Monday, 25 July 2016

Inequality v's crony capitlism

At his Stumbling and Mumbling blog, everybody's third favourite Marxist, Chris Dillow says Yes, Inequality Matters. Dillow writes,
A free market society in which high incomes arise from the free choices of consenting adults – as in Robert Nozick’s Wilt Chamberlain parable – might have the same Gini coefficient as a crony capitalist society. But they are two different things. A good reason to be worried about current inequality – even if it hasn’t changed – is that it is a symptom of market failures such as corporate welfare, regulatory capture or the implicit subsidy to banks.
Here I think Dillow is right .... and wrong. He is right that crony capitalist societies are bad, but he wrong to tie this to inequality.

The reasons for disliking crony capitalism is the inefficiencies, via things like rent seeking, corporate welfare, subsidies to favoured industries etc, that such a system invariably results in. But these outcomes are independent of the level of inequality.

Even if inequality was low under a crony capitalist system, that system would still be in need of change and if a (truly) free market society has greater inequality it would not justify the transformation that the crony capitalist system would. Inequality is not the reason for worrying about crony capitalism, there are many other, better, justifications for doing so.

Not everything that is thought wrong in this world is due to inequality, no matter what some people will tell you.

Sunday, 24 July 2016

The beginning of British economics?

An interesting comment from Beer (1938: 86-7):
In 1581, a certain W.S., into the personality of which it is irrelevant to inquire, brought out a quarto volume under the tide A Briefe Conceipte of Inglish Policie, which may be regarded as the beginning of British political economy: The treatise was reprinted in 1751, 1808, 1813. 1876 by various publishers, one of whom thought to have discovered under the letters W.S. the name of William Shakespeare. In 1893 it was edited under the title A Discourse of the Commonweal of this Realm of England, by Miss Elizabeth Lamond. The editing may serve as a model for such literary ventures, though not easily imitated or duplicated. She sent the book out with an introduction-the product of vast researches-proving with a certainty which is all but absolute that it was John Hales (a member of Parliament in 1548, a member of the Commission on Enclosures in I 549, a promoter of learning, a reformer imbued with warm sympathy for the dispossessed peasantry) who wrote it in 1549 (Emphasis added).
I must say its the first time I have seen such a claim. I don't recall any other historian of economic thought arguing that it is the start of British economics. That said, no lesser historian of thought than Lionel Robbins does say that it is "highly readable" and that it contains the first statement of the quantity theory of money. Robbins also argues that it is unlikely that John Hales is the author of the work. He argues that the author is Sir Thomas Smith (Robbins 1998: 42-3).

  • Beer, M. (1938). Early British Economics: From the Thirteenth to the Middle of the Eighteenth Century, London: George Allen and Unwin Ltd.
  • Robbins, Lionel (1998). A History of Economic Thought: The LSE Lectures, Princeton: Princeton University Press.

Thursday, 21 July 2016

How mandatory shareholder voting prevents bad corporate acquisitions

In a new column at Marco Becht, Andrea Polo and Stefano Rossi argue that many corporate acquirers impose losses on their shareholders. Conflicted or overconfident CEOs and boards embark on acquisitions that are not in the best interest of the owners of the firm. They go onto argue that the governance tool of shareholder voting can represent a potential solution. Their column shows that in the UK, where bids for relatively large targets require mandatory shareholder approval, shareholders gain when the transaction is conditional on a vote and lose when it is not. The evidence suggests that the vote puts a constraint on the amount the CEO can offer for the target.

This does raise the question that if this is true, why do we not see more shareholder activism on this issue? Also if this is true and activism is low, ie "voice" is not used, then why do we not see more "exit" occurring? That is, why do we not see disgruntled shareholders selling their shares?

Becht, Polo and Rossi write,
One of the most striking empirical regularities in finance is that many acquirer shareholders earn negative abnormal returns (Andrade et al. 2001, Bouwman et al. 2009), and that the losses from the worst performing deals are very large (Moeller et al. 2005). Why is this the case?

