Category: Class Notes

The Lysine Price-Fixing Conspiracy

Tuesday night, for about the fourth time in my tenure, the Economics Department will show The Informant as a complement to our oligopoly case study in Economics 400.  It should start at 9 p.m. in the Warch Campus Center Cinema.   A good chunk of this text is a repost from last year:

The movie “comically” recreates the character of Archer Daniels Midlands (ADM) employee, Mark Whitacre, the principal informant in the notorious lysine price fixing scandal.  Lysine is an essential amino acid used to fatten up hogs and broilers. If you mix it in with corn, you don’t have to spring for the relatively more expensive soymeal, or so I’m told.

Well, I’ll let deRoos (2006) characterize the market for us:

Lysine is an essential amino acid for the lean muscle development of hogs and poultry. Being a chemical compound, lysine is as close as we get to a homogeneous product. Farmers can obtain the required nutrients either through the use of soybeanmeal, or through the combination of corn and lysine… Industry experts suggest that there are no substantial costs involved in switching between these two nutrient sources. The shadow price of the alternative feed source (henceforth the “ceiling price”) can be approximated by a weighted average of corn and soybean meal prices. In the demand estimation results below, we will characterise demand as being relatively inelastic… Firms face capacity constraints. There is a great deal of heterogeneity in firm capacities, locations, and costs.

Through 1990 the market lysine market was dominated by three firms with prices (as you can see) somewhere north of $1 / lb.  However, in 1991 ADM opened a massive production facility in Decatur, Illinois, doubling world capacity and pushing the price below $1 toward its (probable) marginal cost of $0.66 / lb.

Whitacre subsequently orchestrated a coordinated effort to fix prices among the four dominant producers (a CR4 of 95-97%), though there is some dispute as to what exactly happened. Nonetheless, price fixing is a per se violation of federal antitrust laws, so ADM was in pretty serious hot water as soon as Whitacre turned informant.

On the other hand, Whitacre was absolutely crazy himself. And the movie does a good job portraying the frustration and insanity of everyone involved in the situation as the events unfolded. It seems the best defense for ADM was to simply let Whitacre unravel and leave the prosecutors to deal with him.

Meanwhile, the economics of the case spawned a rather, well, let’s call it a rather spirited debate in the academic literature over the length of the conspiracy and the damages done.  These are well documented in the sources below, particularly John Connor and Lawrence White, who trade body blows over the appropriate theoretical model, the appropriate choice of the conspiracy period, and the proverbial “but for” price (that is, the price that would have prevailed “but for” the conspiracy).  Connor is sort of the go-to guy on these issues and he was profiled in the Chronicle of Higher Education about three weeks ago.

A truly remarkable episode all around.

Pop some corn and mix in three parts lysine. We’ll see you there.

 

For further reading:

John M .Connor (1997) “The Global Lysine Price-Fixing Conspiracy of 1992-1995,” Review of Agricultural Economics, 19 (Fall/Winter), 412-427.

Nicholas deRoos (2006) “Examining models of collusion: The market for lysine,” International Journal of Industrial Organization, 24(6): 1083-1107

Lawrence White (2001) “Lysine and Price Fixing: How Long? How SevereReview of Industrial Organization,18 (1):23-31

 

I’m Lovin’ It. But if that Counter Guy Gets $15/hour, I’m Lovin’ Less of It

I see that McDonalds employees from around the country have been walking off the job to protest low wages, even causing some restaurants to shut down temporarily.  What would happen, do you suppose, if McDonalds started paying its employees more?

Writing in ForbesTim Worstall makes the extraordinary claim that McDonalds could raise workers wages to $15 an hour and it would have no impact on the price of a Big Mac!  This is such an extraordinary claim that I will go ahead and quote it at length:

Hmm. Well, what else can we surmise about a rapacious capitalist organisation? In that ruthless pursuit of gelt and pilf for its shareholders it is going to gouge the customers for the absolute maximum that it can, yes? … What limits McDonald’s ability to entirely empty our wallets every time we want a hamburger is that there are other people who will also sell us one. Wendy’s, Jack in the Box, In and Out, there’s a multiplicity of places where we can go to fur our arteries. Which leads to our conclusion on pricing in a capitalist and free market economy. The capitalists charge the absolute maximum they can get away with, that ability being limited by the competition that comes from alternative suppliers.

