Tuesday, 25 August 2015

EconTalk this week

Thousands of bears in New Jersey. Humpback whales near New York City. Acres devoted to farming stable or declining even as food production soars. Jesse Ausubel of the Rockefeller University talks with EconTalk host Russ Roberts about the return of nature. Ausubel shows how technology has reduced many of the dimensions of the human footprint even as population rises and why this trend is likely to continue into the future. The conversation concludes with Ausubel's cautious optimism about the impact of climate change.

A direct link to the audio is available here.

Thursday, 20 August 2015

Chris Trotter misunderstands economics

Over at the Offsetting Behaviour blog Eric Crampton notes that Chris Trotter has been writing In praise of Bryce Wilkinson. And justly so.

But at one point Trotter writes,
Economics II was staffed by young economists who had studied at universities in the United States where the monetarist theories of Milton Friedman, and the ideas of neo-classical economics generally, were already well-entrenched.
"[T]he ideas of neo-classical economics generally, were already well-entrenched". Is this in anyway surprising? This comment seems to show a rather large misunderstanding of the development of economics.

I mean neo-classical economics developed in the 1870s with the work of Carl Menger, William Stanley Jevons and Léon Walras. So by the 1970s and 1980s it had been around for 100 years. It had been the standard in economics textbooks since, at least, Alfred Marshall's Principles of Economics in 1890s. So I am confused as to why Trotter thinks its worth noting that Treasury economists were trained in it. Every economics student, then as now, is trained in it. Its the standard, there is nothing unusual or noteworthy about it.

What would be worthy of note is if they were using non neo-classical ideas. And it is, because they were. Many of the ideas introduced by treasury economists of this time where ideas which moved thinking outside of the purely neo-classical box. They were thinking Coaseian thoughts by applying ideas from the law and economics literature and the new institutional economics to the New Zealand policy scene. They also utilised ideas from contract theory, in the main principal-agent theory, and the transaction cost economies of Oliver Williamson,

This kind of thinking is non neo-classical thinking. It moves away from the ideas of perfect markets, perfect information, zero transaction costs and institution free worlds. So one of the most important things we should be grateful to Wilkinson et al for is the introduction of non neo-classical thinking into New Zealand policy making. It is a great and lasting contribution, a contribution for which they can be justly praised.

Hal Varian interviews Alvin Roth

Hal Varian interviews Alvin Roth about Roth's new book "Who Gets What — and Why," at Google.

Wednesday, 19 August 2015

EconTalk this week

Rachel Laudan, visiting scholar at the University of Texas and author of Cuisine and Empire, talks with EconTalk host Russ Roberts about the history of food. Topics covered include the importance of grain, the spread of various styles of cooking, why French cooking has elite status, and the reach of McDonald's. The conversation concludes with a discussion of the appeal of local food and other recent food passions.

A direct link to the audio is available here.

Tuesday, 11 August 2015

EconTalk this week

Summer Brennan, author of The Oyster War, talks with EconTalk host Russ Roberts about her book and the fight between the Drakes Bay Oyster Company and the federal government over farming oysters in the Point Reyes National Seashore. Along the way they discuss the economics of oyster farming, the nature of wilderness, and the challenge of land use in national parks and seashores.

A direct link to the audio is available here.

Tuesday, 4 August 2015

The "anti-commons" in intellectual policy

A common argument made with respect to intellectual property is that many countries innovation system provide excessively strong or numerous intellectual property rights that drown innovation in a “thicket” or “anti-commons” of overlapping legal rights. The majority view holds that anti-commons effects are a common occurrence that raises significant policy concerns about excessive intellectual property rights. A counter view to this line of argument is that market players have incentives and capacities to correct for anti-commons type effects through contract and other mechanisms.

In a paper, The Anti-Commons Revisited, forthcoming in the Harvard Journal of Law and Technology, Jonathan Barnett aggregates and critically reviews the diverse body of evidence on this issue. He independently replicates some of the most controversial results, surveying over a century’s worth of pooling arrangements, and providing additional evidence on potential anti-commons effects in certain markets. Two surprising and unusually consistent conclusions emerge. First, there is little concrete evidence that intensive levels of intellectual property acquisition and enforcement restrain innovation or output. Second, unless constrained by antitrust limitations, markets consistently exhibit capacities to devise transactional solutions that preempt or mitigate intellectual thickets. These conclusions erode confidence in the majority view, which in turn casts doubt on normative recommendations in favour of weakening intellectual property rights to preclude anti-commons effects.

