Sunday Book Review- The Economic Institutions of Capitalism

As much as I'd like to, we can't limit this column to reviews of important topics like In-N-Out Burger every week. Every once in a while, we have to take a look at the landmark works of Nobel Prize winners. We will not be reviewing The Audacity of Hope. At least not today. However, it is worth taking a look at the work of Oliver Williamson, who shared this year's Nobel Prize in Economics with Elinor Ostram.

Don Boudreax at Cafe Hayek says that Williamson's 1985 book, The Economic Institutions of Capitalism, "remains a classic that repays careful study, even in 2009."

The Academy of Management Review

Oliver Williamson has written the most important book on the corporation since Berle and Means' The Modern Corporation and Private Property. -- Review

Alfred D. Chandler, Jr. Harvard Business School

For a historian concerned with the evolution of modern institutions, this is the most valuable book written by an economist since those of Joseph Schumpeter.

Kenneth J. Arrow Nobel Laureate in Economics

[Williamson] works on a much broader canvas than before and demonstrates the power of his approach in understanding such elusive phenomena as contract relations, vertical integration, labor unions, and antitrust law.

Paul L. Joskow, Massachusetts Institute of Technology

An extraordinarily impressive achievement and must reading for all serious students of law, economics, and organization...The Economic Institutions of Capitalism synthesizes Oliver Williamson's extensive work on these subjects with related work of other scholars in a comprehensive and stimulating presentation of the theory and applications of a new institutional economics that is changing the way we think about many issues in law, economics, and organization.

Obama Snubbed for Nobel Prize in Economics

Despite his vast potential and hopeful changiness on economic policy, Barack Obama did not receive the Nobel Prize in Economics from the Royal Swedish Academy of Sciences this morning. Instead, it went to two people you and I had probably never heard of before, Elinor Ostrom and Oliver E. Williamson.

Elinor Ostrom has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories. She observes that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes.

Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures which differ in their approaches to resolving conflicts of interest. The drawback of markets is that they often entail haggling and disagreement. The drawback of firms is that authority, which mitigates contention, can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets. A key prediction of Williamson's theory, which has also been supported empirically, is therefore that the propensity of economic agents to conduct their transactions inside the boundaries of a firm increases along with the relationship-specific features of their assets.

Cafe Hayek has some great coverage of the newest Nobel Laureates.

Apart from issuing my now-annual October lament that Armen Alchian and Gordon Tullock still do not have Nobel Prizes, I applaud this year’s selection of Elinor Ostrom and Oliver Williamson. Williamson’s 1985 book The Economic Institutions of Capitalism remains a classic that repays careful study, even in 2009. And Ostrom’s work on how people often solve public-goods problems voluntarily is too often overlooked — until today, that is!

Bonus Sunday Book Review

Not a full review, but a strong recommendation of Money, Markets & Soveriegnty from Don Bourdreaux at Cafe Hayek.

"Buy American" bad for U.S. economy

Reason TV takes on the ridiculously counter-productive "Buy American" movement.

Warning: this video contains images of women in bikinis which some viewers may find offensive.

Hattip: Cafe Hayek

UL- "Fuel costs: More than meets the study"

The Union Leader editorializes about a new study from Carbon Solutions New England, a partnership of UNH and environmental groups that favor federally mandated carbon caps. The paper doesn't buy the study's results showing massive economic savings coming from proposed increases in fuel effeciency.

They acknowledge that the new standards will have a net negative economic effect in 2011 -- a cost of $180 million. But that figure is not multiplied (as dollars saved are) to account for spending and investments not made because of the higher costs. They assume that no one will keep an older car rather than by a new one that costs an extra $2,100 thanks to the higher fuel standards. And they fail to account for increased deaths and injuries that will occur when more people buy smaller, lighter cars.

Maybe New England will benefit economically from the new CAFE standards, but this study doesn't prove it.

Here's the full report. The study's conclusions are based largely on assumptions about the future price of gasoline. The study assumes that fuel prices rise slowly and steadily after inflation. Recent experience shows that such projections are little more than wild guesses.

All regulations have benefits. Even the rent-seeking and corrupt regulations have benefits. But their costs are usually much higher. We favor free-market solutions because the trade-offs tend to be lower, and the benefits more widespread. By choosing to quantify only the benefits of the CAFE regulations, and assuming away some of the highest costs, this study missed a chance to give the public some good information about the consequences of a sweeping change in federal policy.

The Washington Post is making sense

Missed this Tuesday, but the Washington Post is taking a stand against the Obama Administration's blatant thuggery in the U.S. automotive marketplace:

IN THEORY, a government bailout should provide a short-term infusion of cash to give a struggling company the chance to right itself. But in its aggressive dealings with U.S. automakers, most recently General Motors, the Obama administration is coming dangerously close to engaging in financial engineering that ignores basic principles of fairness and economic realities to further political goals.

Hattip: Cafe Hayek

The economic consequences of luggage

Don Boudreaux at Cafe Hayek has an amazing mind. He sees the economic consequences in everything:

I'm on the road today. As I checked out of my hotel room -- rolling my suitcase behind me -- I wondered how many bellmen jobs were destroyed by the innovation that put wheels on luggage.

Boudreaux misses the obvious policy implications. Simply pass federal legislation banning all roller bags. Imagine the economic stimulus we'd create when all those bellmen jobs come back. It certainly makes as much sense as mandating paid vacation.

How can you save more money than the federal government?

Don Boudreaux of Cafe Hayek crunches the numbers on President Obama's proposal to cut $100 million from the federal budget:

To put this budget "cut" in perspective, suppose that the typical American family, earning $50,000 annually, plans this year to run a budget deficit proportionate to the deficit that Uncle Sam will run. Such a family would plan to spend $75,000. Now suppose that this family, seeking to signal its faux-commitment to financial prudence, promises spending cuts equal, in proportion to its budget, to the cuts announced today by Mr. Obama.

This family would declare - surely with much fanfare - that it will reduce its planned expenditures for the year by $2.08! Perhaps it might promise to survive the year with one less gallon of gasoline or with one less cup of coffee.

So, with the money I've saved on ice coffee because of Dunkin Donuts $.50 promotion, I've saved a higher proportion of my annual budget than President Obama proposes over the next 90 days. Slow down, Mr. President. I'm not sure we can absorb these massive cuts that quickly.

PS- I love $.50 Ice Coffee Day.

Backyard Economics is BACKWARD Economics

My favorite website, Cafe Hayek, alerts me to a post on Charlie's favorite website, Carpe Diem, about the absurdity of "localism" as an economic philosophy:

Using Backyard Economics logic, Duval County residents should only support Duval County businesses, and should avoid patronizing out-of-county businesses.

But let's go one step further. By the same logic, cities located in Duval County like Jacksonville Beach should only patronize shops, restaurants, and businesses in Jacksonville Beach, and avoid out-of-city businesses. But then the logic would also apply to even smaller geographical areas like neighborhoods within Jacksonville Beach (don't buy "out-of-neighborhood"), a neighborhood resident's own block (patronize only "in-block businesses"), and then ultimately a resident's own household.

In other words, the logic of Backyard Economics for state economies like Florida ultimately leads to an individual household's OWN BACKYARD (literally), and complete and total economic self-sufficiency at the household level (don't buy any "out-of-household" goods or services).

Russ Roberts, who posts at Cafe Hayek, said it well in a lecture I attended several years ago. "Self-sufficiency is the road to poverty."