Thus the price is not determined by the cost of production of an item. Which means that, if we raise McDonald’s production costs by increasing the wages of the workers, the price isn’t going to change. For it’s not production costs that determine prices: it’s competition that does. Another way to put this is that McDonald’s is already charging us the absolute maximum that it can for its current level of sales. Thus it cannot raise its prices if its production costs go up.

All of which means that the real change in the cost of a Big Mac, or the dollar menu, if McDonald’s workers were paid $15 an hour is: nothing. For production costs simply do not determine the prices that can be achieved in a competitive market.

I’m not sure I’ve ever heard anyone argue that costs don’t matter in determining prices:  Every text that I’ve taught out of walks through the logic of a firm’s profit maximizing decision — firms maximize profits by setting output where marginal revenue equals marginal cost.  So, costs do help to determine prices, at least the way I teach it. Continue reading I’m Lovin’ It. But if that Counter Guy Gets $15/hour, I’m Lovin’ Less of It

Economics Course Additions, 2013-14

Welcome back, students and faculty.  Here is the full schedule for your perusal.

Fall Additions:

ECON 120 ● INTRODUCTION TO MACROECONOMICS ● 12:30-01:40 MWF MEMO 118  Briggs 217 ● Mr. Rhodes

ECON 200 ● ECONOMIC DEVELOPMENT ● 08:30-09:40 BRIGGS 217 ● Mr. Devkota

ECON 295 ● TOPICS : LABOR ECONOMICS 03:10-04:20 MWF BRIGGS 217 ● Mr. Rhodes

Winter Additions:

ECON 295  TOPICS: FINANCE  12:30-01:40 MWF TBD  Mr. Vaughan (not yet listed)

ECON 380  ECONOMETRICS   08:30-09:40 MWF BRIGGS 223 09:00-10:50 T BRIG 223  Mr. Devkota  (not yet listed)

ECON 495  ADVANCED TOPICS: SPORTS ECONOMICS  03:10-04:20 MWF BRIGGS 217  Mr. Rhodes

Spring Additions (not on schedule yet):

ECON 120 ● INTRODUCTION TO MACROECONOMICS ● 12:30-01:40 MWF TBA ● Mr. Rhodes

ECON 200  ECONOMIC DEVELOPMENT  11:10-12:20 MWF TBA  Mr. Devkota

ECON 460  INTERNATIONAL TRADE  08:30-09:40 MWF TBA  Mr. Devkota

 

Did they play with “chained” dollars?

Loyal reader “Mr. H” points us to some recent improbable research from the Journal of Economic Behavior and Organization (JEBO*) that analyzes the classic prisoners’ dilemma game.  The big story here is that the authors ran the experiments using actual prisoners!  Specifically, they surveyed about 92 women from a prison “für Frauen” along with 90 college students as a control group, and they found that prisoners were actually more likely to cooperate (keep their mouths’ shut)  in some situations.

Here’s from the abstract:

We compare female inmates and students in a simultaneous and a sequential Prisoner’s Dilemma. In the simultaneous Prisoner’s Dilemma, the cooperation rate among inmates exceeds the rate of cooperating students.

In the conventional setup, of course, cooperation means not ratting out your criminal partner.  So what do the differential rates tell you — snitches get stitches?

Relative to the simultaneous dilemma, cooperation among first-movers in the sequential Prisoner’s Dilemma increases for students, but not for inmates. Students and inmates behave identically as second movers. Hence, we find a similar and significant fraction of inmates and students to hold social preferences.

Now what does that tell you?  I’m not sure.

 

* For those of you keeping track, that’s pronounced “Gee bow”.

Hayek on the Price System

It’s hard for me to give a better example for the 300 students than Hayek talking about tin.  This is from the 1945 AER piece, “The Use of Knowledge in Society“:

It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.

‘The Benefits are the Costs’ and Other Links

I’m just going through a backlog of interesting stories to share with my Econ 280 class.  First up, Jonathan Adler points us to a short story on a residential subdivision’s successful legal challenge to the construction of a home windmill.  The residents of a the Forest Hills subdivision just outside of Carson City, Nevada, argued that the proposed windmill would sully their sight-lines and provide interminable noise from the turning of the rotors. This is a solid example of what Shavell would call an ex ante property rule, and you can read all about it in the Las Vegas Sun.  

Speaking of benefits, the fall Journal of Economic Perspectives has another symposium on contingent valuation.  Twenty years ago, Peter Diamond and Jerry Hausman famously asked, “Is Some Number Better than No Number?”   Although Hausman seems to have found some clarity on the issue, I’d say for the profession the question remains unresolved.

