Bylund on Coasean Transaction Costs

Per Bylund recently published “Signifying Williamson’s Contribution to the Transaction Cost Approach: An Agent-Based Simulation of Coasean Transaction Costs and Specialization” the Journal of Management Studies.

Bylund writes: “It is a simulation test of Coase’s transaction cost approach using agent-based modeling, and what I do is basically show that transaction costs have no explanatory power – but specialization and the division of labor does.”

 

An International View of Drug Prohibition: An Interview with Mark Thornton

The Radcliffe Camera in Radcliffe Square, OxfordMises Daily Friday by Mark Thornton:

In this interview, Mark Thornton discusses his debate on the drug war at Oxford University and provides a view on how drug prohibition is viewed internationally.

The Scottish Referendum

I’ve refrained from comments on the Scottish referendum on independence. Let people decide their own path is a reasonable stance to take, so let the Scots decide the future of Scotland.

Yet in discussion with one of my past students yesterday, the question arose “should other citizens of the United Kingdom have a say in the matter?”

Matters are often much more clear in theory than in practice. Any divorce is difficult. One person can put in motion the steps to one (“I want a divorce”), but the details of how the separation is achieved is a bilateral process. In dissolving a marriage, the couple needs to hash out who gets the house, the car, what percentage of debt, and so forth. Children complicate the matter by introducing a human element.

The divorce between the rest of the U.K. and Scotland would be no different. There are shared assets, and debts. How much of the public debt should Scotland take with it? How much of the U.K.’s military equipment would the newly independent country have a claim too? Would Queen Elizabeth still reign over the country, or would a governor general be appointed for her, or would the severance from the crown be complete?

These are thorny, but essential, issues. They are important enough that clear answers should have been provided in the vote. Without a defined pathway outlining exactly how the new country of Scotland would be formed, and what it would look like, people didn’t know exactly what they are voting for.

Instead of grappling with these issues, voters were given an easy yes or no question: “Should Scotland be an independent country?” It’s difficult, at least for me (but then I am far removed from any Scottish descent by now), to answer this question because the comparison is apples to oranges. I know what Scotland looks like today, but I have no idea what the independent country alternative will turn out like.

So the answer remains: “should the English, Welsh and Northern Irish also have had a say in the vote?”

I like the divorce analogy. Why bind one person in a relationship if they don’t want to be. But I can’t help but feel that many divorces are put in motion in the heat of the moment, and when the terms of separation are hashed out, regret ensues. The grass is always greener, after all. Knowing in advance exactly what the new future would look like could save a lot of heart ache.

The whole referendum was a fiasco from the start. It was a political sham. No one knew what was being voted on, except some vaguely appealing concept of “independence”. If the decision is “no”, as it looks right now, there will always be a portion of voters wondering what could have been. If it was turned out that a new country was formed, the melee that would ensue in working out the details of separation could prove to be the messiest divorce ever.

Think of the hard feelings that couples have while getting divorced after a few short years of marriage. Kris Humpries and Kim Kardashian knew each other for seven months, were engaged for 90 days, and married for only 72 more. The divorce took 536 days to settle.

Scotland has been married to the U.K. since 1707. That’s over 300 years, or 112,554 days (but who is counting?). Breaking up that history would be a nightmare.

Possible? Yes. Drawn out with more hard feelings than glee? Almost certainly.

I think it’s great that the Scots got to decide on their future. I wish more people had the opportunity. I just wish the politicians staging the vote spent more time informing them what that new future would look like.

(Cross posted at Mises Canada)

Upcoming Austrian-School Events in Germany

Frankfurt_Am_Main-Stadtansicht_von_der_Deutschherrnbruecke_am_fruehen_Abend-20110808Guido Hülsmann writes:

In January 2015, the Mises Institut Deutschland will conduct a “Mises Seminar” at a very prestigious venue: the German stock exchange in Frankfurt. This event is open to the public and has just been announced on their website:

http://www.misesde.org/?p=8504

Each year they also organise an annual congress. The past two ones took place in Munich:

http://www.misesde.org/?p=7914

http://www.misesde.org/?p=5277

This fall, I will also speak at two other Austrian events that might be of interest:

http://wertewirtschaft.org/symposion/

http://www.uni-wh.de/economics/witten-institute-for-institutional-change/events/witten-conference-money-credit-and-banking/

IMF: QE Encourages Risk

Headquarters_of_the_International_Monetary_Fund_(Washington,_DC)Recently the Fed released research stating that it encouraged moral hazard and risk taking with its QE programs. Never one to fall behind, now the International Monetary Fund is in on the trick.

