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Congratulations…but let’s not over do it

Posted by Michael Sykuta on October 11, 2010

I was waiting to write something about today’s announcement of the Nobel Memorial Prize in Economics being awarded to Diamond, Mortensen, and Pissarides. Josh has already provided his thoughts and provided links to comments by Ed Glaeser and Steve Levitt, respectively. As they describe it, the honorees’ research provides a theory of unemployment, explaining why we see willing buyers and willing sellers of labor go without finding trading partners, thus resulting in persistent unemployment. The Nobel committee paints it a bit more broadly, explaining:

Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish.

This basic lesson certainly has broader implications for the workings of markets and the build-ups or mismatches of production capacity, inventories, and consumer demand more generally. In that sense, I believe the honorees provided much more than simply a theory of unemployment, though that is certainly where their particular applications have focused.

My colleague, Peter Klein, over at O&M has offered a little more crude assessment of the economics Nobel Prize in general, and this year’s award in particular. In short, Peter suggests the Nobel Prize in economics has become an award for those who most elegantly state (or prove) the obvious. That there are information and search costs that keep buyers and sellers from finding one another and efficiently taking advantage of all possible gains from trade is one of those things you don’t really need a PhD in economics to figure out. (Perhaps that’s why it isn’t taught much in Econ 101…overestimating students’ grasp of the obvious.)

Indeed, this idea (of search costs) was already awarded the Nobel Prize at least once, in 1991 when Ronald Coase received the prize “for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy” (see here). The work of this year’s recipients is simply one specific application of Coase’s theory, which identified the cost of searching out trading parties and determining relevant prices as part of the set of costs that affect behavior (and boundaries) in the market.

So, I am very delighted that Messrs. Diamond, Mortensen and Pissarides have received this honor, further illustrating the importance of understanding transaction costs (or more specifically, search costs in this case) and their implications for the workings of the economic system.

That said, I am appalled at the New York Times report today that suggests the action of the Nobel Prize committee somehow qualifies Peter Diamond to serve on the Federal Reserve Board. While Republicans may be making too little of Mr. Diamond’s experience, I don’t believe they have suggested his academic research is sub-par. The Nobel Prize committee may have added weight to the idea that Mr. Diamond’s (and his fellow honorees’) research has made significant contribution to the field, it bears nothing on the relevance of that research–or on Mr. Diamond’s personal experience–for setting federal monetary policy, the role of the Federal Reserve Board.

It is a shame that, for the second year in a row, Alfred Nobel’s memory is being abused as a battering ram for partisan politics in the US. We may expect that more of the Peace Prize. And while I would like to think that was not the intent of the selection committee for the 2010 Economics prize, its use to that effect by the NYT and others detracts from whatever significance the Prize imbues to the research contribution of its recipients.

Posted in economics, Sykuta | 7 Comments »

Elgar Companion to Transaction Cost Economics

Posted by Michael Sykuta on September 24, 2010

Peter Klein (over at Organizations and Markets) and I recently edited a volume for the Elgar Companion series titled The Elgar Companion to Transaction Cost Economics. At long last, the volume will be available in the US in November, 2010; in plenty of time for spring semester classes that might want to incorporate some or all of the readings in the book.

Transaction cost economics (TCE)  has become a dominant, if not mainstream, theoretical approach for understanding a variety of applied topics such as vertical integration, the structure of networks and alliances, franchise contracting, the multinational firm, parts of antitrust analysis, marketing channels, and more. The influence TCE has come to have in law, economics and organization theory was recognized last year when the Nobel  Prize in Economic Sciences was awarded, in part, to Oliver Williamson “for his analysis of economic governance, especially the boundaries of the firm”, which has come to be known as TCE.

Our objective in editing this volume was to create a thorough, if not exhaustive, resource for individuals interested in better understanding TCE, its intellectual origins, the fundamental concepts underlying the theory, TCE’s application in a broad array of specific fields, and some critiques of the theory. The volume includes articles from a range of leading scholars in their respective fields, including my fellow blogger, Josh Wright.

