Tuesday, March 03, 2015

Cities and the evolution of transactions costs

In her big-themed and important Bourgeois Dignity: Why Economics Can't Explain the Modern World, Deidre McCloskey covers a lot of ground. She takes on most of received economic growth theory; she takes a strong stand in favor of culture over institutions as an explanation of the "hockey stick" bend in economic well being that we often simply refer to as the "industrial revolution" and she evokes Austrian economists' emphasis of entrepreneurial discovery as an important force in economic growth explanations.

The author also offers a schematic (her Figure 4, p. 409) that collects most her her ideas on a single page. (The diagram is too complex to display here).  But I think she misses some essentials when she mentions on page 406 that cities simply belong to the "background conditions" that were always around.

Having noted the importance of entrepreneurial discovery, she has to wonder how that happens. Urban Economists (see, for example Ed Glaeser's Triumph of the City) now almost routinely cite cities as the places where the interactions by which ideas are discovered and incubated take place. My quibble with the standard view is that "density" is too often used as the convenient proxy for how all of this happens.  Rather, I believe, entrepreneurs (and everyone else) seek propitious locations from which they expect they can best execute all of the activities they are involved in. Each of us participates (as buyer and/or as seller) in numerous supply chains. I include supply chains for ideas. Seeking and finding propitious sites for all of this activity is actually the way we deal with transactions costs. Modern cities (with flexible enough land markets) and modern networks (electronic and other) represent where we are in the ongoing evolution of transactions costs.

A schematic that does it for me is one suggested by Cowen and Tabarrok (below). They place "organization" at the center. But organization can be mean things.  I suggest that spatial organization belongs side-by-side with industrial organization. When the make-or-buy decisions are made, where to make or buy are made concurrently (nearby or not? how nearby?).  The evolution of transactions costs affects all of them.

Thursday, February 26, 2015

Car culture?

Declining VMT per capita (left graphic below) is a relatively new thing. Is it economics? Demographics? Changing life styles? Unscrambling the eggs is never simple. Iain Gately (Rush Hour) cites a recent KPMG study that this way: 
They divide the population of the USA into four generations: Baby Boomers (anyone over 45); Generation X (35-45 years old); Generation Now (15-34) and Digital Natives (younger than 15). Whilst Baby Boomers and X-ers were in love with cars and got their licences young - in 1978, for instance, 75 per per cent of American seventeen-year-olds had theirs- Generation Now aren't quite so obsessed. In 2008, only 49 per cent of their age cohort had passed their driving test by the age of 17. If a machine does it for them, they won't care. They're happy to limit their driving experiences to Grand Theft Auto (p 322-323).

A similar generational divide is apparent in data shown in The Economist (right graphic, below).  It is the old question: is new tech a good or a bad substitute for old tech?  The nature of substitutes is always in the eyes of the beholder. Beholders of different ages come at this is different ways - and entirely as we might expect.


Various age-related trends in 15 countries.

Monday, February 23, 2015


The labels "Malthusian" and "neo-Malthusian" in modern usage obscure more than they convey. Robert Mayhew, in Malthus: The Life and Legacies of an Untimely Prophet, goes a long way to place Malthus into context and perspective. Malthus was clearly a giant in the age of the classical economists.  His influence was profound and he was right about how the world works for much of human history -- until very recent times.  It is fair to say that much of the world has only very recently escaped the sad fates of "the Malthusian trap."  Angus Deaton is one of meany who informs us about the "post-Malthusian-trap" state of most of the world.

Julian Simon deserves tremendous credit.  Whereas economists love to talk about scarce resources, it was Simon who described how one resource, human ingenuity, is not scarce; it is infinite -- in a context of economic freedom. This kryptonite for the neo-Malthusians and explains how and why Simon made and won his bet with Paul Ehrlich.  I suspect you can take Simon's side in similar bets and win 9 out of 10 times.

I say all this because it is perplexing that, in an otherwise fine book, Mayhew lumps Simon (and also Bjorn Lomborg) with a group he refers to as "neo-conservative."  Hmmmm. Here is Hayek's encomium on the book jacket of Simon's book:  "I have never before written a fan letter to a professional colleague, but to discover that you have ... provided the empirical evidence for what with me is the result of a lifetime of theoretical speculation, is too exciting an experience not to share with you."  Good historians like Mayhew should take note.