The abstract reads:
Intellectual property scholars and policymakers often assert that technology and creative markets suffer from “anti-commons” (“AC”) effects that restrain innovation within a web of conflicting intellectual property claims. A minority view asserts that market players have incentives and capacities to correct for AC effects through transactional solutions. To assess the relative merits of each side of this debate, I review a large and diverse body of empirical evidence relating to AC effects in contemporary and historical markets. I independently replicate the most controversial empirical findings, supplement additional research on selected markets, and provide a survey of all documented IP-pooling arrangements in U.S. markets since 1900. The weight of the evidence strongly favors the minority view. Evidence for AC effects is scarce while evidence that markets correct for AC effects is abundant. AC effects are typically preempted or mitigated through cooperative arrangements among small numbers of IP holders or transactional solutions devised by entrepreneurial intermediaries for large numbers of IP holders. This pattern recurs over a diverse array of markets and periods, including automobiles, petroleum refining, aircraft, and radio communications in the early to mid-20th century, and information and communications technology markets from the late 20th century through the present. Contrary to standard assumptions, there is little evidence that these markets experienced reduced or delayed innovation or output despite intensive levels of patent issuance and litigation.

EconTalk this week

Seafood is highly perishable and supply is often uncertain. Roger Berkowitz, CEO of Legal Sea Foods talks with EconTalk host Russ Roberts about the challenges of running 34 seafood restaurants up and down the east coast. Berkowitz draws on his 22 year tenure as CEO and discusses how his business works day-to-day and the question of sustainability.

A direct link to thee audio is available here.

You REALLY know your economy is in trouble when .......

you start to run out of beer!!

From Vice News comes the news that Venezuela Faces Looming Beer Shortage in Dispute with Nation’s Biggest Brewer.
Venezuela's largest food distributor on Thursday denounced the government occupation of a Caracas warehouse amid accusations that the company is hoarding goods.

Soldiers took over the warehouse complex used by Empresas Polar late Wednesday just as Venezuela's federation of brewers announced that Polar's beer manufacturing subsidiary is shutting two of its six plants because of a lack of imported barley — a crucial ingredient in beer.
Earlier this month, the head of Venezuela liquor store federation warned that the nation was about to run out of beer because brewers had reached "zero hour" amid widespread shortages in raw materials. Days later, he was detained for reasons that remain unclear.
An economy without beer is an economy in need of reform, big time!

Friday, 31 July 2015

The history and future of workplace automation

There is much written about the effects that automation and robots will have on human employment and normally we are told it's all bad. The Luddites are still with us.

In a new article in the Journal of Economic Perspectives David H. Autor considers the effects on automation on jobs and asks Why Are There Still So Many Jobs? The History and Future of Workplace Automation. The abstract reads:
In this essay, I begin by identifying the reasons that automation has not wiped out a majority of jobs over the decades and centuries. Automation does indeed substitute for labor—as it is typically intended to do. However, automation also complements labor, raises output in ways that leads to higher demand for labor, and interacts with adjustments in labor supply. Journalists and even expert commentators tend to overstate the extent of machine substitution for human labor and ignore the strong complementarities between automation and labor that increase productivity, raise earnings, and augment demand for labor. Changes in technology do alter the types of jobs available and what those jobs pay. In the last few decades, one noticeable change has been a "polarization" of the labor market, in which wage gains went disproportionately to those at the top and at the bottom of the income and skill distribution, not to those in the middle; however, I also argue, this polarization and is unlikely to continue very far into future. The final section of this paper reflects on how recent and future advances in artificial intelligence and robotics should shape our thinking about the likely trajectory of occupational change and employment growth. I argue that the interplay between machine and human comparative advantage allows computers to substitute for workers in performing routine, codifiable tasks while amplifying the comparative advantage of workers in supplying problem-solving skills, adaptability, and creativity.
So machines are both a substitute and a complement to labour, and when thinking about the effects of automation on employment we need to keep both these factors in mind. Machines have not, so far, replaced all workers, in fact employment is growing, and it's unlikely that they will replace all jobs in the future. The complementarities between labour and machines are stronger than many people seem to realise.

Wednesday, 29 July 2015

Are NZ First really as xenophobic and economically illiterate as this makes them sound?

An article at Voxy.co.nz tells us that English concedes NZ farms better off in NZ ownership - NZ First. The article states,
The government has finally admitted its folly over foreign ownership of New Zealand’s farms, says New Zealand First.