Scott Masten, one of the early scholars to apply and promulgate TCE, offered these comments in his review of the book:

‘Not too long ago it was possible to be familiar with all of the important works and latest developments in transaction cost economics. That that is no longer the case is a testament to the intellectual appeal and empirical success of the transaction cost approach. For newcomers, the entries in this volume, by some of TCE’s most knowledgeable and eloquent contributors, offer an excellent introduction to the issues, methods, discoveries, and debates in the field; for veterans, the volume provides a highly valuable resource for catching up on the newest research.’

Following is a copy of the table of contents, for those interested.

Read the rest of this entry »

Posted in general, Sykuta | 1 Comment »

The Complexity of Simple Economics

Posted by Michael Sykuta on September 17, 2010

That’s the title of Steve Horwitz’s blog post reflecting on a recent celebration honoring the lifetime contributions of 1986 economics Nobel Prize winner James Buchanan. (HT: Art Cardin for pointing it out on FB) Horwitz describes Bachanan’s comments about how “the most basic insight of economics is fairly simple: the spontaneous order of  the market.” He goes on:

At the core of the economic way of thinking is the idea that economic coordination requires no coordinator and that an order which serves the interests of all can emerge from the interaction of self-interested choices. Although simple, it is also highly counterintuitive when first encountered.

This fundamental insight underlies much of the spirit that unites the collection of bloggers called Truth On The Market (at least as I see it…Geoff and Josh can delete me if I’m wrong). Horwitz then goes on to describe Buchanan’s remarks on a subject that relates even more closely to TOTM. To wit:

Buchanan’s final point, however, was one that is perhaps the most important in our own time and place. He reminded the audience that not all spontaneous orders are equally good. The quality of the outcomes depends crucially on the rules that frame the economic processes and behavior which produce that order.

In short, the rules matter. Or, as one of my professors, 1993 economics Nobel Prize winner Douglass North might say, “institutions matter.”  Spontaneous order will emerge from the interaction of individual decision makers as they work to maximize (or satisfice) their own well-beings, regardless the nature of the rules. However, the rules themselves create incentives and constraints that shape the nature of the spontaneous order itself.  Often, the rules result in spontaneous orders which are neither intended nor desirable…largely because those responsible for creating the rules have such little grasp of and/or appreciation for that most basic insight of economics: the spontaneous order of the market.

When I was in grad school I had the pleasure of attending a talk by Buchanan and picked up an anecdote that I still use with my students. Buchanan told a story of a trip to Russia just shortly after the reforms of the early 90s. He learned that there had been (or was at the time) a thriving market for burned out light bulbs. It was a great tale of how spontaneous market order can emerge, even in a society that had been taught for generations to eschew the market.

So,while not so presumptuous as to write on behalf of all my colleagues, I will simply suggest that TOTM readers may better understand the philosophy behind much of what is posted here by coming to an understanding of the complexity of simple economics; remembering the spontaneous order of the market and the importance of the rules by which it is shaped.

Posted in economics, markets, Sykuta, truth on the market | Comments Off

Now, Everyone, Gasp In Surprise

Posted by Michael Sykuta on September 15, 2010

Alan Greenspan has been revered in political and media circles since his benevolent reign over times of fortune as the Chair of the US Federal Reserve. Now Mr. Greenspan has acknowledged what many of us have been saying for a long time: fiscal stimulus didn’t work. (insert gasps of surprise here)

Now, to his credit, Mr Greenspan was not an avid proponent of the fiscal stimulus plan (that I have seen) and more often pointed to concerns about the financial markets and the debt (and politics) associated with fiscal spending (for instance, see here).  However, Mr. Greenspan’s newly restated appreciation for normal market forces is welcome, especially given the reverence with which he is typically held by the political masses.  From today’s Wall Street Journal “Real Time Economics” blog (see the full post here):

“We have to find a way to simmer down the extent of activism that is going on” with government stimulus spending “and allow the economy to heal” itself, former Fed Chairman Alan Greenspan told a gathering held at the Council on Foreign Relations in New York on Wednesday.

