Misled by Transaction Costs

That is the title of a paper delivered at a conference held GMU Law School by UCLA professor Harold Demsetz.

Bottomline:

Organizational efficiency cannot be established simply by knowing the properties of organizational forms...The second erroneous notion is that the efficiency of an organizational form can be determined by transaction cost considerations.....(p.9)


My quick response to the first point:

Now what professor Demsetz refers to in his first point is that exogenous conditions may render it efficient to have commons in one location while private property in another...so one cannot make a judgement on the efficiency properties of an institutional arrangement by looking at the organizational form and its properties alone (ie commons vs private ownership).

The key word here is alone. Even if professor Demsetz's point is valid, ie one has to examine exogenous conditions which govern/dictate an organizational form, there might still be choices to be made by economic agents. For instance, while both commons and private property are organizational forms which would help individuals to tackle their day to day problems under a set of given exogenous transactions, one organizational form might still be better than (less costly to maintain and operate) the other. Hence, the properties of the organizational forms might still matter even if we pay heed to professor Demsetz's point.

Or do we really have to?

Once a given set of exogenous conditions are set/given, by implication of the maximization postulate, wouldn't the least cost organizational form be automatically taken up by individuals? If so, why bother with the properties of the different organizational forms at all? Because we know that whatever properties the ultimate choice of organizational form would have (common vs private property), they would be optimal in any case. What is, is efficient.

Let us call this point "Organizational Properties Irrelevant Theorem", what do you think?

A Bad Day

An old friend called. He told me he was fired by his company. I was and am still in shock.

One is never prepared for such things in life. Think of it this way. As an free market economist, you talk about how a person's separation from his job only means that other jobs might be waiting for his application..bla bla bla....It may take some time, but he would find his match anyway if he or she searches hard enough. You say all this in a cool and almost cold-blooded manner.

But now imagine this. What if that person is your best pal? your spouse? your best graduate school room mate? your brother? Can you tell him straight in the face: no problem, what you are encountering is only a transitory phenomenon, and the labor market soon or later would come up with a job to match your skills.

No, I cannot. Hence, I did not say a word to my friend when I first heard the bad news.

My role, then, I realize, is not to be an economist. I am his friend. I am only a listener.

Then it hits home to me that, may be, just may be, every economist who does not believe in free market might have similar experiences of what I have just said above. It is thus not surprising to me at all that some economists hold such skeptic views on the market. They start blaming the free market for their loved ones' plight. Their personal experiences might have clouded their view.

Adam Smith, in his Theory of Moral Sentiments, did mention something like a person is more likely to care about his little finger than the sufferings of peoples thousand and thousands of miles away. But I don't know whether he went on to examine how this could affect peoples' perception of the free market.

But here is the real puzzle: Why others who share similar experiences of what I have encountered today stick to their original free market beliefs despite the bad experiences? How could they? Can they tell their loved ones what I did not dare to say to my friend. Answer is, I don't know. But do you?

This is a really bad day.

The Pacific

Best Sentence I Have Read Today (and yes it is related to Superfreakonomics)

"Ancient Romans watched gladiators in much the same way that we read angry bloggers."

This is from Nathan Myhrvold former Chief Technology Officer at Microsoft.

The line refers to the controversies stirred up by Chapter Five of the sequel to Freakonomics, Superfreakonomics. Read more for yourself here.

I will soon write up a book review for a local paper here in Hong Kong (and yes it will be in English), hopefully soon. And yes I have read it already. My bottomline assessment: better than the last one.

Oliver Williamson, Elinor Ostrom and New Institutional Economcis

This is a piece I wrote for the Hong Kong Economic Journal. The piece would only appear on the website of the paper, not the hard copy. Tell me what you think.

And yes, I still think that Professor Steven N S Cheung has a shot at the prize.

Be Careful When You Want to Use Statistics from the UN Next Time

Read this piece from the always insightful development guru Bill Easterly.

Bottom line: International agencies make up numbers in a bid to have bigger budgets. Sad.

Paul Romer, Charter Cities and Credible Commitment

Paul Romer, yes the new growth theory guy, quit his job at Stanford in an all-out effort to promote an idea to help developing countries grow out their adject poverty. The idea is called Charter City. The bottom line is that a developing country could sign an intenational treaty with another country so that a presumably better set of institutions could be imported to a designated special economic zone in the former.

The biggest issue of course is how to resolve the credible committment problem:
That is, how to prevent the government of the developing country to renege on its promise to allow a foriegn set of institutions to be implemented on its territory.

In this interview, Paul nicely addressess this issue. The piece is interesting throughout, but I like this bit especially:

"Economists seem to think that we should propose things that are acceptable and that political systems will pursue, but that we should avoid proposing or even discussing things that are controversial or politically incorrect.

I think we’d do our jobs better if we just said what’s true without trying to be amateur politicians. "