The finance literature has pointed to two non-mutually exclusive explanations. First, in line with the traditional ‘separation of ownership and control’ problem, managers who control widely held corporations may have private goals – such as empire building – that conflict with those of shareholders, particularly in the case of acquisitions (Morck et al. 1990). According to this view, managers know what they are doing and deliberately take excessive risks. Second, managers may be overconfident or suffer from ‘hubris’, thereby paying too much relative to rational managers (Roll 1986, Malmendier and Tate 2008).

Can shareholders address these issues and prevent negative abnormal returns in acquisitions from materialising in the future? In principle, shareholder voting can provide a potential solution in both of the cases described above. Rational shareholders can veto actions driven by overconfidence, while vigilant or active shareholders can halt transactions motivated solely by empire building or private benefit purposes. If shareholder voting is effective in deterring CEOs’ behavior, CEOs will not overpay relative to the median shareholder and will not propose projects the shareholders are unlikely to support. As a result, in equilibrium all acquisition proposals will be approved.

In the conclusion Becht, Polo and Rossi ask, given the above results, why is mandatory voting on relatively large acquisitions not adopted more widely among issuers? In their answer to their own question they write,
Acquirer shareholders could be better off by writing a mandatory voting provision into the corporate charter. In some jurisdictions this might be difficult because the board and the management can get in the way and want to guard their autonomy. Under Delaware law in the US, for example, shareholders could potentially make the necessary charter amendment but this would require the approval of the board. The same frictions that explain the large value destruction in acquisitions - self-dealing and overconfidence - might explain why we do not see such charter amendments. In other countries company law and listing rules simply do not foresee the possibility of mandatory voting on acquisitions. Acquirer shareholders would have to lobby more effectively to get the tools that would allow them to protect their wealth.

Wednesday, 20 July 2016

How well does GDP measure the digital economy?

A question asked by Timothy Taylor at his Conversable Economist blog. Taylor writes,
Digital technologies aren't just changing the way existing companies communicate and keep records, but are creating new kinds of companies (think Uber, AirBnB, or Amazon) and products (think and "free" products like email and websearch or an app like Pokemon Go). Can the old-style methods of measuring GDP keep up? Nadim Ahmad and Paul Schreyer of the OECD tackle this question in "Are GDP and Productivity Measures Up to the Challenges of the Digital Economy?" which appears in the Spring 2016 issue of International Productivity Monitor, which in turn is published by the Ontario-based Centre for the Study of Living Standards. Perhaps a little surprisingly, their overall message is upbeat. Here's the abstract:
"Recent years have seen a rapid emergence of disruptive technologies with new forms of intermediation, service provision and consumption, with digitalization being a common characteristic. These include new platforms that facilitate peer-to-peer transactions, such as AirBnB and Uber, new activities such as crowd sourcing, a growing category of the ‘occasional self-employed’ and prevalence of ‘free’ media services, funded by advertising and ‘Big data’. Against a backdrop of slowing rates of measured productivity growth, this has raised questions about the conceptual basis of GDP, and whether current compilation methods are adequate. This article frames the discussion under an umbrella of the Digitalized Economy, covering also statistical challenges where digitalization is a complicating feature such as the measurement of international transactions and knowledge based assets. It delineates between conceptual and compilation issues and highlights areas where further investigations are merited. The overall conclusion is that, on balance, the accounting framework for GDP looks to be up to the challenges posed by digitalization. Many practical measurement issues remain, however, in particular concerning price changes and where digitalization meets internationalization."
Contrary to this "upbeat" assessment I would argue that there are reason to think that GDP, as we know it, does not capture much of what happens within the digital/knowledge/information economy, call it what you will. There are substantial challenges to be overcome in any attempt to measure the such an economy. These are at both the theoretical and the method level.