At this point, “we’d probably be better off doing less than more” because “you’d be far better off to allow the normal market forces to operate here,” Greenspan said.

(Again, gasps of surprise, indeed shock: You mean, we should just let the markets work?!)

According to the article, Greenspan claims that “fiscal stimulus efforts have fallen far short of expectations and the government now needs to get out of the way and allow businesses and markets to power the recover.”

I would suggest a different interpretation.  The fiscal stimulus efforts have had no less effect than expected…at least by the expectations of reasonable economic thinkers. For example, see the posts here and here from my pre-TOTM days.  But as to his conclusion that government needs to get out of the way? Preach it, Brother Greenspan!

Posted in economics, markets, stimulus debate, Sykuta, truth on the market | 2 Comments »

To Slice or Not To Slice; a Taxing Question

Posted by Michael Sykuta on August 26, 2010

Earlier this week, the WSJ reported on a nuance in the New York state tax code that has come take a bite out of at least one bagel company’s profits, and it illustrates how the complexities of arbitrary taxation schemes can rear their ugly heads and create incentives–and challenges–for consumers and sellers alike that would seem silly were it not for their very real economic impacts. The article reads:

State tax officials, under orders from cash-strapped Albany to ramp up their audit and compliance efforts, have begun to enforce one of the more obscure distinctions within the state’s sales tax law.

In New York, the sale of whole bagels isn’t subject to sales tax. But the tax does apply to “sliced or prepared bagels (with cream cheese or other toppings),” according to the state Department of Taxation and Finance. And if the bagel is eaten in the store, even if it’s never been touched by a knife, it’s also taxed.

To make matters even more confusing, this distinction is apparently not clearly stated in the tax code–and it applies to bagels, but not bread.  So you can have your bread and slice it too, but not your bagel. Unless, that is, you are going to eat the bagel on-premises, in which case you may as well slice since the marginal tax is zero.

A public welfare argument for such an arbitrary distinction is difficult to imagine. Even Catherine Rampell at the NYT recognizes the difference between a Pigouvian tax and a completely arbitrary one. (Please refrain from the obvious point that those are not mutually exclusive sets, since the ‘welfare measures’ used for most any Pigouvian tax can be rather arbitrary themselves.) I’m guessing Ms. Rampell is a bagel eater!

Besides the incentives for people to simply cut their own bagels (no word on whether the provision of free plastic knives is somehow taxed), one should wonder about the further implications of this tax scheme. If customers are charged a tax for eating on premises, how is the store owner supposed to enforce the transaction? Chase customers out of the store before they can pull the bagel out of their to-go bag and take a bite? Have a “tax staff” that goes around collecting the additional 7 or 8 cents from any customer who (wittingly or no) defies the carry out rule?  A tax of 7-8 cents may seem not worth the effort, at least not on a per customer basis. Perhaps the bagel shop owner should just increase the menu price to include taxes…meaning the shop owner would be price discriminating against whole-bagel-eaters on the go. Or a tax-included menu might allow for some cross-subsidization from those on the go to the slice-or-stay crowd.  Of course, the tax-included menu might result in greater consumer upset (or confusion) since the prices of all products would have to be shown higher.

Will a consumer choose to eat on the go simply to save a few cents? Maybe not. But apparently the new tax is causing some displeasure with consumers, suggesting such a change might not be unrealistic. And what then? Are customers who linger in the shop more likely to buy more items before they leave, pay for coffee refills, etc.? Will the shop lose additional revenue because of the change in dining behavior? Will the state end up losing revenue in its attempt to find more?

My guess is no one in Albany has thought that one through.