Mahew ends the book giving attention to the world's trouble spots and allowing for the fact that some places have not shed the prospect of Malthusian checks. But most of these are societies mired in civil wars and not yet able to hop onto the virtuous cycle -- good institutions and prosperity feed each other.“It is evident from the experience of the countries that have successfully reformed policies that the payoff for shifting to a virtuous circle can be enormous.  Better understanding of the political-economic interactions that can enable this to happen is therefore of major importance for improving the development prospects of those countries still mired in the ‘stop-go’ cycle of detailed controls and intervention and gradually decelerating economic performance.”  Anne Krueger, The American Economist (1994)

Thursday, February 19, 2015

"Conversations" and "root causes"

When you hear talk of "root causes," guard your wallet.  The current White House summit re terrorism is looking for its root causes.  In fact, the WSJ's Dan Henninger quotes Susan Rice: “Before I go through the elements of this strategy, I want to note how our approach may differ from what others may recommend. We believe in the importance of economic growth, but we insist upon investing in the foundations of American power: education and health care; clean energy and basic research.”

To "invest" is Washington-speak for funding cronies. I wish the White House summit good luck but applying what sound like ever more "War on Poverty" programs to any old problem is not promising.  Bernard Lewis and Timur Kuran have worked hard to understand why so many of today's Muslim societies have a problem with modernity.

Over 50 years ago, Daniel Moynihan suggested that cultural trends cannot be ignored when explaining poverty, especially inner city black poverty.  He was ignored in favor of a barrage of "programs". What do we have after all these years and programs? Steady hand-wringing over "increasing inequality."  Doubling down on all this, as the WH conference and Susan Rice's remarks suggest, is not at all promising.  Quite the opposite.

We cannot easily prompt cultural awakenings but economic growth is a good place to start -- for its own sake as well as for the ancillary benefits.  Perhaps the WH conferees can look at U.S. trade and agricultural policies and how they hurt poor farmers abroad.  (Briefly touched on by Russ Roberts and Daniel Sumner.) Policy wonks who love "conversations" can work on this one.


Here is Arnold Kling on the WH summit.  He does not know whether to laugh or cry.

Saturday, February 14, 2015

Hidden in plain sight

Most people and most politicians agree that a higher minimum wage is a good thing.  But hell-bent, they throw common sense out the window.  You can bet that they purchase less when prices rise; many of them also advocate internalizing pollution taxes and also sin taxes -- to change behavior they proudly claim.

To approximate some sort of cogency, the same advocates accept all sorts of make-believe stories. First, fat cat employers will simply shell out the extra labor costs when prompted by law. Second, employees are necessary to any operation and not easily laid-off and replaced.

Re the first, I recently ate at a SF restaurant where an extra charge for "San Francisco mandates" was clearly displayed on both the menu as well as the check.  Some cost may be shifted from sellers to buyers. How much each group ends stuck with time will tell.  What about Wal-Mart?  What if some costs are shifted to the customers?  Are they among the fat cats?

Regarding labor demand elasticity, we have all experienced the heroic efforts to which many companies will go in order to make do with less labor.  Call centers will switch you to a human after all sorts of suggestions or maybe not at all.  Below are photos taken mid-day at SFO where the "help" desk was not attended by any human but rather by a sign that kindly guided travelers to three automated alternatives. People seeking help when their flight is cancelled of they missed connections would probably love face-to-face contact with a human.  Again, proportions of losses for the airline, its employees and its customers will be unknown for a time. But we do know that there is no free lunch.

Monday, February 09, 2015


On Oct 30, 1969, the NY Times reported "School Integration Ordered by Supreme Court." That was not a long time ago. Some of us celebrate remarkable progress -- while wanting ever much more.

In The Moral Arc, Michael Shermer joins others who have documented that humanity is generally on a good path.  History is a hard read but I believe that Shermer makes a strong case (as do Steven Pinker, Joshua Greene, Deirdre McCloskey, Robert Wright, and many others).

The worst impulses (and the worst atrocities) occur when people revert to tribalism. One of the charms of Shermer's analysis are his demonstration that humanity has (for the most part) been moving away from tribalism towards greater cosmopolitanism.  He offers a schematic that he calls "The Expanding Moral Sphere" (above).

In the recent Commentary, Noah Rothman writes "The 'Conversation About Race' That Isn't a Conversation"  He suspects a lot of demagoguery. Race-baiting for votes is retrogressive and dangerous.  It is also a digression from the expanding moral sphere.

Thursday, February 05, 2015

Disappointing discourse

In the current New Yorker, James Surowiecki cites research that finds minimum wages hikes are really good for everyone.  This is counter-intuitive for at least two reasons.  First, it is hard to deny the law of demand; we buy less at higher prices.  Second, its hard to believe that it has never dawned on many millions of business people that they could do themselves a big favor by unilaterally raising the wages of their lowest paid workers. "Better-paid workers tend to work harder ..." Surowiecki notes.  There is always a finding the "sweet spot" problem that we expect all owners to discover if they plan to stay in business.

To be sure, there are spontaneous salary hikes all around -- when employers find that the market is telling them that to retain the services of key people, they have to cover that worker's opportunity cost -- as it is signaled by the relevant labor market.

