1. Referring to oneself as an expert in economics. Economists want to attract people to our discipline, so we refer to the “economic way of thinking” as something that anyone can do. Sadly, that is not true. Anyone can get a lot smarter by learning their first bit of economics, but non-economists interpret personal diminishing returns in this regard as knowing all there is to know. Real expertise takes a big commitment plus the right personal characteristics (including personality).

2. Failing to distinguish between settled theory and open theoretical disputes. Price theory is settled. If price theory strongly implies something, that something does not need empirical support, though it may of course need to be interpreted properly. Macroeconomic issues such as the effectiveness of fiscal policy are not settled; these claims are in need of empirical support, which, it should be stressed, is not easy to come by. If it were, we would have settled the theoretical issues long ago.

3. Gleefully citing behavioral economics as overturning the basic economic model. There’s a lot to like about behavioral economics, but mostly it informs us about small deviations from rational choice predictions, e.g., preference reversals when agents are almost indifferent in the first place.

4. A preoccupation with public policy. Much of what is fascinating in economics has little relevance to the everyday political wrangling that goes on in the press. Even when something has policy implications, often the non-political elements of the theory are the most interesting. Why not spend some time on the good stuff?

5. Coverage should correlate more strongly with importance of the topic, at least partially determined by the size of the economic distortion. No matter what side you take, union policy is relatively unimportant. The size of the distortion generated by immigration restrictions, however, is enormous. Your readers need to understand this.

6. Too verbose. Would it be too much to ask to replace a few paragraphs now and again with a single equation?

This list would presumably be longer if I consumed more mainstream media. Got any more items? I’ll add, though I shouldn’t have to, that this list is not directed specifically at Ezra.

I am an economist, not a programmer, so what am I doing with an app in the App Store? This question got me thinking about the economics of the App Store, and I think I have a satisfactory answer.

As with most things, it begins with Ronald Coase (who turned 100 last month, huzzah!). What are stores? They are mechanisms for reducing transaction costs. Notice that I said “reducing.” Store owners are middlemen, and they take a cut of the proceeds for their trouble. Apple takes 30% of gross sales. Nevertheless, the value of their brokering services exceeds their cut of gross sales, so on net they reduce transaction costs.

When transaction costs are lower, we know from The Nature of the Firm that firms get smaller. They outsource more. More people start firms to which other firms outsource, so there are more entrepreneurs. Most importantly, patterns of specialization change. Instead of doing something for myself, I will be more likely to pay someone else to do it for me.

I wonder what The Nature of the Firm would have said if it had been written today, when so many businesses deal in products, such as software, that are characterized by high fixed costs and low marginal costs. The specialization story changes a little. My own adventures with the App Store are instructive.

I wrote Gmail Dock entirely for my own use almost a year ago. I was tired of desktop email clients like Mac OS X’s Mail that were slow, bloated, and not as useful as the web-based Gmail. So I wrote something that attempted to bridge the gap between desktop email and webmail. I found it useful. But I didn’t try to sell it online because of the difficulty of marketing, distributing, and collecting payment. Giving it away would have made me strictly worse off because of support requests.

The App Store came along, and all of a sudden it was cost-effective to sell my software. I went into business. But the thing that is different from the Coasian story is that my pattern of specialization hasn’t actually changed. I’m still producing the same things that I produced before the store came into the picture. Lower transaction costs plus low marginal costs mean that people’s hobbies, creative outlets, and tinkering will increasingly become profitable side businesses. Who knows, maybe some day I’ll get paid to blog.

Those of us who do not spend all day in front of a TV create real value in our spare time. Lower transaction costs enable us to capture some of that surplus. To me, that is one of the important stories of how the App Store, the Internet, and the world of low marginal cost is changing society.

Let’s start with the most important question: why did Google decide to start being evil? People seem to actually be asking this childish question. The answer, of course, is that good and evil is not a useful framework for analyzing Google’s actions (though if they open concentration camps I will take this back). Google is motivated by profit. It faces incentives. I outlined Google’s strategy for profit-maximization in A Theory of Google. The basic conclusion of that post is that Google benefits from widespread, cheap, and high-quality access to the Internet.

If that’s true, then why doesn’t Google support net neutrality for wireless providers? <sarcasm>It’s almost as though they haven’t given this any thought.</sarcasm> Except that their chief economist is Hal Varian, who is one of the top scholars of the industrial organization of information-intensive markets and coauthor of one of the seminal books of the field, Information Rules. Varian and his fellow Googlers must have some reason to believe that net neutrality could hinder the development of the wireless Internet (though it appears not all of the rank-and-file are on board).