Posted in business, regulation, Sykuta, taxes | Comments Off

Food for thought, but don’t believe the label

Posted by Michael Sykuta on August 10, 2010

“People who read food labels such as the Nutrition Facts Panel, ingredient lists or serving size are more likely to have healthier diets than those who do not read labels, according to a new study appearing in the August issue of the Journal of the American Dietetic Association.”  So reads the opening line of a news report today. The article goes on to describe a number of correlations between gender, education, income and use of food labels. The article concludes by citing the study:

“If food labels are to have greater influence on public health rates of use will likely need to be increased among U.S. adults,” researchers said, adding that “Low rates of label use also suggest that national campaigns or modification of the food label may be needed to reduce the proportion of the population not using this information.”

Food labeling is a big issue, both for public health reasons and for business reasons among agrifood firms. So I was curious to see just what the study actually shows (or doesn’t). Best I can tell from reading the article, the authors do nothing to control for the biggest underlying correlations in their model: Who reads food labels?  And what kinds of consumers are more likely to be health-conscious in their food consumption decisions?

Oddly enough, the same demographic characteristics that feature prominently in the use of food labels (female, highly educated, higher income) also feature prominently in health-conscious behavior to begin with. The researchers seem to ignore this self-selection bias in their research method. So, do consumers who read the nutrition label eat more healthfully because they read the label, or do people who eat more healthfully read the label because the want to eat more healthfully?  As yet, (to quote a candy-peddling owl) the world may never know.

The researchers find that the “proportion of variance in nutrient intake explained by food label use alone was small (0% to 1.99%).” But don’t let little explanatory power get in the way of a policy recommendation!  The authors go on to claim that, “Despite the limited amount of variance explained by label use, mean differences between users and nonusers for several nutrients were of sufficient magnitude to be of potential public health importance.” They go on to list a series of recommendations about possible labeling changes.

Of course, there was no consideration to whether these labeling changes would have a meaningful health benefit (even assuming their findings on nutrient consumption are meaningful), nor any consideration for the costs associated with changing labels on tens of thousands of food products.  Interestingly, however, there is another article in the same journal issue titled “Labeling Law Could Mean New Career Opportunities for RDs” (registered dietitians).

Posted in regulation, Sykuta | 3 Comments »

The (deficit) spender of last resort

Posted by Michael Sykuta on August 10, 2010

Todd posts below about the $26 billion bill before the US House today as a gift to teachers (or perhaps more accurately, teachers unions) and school bureacrats. In reality, only $10 billion of the funds is specifically slated to rehire laid off teachers and some other public employees. The other $16 billion is to fund another six months of increased Medicaid payments to the the States (according to this NYT article). In theory, States would use the freed up cash flow to retain more teachers, police and other public service employees. So it would appear the gift is more to the whole collection of public employee unions, not just the teachers. However, I want to focus on a different dimension of this bill: the use of the Federal government to circumvent State laws, rules and regulations regarding responsible fiscal spending.

According to the National Conference of State Legislatures, all but one state “have a legal requirement of a balanced budget” (see here).  State budgets have been hit by the downturn in the economy, just like everyone else’s. Most state legislatures have convened during that period and were able to choose for themselves whether to cut expenditures or to raise revenues in order to deal with their balanced budget requirements. In many (if not most) cases, the states chose to cut funding for the positions that would be refunded by the $26 billion bill in front of the House today. Legislators and executives in those states had to balance the needs of their states and the tolerance of their electorates in making those difficult decisions. These decisions were made much closer to the actual need–and the actual tax base–than anything done in Washington, D.C., and yet these were the choices made by our (more) local elected officials.

So now the Congressional Democrats and the Obama administration have decided (or are about to decide) to circumvent the balanced budget rules imposed on states by the citizens of those states and use the federal government’s seemingly unlimited ability to deficit spend in order to effectively allow the states to spend beyond their budgetary means. On paper, state budgets will appear balanced because the “revenue” from the federal funds will offset the increased expenditures they support.  But this simply shifts the state-level deficit to the federal level–where the voters have much less influence to restrain spend-thrift politicians and bureaucrats.

One can debate the merits of state-level balanced budget rules. However, the fact that the rules exist and that this federal pay-off to public service and teachers unions circumvents the spirit, if not the letter, of those rules should be taken into account. Then again, it seems there is little accounting–or accountability–for fiscal policy in the current political environment. It seems this Congress has expanded its role to include “the nation’s deficit spender of last resort.”