The Surowiecki piece disappoints for other reasons. He and the people he cites use "fair" as if waving that flag solves all problems.  Call that the "unfair" reliance on rhetoric.

He cites stagnating wages in recent years but we cannot know any of this by comparing snapshots; the fortunes of real people must be tracked.  This is hard.  So an uncountable number of lazy commentators fall back on comparing snapshots of different people in different years who may be in the same bracket or fit the same profile.

The writer also cites the fact that many companies are making a lot of money.  But they also compete on capital and many other markets; it is unlikely that they can easily dip into deep packets. More "sweet spot" problems.

Finally, the NY Times recently posted data on the shrinking middle class.  Where had these people gone?  Most had moved up. Have a look.

Monday, February 02, 2015


China is, to say the least, fascinating. Coase and Wang are mainly optimistic. I would like to be too.  I teach there occasionally and find that the students are smart, inquisitive, thoughtful and well trained.  The Chinese students that I encounter at USC are usually superb.

China's growth record of the last 30+ years is a thing to behold; hundreds of millions were lifted out of abysmal poverty.  But was it a case of starting at a very low base and taking available ideas and technologies "off the shelf" so to speak?  Or will there be home-grown endogenous high tech breakthroughs and innovation?

We do not know.  But the news that Chinese authorities are tightening censorship and threatening to shut down VPN internet access to the outside world is awful (Gordon Crovitz comments in this morning's WSJ). The free exchange of information and ideas is the last thing to do if the regime wants to achieve economic pre-eminence.  The internet is a blessing in this area; ham-fisted control is the curse.

I think that Peter Boettke once commented on the race between the three S's (Smithian exchange, Schumpeterian entrepreneurialism and political stupidity).  The first two have to work very hard because the the third formidable. We see it in the U.S. almost every day.  But there is nothing like an international perspective.

Sunday, January 25, 2015

Complexity models and policies

Here is a famous headline from The Telegraph, 5 Nov, 2008: “The Queen asks why no one saw the credit crunch coming … During a briefing by academics at the London School of Economics on the turmoil on the international markets the Queen asked: ‘Why did nobody notice it?’”

Since then, many others have asked the same question. There are now an uncountable (and counting) number of books and papers that explain it all -- after the fact. This will go on.

David Colander and Rolan Kupers (Complexity and the Art of Public Economy: Solving Society's Problems from the Bottom Up) provide a recent addition.  One Amazon reviewer calls it the "best economics book of 2014." Economists, CK write, are wedded to wrong and inadequate models.

They start off on a bad foot, attacking the straw man notion that most people are wedded to either a "market-can-fix-everything" or a "government-can-fix-everything" view. I dislike binary choices. And clearly, institutions and culture matter.In my view Deirdre McCloskey (Bourgeois Dignity: Why Economics Can't Explain the Modern World) tells that story best. Evolving norms matter a great deal and the phenomenon is absent from formal economic models.

Even those who will not go as far as Pres Obama's "you didn't build that" view understand that markets function best in the context of a credible legal infrastructure and a government that takes care of significant physical infrastructure.  Our challenge is to somehow invent a politics and a government that stops about there.

Colander and Kupers take conventional economics to task for trying to mimic the approach of physics; biology, they say, offers the better model.  Could be.  Their argument is that "complexity economics" is where the hope lies.  They mean that economics has to recognize the possibility of increasing returns, multiple equilibria, endogenous tastes, nonlinear dynamics and positive feedbacks.  CK want the possibility of "lock-in" to be recognized.  But how many of the original 1955 Fortune 500 are still on that list?  Very few.  CK claim that as we recognize the various realities that belong to complexity, we will come up with better policies, e.g. "complexity policies."  Will such policies meet the challenge I mention in the previous paragraph?  I liked the book but I am not convinced that the answer is "yes."

CK write about all the things that "government" "should" or "could" be doing.  They might delete "government" and insert the synonym "politicians" -- the ones we have, the ones I see on the nightly news.

Wednesday, January 21, 2015

State of the economy

Twenty-five years ago, Milton Friedman suggested that the U.S.was 45% socialist.  I prefer the label "crony capitalist" and the percentage may be higher than 45. Both of the major political parties are redistributionist; both want to redistribute in the direction of their political base. As office-seekers, and presiding over very large budgets, can they be anything else?  Perhaps we should not be surprised that the U.S. ranks 12th in the 2014 Heritage Index of Economic Freedom. Free the World also puts us at 12th. It would be nice for the U.S. to move up in both rankings.