The first step to understanding the economics of net neutrality is to recognize the large fixed costs that accompany any network industry. The presence of large fixed costs means that the simple price-equals-marginal-cost condition for efficiency no longer applies. If all customers were charged MC, the firm would go out of business. It could not cover its large fixed costs. Even if the costs were sunk, the firm would “go out of business” at the margin, refraining from adding capacity on which it would only lose money. In general, large fixed costs imply that price and/or quality discrimination is a necessary feature of an efficient equilibrium (that is, if consumers do not all have identical demand). Read Michael Levine to see how this is the case even in competitive markets!

Another feature of industries with high fixed costs is that they tend to be monopolized or at least highly concentrated. Economists use the term “natural monopoly” to refer to those cases in which the monopolization is due purely to fixed costs and not to any coercive factor. In fact, traditional ISPs, in addition to being natural monopolies, are also coercively monopolized due to municipal franchises that grant them exclusivity. They therefore do not face even potential entry into their markets. A monopolist ISP might favor its own properties on the web, which is what worries net neutrality advocates. But if the monopolist ISP is free to charge whatever prices it wishes for its service, it can’t gain from pushing its own properties, or at least not at the consumer’s expense. Its incentive is to make the Internet as valuable as possible for its consumers so that it can maximize its profits on its monopoly. Remember the logic of double marginalization. If the municipal franchise results in regulated prices, then the monopolist ISP may have a strong reason to favor its own content. It leverages its monopoly position to reap profits through unregulated content rather than regulated Internet service.

A third factor intrinsic to Internet service is congestion. Transferring data on a network reduces the ability of others to do the same. This is a negative externality that can be remedied through a Pigovian tax, or better yet, through a Coasian solution. After all, property rights are well defined and transactions are already occurring. The externality can be resolved by a change in the terms of the contract.

The challenge, then, if you are socially benevolent, is to find a way (1) to efficiently incentivize investment in Internet service infrastructure, (2) to minimize the ill effects of the tendency of the industry to be monopolized, and (3) to reduce congestion, thereby making existing bandwidth capacity maximally valuable. This is not easy. The efficient solution would be something like the following. Consumers would pay for Internet service in two parts. First, they would pay an access fee, which varies from consumer to consumer in proportion to how much they value the Internet. Second, they would pay for the data they consume on a metered basis, with peak rates being higher than off-peak rates to efficiently allocate traffic. There would be no restrictions on the price or quality of service, though violations of service agreements would be prosecuted as fraud. Because the value of Internet service to consumers vastly exceeds the fixed costs associated with running an ISP, my intuition is that all monopolistic municipal charters should be abrogated and all markets contestable.

If that’s the ideal world, it’s not clear whether net neutrality brings us closer to it or further from it. Because we do not observe the ideal pricing structure, net neutrality regulations hamper firms’ ability to ease congestion by de-prioritizing what they believe is the lower-value traffic (remember, if optimal pricing exists, congestion is self-regulating). On the other hand, because some firms are coercive monopolies and face regulated pricing, net neutrality can improve welfare by taking away an inefficient monopoly rent.

Perhaps the most subtle way that net neutrality could be harmful is by aiding collusion between ISPs. If the firms have a sunk investment in infrastructure, regulations that make it more difficult to recover the value of new investments will discourage entry and expansion. Existing firms can carve up the current market and keep prices artificially high.

Google’s position, that traditional ISPs should be regulated and wireless ones should not, is defensible. Competition is more vigorous in the wireless sector than in the wired, and pricing is less regulated. Furthermore, the wireless industry is further from optimal capacity, so we ought to be sensitive to the incentives to invest.

I don’t mean to endorse Google’s proposal; rather, I wish to suggest that critics take the time to learn something about what it is they are criticizing. It’s dismaying to me that so many non-economists think they understand the effects of net neutrality. Skim some of TechCrunch’s recent posts on the topic: they are, frankly, asinine. It reminds me of a quotation from Murray Rothbard:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

The second law of thermodynamics says that the entropy of the universe tends to a maximum. We cannot be sanguine about the very long-term prospects for the universe. But even though entropy increases in closed macroscopic systems, in open microscopic systems it may decrease for a period. Fortunately, Earth is an open microscopic system that is constantly (well, for now) importing negentropy from the sun, which is blowing up (tending toward disorder). This means that order is possible on Earth.