Next up in the news, we have a consortium  of cities and businesses is looking at a $200 million reservoir project to satisfy all its water needs, but it is contemplating paying rice farmers $100 million not to farm instead.

Is this Coasean bargaining inevitable? I wouldn’t bet the farm on it.

Finally, we have Thomas Kinnaman offering the classic economist’s take down of two benefit-cost analyses of shale gas production (i.e., fracking):

The costs of natural gas extraction include, paradoxically, all of the items listed as “benefits” in the two reports discussed above. Natural gas extraction requires labor, capital equipment, pipelines, and raw materials. These economic resources, in a fully employed economy, could have been allocated to other uses. The price paid to secure these resources from these other industries indicates the value of these resources to these other industries (had their value been higher, the market price would have been higher). Thus, the quantity of each economic resource times its market price – in fact 13 the total expenses by the industry as gathered in the surveys – represent the cost of utilizing scarce economic resources to gas extraction.

This block quote is a battle we economists will probably never win.  When I tell my students “jobs” are a cost not a benefit, they look at me as if I suddenly began speaking Swahili.   The paper is from Ecological Economics, and an ungated version is available here.

Modelo Justice

Blocked!

Amidst the hoopla of the triumphant release of Budweiser Black Crown, the King of Beers learned that its $20.1 billion offer to purchase Grupo Modelo — maker of Corona, that beer people put lemons in — had been given the kibosh by the good folks at the Department of Justice.

One of the key DoJ players in the blockages is our own LU alum William Baer, who had this to say:    

This is the sort of product that matters to consumers. If you have a very slight price increase that happens because of this deal, it could mean that consumers will pay billions of dollars more.

Now, reaching for the back of my envelope, the average American guzzles down about 30 gallons of beer per year, about a half gallon per week.  Now, if the price per gallon goes up $0.10, that would entail about $3 per person per year times 300 million people, or about a billion dollars (assuming the demand for beer is pretty inelastic, of course).

On the down side of all this consumer largess, young folks will probably be saddled with more STDs!

Thanks you to the formerly bearded “Mr. T” for the tip.  Those of you in the 400 class should take a look.  Very interesting stuff.

The Informant is Back

Once again this year, the Economics Department proudly presents The Informant Tuesday, January 29 at 9 p.m. in the Warch Campus Center Cinema.  

The movie “comically” recreates the character of Archer Daniels Midlands (ADM) employee, Mark Whitacre, the principal informant in the notorious lysine price fixing scandal.  Lysine is an essential amino acid used to fatten up hogs and broilers. If you mix it in with corn, you don’t have to spring for the relatively more expensive soymeal, or so I’m told.

Well, I’ll let deRoos (2006) characterize the market for us:

Lysine is an essential amino acid for the lean muscle development of hogs and poultry. Being a chemical compound, lysine is as close as we get to a homogeneous product. Farmers can obtain the required nutrients either through the use of soybeanmeal, or through the combination of corn and lysine… Industry experts suggest that there are no substantial costs involved in switching between these two nutrient sources. The shadow price of the alternative feed source (henceforth the “ceiling price”) can be approximated by a weighted average of corn and soybean meal prices. In the demand estimation results below, we will characterise demand as being relatively inelastic… Firms face capacity constraints. There is a great deal of heterogeneity in firm capacities, locations, and costs.

Through 1990 the market lysine market was dominated by three firms with prices (as you can see) somewhere north of $1 / lb.  However, in 1991 ADM opened a massive production facility in Decatur, Illinois, doubling world capacity and pushing the price below $1 toward its (probable) marginal cost of $0.66 / lb.

Whitacre subsequently orchestrated a coordinated effort to fix prices among the four dominant producers (a CR4 of 95-97%), though there is some dispute as to what exactly happened. Nonetheless, price fixing is a per se violation of federal antitrust laws, so ADM was in pretty serious hot water as soon as Whitacre turned informant.

On the other hand, Whitacre was absolutely crazy himself. And the movie does a good job portraying the frustration and insanity of everyone involved in the situation as the events unfolded. It seems the best defense for ADM was to simply let Whitacre unravel and leave the prosecutors to deal with him.

