RIP Ronald Coase

Extremely sad news that Ronald Coase passed on today.  His work on economics had a profound impact upon the discipline, and significantly added to the way economists think about the allocation of scarce resources – so economics itself.  There are few people who have had this sort of impact.  While I was going to write a couple of things about his work, I found that A Fine Theorem covered this off a much more satisfactory way than I could:

Sad news today that Ronald Coase has passed away; he was still working, often on the Chinese economy, at the incredible age of 102. Coase is best known to economists for two statements: that transaction costs explain many puzzles in the organization of society, and that pricing for durable goods presents a particular worry since even a monopolist selling a durable good needs to “compete” with its future and past selves. Both of these statements are horribly, horribly misunderstood, particularly the first.

I would suggest reading the whole post.  These are two ideas that were an important part of my economics study, however there were links to the literature in there that I had not seen before and that helped breath further life into these ideas for me.

Paul Walker also pays his respects here.  While for some story telling about interpreting the Coase theorem this McCloskey piece is golden.

Law vs economics: preventive detention

From Andrew Geddis:

National plan to legislate to permit the ongoing “civil detention” of offenders deemed at high risk of future sexual or violent offending even after their jail sentence [is] complete. Civil detention[,] now apparently called “Public Protection Orders”… would thus be a retrospective restriction applied to some prisoners on top of the original sentence that they received for their crimes, based purely on the prediction that they inevitably will commit further offences when and if released.

the proposed Public Protection Orders differ from preventive detention in that they are imposed not because of a crime already committed, but rather purely because of predictions of a crime to come.

That’s a difference that has been held important by the European Court of Human Rights (see here), as well as the United Nations Human Rights Commission (see here and here). Both of these bodies have said it is OK for a country to sentence someone to an indefinate period of detention for something they have done (combined with a justified fear of what this shows they may do when released). However, altering a person’s prison sentence once this has been imposed purely because of fears the person may do bad things in the future is a no-no from a human rights perspective.

As I understand it (not being a lawyer) there will now be two ways to spend an indefinite period of time in jail: either you committed a crime, posed a risk to the community at the time of sentencing and still pose a risk to the community, or you committed a crime and pose a risk to the community at the time of release. Apparently the latter is more problematic for lawyers because the ‘indefinite’ bit happens after sentencing. From the perspective of an economist I find that a bit perplexing.

First of all, let’s suppose that we think putting people who pose a risk to the community in jail indefinitely is a good thing. Presumably the motivation for doing it is to protect the community from harm; any other motivation seems hard to justify. So, at what point following the conviction for a crime would we be concerned about harm to the community? Certainly not when the person is incarcerated, and probably not when they’re in custody awaiting sentencing. Surely the time at which we might be concerned is when we have to make a decision about releasing them. Does it matter when, between conviction and potential release, they were adjudged to be a risk to the community? Well, certainly not from the perspective of the potential victims. So why would there be some fundamental difference between preventive detention and an equivalent test incorporated in a Public Protection Order (PPO)? To go a bit further, if it’s a good idea to keep people who are a risk to the community in jail, surely we want the option to keep them there up until they are released. Anything else risks being unable to react appropriately if the convict develops risky behaviours while in jail.

Now I can understand that people might be concerned about abuse of power and the unethical use of PPOs, but there seem to be similar problems with preventive detention. The best one can argue is that the PPO gives more time for the justice system to abuse its power, but I can’t see why judicial checks on that would be any less effective than judicial discretion over preventive detention.

I’d very much welcome any lawyers to clear it up for me, because I may very well be entirely confused here!

Do lawyers really understand economics?

With more and more policy being founded in economic analysis, lawyers are having to become ever more familiar with economic concepts. Competition law (antitrust to Americans) is an area that has become particularly mired in economic analysis. In New Zealand we have seen plenty of debate over large cases in which anti-competitive behaviour has been alleged. So it is apropos to find two economists asking whether “antitrust [is] too complicated for generalist judges”:

We find that decisions involving the evaluation of complex economic evidence are significantly more likely to be appealed, and decisions of judges trained in basic economics are significantly less likely to be appealed than are decisions by their untrained counterparts. Our analysis supports the hypothesis that some antitrust cases are too complicated for generalist judges.

One of the authors has an interesting and detailed (for a blog post) discussion here. It’s certainly a worthwhile topic for investigation, since the decisions in these cases can be extremely expensive for the parties involved. If there is enough evidence, does it point to the need for specialist judges in this field?

Banning relegation from the Premier League: More Investment certainty, less excitement?

There has been a bit of talk recently about abolishing the promotion and relegation system in the English Premier League, mainly coming from the Foreign owners of Premier League clubs. A couple of quotes from this article sum up the argument, which is really about investor certainty:

a growing cartel of owners believe the Premier League should adopt the American franchise model to end financial fears linked to the massive cost of dropping out of the elite

Obviously, if I was an American owner and I owned a football club, or I was an Indian owner, I might be thinking I would like to see no promotion or relegation. My investment is going to be safer and my shares are going to go up in value

Relegation results in a massive drop in revenues so I can see an argument that owners will be more willing to invest in the clubs if they know that they will not be regulated. Basically, getting rid of relegation would give more certainty on the firms future cashflows. Interestingly, the Premier League already gives “parachute” payments to relegated clubs to help compensate for this.

The other side of this argument, voiced quite passionately by Sir Alex Ferguson, is that this would “kill English football”. For once, I’m inclined to agree with red nose. The Premier league would be so much more boring without relegation. Given the gulf between the top 6 or so teams and the rest of the 20 team league, the majority of the games would become relatively meaningless. Similarly, the Championship (England’s second division) would become pretty boring too. Given the big prize of promotion would disappear, who would actually care who wins the 2nd division??

Now you are probably wondering where the economics is, this is an economics blog after all. If the league is less exciting due to getting rid of the relegation system then fewer people will watch games on TV, go to games etc.. which means the league will suffer financially. My hypothesis is that supporters of the big teams would be still be just as interested, but supporters of the teams at the mid to bottom end would be less interested and that the Championship would die.

So there is a trade-off here. It’s possible that by giving owners more certainty through a “franchise model” the entire Premier League would become more even as owners would be willing to plow more money into their teams, this may make the league more exciting and make more people watch. But there would be a countervailing effect of potentially less revenue available to teams as fewer people bother tuning in (which is particular important with UEFA’s financial fair play rules coming).

 

Means testing fines: economic efficiency, or unjust policy.

As recently reported, European nations are increasingly pegging speeding fines to income levels, in an attempt to standardise punishment for such infringements.

The intuition is simple: a $100 fine to a person of wealth in excess of a billion dollars is trivial. Clearly, there is no (or at the least little) incentive to curb one’s behaviour.

However, in examining a recent USD $290,000 (euro203,180.83) speeding ticket slapped on a millionaire Ferrari driver in Switzerland,  one cannot help but feel this is somewhat excessive.

Conversely, it would seem that such laws have the potential to induce ridiculously low penalties to those without any assets. Is New Zealand society willing to burdening the rich with the external risks created by the poor?

Pablo and Goliath

Pablo Soto, the author of popular peer-to-peer file-sharing software, is being sued for LOTS by the recording industry. Their case is that he broke the law by facilitating distribution of copyright protected material. While I understand the reasons they’re going after him, I can’t understand how finding him guilty would be a good outcome. Read more