We can draw (arbitrary?) distinctions between the kinds of order that we observe on Earth. One kind of order we call “life”—we call the discipline that studies the production and depletion of this kind of order “biology.” Another kind of order we call “consciousness.” Consciousness is related to biology—it is a kind of spontaneous order that occurs within brains, which are living—but it is also studied by psychologists and philosophers.

Another kind of order is social order. This is the order that arises by interactions between (discrete?) consciousnesses. It is the domain of the social sciences, particularly economics. These interactions might include violence, altruism, and exchange. The task of economics, then, is to give an account of how these interactions (note to Hayek: not just exchange!) create or destroy order.

It is striking to me that many people reject the idea of intelligent design for life or consciousness, but accept it for social order. Social order involves conscious beings who consciously design things, but it is not itself designed. It grows organically, for the same reason that the other kinds of order grow: the application of energy, which in the case of Earth originated in the sun.

Everything I have written so far has been non-normative. What are the ethical implications if we are willing to take a leap and say that order is good and disorder is bad? We should view actions which increase entropy as bad. Indiscriminate killing (and even indiscriminate ransacking), for instance, would be bad. Eating smart animals (including, but not limited to, other humans) instead of plants or dumb animals would be bad. Interfering with order-producing social processes (such as trade) would be bad. All this seems fairly plausible to me.

That’s what I have so far. What do you think?

The money sentence in Jobs’s letter is this:

Though the operating system for the iPhone, iPod and iPad is proprietary, we strongly believe that all standards pertaining to the web should be open.

Replace “though” with “because” and you have a succinct explanation for why companies like Apple would want to support open standards. Apple makes its margin on the iPhone; no need to let Adobe make a margin on content or development. If Apple can replace Flash on the web with open standards, Apple will make more money, and consumers will be better off by not having to (indirectly) pay the Adobe tax. Pretty much the only loser in this is Adobe.

Let me preface my argument by reiterating that there is a lot about Facebook that I don’t like. I hate the “walled garden” approach, and would prefer that decentralized protocols like those used in Google Buzz take off. I’m not a cheerleader for Facebook or its strategy by any means. Nevertheless, I don’t think Internet users have much to fear.

The way to start thinking about network effects is to think about fax machines. A fax machine is absolutely useless if you are the only one who has one. It’s only when other people have fax machines that they become useful. A fall in the price of fax machines has two effects. First, it will induce people to buy more fax machines—this is the ordinary demand effect of moving along the demand curve. Second, because people are buying more fax machines, fax machines become more useful, which increases demand for fax machines—the demand curve shifts out, amplifying the effect of the price drop on quantity. Since the effect is amplified, the true demand curve, the one that takes this into account, is very “flat” or elastic.

Facebook accounts are like fax machines—they are only useful if other people have them. There is the same positive feedback effect of price on quantity. As a thought experiment, imagine that Facebook started charging $10/month for access. My intuition is that many people get more than $10/month of value out of Facebook, and therefore would be willing to pay the fee. However, a lot of marginal users would drop the service. The fact that a lot of users would drop the service would make Facebook less useful to those people who remained; they may no longer get $10/month worth of value out of Facebook if half their friends weren’t on it any more.

I’m not suggesting that Facebook is going to start charging a fee for access. But nevertheless, elastic demand plays a role in how it relates to its users. For instance, one way of cashing in on the service’s popularity would be to plaster it with interstitial ads. This would be kind of like charging a “price” for the service. Why doesn’t Facebook do this? Elastic demand. And elastic demand places limits on the amount of “evil” that Facebook can do, or at least the amount of wealth it can transfer from its users to itself.

Finally, think about network effects and monopoly. Goods and services that exhibit network effects are going to tend toward monopoly (at least if the network effect applies to the good or service directly, and not the protocol, as with fax machines). We should not be surprised that Facebook is becoming huge; if it wasn’t huge, something else would be huge. That’s just how these industries work. But with very elastic demand, having lots of users doesn’t translate into a large monopoly rent. And meanwhile, Google has a strong incentive to ensure that the Facebook tax is not very high.

So my advice is stop worrying and enjoy your consumer surplus. Facebook is not good or evil—it is profit-oriented and faces a serious demand constraint due to the nature of its own product.

If you’re interested in politics, you may have done the following thought experiment. Suppose there are three voters—1, 2, and 3—and three alternatives—A, B, and C. Voter 1 prefers A to B to C. Voter 2 prefers B to C to A. Voter 3 prefers C to A to B. By a vote of 2-1, “society” prefers A to B. It also prefers B to C. If a rational person prefers A to B and B to C, then that person prefers A to C. But in this example, “society” prefers C to A! Is society irrational? Is this just a problem with majority rule? To cut to the chase, in this paper Arrow shows that it is a general problem. Any method of aggregating individual preferences is either irrational or has some other properties that are arguably undesirable.