Posted in politics, Sykuta, truth on the market | 7 Comments »

Copyright Conundrum

Posted by Michael Sykuta on August 4, 2010

Earlier this year, the US Supreme Court granted a writ of certiorari to Costco in the case of OMEGA SA v. Costco Wholesale Corp. (541 F. 3d 982 (2008)).  At issue is whether the ‘first sale doctrine’ of US copyright law (17 U.S.C. § 109(a)), which limits the copyright owner’s ability to restrict distribution of its product after first sale, applies to foreign-manufactured products whose first sale was outside the U.S. and whose importation to the U.S. was not authorized by the manufacturer. (I happened to run across a July 31 op-ed by Eric Felten at the WSJ lamenting the potential for the case to limit the ability of libraries to lend books, particularly books originally published and purchased overseas.) The case raises some interesting issues about the role and purpose of copyright protection, segregated market price discrimination in a global economy, and the role of the gray markets in arbitraging global price disparities.

Read the rest of this entry »

Posted in copyright, intellectual property, international trade, law and economics, markets, Sykuta | Comments Off

Ag Antitrust and the Packers & Stockyards Act

Posted by Michael Sykuta on April 29, 2010

The theme of the newest issue of the CPI Antitrust Chronicle focuses on agriculture and antitrust. The issue includes a paper by yours truly on the difficulties of effectively using the Packers & Stockyards Act of 1921 as an alternate means for enforcing competition policy in the agriculture sector (see here; also available at SSRN here).  Below is a psuedo-abstract of the paper (since there is not a formal abstract on the publication itself):

Consolidation and increased concentration in the agrifood sector over the past two decades, combined with an increased use of alternative marketing agreements in the poultry and livestock industries, have fueled concerns of anti-competitive behavior among large agribusinesses such as the major meat packing companies. The DOJ and USDA have partnered together in a pledge to strengthen enforcement both of antitrust restrictions and of the Packers and Stockyards Act of 1921 (“PSA”). This paper provides a brief overview of the ongoing changes in the meat and livestock industries and the role of the PSA. The paper then outlines several challenges facing the successful and efficient use of the PSA as a competition policy from both theoretical and empirical economic perspectives. I argue that regulators need to tread carefully into their newly launched enforcement partnership given how little is well understood of the factors leading to the existing system and, therefore, the likely consequences associated with more aggressive enforcement in the name of competition.

Posted in antitrust, law and economics, regulation, scholarship, Sykuta | Comments Off

Getting The Cart Before The Horse Exposes the Horse's Rear

Posted by Michael Sykuta on April 14, 2010

Will someone remind me just why the USDA and DOJ are hosting their little Antitrust in Ag roadshow this year?

The Associated Press reports today that the USDA is set to release a new set of regulations on the livestock and poultry industries. Reporter Christopher Leonard describes the new regulations as “the most sweeping antitrust rules covering the meat industry in decades, potentially altering the balance of power between meat companies and the farmers who raise their animals.”

Set aside the merits of those regulations and the likely effect on the consumers’ abilities to access consistent, quality meat products at low cost (hint: a non-positive change at best). The bigger question at this point is: Why is the USDA issuing “sweeping changes” now when its Antitrust in Ag workshops focusing on poultry and cattle have yet to take place?

Seems there are two logical inferences to be drawn. Either the USDA is acting in ignorance, since they haven’t gathered the relevant information the workshops are intended to elicit, or the entire workshop series is nothing but political showmanship for Ag-pandering Senators and the Obama administration;  the kind of abuse of influence that completely undermines any perception that our regulatory and legal enforcement agencies are objectively working for the public good.

Of course, regular readers here have likely inferred the latter to be true all along. But the USDA’s move now to impose sweeping regulatory changes in advance of its purported “information gathering” workshops certainly seems to seal the deal.

Posted in ag/antitrust workshop, antitrust, regulation, Sykuta | Comments Off

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