"When questioned in Parliament yesterday, Finance Minister Bill English first parroted the government line that Landcorp buying Crafar farms is not an obvious advantage to Landcorp or the New Zealand economy," says Spokesperson for Primary Industries Richard Prosser.

"However, Mr English then confirmed what farmers know but the government would not admit, until yesterday. He compared foreign corporate ownership of NZ farms to a fashion trend that came and went, but then revealed his own view that the ‘New Zealand owner-operator model - those who live it and love it - tend to be the only ones who can make money out of NZ farmland’.
First, a little knowledge of economics would suggest that the fact that the owner-operator model, normally a family-owned model, tend to be the ones to make money out of framing should not surprise anyone.

In New Zealand, and most other places, it is obvious that family-based firms still dominate in agriculture. Which is odd if you compare agriculture with, say, manufacturing, investor-owned firms predominate in manufacturing, So why not farming?

The short answer given by Allen and Lueck (1998) and Allen and Lueck (2002) is "nature". They argue that farms operate in unique circumstances defined by nature, in particular seasonality. This is the main feature that distinguishes farm organisation from industrial organisation. For farmers a season is a distinct period of the year during which a given activity is optimally undertaken.

This is key to understanding the why the incentives generated within agriculture favour family farms. The two basic issues are opportunities for hired workers to shirk due to random production shocks from nature and the limits on the gains from specialisation and the timing problems caused by seasonality. The trade-off between effect work incentives and gains from specialisation help determine the costs and benefits of different farm organisational types.

The family farm model provides the best work incentives since the owner is the sole recipient of the benefits, but this model misses some benefits due to specialisation. This follows from the fact that the farmer must engage in numerous different tasks during each stage of production, and in addition, numerous production stages throughout the year.

On the other hand, large factory-style corporate farms gain from a specialised labour force and lower cost of capital, but suffer from bad worker incentives since hired workers, not being one of the owners, have an increased incentive to shirk.

To some degree all firms are governed by the trade-off between gains from specialisation and work incentives. For the case of farming it is the unique, large impact of nature that biases it towards family operations.

An obvious, but key, feature of agriculture is that it involves a living, growing product. In the case of livestock, for example, you have breeding, husbandry, feeding and slaughter. Such a cycle is largely governed by nature. In principle there is no reason that a different farmer could not own each stage. But timing difficulties between stages result in high costs of engaging in market transactions. Such timing issues are particularly severe in farming because the inventories of the intermediate goods cannot be held given the living nature of the product.

There are a number of factors, such as the number of crop cycles, the length of the production stages and the number of tasks within a stage, which also influence wage labour incentives. When cycles are few, stages are short, random shocks are large and the tasks are few, there is little to gain from specialisation and labour is especially costly to monitor. Thus family farms.

If these issues can be overcome, that is, if farmers can mitigate seasonality and random shocks to output, farm organisation starts to look much like that in the rest of the economy. Under such conditions farm organisation will gravitate towards factory process and develop the large-scale corporate forms of other sectors of the economy. But thus far this hasn't happened.

Given the nature of farming, corporate ownership, be it local or foreign, isn't yet the most efficient form of ownership and thus it hasn't penetrated agriculture to the degree it has in other sectors of the economy.

So farms being in family ownership is simply a result of the economics of farming. It is the fact that the owner-operator model is the most efficient that is important here, not the nationality of the owner.

The economics of farming will give the result that most farms are in New Zealand hands, since family-owned business are most likely New Zealand owned business. There is no need for any xenophobic ownership restrictions to keep farms in New Zealand hands, the market will achieve this.

Also putting restrictions on ownership can prevent foreign investment in the situations where it is needed.

The Voxy article continues,
"Ownership of New Zealand property, be it residential or farmland, needs to be restricted to New Zealand citizens and permanent residents only, the end," says Mr Prosser.
Such restrictions are not need since as noted above when local ownership is efficient you get it, and there are times when you want foreign ownership. The point is that New Zealand gains the most when you get assets into the hands of those you value them most, who will use them most efficiently, and the restrictions on ownership can prevent this.

  • Allen, Douglas W. and Dean Lueck (1998). "The Nature of the Farm", Journal of Law and Economics, 41: 343-86.
  • Allen, Douglas W. and Dean Lueck (2002). The Nature of the Farm: Contracts, Risk, and Organization in Agriculture, Cambridge Mass.: The MIT Press.