One can envision collective decision-making as selecting a social welfare function and then using it to compare states of the world. Arrow defines five conditions to which a social welfare function ought to hold:

1. The function is universally defined. There are not certain preferences that people can have that cause the function to be indeterminate (though the function is allowed to express indifference).
2. If someone decides that X is more desirable than he initially thought, and nothing else changes, the social welfare function cannot penalize X.
3. The function should provide the same ranking for a subset of options as it would for that subset within a complete set of options. Adding or removing an option should not affect the ranking of other options.
4. No preferences are taboo. Any social preference ordering is possible if people have the right individual preferences.
5. The function must be collective in the sense that it does not simply mimic one person’s preferences.

Seems reasonable, no? Arrow’s proof proceeds by contradiction. He assumes that there are two individuals, three alternatives, and a social welfare function that satisfies the above conditions. These assumptions lead to three consequences:

1. If both individuals prefer one outcome to another, then the social welfare function prefers it as well.
2. “[I]f in a given choice, the will of individual 1 prevails against the will of individual 2, then individual 1′s views will certainly prevail if 2 is indifferent or if he agrees with 1.”
3. If individual 1 prefers X to Y and individual 2 prefers Y to X, then the social welfare function must be indifferent between X and Y.

Now, suppose that individual 1 prefers X to Y to Z and individual 2 prefers Z to X to Y. By consequence 1, the social welfare function prefers X to Y. By consequence 3, the function is indifferent between Y and Z. Since the function prefers X to Y and is indifferent between Y and Z, the function must prefer X to Z. However, also by consequence 3, the function must be indifferent between X and Z. This is a contradiction, which means that one of our assumptions cannot hold. In Arrow’s words:

If we exclude the possibility of interpersonal comparisons of utility, then the only methods of passing from individual tastes to social preferences which will be satisfactory and which will be defined for a wide range of sets of individual orderings are either imposed or dictatorial.

What does this mean? There is no “will of the people,” at least not if that phrase is to encompass what we normally think of as rationality. Rousseau is incoherent. Democracy can be manipulated by agenda control, as Levine and Plott show in a hilarious article in Virginia Law Review.

How can we get around this conclusion? One way is if preferences are unidimensional and single-peaked. If all voters think in terms of a single liberal-to-conservative spectrum and prefer candidates that are closer to some optimum point, then you can no longer demonstrate the contradiction. Another way is if you allow some way of expressing intensity of values (interpersonal comparisons of utility), such as by bidding with dollars, though this may undermine some of Arrow’s conditions.

For discussion: Voter preferences are shockingly unidimensional, are they not? People who favor high taxes tend also to be pro-choice on abortion. What do these have to do with each other? Does this correspondence save democracy from the charge of irrationality? Or is it further evidence of it? Does Arrow’s result explain why everyone is so dissatisfied with the government basically all of the time? In light of Arrow’s result, are some voting systems better than others? Does the fact that collective choice is incoherent mean that collective morality is also incoherent?

Next time, we will discuss Ronald Coase’s 1960 paper The Problem of Social Cost. If Arrow had read Coase, he would not have made the errors that he made on p. 334. See you in the comments!

Whereas Coase invites us to consider (and dismiss) a world without transaction costs, Hayek invites us to consider (and dismiss) a world in which all information is known to a single mind. In this world, Hayek points out, allocating resources in the most rational or efficient way is strictly a math problem, a more complicated version of some of the problems I make my Intermediate Micro students do. “This, however, is emphatically not the economic problem which society faces.” In the real world, information is dispersed, incomplete, and frequently contradictory. How can we use all this dispersed, incomplete, and contradictory information to make the best use of the resources we have?

When we engage in decision-making about resource allocation—whether collectively or individually—we are engaging in what Hayek calls “planning.” This raises two questions. First, how can those who possess some fragments of information communicate them in a useful way to the planner? Second, who should do the planning—one person or many people—and should it be centralized or decentralized? Under what arrangement can we make the best use of all the knowledge that is dispersed in society?

Most of the knowledge that exists in society is not universal, like F=ma. Instead, it is local; in Hayek’s words, “the knowledge of the particular circumstances of time and place.” Everyone knows at least something that no one else knows. For instance, I need a new holder for my EZ Pass because my old one melted in the sun. How likely is it that anyone else would know that? For society to make the best use of its resources, it must develop a method to collect and exploit local knowledge, not just universal knowledge.

