Stumbling and Mumbling

Complements in production

A colleague of mine is doing jury service; the case has dragged on for ages, because a jury member has fallen ill. The west coast main line will be closed over Easter because of engineering works in Rugby. The sale of my flat is taking forever, because my solicitor is so slow.  And despite the Bank of England's efforts, interbank markets are illiquid.
These four things are related.  They all show the troubles that happen when inputs into a production process are complements rather than substitutes. If a jury member falls ill or idle, you can't easily replace him halfway through a case; the 12 jury members are complements. If the line in Rugby is closed, trains can't easily be diverted through Coventry, and the track around Rugby is a complement to the track through to Manchester. I can't now substitute to a quicker solicitor. And the production of market liquidity is a complementary process. It's no use one bank being healthy and able to lend if others aren't perceived to be creditworthy. Market liquidity is like making a dream so real - it takes two baby.
In cases like these, single failures can badly hold up production - a chain is only as good as its weakest link - and substitution away from that link is difficult. We have Leontief production functions.
Now, Charles Jones has showed in this fantastic paper (pdf)  that such  complements in production processes help explain why poor countries stay poor.  But my examples suggest that they matter in richer countries too.
Could it be that  sectors have low productivity partly because they are riddled with complementarities in production, and so suffer from weakest link problems; think of transport, construction and the law, where Jarndyce vs Jarndyce is still an accurate description?
One of the tricks of good management is to try and overcome problems like these; remember, the assumption of conventional economics, that the production function is given, is false; such functions have to be discovered. A good manager asks: how can I avoid being dependent upon a weak link? Sometimes, the answer to this is to bring the complements under the same ownership. Other times, it's to increase potential to substitute between inputs, for example by replacing highly paid stars with cheap formats or by offshoring.
But what happens if managers lack incentives to find such substitution possibilities? Could it be that one reason for inefficiencies in the public sector - and even perhaps for  the collapse of the Soviet Union - is that managers lack incentives to minimize costs and hold-ups by finding technologies that permit substitution?

Giving thanks

On Thanksgiving Day, Spiked is asking: what should we give thanks to Americans for? For me, there are five big things:
1. Popular music. Be it country, jazz or blues and their descendants - they have a common root - Americans have done a great job of preserving and developing a musical heritage that combines popularity, technical excellence and faithfulness to tradition. We English have not been so diligent. One thing that makes me a little ashamed of my country is that Kate Rusby is not regarded as a national treasure.
2. Television. In his In Praise of Commercial Culture, published in 1998, Tyler Cowen cites the dubious quality of American television as a counter-example to his thesis that market forces are good for culture. Subsequent events have proved him too pessimistic. The list of great recent US TV is almost endless: The Simpsons, CSI, 24, House, West Wing, The Sopranos, The X-Files, and the mighty Californication. Barring Corrie and Doctor Who - the legacy of an older era - Britain has little to compare.
There's a reason for this. Americans who make television programmes love TV. Brits who do so are middle class ponces who prefer the theatre, and look down on TV as something for chavs to slob out in front of. Which brings me to...
3. The democratic spirit. In the early 90s, my employers held a conference in Prague. Getting through immigration control at the airport was very slow; having let in the Nazis and the Communists all too quickly, the Czechs were a little tardy in becoming fussy. Anyhoo, someone walked to the front of the queue, waved a diplomatic passport and went through. A normally mild-mannered American friend went ballistic at this, thinking this an outrageous privilege whilst we Europeans just shrugged. This taught me that Americans are different, in that they, more than us, have the democratic spirit. They have a hostility to privilege, and a belief that government must serve its people rather than vice versa. Allied to this is a respect for rights and the rule of law, an optimism that people can improve things. As Tocqueville wrote:

Democracy does not provide people with the most skillful of governments, but it does that which the most skillful governments often cannot do; it spreads throughout the body social a restless activity, superabundant force, and energy never found elsewhere.

