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.

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.

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!

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

Promises, Privacy, Patronage

A few yeas ago, I gave a talk on how institutions emerge endogenously to enable people to capture the gains from trade in the face of potential opportunism.

Except I didn’t use any of those words. My talk was about commitments and how people make them credible.

Most economic problems have a commitment dimension because most economic problems deal with the future. As I tell my “Law and Econ” students, you can read the classic “I, Pencil” with an eye toward contracts, as much as toward prices! Anonymous exchange coordinated through time requires a series of credible commitments or else the pencil will never arrive on your store shelf.

In my talk, I discuss one classic and two unique (to my knowledge) examples of credible commitments.

The classic example comes from Margaret Brinig’s excellent paper, “Rings and Promises.”

My first unique example comes from the world of digital privacy about which I’ll write a follow-up post.

My second unique example comes from the very interesting case of Cummins Engine Company and its relationship with the municipal government in Columbus, Indiana. To learn more about that case, see these videos or read my paper with Dylan DelliSanti.

Non-Competes Benefit Workers

Nick points to Walter Block on non-competes. Economists like Brian Albrecht and Tyler Cowen have also weighed in.

As Brian notes, non-competes protect the investments that employers make in their employees. This is a specific instance of the more general–and commonsense–principle that investment is more likely when it’s protected. On-the-job training (a form of investment), which raises the marginal productivity and wages of workers, becomes more likely under a regime of free contracting. The employee voluntarily “ties his hands” in order to receive other benefits he deems more valuable than a low cost exit option. If he preferred the ability to swiftly switch to a rival employer, he could take lower wages in return for this perk.

Check out chapter twenty-four of Alchian and Allen’s recently published Universal Economics. A&A describe and defend one of the most (in)famous examples of a non-compete: the baseball reserve clause. In their own words:

How could the reserve clause be defended in baseball? The defense rests on the necessity of expensive training and testing of athletes during their early careers. A team owner makes exploratory, developmental investments in many rookies, hoping that a few players will ultimately be worth the expense. The reserve clause restriction protects the team owner’s investments. Absent the initial investments by the team owners, the aspiring players would have had to bear more of their own investment costs during their early careers, possibly playing with no salary in the minor leagues or not trying at all.

The same sort of reasoning applies to the seemingly “lopsided” contracts signed by no-name actors and musical artists. But good luck explaining this reasoning to your average Hollywood leftist.

Incidentally, Harold Demsetz wondered if the “reserve clause” would have any allocational effects at all, given the Coase Theorem. However, to me, this seems like the classic high-transaction-costs-case that Coase cared most about.