It is essential that this method be robust in the sense of being able to withstand constant change. The world is not static. Statistical aggregates hide the innumerable small changes that occur. For instance, if my demand for eggs rises and my neighbor’s demand for eggs decreases by the same amount, my neighborhood’s demand for eggs has not changed. Nevertheless, the optimal allocation of eggs has changed; this suggests that statistical aggregates are not an appropriate basis for allocating resources.

“[T]he economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place.” To solve the problem, we need some form of decentralization. Decentralized actors need to be able to 1) exploit their local knowledge while 2) making use of some sort of summary of the local knowledge possessed by others that is relevant to their decisions. This summary can strip out a lot of “why” questions. The actor does not need to know why some resource is more or less scarce than before, but he does need to know if it becomes more or less scarce.

The problem is solved by the price system. “[P]rices can act to coördinate the separate actions of different people in the same way as subjective values help the individual to coördinate the parts of his plan.” If there is some new and valuable use for tin, the price of tin will rise and people will economize on tin without even knowing why they are doing it. “The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all.”

“We must look at the price system as such a mechanism for communicating information if we want to understand its real function…The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action.” This is not to say that the system operates with 100% efficiency. But it is nevertheless a marvel that changes occur and tens of thousands of people adapt by moving in the right direction, without any orders being issued. “I have deliberately used the word ‘marvel’ to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design…this mechanism would have been acclaimed as one of the greatest triumphs of the human mind.”

Hayek was more aware than most intellectuals of the extent and significance of our ignorance, and of the importance of extending the range of human cooperation beyond that which could be imagined by a single mind. The idea of a spontaneous order, that some phenomenon could be the product of human action, but not of human design, has been around since at least Adam Ferguson of the Scottish Enlightenment. It is striking that so many people persist in attributing both omniscience and deliberate design to society. We will discuss something else that people erroneously attribute to society next time when we review Ken Arrow’s 1950 paper, A Difficulty in the Concept of Social Welfare.

Suggestions for discussion: I have quoted extensively from this paper because it is very quotable. What are the best quotations that I have left out? Approximately how many bytes of local knowledge are there? Is it conceivable that a very powerful computer could solve the economic problem society faces? Are there other difficulties beyond the sheer quantity of information? What is it about undesigned phenomena that makes people uneasy? What is the greatest deliberately-designed triumph of the human mind and how does it compare in importance to the discovery of the price system? Is there any value at all to the math problems I make my Intermediate Micro students do? Does Hayek’s way of thinking about prices yield any insight into what happens when relative prices are distorted by taxes and subsidies? I look forward to your comments!

Ronald Coase wrote only a handful of academic journal articles—nearly every one is a blockbuster. He won the Nobel Prize in 1991 “for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy.” He is still alive at the ripe old age of 99; if you do the math, that means he wrote the article we are discussing today when he was 26. This gives me the sneaking suspicion that I am “behind.”

One useful way of thinking about the market is as a coordinating system. The price mechanism serves as a means for directing the flow of every resource to its highest valued use. Suppose that a hurricane hits New Orleans, and as a result the price of plywood increases. That increase in price performs an important coordinating function. As a Virginia resident, when I observe the price of plywood going up, I am induced to delay my plans to build a shed in my backyard. That is, I conserve plywood. This leaves more plywood available to go to New Orleans, where it is most needed. The price system is impersonal, meaning that I don’t even have to know or care about the people in New Orleans in order to behave in a way that is beneficial to them. We will talk much more about the role of prices in the next installment.

However, the market is only one of two main ways that resources are directed. The other mechanism is command and control. Within firms, the autonomous impersonal coordination of the price system is replaced by a conscious interpersonal coordination mechanism. The boss has to gauge or guess if employees are pulling their weight, and to figure out if there are enough computers and office space and coffee and so on. The whole purpose of a firm is to engage in production without the coordinating assistance of the market mechanism. Why should this be? Why would anyone want to avoid a system that sends resources to their highest valued use?

It must be the case that there are costs intrinsic to using the price system. These “transaction costs” include the cost of discovering what the relevant prices are and the cost of negotiating complete contracts that plan for all contingencies and eliminate opportunism. When an entrepreneur starts a firm, she is making a bet that she can direct resources within the firm with enough efficiency so as to produce at a lower cost than the market could produce. That is, she is betting that she can economize on transaction costs. This, Coase argues, is the raison d’être of a firm.