To begin with, a more consistent set of definitions are required as are more robust measures that are derived from theory rather than from whatever data is currently or conveniently available. In order to identify the size and composition of the knowledge based economy one inevitably faces the issue of quantifying its extent and composition. Economists and national statistical organisations are naturally drawn to the workhorse of the ‘System of National Accounts’ as a source of such data. Introduced during World War II as a measure of wartime production capacity, the change in (real) Gross Domestic Product (GDP) has become widely used as a measure of economic growth. However, GDP has significant difficulties in interpretation and usage (especially as a measure of well being) which has led to the development of both ‘satellite accounts’ - additions to the original system to handle issues such as the ‘tourism sector’; ‘transitional economies’ and the ‘not-for-profit sector’ - and alternative measures, for example, the Human Development Indicator and Gross National Happiness. GDP is simply a gross tally of products and services bought and sold, with no distinctions between transactions that add to well being, and those that diminish it. It assumes that every monetary transaction adds to well being, by definition. Organisations like the Australian Bureau of Statistics and the OECD have adopted certain implicit/explicit definitions, typically of the Information Economy-type, and mapped these ideas into a strong emphasis on impacts and consequences of ICTs. The website ( for the OECD’s Information Economy Unit states that it:
“[...] examines the economic and social implications of the development, diffusion and use of ICTs, the Internet and e-business. It analyses ICT policy frameworks shaping economic growth productivity, employment and business performance. In particular, the Working Party on the Information Economy (WPIE) focuses on digital content, ICT diffusion to business, global value chains, ICT-enabled off shoring, ICT skills and employment and the publication of the OECD Information Technology Outlook.”
Furthermore, the OECD’s Working Party on Indicators for the Information Society has
“[...] agreed on a number of standards for measuring ICT. They cover the definition of industries producing ICT goods and services (the “ICT sector”), a classification for ICT goods, the definitions of electronic commerce and Internet transactions, and model questionnaires and methodologies for measuring ICT use and e-commerce by businesses, households and individuals. All the standards have been brought together in the 2005 publication, Guide to Measuring the Information Society [ . . . ]” (,3343,en_2649_201185_34508886_1_1_1_1,00.html).
The whole emphasis is on ICTs. For example, the OECD’s “Guide to Measuring the Information Society” has chapter headings that show that their major concern is with ICTs. Chapter 2 covers ICT products; Chapter 3 deals with ICT infrastructure; Chapter 4 concerns ICT supply; Chapter 5 looks at ICT demand by businesses; while Chapter 6 covers ICT demand by households and individuals.

As will be shown below several authors have discussed the requirements for, and problems with, the measurement of the knowledge/information economy. As noted above most of the data on which the measures of the knowledge economy are based comes from the national accounts of the various countries involved. This does raise the question as to whether or not the said accounts are suitably designed for this purpose. There are a number of authors who suggest that in fact the national accounts are not the appropriate vehicle for this task. Peter Howitt argues that:
“[...] the theoretical foundation on which national income accounting is based is one in which knowledge is fixed and common, where only prices and quantities of commodities need to be measured. Likewise, we have no generally accepted empirical measures of such key theoretical concepts as the stock of technological knowledge, human capital, the resource cost of knowledge acquisition, the rate of innovation or the rate of obsolescence of old knowledge.” (Howitt 1996: 10).
Howitt goes on to make the case that because we can not measure correctly the input to and the output of, the creation and use of knowledge, our traditional measure of GDP and productivity give a misleading picture of the state of the economy. Howitt further claims that the failure to develop a separate investment account for knowledge, in much the same manner as we do for physical capital, results in much of the economy’s output being missed by the national income accounts.

In Carter (1996) six problems in measuring the knowledge economy are identified:
  1. The properties of knowledge itself make measuring it difficult,
  2. Qualitative changes in conventional goods: the knowledge component of a good or service can change making it difficult to evaluate their ‘levels of output’ over time,
  3. Changing boundaries of producing units: for firms within a knowledge economy, the boundaries between firms and markets are becoming harder to distinguish,
  4. Changing externalities and the externalities of change: spillovers are increasingly important in an knowledge economy
  5. Distinguishing ‘meta-investments’ from the current account: some investments are general purpose investments in the sense that they allow all employees to be more efficient
  6. Creative destruction and the ‘useful life’ of capital: knowledge can become obsolete very quickly and as it does so the value of the old stock drops to zero.
Carter argues that these issues result in it being problematic to measure knowledge at the level of the individual firm. This results in it being difficult to measure knowledge at the national level as well since the individual firms’ accounts are the basis for the aggregate statistics and thus any inaccuracies in the firms’ accounts will compromise the national accounts.

