Author Archives: Caleb Fuller

About Caleb Fuller

Assistant Professor of Economics, Grove City College.

Competition: Tough Weed or Delicate Flower?

Louis Rouanet reviews Thomas Philippon’s The Great Reversal.

When we remember the many margins on which competition occurs, we’re inclined to think of competition as a “tough weed,” rather than a “delicate flower.” In addition to taking on highly sophisticated economic thinkers like Philippon, Louis’ review should also be seen as a provocative challenge to the rising Neo-Brandeisians.

Margins of Adjustment

The old consensus on the minimum wage has broken down. More recent evidence here–though I’d still characterize those responses as being skewed toward “minimum wage skepticism.”

Almost entirely missing from the empirical minimum wage debates are the other “margins of adjustment” that are available to market participants. And when it comes to labor markets, that means adjustments to the contractual terms of employment.

Unfortunately, focus on these “margins” has ben a casualty of the “MIT approach” to economics, with its laser-like focus on “p’s” and “q’s” to the exclusion of all else. Then there’s the fact that these margins aren’t easily measured. After all, the possibilities for adjustment are limited only by entrepreneurial imagination. Gordon Tullock, for instance, pointed out that employers might respond to the minimum wage by turning off the air conditioner on a sultry day.

A recent paper by my student, Jack Everett, reminds us of the myriad margins of adjustment available to employers. If the empirical analysis doesn’t show disemploying effects of the minimum wage, that just means it’s time to roll up our sleeves and dive into the rich, multi-faceted nature of economic life.

The E Stands for Excellence

Walter E. Williams passed away in December, 2020. At the time of his passing, he was one of the clearest expositors of the property rights approach to economics, of whom Armen Alchian (Williams’ teacher) was one of the giants.

My reflections, from December, can be read at The American Spectator. Here’s an excerpt:

Thankfully for us, Williams didn’t nurse the grievances he’d endured at the hands of racist Army officers; instead, they were a source of curiosity to him. He became a fervent disciple of Armen Alchian’s distinct “UCLA” approach to microeconomic theory. The UCLA approach pursues “opportunity-cost” reasoning unflinchingly, all while emphasizing that opportunity costs vary with the property rights arrangement. For Williams, this meant asking questions like: “Why could I experience such vicious discrimination in the military, all while African Americans have begun to dominate the NBA?” Williams found the answer at UCLA: The opportunity cost of acting like a bigot is lower for the military man than the owner of a professional sports franchise. The latter will see his income fall if he indulges his bigoted tastes by passing over the best ball players merely to avoid association with African Americans. The military man’s income is secure regardless of his prejudicial behavior. One man can discriminate with virtual impunity; the other must forgo profits to exercise his bigotry.

Williams taught me and my classmates that “discrimination” is merely a synonym for “choice.” Each of us discriminates when we choose a college, a spouse, a church, and so on. So, the question arises: What are the conditions that allow space for racially discriminatory actions to breathe? In books such as his classics The State Against BlacksSouth Africa’s War Against Capitalism, and Race and Economics: How Much Can Be Blamed on Discrimination?, Williams incisively demonstrated the role that public policies play in lowering the costs of racially discriminatory behavior. Reading Williams’ airtight logic, grounded in his UCLA price theory days, is a devastating blow to all who reason that union activity, minimum wages, or anti-discrimination laws are a boon to the disenfranchised.

Ennio’s reflections are here:

“The best thing I can ever say about Professor Williams is that he was a master at making me feel just ‘dumb’ and ‘ignorant’ enough to motivate me to study hard. Walking home from campus on late Tuesday nights after his graduate micro class, I often second-guessed my decision to get a PhD in economics. This was the result of the mild humiliation to which I subjected myself every week by attempting (and failing) to answer the questions he asked during class. How could I ever get my PhD in economics if I couldn’t even answer right just one of his questions?

The last day of classes, Professor Williams began testing our understanding of the material one last time. This edition of the show had a biblical theme. He went through a long list of peculiar obligations one finds in the Old Testament. I only remember two of them. The prohibition of wearing clothing made for the other gender and the rule that one could work his land with the aid of two oxen or two donkeys, but not one of each. He then asked us what economic notion may explain such rules. Without raising my hand, I blurted “price discrimination!” Professor Williams turned towards me for a second, smiled, and went back to his lecture. I was not sure my answer was right (when it came to his questions, no answer ever seemed to be) but I interpreted his smile as acknowledging that I had an economic thought. It was my first such thought. It was as if something had ‘clicked’ in my head and now I could just think like that, like an economist. That’s what Professor William taught me and generations of students before me, and for which I will be forever grateful.”

Transaction Costs and Secondary Calculation

Transaction costs are a “famously nebulous” concept in economics, and the relationship between the transaction cost approach and the Austrian tradition invites further development. Here’s my small step in that direction.

Defining and establishing property rights is a process that consumes valuable resources. Seemingly obvious, but mostly overlooked: sometimes, the value which can be seized by establishing property rights falls short of the resources necessary to establish them.

For one, under private ownership, economic calculation governs the decision of how, when, and where to construct a road in the first place. But after that initial decision, a form of calculation—what Piano and Rouanet term “secondary calculation”—continues to govern the very decision about whether to use prices for allocating space to the roads. Additionally, even if prices are used (as opposed to, say, a non-profit model), secondary calculation governs how swiftly and thoroughly to adjust those prices. Such secondary calculation assesses the profitability of first enhancing one’s private property right to the road and then subsequently implementing and adjusting prices. Once again, if transaction costs are prohibitive, pure market-clearing prices won’t be used, and some other mechanism will be, but importantly, this decision is itself also guided by (secondary) calculation.

Published at at EconLib. For the original discussion of “secondary calculation,” see Piano and Rouanet.