Coase then asks, “[W]hy, if by organising one can eliminate certain costs and in fact reduce the cost of production, are there any market transactions at all? Why is not all production carried on by one big firm?” There must be some countervailing cost that increases with firm size that makes it uneconomical for firms to continue increasing their “insourcing” forever. The main answer that Coase gives is that it gets harder for the entrepreneur to direct resources as the number of resources increases. At some point, the firm is directing so many resources internally that the cost of directing one more resource is equal to the cost of just relying on the market to direct it, transactions costs and all.

The theory can now be used to discuss what affects firm size. Factors that decrease transaction costs or increase organizing costs will tend to make firms smaller. Factors that do the opposite will tend to make firms larger. One factor that increases transaction costs is taxes on market exchange. If it costs firms extra money in taxes to buy furniture, they may decide to make their own furniture in-house. (For discussion: how does the income tax affect the household’s decision to have a second partner go to work or stay home? Hint: households are firms!) A second factor is technology. As communications technology improves, it becomes cheaper to organize over a wider spatial area, increasing firm size. On the other hand, technology also reduces the cost of using the market, e.g. locating prices, and therefore would tend to reduce firm size.

We can keep going with this. Here are some issues that Coase did not discuss. Another factor is bankruptcy and contract law. The fact that there are default rules for contracts lowers the costs of creating contracts (assuming the law is reasonably efficient). Fewer contingencies need to be specified in advance. This makes the cost of using the market lower, decreasing firm size. Next, consider employment regulations. These tend to make it more expensive to direct resources (at least human resources) internally, and therefore firms will be smaller when there is extensive employment regulation. Finally, what if there is a complete breakdown in law and order? This will tend to increase transaction costs, making markets less attractive. Firms will increase in size, and in fact, humans might revert to a tribal existence (tribes are firms!). Law and order, and markets generally, are what enable us to live our lives in a reasonably individualistic way.

Coase also spends a fair bit of space contrasting his theory with Frank Knight’s theory of the firm. I won’t spend a lot of time on this, but we can discuss it in the comments if people are interested. If you want food for thought on this, how plausible is Knight’s view if there are insurance markets and no transaction costs?

To sum up, using the price system is not free. The fact that there are transaction costs means that people will attempt to limit the number of their transactions to economize on these costs. This implies that they will seek alternative methods of directing resources, which we find in firms. The other method, command and control, does not scale well forever. Therefore, there are natural economic limits to the firm’s size.

I’ve raised a few questions above, but here are a few more. How does Coase’s notion of what it means for a firm to be large or small differ from our usual metrics? What is the role of market discipline (profits and losses) in ensuring that firms do not become inefficiently large? If you were an inventor with strong humanitarian impulses, would you want to invent a technology that lowers the cost of transactions or of organization? In a world with no transaction costs, would there still be unemployment? How does the existence of the concept of morality affect transaction costs?

The discussion is not limited to my questions, of course. Feel free to raise whatever issues in the paper you want to discuss. Our next article will be Friedrich Hayek’s 1945 piece The Use of Knowledge in Society. I will be in Las Vegas at a conference early next week, so our next discussion will not be until the latter part of the week. See you in the comments!

Here is what I propose. I will select an article and give anyone who wishes to some time to read it (optional). A few days later, I will write a post in which I give a framing summary and explanation of the article, and perhaps some questions for discussion. I will conclude each post with a link to the next article on the list.

I am shooting for ten articles. I haven’t fully decided on the list yet; suggestions, especially from my economics colleagues, are welcome. I will try to go in chronological order by publication date, though because I have not yet decided on the full list, there may be a little backtracking. The articles I am interested in are not necessarily those with the most citations or the ones that have had the most influence on the profession. I assume no one is interested in Heckman selection. I am looking for articles that provide the greatest insight into the world we live in.

If this sounds like something you’d be interested in, I encourage you to participate. I only ask that you keep the discussion in the comments civil and on topic. If you want to be uncivil, you can always post on your own blog about what an idiot I am. And of course feel free to pass this link around to other people who might be interested.

I will aim the discussion to be at the level of an intelligent and educated general reader with no prior background in economics (trained economists are of course welcome to participate as well). My hope is that this exercise will be helpful to many of you. I believe that studying and discussing these articles is a way to get a lot smarter very quickly. I also hope that by blogging about them, I will organize my own thoughts about them and their importance.

The first article in the series will be Ronald Coase’s 1937 article The Nature of the Firm. See you in a couple days.