Meanwhile, the economics of the case spawned a rather, well, let’s call it a rather spirited debate in the academic literature over the length of the conspiracy and the damages done.  These are well documented in the sources below, particularly John Connor and Lawrence White, who trade body blows over the appropriate theoretical model, the appropriate choice of the conspiracy period, and the proverbial “but for” price (that is, the price that would have prevailed “but for” the conspiracy).

A truly remarkable episode all around.

Pop some corn and mix in three parts lysine. We’ll see you there.

 

For further reading:

John M .Connor (1997) “The Global Lysine Price-Fixing Conspiracy of 1992-1995,” Review of Agricultural Economics, 19 (Fall/Winter), 412-427.

Nicholas deRoos (2006) “Examining models of collusion: The market for lysine,” International Journal of Industrial Organization, 24(6): 1083-1107

Lawrence White (2001) “Lysine and Price Fixing: How Long? How SevereReview of Industrial Organization,18 (1):23-31

 

Senior Experience Reading Option

As you know, or should know, departments must now offer a Senior Experience to fortify those of you who will be heading from this world into the next one.   Here in economics, we actually provide you with two options.  One is to augment a research paper,* and the other is to participate in a reading and discussion seminar — the Reading Option.

Suggested Cover

For this year’s Reading Option, we will be taking on The Nature of the Farm: Contracts, Risk, and Organization in Agriculture by Doug Allen and Dean Lueck.  Allen & Lueck — students of the great Yoram Barzel — lay out a transaction cost theory of farm organization, and then test this theory using mounds and mounds of data on farm contracts that they obtained from far and wide. Of central interest to Allen & Lueck is why, despite massive technological change, family ownership remains the dominant ownership form for planting and harvesting crops in America.  Yes, you read that right.

We are going to learn a lot about North American agriculture.

Our group will meet Tuesdays 2:30-4:20 or thereabouts.  Students should plan to read and think hard about one or two chapters per week, and will be responsible for writing a book review or some other short, crisp essay related to the course material.  If you are interested in sitting in without taking on the entire “Experience,” you should see me.  Sophomore and Junior majors are certainly welcome.

Co-author Doug Allen will be on campus Thursday, February 14 to discuss his work and help you with your own, so mark that on your calendar.  He will also give a public lecture as part of the Economics Colloquium.

Those of you taking the course can check out the course Moodle here.

For our first meeting on Tuesday, January 8, you should read the first two chapters, make sure to tackle the “economics vocabulary,” and be prepared to respond to the Fun Facts and Questions for Discussion.

Here is a selection of the vocabulary for our first meeting:

  • Stylized fact
  • Vertical integration, vertical coordination (see p. 184 if you need an example)
  • Principal-Agent Model (Agency Model)
  • Shirking
  • Moral hazard
  • Risk aversion, risk neutrality
  • Residual claimant
  • Endogeneity

If you don’t know what these mean, you might try asking someone.  If that doesn’t work, Google is your friend, as they say. I find the New Palgrave Dictionary of Economics to be an excellent resource (available to on-campus IP addresses).

See you in January.

 

*See Professor Finkler for details.

The Morality of Markets

Here is our schedule for the term:

October 4th 11:10–12:20       Ethics, Efficiency, and Markets, up to page 103

October 25th 11:10–12:20            What Money Can’t Buy, Chapter 1

November 1st 11:10–12:20      What Money Can’t Buy, Chapter 2

November 8th 11:10–12:20      What Money Can’t Buy, Chapter 3

November 15th 11:10–12:20     What Money Can’t Buy, Chapters 4, 5.

The reading for the first meeting  (10/4)  is 100 pages, and for subsequent meetings it is about 50 pages each. The first reading, Ethics, Efficiency, and Markets, is available for purchase as an online book, you can order used copies, or you can download it from this website: http://en.bookfi.org/book/1172337. The first chapter in that book is a short introduction in which basic notions are established; Chapter 2 will review several arguments that you will be familiar with from your economics classes; and Chapter 3 is the most significant for our discussion. Be prepared to state succinctly the moral arguments for and against the market. You have over two weeks to cover the 100 pages, which should not be too taxing. This first reading should give us some ammunition for our discussions of the second book.

The Most Interesting Good in the World

The clever graphic is one of Art Carden’s economic “memes” that has been circulating around in cybersphere for a day or two. The lesson, of course, is the law of demand — price goes up, people buy less; price goes down, people buy more.

But Slate’s Matthew Yglesias steps up and says that maybe it isn’t so!

