Saturday, January 21, 2017

How Do We Fix Rent Seeking?

by Levi Russell

Over at the ProMarket blog, Asher Schechter summarizes some key arguments made at the recent ASSA meetings on rent seeking, antitrust enforcement, and inequality. The post is quite long (for a blog), so I'll just comment on some key paragraphs and leave the rest to the interested reader.
“In all areas of economics, the rules of the game are critical—that is emphasized by the fact that similar economics [sic] exhibit markedly different patterns of distribution, market income, and after tax and transfers income. This is especially so in an innovation economy, because innovation gives rise to rents—both from IPR and monopoly power. Who receives those rents is a matter of policy, and changes in the IPR [Intellectual Property Rights] regime have led to greater rents without having any effects on the pace of innovation,” said Stigltz.
 Stiglitz's complaint about rents from innovation is telling. As I've discussed previously here at FH, if we take a dynamic view of competition, the rents (i.e. profits in excess of all costs) from innovation are merely an inducement to continue innovating. The value of the innovations themselves are still determined by the consumer and the "monopolist" is still incentivized to create what the public wants.

So, taking his last claim at face value, what would explain increasing profits to innovators without concomitant increases in innovation? I don't buy the intellectual property argument. More likely, it's the seemingly unceasing increase in regulation in so many industries. It explains reductions in the pace of innovation because it restricts entrepreneurs from doing what they believe is best for customers. It explains increasing profits because it keeps out new entrants and potentially pushes out smaller competitors.

Both Stiglitz and Deaton agreed that tougher antitrust enforcement is “incredibly important” in reducing inequality (an argument that was explored at length in ProMarket as well), rejecting claims that diminishing the role of government and regulation is the key.
What to do about increasing concentration? Ramp up antitrust enforcement, of course! The problem here is that a move back to the old ways of measuring market power, namely concentration indices, don't accurately capture market power. The work of Israel Kirzner, Harold Demsetz, and William Baumol bear this out. Stiglitz and Deaton seem to want more (or at the very least, not less) regulation, and more antitrust enforcement. The problem is that regulation creates barriers to entry that enhance market power of incumbents!

Campaign finance reform, he said, “would reduce the current selection of Representatives and Senators who are beholden to deep pockets. It’s hard to be elected to Congress or to stay elected without support from well funded interest, and that’s as true in recent years for the Democrats as for Republicans. Congressmen and Congresswomen are the farm team for K-Street.”
Another phrase for "campaign finance reform" is "abridgement of the first amendment." If we're concerned about the power of K Street Lobbyists (and I think we should be), it seems reasonable to address them directly, rather than through potentially damaging the freedom of political speech. If you want to reduce K Street's influence, the most direct way to do so is to reduce the scale and scope of power of the administrative bureaucracy and the legislature.

I'd love to hear readers' thoughts on these selections or on any other topic discussed in the article linked above!

Thursday, January 12, 2017

Entry Regulation - Public Interest or Public Choice?

by Levi Russell

Don Boudreaux at his Cafe Hayek Blog points to a great article which comprehensively measures the effects of entry regulation - regulations associated with starting a business - that I thought I'd share.

The article does a great job explaining the three primary theoretical reasons for regulation:

1) the public interest view, which states that regulation is used by governments to correct for the many, many market failures existing in private markets

2) the public choice view, which states that regulation primarily serves politically-well-connected interest groups and that the public at large is inept to curtail these favors because of poor incentives and information problems associated with political decision making

3) another public choice view, which states that regulation benefits politicians because politicians are able to extract payments from private interests in exchange for not passing or exempting said private interests from the regulation

So what do the authors of the paper find? Here's the abstract:

We present new data on the regulation of entry of start-up firms in 85 countries. The data cover the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have lighter regulation of entry. The evidence is inconsistent with the public interest theories of regulation, but supports the public choice view that entry regulation benefits politicians and bureaucrats.
The first 5 pages of the article go into a bit more depth about the three theories listed above and specifically how their analysis leads to the conclusions they draw.

Tuesday, January 3, 2017

Most Popular Posts of 2016

by Levi Russell

Happy New Year! I hope FH readers have had a great 2016 and I hope 2017 is even better. Our second year was very productive. During 2016 we launched a Facebook page that has helped draw traffic to the site. This year I hope to include more guest bloggers and to increase our page views further while increasing engagement in the comments.

In 2016, we published 90 posts here on the Farmer Hayek Blog. Topics included regulation, big data issues on the farm, monopoly theory and evidence, public choice, and many others. While noting that Google's page view counter is inaccurate, I've listed below the top 15 posts of 2016 by page view count in order from highest to lowest. I hope you enjoy looking back at these posts as much as I have!

Tumbler Competition: The Rise and Fall(?) of the Yeti

Nirvana Fallacy Watch: Stiglitz Edition

Precision Agriculture Implications for Farm Management: Farmland Leasing Example

Fixed Costs, Marginal Cost, and Ronald Coase

Don Boudreaux's Review of Phishing for Phools

Farmers Must Actively Protect Data to Secure Trade Secret Protections

Intentions, Faith, and the Nirvana Fallacy

Defend Trade Secrets Act of 2016: Can It Help Protect Your Farm Data?

Richard Langlois on Dynamic Competition

Remembering Ronald Coase

I Can't Put Enough Scare Quotes Around "Free Market"

Behavioral Public Choice: A Literature Review

Legal and Economic Implications of Farm Data

Monopoly Concerns with Baysanto

Relatively Good Regulation - GMO Edition