Paul Krugman is Confused About the Theory of the Firm

Krugman's Memorial Day blog post shows his unfortunate misunderstanding of the difference between government bureaucracies and the managerial structures of private businesses. He goes as far to state that those who work for large private firms work under "command-and-control" regimes.

At one level, this is all just semantics. Certainly one can define the managerial structures of private businesses as bureaucracies or define "command-and-control" broadly enough that it encompasses private firms. However, defining these terms so broadly is not helpful because there is an important distinction between the ways in which a government bureaucracy and a (truly) private firm operate.

Economics in TWO Lessons?!

Economist John Quiggin recently provided a draft of the preface of his new book "Economics in Two Lessons" on his blog, Crooked Timber. The book is a response to the classic "Economics in One Lesson" by Henry Hazlitt. It's certainly an interesting project and I plan to pick up a copy when it's published.

That said, the preface indicates the potential for some problems in terms of his criticisms of markets. Quiggin seems to think that Hazlitt has a very simplistic view of markets, to the point that he refers to the "dogmatic certainty of Hazlitt's free-market policies." Whether or not Henry Hazlitt himself simply thought "markets good, government bad" and assumed perfection in markets is immaterial. Such simplistic thinking is not required to come to Hazlitt's conclusions about the outcomes of government policy. (As Quiggin admits, this simplistic presentation may have made sense at the time Hazlitt wrote, and one can certainly expect a simplified presentation in a book for popular audiences.)

The Importance of Economic Education in Regulatory Reform

A Mercatus Center blog post from last year on the need for regulatory reform popped up in our Twitter feed yesterday. The article makes several points about the need for a process of consistent regulatory reform. Specifically the authors note that

The total number of restrictions in federal regulations has grown from about 835,000 in 1997 to over 1 million by 2010. Over time, these accumulated restrictions can either directly foreclose paths to innovation or entrepreneurship or add up to the point where their cumulative cost makes certain actions prohibitively expensive.

They go on to state that every president since Carter has tried to reduce the burden of "nonfunctioning" regulation, but there has not been a substantial decrease in the number of pages in the Code of Federal Regulations (CFR). In fact, the CFR has consistently grown over the last several decades.

The Benefits of Free Market Monopoly

For most politically-minded people, the term "monopoly" typically brings to mind an image of greedy corporate executive laughing as he counts his wads of cash. They likely think of unjustifiably high prices and industries dominated by one or a few firms. Certainly most people view monopoly as a bad thing.

The primary reason economists consider monopoly to be a bad thing is deadweight loss. Deadweight loss refers to the loss in consumer and producer surplus due to lower optimal output relative to the outcome in perfect competition. This deadweight loss is problematic because it represents value that is never created. It's not such a concern who would have captured that value (i.e. whether it would have been consumer or producer surplus), but that the value is never created in the first place. Even if the appeal to perfect competition seems problematic, doesn't it still seem sensible to oppose monopoly on the grounds of the deadweight loss it creates?

Potpourri

I haven't done one of these in awhile, so I thought it was time to share a handful of links to some great stuff I've read recently.

Richard Ebeling at The Citadel offers a fantastic take down of the Keynesian view of recessions for the layman. It's certainly worth a read for the non-specialist in macro.

The always-insightful Don Boudreaux recently discussed the role of theory in measuring the effects of the minimum wage. He also provided a short note on the role of institutions in economic analysis in response to a reader's question and an interesting take on the economic way of thinking. Very good stuff.

Jayson Lusk recently weighed in on the fight between scientific integrity and consumer sovereignty in the food world. He also provided a short discussion of an article on crop insurance subsidies and risk taking.

John Tamny reviews a recent book on the myriad ways gov't policy has and will negatively affect the millennial generation.

Scientific Evidence that 4-H is Awesome

Bryan Caplan recently discussed an article published in the Journal of Marriage and Family about how kids aged 0-12 spend their time and how the activities in which they engage affect their academic achievement.

The authors of the article controlled for a whole host of individual factors such as income, family characteristics, race, sex, and investigate many factors thought to drive academic achievement such as leisure, housework, being in school, studying, doing sports, going to church, watching TV, etc.

Bryan focuses on the somewhat surprising results that TV doesn't do much harm and studying or being in school don't (at the margin) have much of a positive impact. He also discusses one of the two consistently statistically significant factors: reading. I found the other significant effect more interesting.

That other big driver of academic achievement is called by the authors of the article "visiting." This term is just weird and seems pretty unclear until you pull up the article and execute a ctrl-f search for the word. Visiting, according to the authors, is a catchall term that means organized activity that is not church-sponsored and does not involve sports. My first thought when reading this was 4-H!

Children involved in 4-H can expect to learn a wide array of life skills and interact with a wide range of people from different walks of life and age groups. Whether you live in a rural area or dwell in the city, 4-H has something for your children. Kids learn about biology, citizenship, art, nutrition and fitness, leadership, public speaking, and more. This is all done in an atmosphere that is supportive of the child and his/her development.

So there you have it. Although the article doesn't specifically mention 4-H, this seems to me to be scientific evidence that 4-H is awesome!