Monday, October 26, 2009

Commons, Nobel prize and decentralization

This year Nobel Prize winner, Mr. Williamson, said that with hierarchical decision-making processes based on rules and authority, firms ought to be less efficient than decentralized market exchange based on relative prices as standard economic theory assumes that transactions occur. But companies do exist, so why? Because any transaction has an implicit cost that enterprises reduces via hierarchical decision-making and authority.

The other winner, Mrs. Ostrom, found that self-governance often worked much better to punished those who take advantage of tragedy of Commons, than an ill-informed government taking over and imposing sometimes clumsy, and often ineffective rules.

This is exactly what Easterly argues, decentralism and down to top creation of institutions, rules and laws makes economic development. Imposing institutions from outside cuts freedom, cuts the local own ideas, cuts entrepreneurship and the unforeseeable process of development.

And last but not least, J. Diamond says a middle point between decentralized societies and centralized ones would be the maximized point of efficiency in a historical economic perspective. China was too much centralized, depending so much on emperors’ decisions. India was too much dispersed leading too battles, wars and conflicts that brought stagnation. Europe instead was a middle point between those two and this would be the reason of its economic achievements. Diamond explains geography was behind centralized/decentralized societies. While (coastal) China is a monotone and easy access territory, Europe was a mixed of accessible lands and a complex relief.

Thursday, October 22, 2009

Statistical mistake

Many times lately I have heard about a statistical mistake. Based on those who were successful, in management, economic growth countries, sports competitors, etc, take their common strategies and managing and apply them to you or your interest and you will see it success.

The fallacy here is that unsuccessful stories have not been counted. What if a thousand unsuccessful stories had applied those “apriori” successful strategies and managing. That would mean that those were not such good ideas.

Usually we all ignore failures and as is commonly said “we learn from failures” also statistically.

Thursday, October 15, 2009

Rational Income-Maximisers

One supposition in perfect markets theory is rational income-maximization actors.. However, an experiment bring by John List shows theory’s lack of real existence. On the experiment one person (A) were gifted with 10$ while another one (B) was not. The first one was compelled to give the part he wanted to the other. The other, has the option to reject it, in such case all 10$ would be lost.
Rational income-maximization actors’ principle would tell us that (A) would just give a cent to (B). Both win something and (B) would accept because that’s better than nothing. What List’s experiment showed was that people representing (B) almost never accepted such a less quantity and in average the amount trespassed was between two and three dollars.

http://www.ft.com/cms/s/2/3138a3fc-b3a8-11de-ae8d-00144feab49a.html

Tuesday, October 6, 2009

How do we grow?

From long time ago is it said that R+D+i (research + development + innovation) is the key for growth. Now a tool from OECD stats webpage, makes easy to see wealth relations to those science and technology variables.
First of all we must clarify that not any kind of research is useful, see graph below.





Each dot is a region (not a country), 50 for USA, 17 for Spain, etc….

As we can see Public Expenditure in Research is not very related to GDPpc. However if we compare private research to GDPpc, the relation becomes much more clear. Look:


And if we use a proxy for innovation as it could be Patents, the relation to GDPpc still is quite important. Look:


So, it seems that ‘A’ from Solow equation is the origin of growth. And must be an ‘A’ brought by free market and competition.

But what I must say now is… growth relations and causation is much more difficult than this and there are great academic papers arguing about it. Be cautious on this matter.

Thursday, October 1, 2009

Is US a more unequal country?



First of all, I would like to advise that I don’t even dare to search for an explanation of the result. And also I would like to advise that you will find many convincing and conflicting explanations out there. Don’t believe what they say, be skeptical.
Is wages’ portion of GDP sinking? Here, almost all studies agree, yes.



Source: Bureau of Economic Analysis. U.S. Department of Commerce.

Does that mean that workers are receiving less portion of what is produced? Therefore is US more imbalanced? Yes and no. What is agreed is that workers are becoming paid with not only wage but complementary retributions like health insurance, pensions…. What is called Employees Compensation. Moreover, more population is self-employed and freelance that in the past. This means that we should add those retributions and ways of work to wage account. But, still with this aggregate there are studies asserting that Employees compensation portion is sinking and other studies asserting the opposite. It all depends on how you count it.
See:

http://www.nytimes.com/2006/08/28/business/28wages.html?_r=2&pagewanted=print
http://www.u.arizona.edu/~lkenwor/indv102slowincomegrowth.pdf



Source: Bureau of Economic Analysis. U.S. Department of Commerce.


One point not considered by the second study is that a portion of GDP has to be devoted to capital depreciation so it goes to nobody, not capitalists or workers. Once this is considered the result should be first study, they say.

And that’s not all, a study published in The Economist argued that inquality is not just a matter of income but a also a matter of costs. The article was based on a paper that argued inflation for rich people product’s to be higher than those for poor people. Therefore, the difference in inequality would be lower than considered first.

So, as usual in economy, a hazy subject.