The Filter^

Ronald Coase (1910-2013)

New categories

Since we started this blog in 2004 most of my posts have fallen into a category labeled 'economics'. It's time to be a little more specific. In line with my three main areas of research, most of my posts will now be in one of the following categories:

• Management
• Monetary theory
• Sovietology

Broadly speaking, the first is microeconomics, the second macro, and the third institutional/constitutional. But that'll probably evolve.

I might have it wrong on legal tender

During the Q&A after a talk I gave at the LA Conference last Sunday (video, I believe, to follow), a discussion arose on legal tender laws. This is important to me because I advocated a repeal of legal tender laws as one of the three pillars of financial liberalisation in my recent Guardian Unlimited article. One of the commentators then raised a point on this that I didn't fully get, and the same issue arose last weekend - how important are legal tender laws.

My reason stems from a reading of Hayek's Denationalisation of Money - if legal privilege is associated with one particular currency then people don't have a choice. This inability to opt out means that there's no competitive pressure on the supplier of that currency, and all else equal they'll over inflate. Hayek therefore saw the legal tender laws as crucial: if you get rid of them and allow choice amongst different currencies, even if they're issued by governments, there is some competitive pressure to maintain the value of the currency. But there seems to be three separate stages of legal tender:

1. Currency that both buyers and sellers are obligated to use
2. Currency that sellers are obligated to accept, but buyers are not obligated to offer
3. No obligations regarding currency

What has been pointed out to me is that the UK at the moment (possibly in contrast to the US and the EU) is type 2 legal tender - whilst shopkeepers are obliged to accept sterling if it is offered, they can accept other currencies. I was aware of this - I believe Marks and Spencer are the most famous example of a company that routinely accepts non-sterling currency (in this case Euros) - and I'm sure many shops on the South Coast do likewise. I don't know if the same is true elsewhere in Europe.

So technically the UK can have parallel currencies, and perhaps I've under estimated the amount of currency competition that does exist. Underpinning all of this is the fact that the use of Euros to settle bills is not widespread, and Euros are subject to the same politicised problems as sterling, but from a Hayekian position maybe the repeal of legal tender laws isn't the panacea I thought it was.

Finally, whilst I was aware that the UK had type 2 legal tender laws, my bigger concern was the degree to which "obligation" is fluid. If companies are mandated to use sterling for tax returns, for example, this gives a massive "nudge" in the direction of the nationalised currency. Some people have argued that this will always be the case, but I'm not so sure. Many businesses use dual pricing, so why can't government accept different currency units?

To sum up, I need to give this a bit more thought, and I'm hoping others can jump in. I still feel though that there's a very simpe piece of legislation that would lead to where I want to be - private institutions being legally able to supply their own currency, and we the people having freedom to choose which to use.

Update: I don't have it wrong on legal tender

Narrow banking, and other alternatives

I was interested to see Mervyn King advocate "narrow banking". At last the debate seems to be moving away from monetary policy, and towards monetary regimes. The Economist has a useful list of alternatives:

• Higher capital ratios
• Living wills
• Catastrophe insurance
• Higher fees for lender-of-last-resort service
• Windfall tax on bank profits

The problem with most of these are that they are piecemeal social engineering. I have no idea what the unintended consequences of any of these would be, and neither do their advocates. Rather than neat ideas (and borderline gimmicks) for particular policy measures, and reforms of the financial system need to be widespread and based on principles. Principles such as:

• No one is too big to fail
• No one can mis-match maturities without auditors approving it
• If people want their deposits to be safe, they should be safe

I find the notion of narrow banking intuitively sensible, however in practice I struggle to see how you'd divide "utility" and "casino" banking in a clear way. Ultimately these sorts of distinctions should be made by individual customers, not regulators. And whilst I wouldn't mandate this, I would like to think that in future banks would publish their reserve ratios in the financial newspapers, and customers would use these as one of a number of factors influencing where they deposit.

Update: Greg Mankiw links to a proposal by Laurence Kotlikoff and John Goodman for "Limited Purpose Banking". The original link seems to be broken but there is a discussion of it here.

More evidence for epistemic primacy

Firstly, to reiterate a point made by Jeff Friedman:

A study by Rüdiger Fahlenbrach and René Stulz [3] showed that banks with CEOs who held a lot of stock in the bank did worse than banks with CEOs who held less stock, suggesting that the bankers were simply ignorant of the risks their institutions were taking.