After promoting QE for years (see here and here), the IMF is finally coming to realize what has been apparent for years now to almost everyone who doesn’t work for the Fed or the IMF : that low interest rates encourage risky decisions.

But [the IMF] also warned that financial market indicators suggested investor bets funded with borrowed money looked “excessive” and that markets could quickly deflate if there were surprises in U.S. monetary policy or the conflicts in Ukraine and the Middle East.

As the IMF put it in its technical language, “New downside risks associated with geopolitical tensions and increasing risk taking are arising.”

It’s reassuring that after years of prodding people to borrow and spend by taking advantage of low interest rates, the IMF now wants to warn us of the risks involved. Oh well, better late then never.

(Cross posted at Mises Canada.)

What About the Roads?

Something tells me Walter Block and many others will find this cartoon highly entertaining.


New Book on Austrian Economics and Organization

A new book on Austrian economics that targets economic organization has been published at Palgrave Macmillan. Edited by Guinevere Nell, it features a number of papers in favor as well as critical of Austrian economics and what Austrians have to say about organizing and organization. In a sense, the book invites to a discussion on “post-Austrian” economics by, as is also the sub title, “reaching beyond free market boundaries.”

This book is the first in a two-volume series on where Austrian economics may be, can be, and perhaps should be headed.

Here’s the table of contents:

PART I: ORDER AND EFFICIENCY IN FREE MARKETS
1. Improving Spontaneous Orders; Randall Holcombe
2. The Problem of Unemployment When Markets Clear; Daniel Kuehn
PART II: THE FIRM IN THE ECONOMY
3. The Corporate Planned Economy; Kevin Carson
4. The Firm and the Authority Relation; Per Bylund
PART III: FREEDOM, CONTRACTS, AND THE STATE
5. Contract, Freedom, and Flourishing; Gus DiZerega
6. On the Perceived Legitimacy of the State; Edward Stringham and Caleb J. Miles
PART IV: AUSTRIAN ECONOMICS AND MARKET SOCIALISM
7. Beyond Market Socialism; Andrew Cumbers
8. A Post-Austrian Market Socialism; Guinevere Nell

The book can be purchased as hardcover, e-book, and pdf directly from Palgrave Macmillan or e.g. Amazon.com.

Joey Rothbard

images (2)Today would have been the eighty-sixth birthday of JoAnn Rothbard, the beloved wife of Murray Rothbard for forty-two years. In the dedication to America’s Great Depression, he called her “the indispensable framework,”and anyone who knew them could have no doubt why he said this. Murray discussed all his ideas with her, and she was a gifted historian in her own right–I recall in particular an excellent talk she gave on Lincoln’s economic policies.

She was totally devoted to Murray, and she regarded it as a principal task to shield him from those who tried to exploit him. She had hilarious stories about some of these people. During the 1979 convention of Libertarian Party at the Bonaventure Hotel in Los Angeles, someone took the occasion to get Murray to speak at her supper club.  She said to me, “Do you know what she paid him? Zip.” Once you were her friend, though, you were her friend for life.

She had an amazing number of stories about people she had known. No one kept up with people as much as she did; and, as she once said to me, “There ‘s a lot I know that I don’t tell anyone.” The memory of her that is clearest in my mind is the kind look in her eyes. This stays with me, “in thinking of the days that are no more.”

The Strike to End All Strikes

1280px-BC_Legislature_Buildings_and_Undersea_GardensThe teachers’ strike in British Columbia, Canada, is over… almost. On Thursday, 40,000 public school teachers in the province will vote on whether to accept the proposed contract. Neither side got everything it wants, and the main headline is that teachers will receive a 7.25% salary raise over 6 years. The province also pledged to add $100-million to an education fund to benefit BC teachers over the next five years.

Education minister Peter Fassbender is seemingly satisfied at a job well done: “We have guaranteed that every student’s educational journey in this school year will be kept whole.”

Right. Not counting the five weeks of shuttered classrooms lost so far this year. That’s over a quarter of the fall term, for those that are counting.

Premier Christy Clark was also pleased with the deal:

We’ve found a way to give teachers a fair raise, improve classroom composition – to really make it work for teachers, but at the same time that we’re making sure it still works for taxpayers. So we’re not going to have to raise taxes, we aren’t going to go into deficit and we’re not going to increase our debt.