Imagine a world with two goods—beer and bourbon—such that beer is cheaper per unit of alcohol than bourbon, but bourbon is tastier. Drinkers arrive at some kind of beer/bourbon mix based on their desires to (a) get drunk, (b) drink something tasty, and (c) have money left over for other activities. Now the price of beer falls…

The first thing to notice is that this is not a two-good world, as assumption (c) places us squarely in a three-good world: beer, bourbon, and other activities.  More on that in a minute.  Yglesias runs through a couple possibilities where people indeed drink more beer when the price decreases, as one would expect, but then he finishes with this zinger:

Yet another possibility is that people hold total spending and total alcohol consumption (constant) and use the budgetary headroom opened up by cheaper beer to buy less beer and extra bourbon.

So, let’s break this down.  First off, total spending here is simply another way of saying the consumer has an income constraint. Second, the “budgetary headroom opened up” is the income effect from the price of a good in the consumption set decreasing. In other words, when the price of a good in a consumer’s consumption set falls, he effectively becomes richer because he can continue to buy his current consumption set, but now he has money left over to buy more beer, more bourbon, or more other activities.

If we go ahead and assume that our consumer has convex preferences, our standard assumption, then we know that holding utility constant that when the price of beer falls, the substitution effect will indeed induce more beer consumption.

But what about the income effect from the budgetary headroom?  It’s possible that greater income leads to lower consumption of some goods (Ramen Noodles, bus rides, World Series viewings), and we call such goods inferior goods. Anyone who has taken price theory knows that I don’t need three goods to get people to buy more bourbon and less beer — I simply need beer to be an inferior good that is subject to a really big income effect. That is, the price of beer falls, the substitution effect leads our consumer to buy more beer, but the income effect from greater budgetary headroom overwhelms the substitution effect. Beer is a Giffen good and we call it a day.

Of course, economists have been looking for Giffen goods for a very long time, and there isn’t a long list, so maybe that isn’t the best route to go.

Instead of this, Yglesias provides this additional “iso-alcohol” constraint, where consumers want to keep overall alcohol consumption constant.  If the standard two-good model, if you hand someone $1000, the beneficiary buys more beer and less bourbon (if bourbon is inferior), more bourbon and less beer (if beer is inferior), or more of both (if both are normal).  With the iso-alcohol constraint, however, the third case is off the table and additional money will go to some other activity.  Hence, for Yglesias’ case of less beer with more “budgetary headroom” to hold, we know that we would have to be in the second case with beer being an inferior good. At the same time, though, if I hand someone $1000, it’s possible that they buy more bourbon and less beer, which is Yglesias’ point to begin with:  “use the budgetary headroom opened up by cheaper beer to buy less beer and extra bourbon.”

Click to Enlarge

So, let’s collapse this back down to a world where we have two goods: (1) beer and (2) bourbon and everything else, where the consumer is subject to both the income and the iso-alcohol constraint (linear combinations of beer and bourbon that lead to an equivalent level of insobriety). For visual simplicity, assume that initial income constraint is the same as the initial iso-alcohol constraint. That is, the relative price of beer and bourbon is the same as the relative weights needed to achieve some level of insobriety.  Also for simplicity, assume that the consumer initially spends all his income on beer and bourbon.  The optimal consumption set denoted by the circle with the 1 with bourbon consumption of Brb 1, where Brb 1 constitutes all spending on goods other than beer.

Now along comes the decrease in the price of beer and all of a sudden we have a new budget constraint, one that pivots outward with the same Y intercept but a new X intercept. The potential consumption set has expanded. Clearly, the consumer can buy more than he bought before, and a new optimum consistent with less beer consumption is illustrated by the smiley.

Because the consumer wants to maintain the same level of alcohol consumption, the amount spent on bourbon has to be on the original budget constraint — in this case the distance Brb 2 represents the amount spent on bourbon and the amount necessary to maintain that level of alcohol consumption. The distance between Brb 2 and the smiley is the amount spent on other stuff.  As you can see, Yglesias’ possibility collapses to the observation that “beer could be a Giffin good.”   In other words, not likely at all.

It’s probably worth noting that the iso-alcohol constraint is problematic in its own right, as it implies a minimum level of consumption that might not be viable in a world where the price of beer and bourbon go up, or income decreases.  In our example if the consumer is initially exhausting his income on beer and bourbon, any price increase or income decrease has the unhappy result that the iso-alcohol constraint cannot be satisfied.