So all this talk about bonuses has the potential to be plain wrong. Maybe bonuses weren't the problem. In fact, maybe it wasn't primarily an incentive problem, but one of ignorance. Even The Economist is on to this:

Far from expertly manipulating their firms’ books, many could not understand them.

There's a really simple point here that no one seems to be grasping: the main cause of the credit crunch was the fact that we're not omniscient. Not bankers, and not regulators. And like it or not, a policy-solution is forced to assume that we are.

Elinor Ostrom - Nobel Laureate 2009

Wow! Here are some wonderful links to look through, via the Mercatus Center. Here is the IU press conference. I've written a few articles on Elinor's work which I hope to publish in the mainstream media, but will update here. A fantastic day for multidisciplinary economists, and those of us who have her research at the core of what we do.

Update:

• Vernon Smith
• Paul Romer
• Larry David
• Paul Dragos Aligica

Update (31/10):

although she is multidisciplinary, she is an economist

My belated article on Elinor Ostrom - Nobel Laureate 2009 - at the IEA Blog. I particularly liked how The Economist demonstrated the common theme between Ostrom and Oliver Williamson:

Both Mr Williamson and Ms Ostrom have built on Mr Coase’s idea that all transactions have costs but that these costs will be minimised by different institutional arrangements in different situations.

It's really all about Coase, and - as I've mentioned before - a massive boon to multidisciplinary economists.

Their win reminds economists that borders between disciplines, like those between the firm and the market, can be profitably crossed.

The Tories need a rethink on the minimum wage - Telegraph

You can’t persuade, cajole or incentivise people off welfare benefits into jobs that don’t exist for the simple reason that minimum wage legislation makes them illegal.

via www.telegraph.co.uk

The minimum wage is perhaps the classic example of the disjoint between economists an the general public. It's a bad policy - it makes the people it purports to help worse off. In the past I'd always assumed that people just don't get it. I've not understood why, but that's life. Sometimes, because we're all different, we just disagree. However the article above from Mark Littlewood in The Telegraph makes me wonder. It makes me hope: maybe people do realise that all-else-equal a minimum wage makes it less likely that companies hire low skilled workers. But this is often masked by rising incomes. Maybe people do get that in a recession the last thing you want to do is raise barriers to employment. In which case - if people do sit back and think "yeah, maybe raising the costs of hiring people isn't the best thing to do when many companies are struggling", perhaps once the recession is over they'll realise that the same logic applies all the time...

The minimum wage has been a horrible policy and it's ill effects have been hidden due to (i) rising wealth; (ii) other policies that probably do increase jobs (e.g. the New Deal) that are timed to coincide with the minimum wage (showing that politicians aren't stupid). But now we're in a recession it's harder to ignore logic. Minimum wages harm low skilled workers. Minimum wages harm low skilled workers. Minimum wages harm low skilled workers. Assuming we all want to help low skilled workers, let's scrap it?

Brief Guide to Money & Banking

The Cobden Centre has just released "A Brief Guide to Money and Banking". This pamphlet was produced for the Conservative Party conference and intends to raise public awareness about economic theory and data. The money supply sections (and graphs) stem from my working paper with Toby Baxendale, available here.

Mark Littlewood at the IEA

The Institute of Economic Affairs has appointed Mark Littlewood as its next Director General

The IEA has announced its new Director-General. I had never seen Littlewood in person until a panel session at a conference yesterday. I was impressed by him and am excited about the future of the original think tank - regulars might remember back in 2005/06 I wrote a lot of posts on 'The Orange Book' and even created a spin off blog (still being maintained to this day). Good luck Mark.

Jennifer Burns on the surprising popularity of a libertarian hero in India | Foreign Policy

Consumer spending in the United States may be down, but an interest in Ayn Rand certainly is not. Sales of Rand's last novel, the vigorously pro-capitalism fable Atlas Shrugged, have seen a huge leap in 2009, briefly outperforming even President Barack Obama's The Audacity of Hope on Amazon's best-seller list. Few 1,000-page, half-century-old tomes can claim so much.

via www.foreignpolicy.com

When I was in Delhi last year I noticed a number of Ayn Rand books in the street stalls and was surprised to hear that she was well known amongst the students I was visiting. As this articles shows (via Bryan Caplan) she's clearly popular.