Teaching economics to Richard Murphy
We’re not averse to a little bit of teaching economics to people. Obviously. Equally, we’re just fine with musing about a subject, or returning to first principles in order to think through it all again. But we do think it’s a little off that it’s necessary to teach basic economics to Richard Murphy. Who, you know, is a Professor at a British university teaching economic matters to students.
The trigger for this ire is this:
Now, that was what my father employed those staff who were excess to apparent requirements to do when they weren't dealing with an emergency. Those people weren't sitting around on their backsides doing nothing. They maintained the power lines. They kept the system in good order. Those spare people weren't spare. They were the pool of labour that was necessary to keep the system in good order so that breakdowns did not take place. And as a result, by and large, those breakdowns did not take place.
But now a power company will do something quite different. It will outsource the maintenance to a contractor.
That contractor will then subcontract the contract they've got.
In other words, they will let out a contract for a particular power line from A to B, and another one from B to C, and a further one from C to D, and on.
In other words, there will be hordes of contracting going on to get what they think is the best price for the maintenance of each element of the lines for which they have accepted responsibility under the main contract they've been given.
The conclusion then reached being that accountants and lawyers make too much out of this and therefore this must all stop.
And, well, maybe it should? At which point we require a logical structure to enable us to think through that very point. When should a company be vertically integrated, when should there be a company at all? When should there instead be a network of contractual relationships? Fortunately, this has been done for us. Ronald Coase. In fact, he gained his Nobel in (large) part for exactly this work:
Coase showed that traditional basic microeconomic theory was incomplete because it only included production and transport costs, whereas it neglected the costs of entering into and executing contracts and managing organizations. Such costs are commonly known as transaction costs and they account for a considerable share of the total use of resources in the economy. Thus, traditional theory had not embodied all of the restrictions which bind the allocations of economic agents. When transaction costs are taken into account, it turns out that the existence of firms, different corporate forms, variations in contract arrangements, the structure of the financial system and even fundamental features of the legal system can be given relatively simple explanations. By incorporating different types of transaction costs, Coase paved the way for a systematic analysis of institutions in the economic system and their significance.
Note that Coase didn’t give an answer nor series of them. Rather, here’s the logical structure to use to think through and thereby be able to decide on a specific example. When transaction costs are low use the network of contracts, when high the centralised company - to reduce to the acorn of the idea.
As we say we’ve no problem with musing from first principles. But we do think that knowedlge of the standout examples of musing from first principles over the past couple of centuries is perhaps a good idea. In fact, we’d suggest that it’s a pre-requisite for an academic position. That knowledge of the subject under discussion thing. That very thing not in evidence here.
Seriously? Contracting versus central control and ownership without Coase? When this is the very work that led (largely) to a Nobel?
We’d suggest that British academia has a significant problem. For, somehow, people who know no economics have ended up teaching economics. This does not bode well for the future economic understanding of the population, does it?
Tim Worstall