No new taxes, but no new debt from this multi-million dollar deal. The money has to come from somewhere. For all of these points Ms. Clark raises to be true, the province must be cutting spending from elsewhere. She doesn’t say where that is, but I have a feeling the offsetting cuts figments of her imagination. My money is on a this settlement attributing to a deficit, or higher taxes, at some point in the future.

While encouraging teachers to accept the deal, BC Teachers’ Federation president Jim Ikers chimed “Be proud… There are meaningful achievements in this deal for teachers and students.”

And therein lies the rub. Everyone should be pleased with this outcome, because a painful strike is the only way it was going to happen. With a near monopoly on schooling in the province (nearly 90% of students are educated in the public system), there is no competitive check to let any of the belligerents settle their dispute elsewhere.

Parents are obviously upset because they don’t have any choice in the matter. Moving to a nice neighborhood with a good school is about all they can do to have a say in their child’s education. Contrast this with, say, buying clothes where you can go where you want and direct your money at the store that best suits you. Parents in BC pay their taxes, and lose all control of how that money is allocated.

It’s fun to poke fun at entitled teachers, but think about it from their point of view. You are in an industry with only one company to work for. Your pay is pre-determined according to a scale that you have no control over, by people you will never meet. Your colleagues cannot be let go if they do not perform. You enter the job wide-eyed and bushy tailed, only to find that for all the efforts you do, there is not much you can do to peaceably argue for better working conditions. No bantering over your salary raise for the coming year during the annual performance review. No back-and-forth with the boss over your working hours. If you are dissatisfied, it’s nearly impossible to quit your job and look for another in the same field (and licensing requirements across provinces make teachers trained for one system unemployable in others). There is only one recourse left to this group if they want a better work life – strike!

You can almost sympathize with the opprobrium felt by the teachers.

This strike will not be the strike to end all strikes, because the conditions for why the strike was necessary are not fixed. There is no competition in schooling as long as it remains in the public’s hands. Parents will continue feeling trapped and looking to the government to maintain services with minimal amounts of disruption, since they can’t vote with their feet and send their kids elsewhere. Teachers will continue protesting and threatening for better conditions the next time their contract expires because it’s the only way they can argue for a better working life.

If you want to understand why public school teachers’ strikes are so disruptive, think about the one main fact that separates that industry from others. It’s not hard to please customers (parents). It’s not demanding employees (teachers). It’s that the lack of competition means that a strike is the only way the two sides can settle disputes.

(Cross posted at Mises Canada.)

Thornton: ‘US-Russia political tensions will speed up demise of dollar’

Mark Thornton interviewed on PressTV:

“The political tensions between the United States and Russia has increased or speeded up the process of which nations are doing business between countries instead of dollars and doing it with their local currencies,” Mark Thornton, Senior Fellow at Mises Institute, told Press TV on Wednesday.

“As a result, that puts pressure back on the United States because the United States wants everybody to use dollars in international transactions as well as a reserve currency in their central banks,” the professor at Auburn University added.

markrussia

Do Incentives Really Matter?

7214510228_fa7685186d_bThe phrase “incentives matter” is ubiquitous in economics, from undergraduate teaching to economic policy debates. The mantra is especially popular in the growing literature targeted at the general public, which I’ve criticized before for its undue focus on incentives (see here and here). My point is that while it’s good to see economic ideas reaching a larger audience, it doesn’t help much if the ideas aren’t sound to begin with. Such is often the case with the concept of incentives.

To answer the question posed in the title, yes, incentives matter, in the sense that individuals have motivations, and it’s important to think about what those motivations are if we want to know how people act in the real world. For example, in the words of Steven Kerr, ignoring incentives often leads to “the folly of rewarding A, while hoping for B,” which produces managerial chaos.

Nevertheless, emphasizing incentives too much glosses over several problems: economic laws can make incentives irrelevant; incentives are in any case too narrow a concept to be the defining characteristic of economics; focus on incentives sometimes leads to a paternalistic view of economic policy.

Read More→

Mises on Secession

In light of the upcoming Scottish independence referendum, some quotes by Mises are appropriate. Too bad the Scots’ idea of independence is Salmond and the EU, not Wallace and Bruce.

memorial

No people and no part of a people shall be held against its will in a political association that it does not want. (Nation, State, and Economy, p. 34)

It makes no difference where the frontiers of a country are drawn. Nobody has a special material interest in enlarging the territory of the state in which he lives; nobody suffers loss if a part of this area is separated from the state. It is also immaterial whether all parts of the states territory are in direct geographical connection, or whether they are separated by a piece of land belonging to another state. It is of no economic importance whether the country has a frontage on the ocean or not. In such a world the people of every village or district could decide by plebiscite to which state they wanted to belong. (Omnipotent Government, p. 92).

