Blogwatch: June 2024🍋

Michael Jensen, Rome & an industrial revolution, minimum wages, PPP comparisons, income effects on violent crime, rent controls, and Covid & small versus large firms

The world is awash in blog posts. Here are some recent ones that caught my attention.

A Michael Jensen tribute

At the Promarket blog, Eugene F. Fama writes a Michael C. Jensen Tribute. Jensen, who died April 2nd, 2024, was one of the leading financial economists of his time. His 1976 paper, with William Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” is a seminal piece in the development of the contemporary theory of the firm. According to Jensen and Meckling, Ronald Coase was wrong to emphasise the differences between firms and markets. For them

“[t]he private corporation or firm is simply one form of legal fiction which serves as a nexus for contracting relationships and which is also characterized by the existence of divisible residual claims on the assets and cash flows of the organization which can generally be sold without permission of the other contracting individuals. […] Viewed this way, it makes little or no sense to try to distinguish those things which are “inside” the firm (or any other organization) from those things that are “outside” of it. There is in a very real sense only a multitude of complex relationships (i.e., contracts) between the legal fiction (the firm) and the owners of labor, material and capital inputs and the consumers of output”.

Rakitu Island from Great Barrier Island. Dave Heatley

Rome and an industrial revolution

Mark Koyama asks the question Could Rome Have Had an Industrial Revolution? at his substack How the World Became Rich.

“But … even the Roman empire at its peak in the reign of Marcus Aurelius does not appear to have been on the verge of modern economic growth. Rome lacked some of the crucial characteristics of Britain on the eve of the Industrial Revolution. There was no culture of invention and discovery, no large population of skilled tinkerers or machine builders, and no evidence of labor scarcity that might have driven the invention of labor-saving inventions”.

But before concluding that an industrial revolution was impossible in Rome, Koyma goes on to argue that caution is advisable.

The minimum wage (again)

At the Cato at Liberty blog Michael Chapman argues that California’s Latest Minimum Wage Hike Reaffirms the Destructiveness of Price Controls.

“The minimum wage for most fast‐food workers in California went up to $20 per hour in April. Since then—no surprise—thousands of workers have lost their jobs and menu prices have risen”.

Chapman discusses two chapters from the recent Cato book The War on Prices. In one chapter Jeffrey Clemens explains that firms adjust to higher mandated wage floors in ways beyond simply cutting jobs. They can cut benefits such as health insurance, paid leave, and pension accounts. They can also defer improvements or safety upgrades. Or they can work employees harder, micromanage their schedules, or replace experienced workers with inexperienced staff. In the second chapter, Joseph J. Sabia contends that minimum wages are an ineffective and inefficient anti-poverty tool.

Latest work on PPP and high and low-income countries

Timothy Taylor looks purchasing power parity (PPP) in International Comparisons with a PPP Metric at his Conversable Economist blog.

“The World Bank International Comparison Program attempts to do an adjustment for prices around the world: that is, what would it cost to buy the same “basket of goods” (as economists say) in different countries. The result of this adjustment is to calculate a difference between the market exchange rate and the purchasing power parity (PPP) exchange rate. The market exchange rate tells you how much of one currency you receive in exchange for another. The PPP exchange rate adjusts for what that goods and services that currency can actually buy. Doing these purchasing power parity comparisons is a huge task, and so the ICP only updates the PPP numbers every few years. The 2021 comparison is now available”.¹

Prices tend to be lower in low-income countries and thus in PPP terms, the economies of high-income countries look relatively smaller than they do at market exchange rates.

Jobs and income effects on violent crime

Also at the Conversable Economist blog, Taylor considers Why Jobs and Income Don’t Reduce Violent Crime. Taylor notes that the available evidence suggests that if people have better access to jobs and income, they are less likely to commit crimes. However, this is not true for all crimes. The reduction occurs in the case of property crime, but not violent crime. Why?

“The difference in impacts surely stems in large part from the fact that most violent crimes, including murder, are not crimes of profit but rather crimes of passion – including rage”.

Thus improvements in people’s material situation will not by itself reduce the burden of violent crime on society.

Empirical results on rent controls

At the IEA blog, Kristian Niemietz discusses a recent paper from the Journal of Housing Economics entitled “Rent control effects through the lens of empirical research: An almost complete review of the literature”.

The study looks at 16 studies that specifically look at the impact of rent controls on the supply of rental properties. Niemietz writes that

“Out of those 16 studies, 12 find a negative effect on supply, 3 fail to find an effect either way, and one unpublished outlier study claims to have found a positive effect”.

There are also 16 studies that look at the impact of rent controls on total housing construction. Niemietz notes,

“Out of those 16 studies, 11 find a negative effect, 4 fail to find an effect, and one finds a positive one”.

Niemietz also comments that

“Out of 20 studies that look at the impact of rent controls on the quality of rental housing, 15 find a negative effect, and 5 find none. No study claims to have found a positive effect”.

Overall, not a great look for rent controls.

Covid and small versus large firms

At VoxEU.org Guido Franco, Mauricio Hitschfeld, Álvaro Pina & Damien Puy examine Large and small firms in the COVID-19 crisis and implications for competition. They argue that a concern in the policy debate during the Covid pandemic was that smaller or younger firms might bear the brunt of the decline in economic activity. Using a large cross-country firm-level database they investigate the performance of more than 150,000 non-financial companies operating in both manufacturing and services sectors across more than 50 countries, through the Covid cycle until the end of 2021. They compare the revenue and investment dynamics of larger and older firms to those of their smaller and younger counterparts operating in the same country and sector. Their results find no evidence of a size premium. This finding should reduce fears about the negative consequences of the pandemic for industry concentration and competition.

By Paul Walker

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Second Cove, Breaksea Sound, Fiordland National Park, Dave Heatley

1. Editor’s note: The punctuation in this quote was edited for clarity.