Haltiwanger and Jarmin (2000) examine the data requirements for the better measurement of the information economy. They point out that changes are needed in the statistical accounts which countries use if we are to deal with the information/knowledge economy. They begin by noting that improved measurement of many “traditional” items in the national accounts is crucial if we are to understand fully Information Technology’s (IT’s) impact on the economy. It is only by relating changes in traditional measures such as productivity and wages to the quality and use of IT that a comprehensive assessment of IT’s economic impact can be made. For them, three main areas related to the information economy require attention:

The investigation of the impact of IT on key indicators of aggregate activity, such as productivity and living standards,
  1. The impact of IT on labour markets and income distribution and
  2. The impact of IT on firm and on industry structures.
Haltiwanger and Jarmin outline five areas where good data are needed:
  1. Measures of the IT infrastructure,
  2. Measures of e-commerce,
  3. Measures of firm and industry organisation,
  4. Demographic and labour market characteristics of individuals using IT, and
  5. Price behaviour.
In Moulton (2000) the question is asked as to what improvements we can make to the measurement of the information economy. In Moulton’s view additional effort is needed on price indices and better concepts and measures of output are needed for financial and insurance services and other “hard-to-measure” services. Just as serious are the problems of measuring changes in real output and prices of the industries that intensively use computer services. In some cases output, even if defined, is not directly priced and sold but takes the form of implicit services which at best have to be indirectly measured and valued. How to do so is not obvious. In the information economy, additional problems arise. The provision of information is a service which in some situations is provided at little or no cost via media such as the web. Thus on the web there may be less of a connection between information provision and business sales. The dividing line between goods and services becomes fuzzier in the case of e-commerce. When Internet prices differ from those of brick-and-mortar stores do we need different price indices for the different outlets? Also the information economy may affect the growth of Business-to-Consumer sales, new business formation and in cross-border trade. Standard government surveys may not fully capture these phenomena. Meanwhile the availability of IT hardware and software results in the variety and nature of products being provided changing rapidly. Moulton also argues that the measures of the capital stock used need to be strengthened, especially for high-tech equipment. He notes that one issue with measuring the effects of IT on the economy is that IT enters the production process often in the form of capital equipment. Much of the data entering inventory and cost calculations are rather meagre and needs to be expanded to improve capital stock estimates. Yet another issue with the capital stock measure is that a number of the components of capital are not completely captured by current methods, an obvious example being intellectual property. Also research and development and other intellectual property should be treated as capital investment though they currently are not. In addition to all this Moulton argues that the increased importance of electronic commerce means that the economic surveys used to capture its effects need to be expanded and updated.

In Peter Howitt’s view there are four main measurement problems for the knowledge economy:
  1. The “knowledge-input problem”. That is, the resources devoted to the creation of knowledge are underestimated by standard measures.
  2. The “knowledge-investment problem”. The output of knowledge resulting from formal and informal R&D activities is typically not measured.
  3. The “quality improvement problem”. Quality improvements go unmeasured.
  4. The “obsolescence problem”. No account is taken of the depreciation of the stock of knowledge (and physical capital) due to the creation of new knowledge.
To deal with these problems Howitt makes a call for better data. But it’s not clear that better data alone is the answer, to both Howitt’s problems and the other issues outlined here. Without a better theory of what the “knowledge economy” is and the use of this theory to guide changes to the whole national accounting framework, it is far from obvious that much improvement can be expected in the current situation.

One simple, theoretical, question is, To which industry or industries and/or sector or sectors of the economy can we tie knowledge/information production? When considering this question several problems arise. One is that the “technology” of information creation, transmission and communication pervades all human activities so cannot fit easily into the national accounts categories. It is language, art, shared thought, and so on. It is not just production of a given quantifiable commodity. Another issue is that because ICT exists along several different quantitative and qualitative dimensions production can not be added up. In addition if much of the knowledge in society is tacit, known only to individuals, then it may not be possible to measure in any meaningful way. Also if knowledge is embedded in an organisation via organisational routines then again it may not be measurable. Organisational routines may allow the knowledge of individual agents to be efficiently aggregated, much like markets aggregate information, even though no one person has a detailed understanding of the entire operation. In this sense, the organisation “possesses” knowledge which may not exist at the level of the individual member of the organisation. Indeed if, as Hayek can be interpreted as saying, much of the individual knowledge used by the organisation is tacit, it may not even be possible for one person to obtain the knowledge embodied in a large corporation.