4. Intellectual activity. There are few questions of political philosophy where one can usefully ignore the influence of Rawls, Nozick or Rorty (to name but a few), and economics is largely extensions or criticisms of Samuelson and Arrow. When we think of economic and philosophical questions, we do so largely as Americans.
5. Mass production. Daniel Ben-Ami has called this right. Cars, TV, radio, computers and the internet were all invented outside the US. What Americans have done, more than others, is develop the techniques that make these cheap enough for the people.
Natch, there's stuff on the debit side of the balance sheet too - all those mullet-headed power balladeers of the 1980s for one - but I'll overlook them today.

TV & society: Gillian's right

Gillian Anderson says:

I don't like television. I never have liked it. The whole concept of sitting down in front of a TV feels like one of things that's destroying society as far as I'm concerned.

There's a lovely piece of economic research on Gillian's side here. Ben Olken shows here (pdf) that in Indonesian villages where TV reception is poor,  villagers attend more social groups and participate in more credit unions. Where reception's good, social activity is lower and people trust each other less.
Now, you might object here that all that's happening here is a rational preference - people just prefer watching TV to building social capital.
However, this paper suggests things aren't so simple:

We find that heavy TV viewers do not benefit, but instead report lower life satisfaction when exposed to more TV channels. This finding runs counter to the standard economic prediction that a larger choice set does not make people worse off.

So, perhaps TV does weaken society and make (some of us) unhappier. Except, that is, when we're watching Gillian.

The thinking fallacy

Via Norm, I discover Nigel Warburton's excellent blog. Here, he makes passing reference to an important error - "the informal fallacy of assuming that more prolonged thought = better results (the Protestant Work Ethic Fallacy?)"
This fallacy deserves much more attention that it gets. There are, I suspect, three bases to it:
1. Quick judgments can often work well, as Malcolm Gladwell and Gerd Gigerenzer (pdf) argue. Our cognitive processes evolved at a time when primitive people needed snap judgments to stay alive - to avoid being hunted.
2. Thinking and gathering information not only expose us to the possibility of countless errors, but increase our chances of making two particular mistakes.  One is overconfidence. If we've gathered lots of information, we can easily have more faith in our judgments than we should. The other is the fallacy of correlated observations; if we hear lots of evidence for a proposition, we might overestimate the validity of the proposition if we under-estimate the extent to which the evidence is correlated. For example, it's easy for policy-makers to over-estimate the danger of inflation, because reports of inflationary pressures are highly correlated.
3. In one field, there's hard evidence which shows that thinking doesn't pay off - fund management. According to Trustnet figures, less than half of actively managed UK company unit trusts have beaten the 58.5% return on the best All-share tracker fund over the last five years; this is no mere quirk of these data - it seems a general fact that index funds usually beat active management. So, thinking full-time about which shares to buy is inferior to buying the market.
This has general implications, as stock-picking is one of the few fields of activity where we can directly compare the efficacy of thinking versus not thinking.
So, here's a theory. Being thoughtful is not so much a utilitarian, practical virtue so much as a moral one; it promotes excellence rather than effectiveness, to use MacIntyre's distinction. Thoughtfulness leads to liberalism and tolerance, even if it doesn't have narrower advantages. 

The gender pay gap and children

One of Tim Worstall's occasional themes is that the pay gap between men and women arises because women lose labour market experiences as they stay at home to care for children. An article in the latest Fiscal Studies* shows that there's a lot of truth in this.
Gillian Paull estimates that, among men and women without children, women in full-time work earn just 4.9% less than men. And they are more likely than men (34.8% against 33.2%) to be in supervisory jobs.
However, among people with school-age children, women in full-time work earn 26.3% less than men, and are only half as likely to be in supevisory jobs (27.1% vs 50.1%). So, it's when a woman has a child, as Gillian Anderson has recently, that her earnings fall.
Does this mean there's no discrimination? Not necessarily. Younger, childless women are more highly qualified than their male counterparts, and so should earn more. But Dr Paull estimates that, controlling for this, they earn 10% less an hour. This could be evidence of taste discrimination. Or it could be that employers discount wages in anticipation of women leaving to have children. Or maybe women prefer jobs with lower pay but higher satisfaction.
* The paper's not webbed, but here's an earlier paper by Dr Paull.