Calculation and the Limits of Organization”

14. Langlois: “The Austrian Theory of the Firm: Retrospect and Prospect”

15. Piano and Rouanet: “Economic Calculation and the Organization of Markets” (optional—on mygcc)   

16. Foss and Klein: “Entrepreneurship and the Economic Theory of the Firm: Any Gains from Trade?” (optional—on mygcc)
Hybrids    17. Dnes: “A Case-Study Analysis of Franchise Contracts”  

18. Menard: “The Economics of Hybrid Organizations” (optional)
Contracts, Brands, Quality   19. Klein and Leffler: “The Role of Market Forces in Assuring Contractual Performance”  

20. Png and Reitman: “Why are some Products Branded and Others Not?”   
Non-Profits       21. Hansmann: “Economic Theories of Nonprofit Organization” (pp. 28-37)  

22. Allen: “Order in the Church: A Property Rights Perspective”
Clubs    23. Leeson: “Governments, Clubs, and Constitutions”  

24. Barzel and Sass: “The Allocation of Resources by Voting”  

25. Greif: “The Fundamental Problem of Exchange” (pp. 265-272)
Criminal Organizations           26. Leeson: “An-arrgh-chy: The Law and Economics of Pirate Organization”  

27. Leeson and Rogers: “Organizing Crime”

28. Skarbek et al.: “The Organization of Danish Gangs: A Transaction Cost Approach”
Bureaucracies       29. Mises: Bureaucracy (pp. 40-56)  

30. Coyne: “The Politics of Bureaucracy and the Failure of Post-War Reconstruction”  
Families     31. Brinig: “Rings and Promises”  

32. Bring and Crafton: “Marriage and Opportunism”   
Miscellaneous Topics   33. Piano: “Organizing High-End Restaurants” (on mygcc)  

34. Wernerfelt and Simester: “Determinants of Asset Ownership: A Study of the Carpentry Trade”  

35. Brown: “University Governance and Academic Tenure: A Property Rights Explanation”

I don’t know of many other undergraduate organizational economics courses in United States colleges/universities. However, there are a few noteworthy exceptions that deserve a shout-out. Tom Nonnenmacher at nearby Allegheny College has an excellent course in “Organizations and Contracts.” Also, check out his book on “institutional and organizational analysis.”

Dick Langlois at UConn has a course called “The Economics of Organization.”

An old Peter Klein class also looks great, though geared toward PhD students. Jens Prufer’s reading list is great, but also looks like a graduate-level course.

Of course, there are a few classics missing from my reading list. That’s because I take a broad view of what’s encompassed by organizational economics (as does Prufer’s syllabus). Rather than an exclusive focus on the for-profit firm, we also discuss non-profits, criminal organizations, families, bureaucracies, and states. This is along the lines of what Robert Gibbons and John Roberts write in an overview of the field:

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.

Q&A

I was pleased to recently conduct a Q&A with the Institute for Faith and Freedom at Grove City College on my new book.

An excerpt:

IFF: What’s one important lesson economics teaches us?

Fuller: Humility.

Each of us depends on an intricate, complex division of labor for the most basic of our daily needs. Adam Smith wrestled with this problem 250 years ago by discussing the numerous workers who all contribute to fashioning a simple “woolen coat” on a “day laborer’s back.” Smith observes that in a single person’s lifetime, he scarce has time to make more than a few close friends. Yet, for every article of clothing he wears, he relies on the cooperation of a vast, anonymous multitude. It’s that cooperation which makes material flourishing possible in this present vail of tears. Economics explains the institutions that facilitate (and impede) that cooperation.