As noted above Carter (1996) emphasises that it is problematic to measure knowledge at the national level in part because it is difficult to measure knowledge at the level of the individual firm. Part of the reason for this is that none of the orthodox theories of the firm offer us a theory of the “knowledge firm” which is needed to to guide our measurement.

Thus many of the measurement problems of the "knowledge economy" are rooted in the fact that we don't have a good theory of the "knowledge economy" or the "knowledge firm". Without such theories calls for better data are wasted, they miss the point. "Better" data collection alone is not going to improve the measurement of the "digital/knowledge/information economy".

Monday, 18 July 2016

Mercantilism and the firm

As is well known the classical economists had no serious theory of the firm. For them economics was more orientated towards marcoeconomic issues than microeconomic ones such as the firm. This situation is one they largely inherited from the mercantilists.

There were at times, in the mercantilist literature, much discussion of firms but it was a limited discussion. Limited in the sense that it dealt not with issues to do with firms per se but with the effects of firms on more macro issues such as the balance of trade. It was also limited in that it largely dealt only with the regulated companies and their monopolies.

When discussing the period 1640-1690, Magnusson (1994) argues that several mercantilist writes attacked the regulated companies. Some authors argued for the adoption of measures to end the monopoly position that regulated companies such as the Merchant Adventurers, the Russian Company, the Levant Company and the East India Company held. There were also debates about the effects of companies like the East India Company on the balance of trade. Gerrad Malynes, for example, argued that the East India Company was exporting money “beyond the seas” and thus hurting England’s balance of trade.

But other voices where added to the chorus against the regulated companies as the seventeenth century progressed. In 1645, for example, an anonymous writer, in a pamphlet entitled “A Discourse Consisting of Motives for the Enlargement and Freedome of Trade”, attacked the Merchant Adventurers. The author argued that there is nothing more “ … pernicious and destructive to any Kingdom or Common-wealth than Monopolies”.

But regulated companies also had their defenders. In 1602 John Wheeler defended the Merchant Adventurers saying that its traffic in cloth led to that “ … a number of labouring men are set to work and gain much monie, besides that which the Merchant gaineth”. That is, what’s good for the Adventurers is good for the country! In 1641 Lewell Roberts recommended that more regulated companies should be set up. He was of the opinion that “ … joyn one with another in a corporation and Company, and not to kase their Traffike by themselves asunder, or apart” would lead to increased strength and maximum benefits for a trading nation. In addition, Thomas Mun, Edward Misselden and Sir Josiah Child had all defended the East India Company from attack at different times.

It should be noted, however, that much of these debates were partisan rent seeking with each side just dressing up their position in terms of the public good. But as Magnusson notes for " ... at least one scholar, Thomas, the controversies around this company [The East India Company] was an overall  important factor propelling the economic discussion as such during most of this century".

Importantly for our purposes such a discussion is more policy orientated than economics orientated. One point is that although such arguments involve firms they do not require a theory of the firm. Just accepting that the firms do exist is enough for policy evaluation, there is no need for an explanation of what a firm is, what its boundaries are or what its internal organisation is.

So what we see here is much like the situation with the classical economists, a largely macroeconomic originated outlook with no need for a serious theory of the firm.

  • Magnusson, Lars (1994). Mercantlitism: The Shaping of an Economic Language, London: Routledge.

Friday, 15 July 2016

David Friedman on "Future Imperfect"

Professor David Friedman delivers the THINK 2016 keynote address on the "Future Imperfect".

What kinds of transformative technologies are likely or possible in the near future? How will they affect us and our relations with government? Will they enhance and extend individual freedom or threaten it – or may they do both? What are the implications for politics and government of some of the things that are happening, that we can foresee and can realistically imagine?

Tuesday, 12 July 2016

An empirical analysis of racial differences in police use of force

A timely new NBER working paper.