The right of self-determination in regard to the question of membership in a state thus means: whenever the inhabitants of a particular territory, whether it be a single village, a whole district, or a series of adjacent districts, make it known, by a freely conducted plebiscite, that they no longer wish to remain united to the state to which they belong at the time, but wish either to form an independent state or to attach themselves to some other state, their wishes are to be respected and complied with. This is the only feasible and effective way of preventing revolutions and civil and international wars. (Liberalism, p. 109).

More great quotes, plus an explanation by Hans Hoppe of “democracy” as understood by Mises, here.

 

The NCAA Racket

ncaa2Mises Daily Tuesday by Andrew Syrios:

The NCAA, a quasi-governmental regulatory cartel, prohibits colleges from paying athletes. So colleges employ a variety of schemes to offer unofficial “pay.” Meanwhile, the NCAA ensures there is no functioning job market for athletes at that level, and no competition to which students might go seeking higher pay.

‘Power and Market’ Is Now in Persian

Thanks to translator Matin Pedram, Rothbard’s Power and Market is now available in a Persian translation.

Front:

rsz_persian_translation

Back:

rsz_2unnamed_3

 

The Mises Institute Hosts Auburn Econ Graduate Students

As has been done for several years, the Mises Institute hosted our annual Auburn University Economics Graduate Student Reception on Friday at our campus next to Auburn University. It was organized by Jonathan Newman (Summer Fellow 2014, Mises U Alum, and Economics Doctoral Student at Auburn).

mises_reception1

mises_reception2 Read More→

Before Adam Smith There Was Chydenius

Stockholm, Old CityMises Daily Monday by Gary Galles:

The work of economist Anders Chydenius, which predates Smith’s The Wealth of Nations, provided a radically free-market voice for Scandinavia in the 18th century as Chydenius battled against mercantilists and those who thought government well-suited to plan economies with laws and edicts.

The Regret of War

Enlist_in_the_Navy_LCCN2002699395.tifWe all have regrets. But if you find yourself consistently ruing your past decisions, maybe it’s best to rethink your rashness.

Writing in the Financial Times this weekend, Richard McGregor gives some perspective on Americans’ change of heart for wars.

In the wake of a triumph in WWII, in 1950 65% of polled Americans supported sending troops to Korea. Two short years later only 37% felt the same way. We know what a boondoggle it turned out to be, but few would remember that nearly two-thirds of Americans supported the Vietnam War early on. As it neared the end, almost no one could stomach it any longer.

And speaking of boondoggles, don’t forget that when American went into Iraq in 2003 more than 70% of the population thought it was a good idea. By 2010 only around half that many thought so. The incursion into Afghanistan in the wake of 9/11 was the most “popular” war in America’s recent history – it was almost unanimous! 93% of polled Americans supported it. Today, public opinion is split 50/50.

We all make mistakes, but should heed Albert Einstein’s advice that the definition of insanity is doing the same thing over and over, expecting a different result.

Why is this troubling right now? With troubles brewing afresh in Syria and Iraq, 61% of Americans think there is a threat to the national interest, and only 13% disagree. Let’s hope cooler heads prevail.

(Cross posted at Mises Canada.)

Peter Thiel on Monopoly and Competition

220px-Peter_Thiel_TechCrunch50Entrepreneur and venture capitalist Peter Thiel has an interesting Wall Street Journal piece on innovation, firm growth, and market structure, misleadingly titled “Competition Is for Losers.” Thiel’s essay is ostensibly about the defense of “monopoly” — the large market shares achieved by successful firms — over “competition,” by which he means perfect competition, the neoclassical economist’s fantasy world in which tiny, identical firms exist in a kind of stasis, not doing anything and not earning any economic profits.

Actually, without meaning to, Thiel gives us a thorough and persuasive critique of mainstream monopoly theory and its bizarre, counterintuitive, and misleading concepts of “monopoly” and “competition.” The business behaviors Thiel praises — innovating, creating economic value, out-competing rivals, and increasing sales and profits — are thoroughly competitive, in the Austrian (and common-sense) notion of of competition. If Thiel had followed the Austrians in defining competition as the absence of legal restraints on entry and exit, he could framed his essay as an explanation of how innovation and entrepreneurship benefit society, rather than making it look like a critique of competition per se. A better title: “Perfect Competition Theory Is for Losers.”