Thank you to loyal reader Mr. P for the tip.

This is Flickey

It looks like the In Pursuit of Innovation crowd is at it again, this time trotting out the revolutionary new Flickey app.  Check out the This is Lawrence video currently featured at the LU homepage for the transformative nature of some of these I&E projects.

And, if you happen to be the ambitious type, you might consider taking ECON 211 / PHYS 201 this fall — perhaps you will be next year’s feature from the thought to action crowd.

Economic Organization of Lawrence University

Oliver's Army

On Monday night students in the Economics of the Firm class (Econ 450) will be showing off their work on the economic organization of Lawrence University.  You can check this out in Briggs 223 on Monday at 6 p.m.  I am impressed with the quality of the students in this course, and I am confident that they will put on a good show.  If you aren’t careful you might even learn something about LU. Indeed, this should be of interest just for the descriptive statistics.

‘Selling’ Yourself Short?  The Promise and Pitfalls of Income-Contingent Loans:  With graduation just a few days away for the Lawrence University class of 2012, the time has come to embrace a looming reality: college loans.  Most of us have them and they need to paid back.  According to FinAid.org, more than 65 percent of four-year undergraduate students in America take on debt in the form of government and/or private loans to finance their education.  Loans are generally issued by institutions or individuals with available money in return for a premium in the form of a fixed interest rate.  An alternative option exists, however, whereby students instead offer investors a share of their future earnings, similar to the capital-raising efforts employed by firms.  The idea is by no means new; in fact, Milton Friedman advocated the use of income contingent loans in 1955.  Our project explores the benefits and concerns associated with issuing equity to finance education and analyzes whether this alternative option is viable for Lawrence University.  We will discuss the adoption of an income contingent loan program at Yale University in the 1970s to provide an experiential understanding of this practice. (David Caprile, Oscar Koberling, Rana Marks, Stuart Smith).

Are Excess Endowments a Problem? Monitoring and Agency Problems among the Associated Colleges of the Midwest   Economic discourse on the theory of the firm developed while trying to understand the for-profit firm; however, the last few decades have witnessed an increase in research on the not-for-profit  firm.  There is considerable variability among the two categories, for-profit and non-profit.  One intriguing non-profit is the university.  Unlike most non-profits and all for-profits, universities keep large cash surpluses.  The reason for these large endowments has remained a puzzle (Hansmann 1990)  One proposed explanation for large endowments is agency problems.  We draw on data from a pool of small private liberal arts colleges to examine the relationship between “excess endowments” and high monitoring and agency costs. (Molly Ingram, Regina Hammond, James Maverick).

Why Does Lawrence University Have So Many International Students? Lawrence University has the highest percentage of international students of any college in the Associated Colleges of the Midwest.  Indeed, the percentage of Chinese students on campus is higher than the percentage of all international students at several ACM schools.  The “awkward” economics of higher education suggests that “colleges can buy important inputs to their production only from the customers who buy their products; colleges  buy important inputs to their production only from the customers.” Lawrence procures these inputs by providing generous financial aid,  lower initial deposits, and through other avenues.  In turn, international students help provide language instruction, promote campus diversity, and contribute significantly to campus cultural activities.  Our regression results are consistent with our contention that LU has an unusually high percentage of  international students. (Linlin Liang, Yue Jia, and Zhan Guo).

Food catering services: Dine in or dine out? This project looks at data collected from 100 top liberal arts colleges ranked by U.S. News and World Report to determine factors that contribute to college’s food services make- or-buy decision.  Consistent with the empirical work on make or buy decisions (e.g., Monteverde & Teece 1982; Joskow 1987, Anderson & Schmittlein 1984), we examine potential conventional microeconomic as well as transaction-cost theories for Lawrence’s recent outsourcing of food services.  We provide logistic regression on outsourcing as a function of based on endowment size, campus acreage, size of the student body, location relative to urban areas.  (Max Randolph, A.S. Darling, Andrew Kraemer, Brian Zindler).

Keynes Hayek: Questions for Thursday’s Read

Alright, I still don’t have an accounting of our numbers (and I’m not even listed as an instructor), but it’s time to start talking about Wapshott’s Keynes Hayek book.

First up, roll call.  Who are Edgeworth? Marshall? Mises? Menger? Robinson? Kahn?

Second up, what do we know about the personalities of Keynes and Hayek?  Do they remind you of anybody?  Do you think the recent rap videos are accurate characterizations? (see, for example, p. 48).