An Empirical Analysis of Racial Differences in Police Use of Force
Roland G. Fryer, Jr
NBER Working Paper No. 22399
Issued in July 2016
NBER Program(s): LE LS POL
The abstract reads:
This paper explores racial differences in police use of force. On non-lethal uses of force, blacks and Hispanics are more than fifty percent more likely to experience some form of force in interactions with police. Adding controls that account for important context and civilian behavior reduces, but cannot fully explain, these disparities. On the most extreme use of force – officer-involved shootings – we find no racial differences in either the raw data or when contextual factors are taken into account. We argue that the patterns in the data are consistent with a model in which police officers are utility maximizers, a fraction of which have a preference for discrimination, who incur relatively high expected costs of officer-involved shootings.
In the introduction to the paper Fryer writes,
The results obtained using these data are informative and, in some cases, startling. Using data on NYC’s Stop and Frisk program, we demonstrate that on non-lethal uses of force – putting hands on civilians (which includes slapping or grabbing) or pushing individuals into a wall or onto the ground, there are large racial differences. In the raw data, blacks and Hispanics are more than fifty percent more likely to have an interaction with police which involves any use of force. Accounting for baseline demographics such as age and gender, encounter characteristics such as whether individuals supplied identification or whether the interaction occurred in a high- or low crime area, or civilian behaviors does little to alter the race coefficient. Adding precinct and year fixed effects, which estimates racial differences in police use of force by restricting to variation within a given police precinct in a given year reduces the black coefficient by 19.4 percent and the Hispanic coefficient by 26 percent, though both are still statistically larger than zero. Including more than 125 controls available in the data, the odds-ratio on black (resp. Hispanic) is 1.173 (resp. 1.120).

Interestingly, as the intensity of force increases (e.g. handcuffing civilians without arrest, drawing or pointing a weapon, or using pepper spray or a baton), the probability that any civilian is subjected to such treatment is small, but the racial difference remains surprisingly constant. For instance, 0.26 percent of interactions between police and civilians involve an officer drawing a weapon; 0.02 percent involve using a baton. These are rare events. Yet, the results indicate that they are significantly more rare for whites than blacks. In the raw data, blacks are 21.3 percent more likely to be involved in an interaction with police in which at least a weapon is drawn than whites and the difference is statistically significant. Adding our full set of controls reduces the racial difference to 19.4 percent. Across all non-lethal uses of force, the odds-ratio of the black coefficient ranges from 1.163 (0.036) to 1.249 (0.129).

Data from the Police-Public Contact Survey are qualitatively similar to the results from Stop and Frisk data, both in terms of whether or not any force is used and the intensity of force, though the estimated racial differences is larger. In the raw data, blacks and Hispanics are approximately two percentage points more likely than whites to report any use of force in a police interaction. The white mean is 0.8 percent. Thus, the odds ratio is 3.335 for blacks and 2.584 for Hispanics. As the use of force increases, the racial difference remains roughly constant. Adding controls for civilian demographics, civilian behavior, contact and officer characteristics, or year does little to alter the results. The coefficients are virtually unchanged and are all highly significant with the exception of the highest uses of force for which data is sparse.

There are several potential explanations for the quantitative differences between our estimates using Stop and Frisk data and those using PPCS data. First, we estimate odds-ratios and the baseline probability of force in each of the datasets is substantially different. Second, the PPCS is a nationally representative sample of a broad set of police-civilian interactions. Stop and Frisk data is from a particularly aggressive form of policing in a dense urban area. Third, the PPCS is gleaned from the civilian perspective. Finally, granular controls for location are particularly important in the Stop and Frisk data and unavailable in PPCS. In the end, the “Truth” is likely somewhere in the middle and, importantly, both bounds are statistically and economically important.

In stark contrast to non-lethal uses of force, we find no racial differences in officer-involved shootings on either the extensive or intensive margins. Using data from Houston, Texas – where we have both officer-involved shootings and a randomly chosen set of potential interactions with police where lethal force may have been justified – we find, in the raw data, that blacks are 23.8 percent less likely to be shot at by police relative to whites. Hispanics are 8.5 percent less likely. Both coefficients are statistically insignificant. Adding controls for civilian demographics, officer demographics, encounter characteristics, type of weapon civilian was carrying, and year fixed effects, the black (resp. Hispanic) coefficient is 0.924 (0.417) (resp. 1.256 (0.595)). These coefficients are remarkably robust across alternative empirical specifications and subsets of the data. Partitioning the data in myriad ways, we find no evidence of racial discrimination in officer-involved shootings. Investigating the intensive margin – the timing of shootings or how many bullets were discharged in the endeavor – there are no detectable racial differences.