Wednesday, September 19, 2012

More on Coordination/Thoughts on M&R Chapter 4

It is not unusual for one branch of economics to borrow from another.  When I was coming up with the ideas about service quality for the transfer pricing worksheet, I borrowed from ideas on the economics of regulation. And with that let me say that even if you learn only a little bit of economics in this class you will get a reference to a series of off-beat movies that somehow tie into the economics.  In the case it's The President's Analyst, a hilarious and very weird picture.  The tie in with the economics comes at the very end of the movie.  (You'll have to ask in class why.)  Also note that when I tie in to other economics I do a little test to see if it makes sense in my experience.  In this case I ask myself whether what the model predicts matches my experience when I was in CITES.  It does.  We'll talk about that a bit during our next class session.

M&R also borrow quite freely from many other areas in economics.  Much of the part of the book on compensation borrows from information economics and labor economics.  Chapter 4 borrows from a literature on economic planning a la the Soviet Union Agency Gosplan and mechanism design, which was a similar area for a theorist but applied to capitalist countries and was about the joint determination of how much public good is provided and how the tax burden for the public good is distributed.  That research was quite hot when I was in graduate school.  But now it's a little older and somewhat out of fashion.  So I want to give some context for why it existed and also say why we won't spend time on it in our course.  The PowerPoint I've prepared for next Wednesday is meant as an alternative.

Note that the Soviet Union came to an end right about the time most of you were born.  M&R came out about a year later.  So the existence of Soviet Union and the economic theory that developed around it had to matter a good deal in M&R's thinking, at least indirectly.  It is generally agreed that as economic systems go, Communism a la Gosplan setting prices and quotas for the economy was much worse than capitalism with market prices determined pretty much by supply and demand, with caveats we've already discussed in class.  Both system have warts - they are not perfect, but communism in this vein was much worse.  There were chronic shortages of many consumer goods, notably meat, and many produced good were of shoddy quality.  This in spite of a well educated populace.  Nobody disagrees about the comparison.  What's at issue for us is the explanation for why this is the case.

The planning and mechanism design literature focus on "informational efficiency" which means being able to communicate what is necessary with the least possible information possible - presumably because information is a scarce resource.  The price system in a market economy is informationally efficient.  But note that M&R were writing at the dawn of the computing and communications revolution and until that time information was a scarce resource.  Now we live in a world of information over abundance.  Walmart, for example, craves piles and piles of data about inventory and where it resides as well as about shopping patterns at its various stores so it can efficiently restock and warehouse its merchandise.  So informational efficiency seems less exciting nowadays as a reason to prefer one economic system over another.

Communism under the Soviet Union produced a massive amount of featherbedding and other forms of corruption and that sustained until the system as a whole collapsed.  Tying this to today's Powerpoint about Schumpeter - captialism is far better on the destruction part of creative destruction than communism is, where inefficient and old ways of doing things may have become entrenched.  Capitalism may also be better about the creative side, but I think its on the destruction side where communism failed.  Personally I think that would have happened even if somehow what Gosplan did was as informationally efficient as capitalistic price system.  There were so many other problems with the Soviet Union, pinning them all on informational inefficiency just doesn't seem right.

In what we will do next week my preferred way of thinking about this is to emphasize the role of the "honest broker" in coordination.  In stead of worrying whether a mechanized scheme like the intern matching program provides incentive to tell the trust, as whether people feel they are dealing with somebody they can trust and who listens to what they say.  That is how to achieve high productivity and upbeat spirit about the work, in my view.

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