Economically, we look much better.  According to comparisons shown in the 10th Annual Demographia International Housing Affordability Survey, as a nation, we are the best. The UBS Prices and Earnings report is my favorite. Their "Working time required to buy" table compares 72 of the world's major cities in terms of how many minutes or hours the average worker must work to purchase one Big Mac, one kg of bread, one kg of rice, or one iPhone 4S with 16GB.

Four U.S. cities are included, some of our most expensive places, Chicago, Los Angeles, Miami and New York.  But in the Bic Mac column, the U.S. cities are among the best, with the sole exceptions of Tokyo and Hong Kong. A Big Mac costs the average L.A. worker 11 minutes of work but it is just 9 minutes in Tokyo and 10 minutes in Hong Kong. The international range goes all over the place, mostly much higher.

We do pretty well in the bread and rice columns, but the U.S. and most of the other places listed have awful farm support policies.  We do very well in the time required to buy the iPhone; the U.S. four-city average is 31.25 minutes; only Geneva is better, at 23.5 minutes. Go figure.

All these comparisons and rankings are tricky and one has to be very careful.  But I caught parts of the State of the Union speech (and its reception) on TV last night. (John Stossel dreams of the speech he would have preferred.)  I did see the President take credit for the low price of gasoline.  No one laughed.

Considering our politics, the state of our economy is pretty good. 

Tuesday, January 20, 2015

Worth listening to

I had previously cited the work of David Theroux.  Here, David links the thought of C.S. Lewis to modern conceptions of liberty and the integrity of the individual.

Monday, January 19, 2015

Horse sense

Tyler Cowen cites The Horse in the City which I reviewed a while back.  This history is interesting for many reasons.

1. Most people fear the environmental effects of cars but have little knowledge of how much more polluted the cities were when we relied on horses.
2. Many routinely extrapolate negative trends to the point of inevitable catastrophe but fail to note how horse-manure doomsday never came; entrepreneurs, not an army of regulators, came to the rescue.

3. Those who rue the passing of a golden-age past are usually ignorant of the realities; it is usually these same folks who fear the future -- and who somehow know how to manage it.

4. Washington politicians recently saw the possible decline of the Detroit auto industry as ominous but the decline of the auto's predecessor, the horse, was not a calamity.

One can never know enough history. Read the book.

Thursday, January 15, 2015

Better than "smart"

Robin Hanson asks "Why not sell cities?"  You buy and own the city; you become the residual claimant (landlord) and can internalize all sorts of externalities. It could be a good deal.

I have often cited the shopping mall as an example of a single owner as the best possible land use planner (for that mall) because of the ability to internalize externalities.

The question always comes up about how scalable the mall example is.  Hanson alludes to some of the difficulties, especially with respect to governance and politics. Spencer MacCallum has famously suggested the hotel as a model for governance and public facilities and space use via contract. (The thing you sign when you check in or make the reservation.) Contracts respond to market forces and management has to choose, for example, who gets "free" wi-fi, gym access, bottled water, etc.

Bob Nelson has been writing about private communities -- and privatizing more of them -- for some years.  The privatizing part is not simple.

All three of the cited works deserve a hearing. Conventional city planning is stuck in a "smart" growth rut whereby growth controls and a bizarre approvals process have resulted in high costs and housing "affordability" problems. Connected crony developers get rich, as do lawyers and handlers who make a good living off the sorry mess.

At the same time, suburbanization trends continue. The promised "smart" benefits have not been realized but the costs have.


Arnold Kling on the same topics.

Monday, January 12, 2015

New economy

What do we know? Our economic data are not very good -- and probably getting worse as more of the economy creates hard-to-measure consumer surplus.  What do we pay for all the cool stuff we get for free on the Web?  Next to nothing.  How will we measure GDP and other stand-byes. Measurement challenges will hamper our understanding -- and forget about macro-economic forecasts.

This is why I do not understand the declinists and stagnationsts. New-economy industries (e.g. Silicon Valley) employ fewer people than in-its-heydey old-economy (e.g. Detroit). But this is just the start.

Many people have used Uber-type taxi services and understand its vast advantages. Networking and apps have been fashioned to reduce transactions and vetting costs to the extent that an army of new drivers (and autos) can step forward to serve another army of new customers.  Note that the app technology involved is stuff that is here now.  (Transportation economists used to worry about all the empty seats in all the cars out there. What to do?)

The Economist looks at the emerging phenomena in "There's an app for that."  Some call it the "sharing economy."  But we ain't seen nothin' yet -- and it's way beyond taxis. As new apps connect buyers and sellers in  a variety of fields, applications that we have not yet imagined will emerge.

More unemployed (and under-employed) labor will find things to do. More unemployed (and under-employed) capital, such as cars parked in garages, will find new work.

No surprise that start-up funding is growing.


I cannot decide whether peer-to-peer professional cuddling is part of the new economy.