Sweden Politically Deadlocked

Sweden_from_ciaUpdated: The poll stations in the Swedish general election closed a mere two three hours ago. With about 60% 90% of voting districts already counted, it looks like the voter turnout has increased – and that voters have caused quite a mess in the parliament. No likely constellation of parties will reach a majority of seats in parliament.

The parliament’s 349 MPs will be distributed proportionally to represent a total of eight parties. The center-right “alliance” four-party government under PM Reinfeldt (marked by * below) has undoubtedly lost the election with a total of 39% to a 44% minority constellation of Three leftist parties. And in the middle is the nationalist/racist party Sweden Democrats as the election’s winner and third largest party in the parliament. The radical feminist party “F!” (Feminist Initiative), it seems, will not make it past the 4% of the popular vote that is necessary to be represented.

To form government requires more pro votes than con votes; most decisions during the four-year period to next election require simple majority.

The results with about 90% counted (with difference to prior election result within parentheses) is as follows:

5.7 % (+0.1) Vänsterpartiet (radical left, formerly the communist party)

31.1 % (+0.4) Social democrats (progressives)

6.8 % (-0.5) Green party (environmentalists)

5.4 % (-1.7) People’s party (social liberal)*

6.2 % (-0.4) Center party (social liberal)*

23.2 % (-6.9) Moderates (conservative party)*

4.6 % (-1.0) Christian democrats*

13.0 % (+7.4) Sweden democrats

3.1 % (+2.7) Feminist initiative

0.8 % Other

Noah Smith: Keynes Misunderstood, Maligned by Austrian Critics

WhiteandKeynesIn a September 11 Bloomberg article, economist Noah Smith claims that Keynes wasn’t a “ ‘socialist’ “or even a “’progressive’.” He did not favor “a command economy.”

Yes he “ was in favor of some amount of wealth redistribution and government intervention into the economy.” But “Keynesian policies are fundamentally . . . about economic stability, . . . about smoothing out the fluctuations in the economy, reducing risk for everyone concerned.”

“Stabilization theory says that you can smooth out the wrinkles of the business cycle without messing with the deep structure of how the economy works. The expectation is that if the government does just that — just that one small, minor intervention — then recessions won’t be a big problem….” To accomplish this, among other things, the government will raise interest rates when the economy is too hot and lower them when it is too cool.

So who is misrepresenting Keynes? His critics or Smith?  In the first place, Keynes himself did not recommend raising interest rates to cool off an economy. He wrote that “ The remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the boom to last.” [General Theory p. 322]. He even recommended eventually bringing interest rates down to zero and keeping them there [General Theory, pges 220-21 and 336].

Nor are Keynesian attempts to stabilize the economy through interest rates a “small, minor intervention.” They represent a price control of one of the economy’s biggest prices, the cost of credit. Today they are also accompanied by many other managed prices—most notably in world currency markets, but also in large domestic markets such as healthcare.

A market economy depends above all on free prices. All the Keynesian price controls, manipulations, and nudges just lead to boom, bust, and economic destruction, the opposite of stabilization.

Smith states that Friedrich Hayek, Keynes’s most prominent critic in the 1930’s and 1940’s, began the misrepresentation of Keynesianism. But Hayek argued that “ the more we try to secure full security by interfering with the market system, the greater the insecurity becomes,” and Hayek was right. Wilhelm Ropke put it even more succinctly: “ The more stabilization, the less stability.”

Smith also describes Greg Mankiw, a leading contemporary Keynesian and author of one of the most widely used economic textbooks, as one of “the most prominent conservative economists writing in the popular media today.” Well, Mankiw is a Republican and did serve George W. Bush as chairman of his Council of Economic Advisors. But George W. Bush is the president who enlarged government and deficits and who coined one of the most memorable oxymorons of all time when he said “ I’ve abandoned free market principles to save the free market system.”

Is Smith at least correct that Keynes was not in favor of a “ command economy?” Here is how Keynes described his own views on this subject:

“[I favor] … a somewhat comprehensive socialization of investment” [ General Theory, p. 378].

“ State planning,…intelligence and deliberation at the center must supersede the admired disorder of the 19th century “ [ BBC broadcast, March 14, 1932].

Keynes did oppose Marxism. He regarded Soviet Communists as deranged “Methodists” [Essays in Persuasion, pg. 299, 310], but said about the Soviet five year plans: “  Let us not belittle these magnificent experiments or refuse to learn from them” [BBC Broadcast, March 14, 1932].

Keynes’s Austrian critics are not distorting him. It is the people who zealously guard his shrine, including the New York Times, Public Radio, and Wikipedia, who are doing so.