Third up, let’s revisit some basics — what is meant by “capitalism” and “socialism”?

A continuing question: What is Keynes view of government?  As you answer this question, think of (1) his reaction to the war reparations and his characterization of the likes of David Lloyd George and Woodrow Wilson; (2) the Bank of England’s decision to raise lending rates in 1923 (p. 32); (3) Britain’s decision to return to the gold standard (pp. 39-40).  In each case the government made what Keynes considered to be disastrous decisions, yet at the same time he believed the “he maintains the belief that the government or the Bank of England should manage the economy. Does Keynes believe that the British government as an institution is fundamentally sound, but that they just need better economic advice?  The second point above, evidently, was the beginning of the Keynesian Revolution (p. 32; read footnote 3).  Does that surprise you?

Another continuing questions: what is meant by “laissez faire”?  The simple answer would seem to be that there is “limited” government intervention.  Yet, the Bank of England sets interest rates, the government must make fundamental decisions about the currency — whether or not to adopt a “gold” standard, whether to have a central bank, whether to have a national currency, whether or not to tie that currency to precious metals (e.g., a gold standard or a “bimetallic” standard).  What would constitute laissez faire in these contexts?

As a follow up to this question, on page 43 Wapshott argues that the battle lines are drawn: Keynes believes in using the government as a means to help the disadvantaged, Hayek sees intervention as futile. Again, given what’s going on in these previous two paragraphs, is this characterization too simplistic?

To what extent does Keynes’ advocacy (ideology?) affect his analysis?  Consider his discussion of sticky wages and unemployment on p. 60.

What is the effect of fixing the price of currency to gold on the general price level and on the exchange rate? (see, for instance, pp. 38-9).

What is the “natural rate of interest”? (see, for instance, p. 43).

That should get us through the first hour.  See you at 3:25 in Steitz.

For those of you with some extra spare time, reviews from  Tyler Cowen, Peter Lewin (UT Dallas), and Brian Doherty (Reason magazine), and here’sNicholas Wapshott talkign with Russ Roberts (including beau coup resources at EconTalk).

 

 

Keynes, Hayek, and Other Dead Economists

This term’s economics read, DS 391 Keynes Hayek and Other Dead Economists, triumphantly kicks off this Thursday at 3:25 in Steitz 230.

You should pick up Wapshott and read the first six chapters (pp. 1- 94).  We will circulate discussion questions Wednesday.

Next week we will continue down the Keynes Hayek track, and also begin with the Buchholtz chapter on Keynes.

It’s not too late to join, and you can pick up sign up sheets from Professor Galambos or Gerard.

Here’s some deep background from EconStories.tv.

 

Special Econ Tea Talk

George Georgiou from the University of California at Santa Cruz will be on campus Friday to give a talk, “An Introduction to Law & Economics.”  Mr. Georgiou is completing his Ph.D. in international economics, with a specialization in applied micro and law & economics.  His work focuses on whether post-incarceration supervision levels affect recidivism.

Mr. Georgiou will give the talk in Briggs 223 at 1:50.

The usual delicious Econ Tea accouterments should be available.

Keynes, Cowen & Capitalism Coda

And, so we wind down another term, and I wonder what exactly is on your mind.  So, for starters, let’s start with Backhouse & Bateman’s characterization of Keynes. What does Keynes see as capitalism’s defect?  What does it “Say” about how his thinking diverges from the status quo at the time?

Now, once we have the defect, is that defect the same type of difficulties that Tyler Cowen and Erik Brynjolfsson and Andrew McAfee are talking about?  Or, put this another way, do Cowen and Byrnjolfsson & McAfee identify the same fundamental defect in the capitalist system that Keynes did?

Once we establish that, let’s get at how Keynes proposed to deal with capitalism’s basic defect. What was his stance in The General Theory?  (Digression: How did Keynes view of this change over time?  What is the basic thesis proffered up by Bateman and Backhouse?). Next, is this way of addressing that defect likely to be of use in addressing the types of problems that worry these other authors?

On that note, if you haven’t done so already, I suggest that you read one of Paul Krugman’s greatest columns ever, “The Accidental Theorist.” I love this column and use it often.  I wish I would have suggested it when we read Brynjolfsson and McAfee.  What does this article imply about the troubles that Cowen and Byrnjolfsson talk about? What does it suggest about Keynesian economics?