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What I'm Reading-April 05th, 2017

4/5/2017

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I haven’t been blogging as much as I wanted to be. My problem with my writing is I’m attracted to “high concept” pieces that take a lot of work but often don’t have the time to finish them “in one go”. Then, once I stop working on them, it becomes difficult to return to them. Thus, starting today, I’m going to make sure I post once a week on what I’m reading. I’m always reading papers, articles and dissertations and I go through much more material than I ever comment on publicly.

Gardiner Means

It hasn’t appeared much in what I’ve written but for the last year I’ve gotten intensely interested in pricing, costing, investment decisions, competition and other aspects of business behavior. For the fans of the late Fred lee, it will not be surprising how influential his book Post Keynesian Price Theory has been on me, however only recently have I returned to his work and started to explore each component in detail One person I’ve been reading about in a lot more detail than I ever have before is Gardiner Means. You may know him as the coauthor to A.A. Berle’s book The Modern Corporation and Private Property. What he is much less known for, but which is arguably his more important body of work, is his work on pricing and the corporation.

This work is what actually occupied the rest of his entire career. He coined the term administered pricing to refer to businesses setting prices rather than “the market” (an idea I hope to run to in the future). It is important to note that he didn’t think that administered pricing implied a lack of competition. Simply a lack of neoclassical “perfect competition”. There are a number of interesting issues to explore in his work and I hope to return to some of these issues in future posts. I may even blog his book
Pricing power & the public interest, which I just received in the mail.

“Customer Value Based” Pricing

In exploring as much of the pricing literature as I can, I’ve spent more and more time on the marketing part of the pricing literature.The marketing-pricing literature is interesting because they are directly advising modern firms on their pricing strategies and berating them for not having the “correct” pricing strategies. For example, a recent article from a prominent marketing-pricing scholar (and consultant) says that

“There is broad consensus among pricing scholars, consultants, and practitioners that a pricing orientation based on customer value and customer willingness-to pay is best and can positively influence pricing power and firm performance” (Liozu 2017).

Nonetheless he goes on to say

“It is commonly understood and accepted that value-based pricing positively impacts firm performance, although more academic research is required to strengthen this causal relationship”.

In other words, they don’t have much influence that value based pricing is net beneficial but there’s a disciplinary consensus that it's true!

    It is difficult to quite nail down what is even entailed in “value based pricing” but the idea seems to be widening (or holding) the difference between one’s own price and one’s competitors while maintaining sales through a sales /advertising effort to convince the customer your products “unique” attributes “deserve” the difference. Indeed a very recent paper on value based pricing begins by saying that “Fierce global competition and the growth of low-cost competitors are causing suppliers in many business and industrial markets to differentiate themselves through value-based strategies” (Provines 2017). More finely segmenting one’s customer base by willingness to pay and income bracket seems to also be wrapped up in value based pricing. In business to business marketing, this pricing strategy seems to entail customising the services and products one produces to the specific needs of the business customer.

However, despite issues with the zealous proselytizing of value based pricing,I think in many ways this literature is much better than neoclassical economics.

1) It is taken for granted that businesses are price setters and this involves no theoretical difficulties for their basic premises

2) Businesses as price setters isn’t posited as in conflict with the notion that businesses are competitive. For example Liozu 2017 reports that in his survey “most respondents agreed that competitive pressure is high”. In short their arguments are in line with an Andrewsian notion of “competitive oligopoly”, Shaikh’s coinage “real competition” and/or Lee’s notion of “managed competition”. This literature is certainly not consistent with any sort of imperfectionist neoclassical theory.

3) Social relations within firms and between firms are taken to be important for business strategy, business performance and for the implementation of consultant recommendations (see Provines 2017). Indeed one of the best marketing scholars of pricing entitled his recent book  “The pricing journey: the organizational transformation toward pricing excellence”. The best of the recent literature is penetrating- through qualitative research methods- the organizational and social costs of implementing

Marketing scholarship is a promising avenue for heterodox economics research and engagement. It is also an extremely useful source of a bevy of qualitative empirical work that heterodox economics doesn’t have the resources to conduct. In turn there are certainly areas (such as the macroeconomic determination of profits) where marketing scholars could learn from heterodoxy. Get to it!
Miscellaneous topics

Indian Postal Banking?

Tumbe’s  "Towards financial inclusion: The post office of India as a financial institution, 1880–2010." is an excellent paper that deserves a lot of attention. Here is a pull quote for all those Job Guarantee fans out there: “Due to the discontinuation of certain postal certificates in the late 1990s, the attraction of the Post Office as a deposit-receiving institution began to wane. However, a strong boost was given to this business with the passage of the National Rural Employment Guarantee Act (NREGA) in 2005 and the subsequent option of payment of wages through POSB accounts. As a result, the depositor/population ratio nearly doubled to 10 per cent in 2012 (Figure 4). That is, today, 10 per cent of the Indian population has a savings bank account with the Post Office, with the majority of the accounts being held in rural India. The low average bank balance of  ₹3,000 shows why the Post Office is rightly called the poor person’s bank of India.”

Origins of the Federal Reserve Book-Entry System

Kenneth Garbade, a long time Federal Reserve Bank of New York economist has an interesting paper on the move from physical treasury securities to “book entry” treasury securities. Especially interesting is the role of the Federal Reserve in managing the “book entries” from the beginning of the system. Essentially, the only part of treasury debt that the Treasury actually manages is “Treasurydirect” the “retail” Treasury bond service:

“Underlying the question of whether the Reserve Banks should operate a book-entry system in their individual capacities or as fiscal agents was the recognition that a book entry system might make all but impossible a clean distinction between the two operating bases. One early analysis observed that a book-entry system “by its very nature ‘meshes’ the actions which a Reserve Bank undertakes as custodian on the one hand and as fiscal agent on the other.” 25 This observation suggested that the Banks might have to operate the system in some sort of hybrid capacity.”

The only difference between current treasury bonds and federal reserve securities is the federal reserve credits the Treasury’s reserve account when it successfully delivers and receives payment for a security. As Garbade says in another paper: “At 9:15 a.m. on the issue date, the Fed, acting as fiscal agent for the Treasury, credits the institution’s account for the new securities, debits the institution’s reserve account for the cost of the securities, and transfers the payment to a Treasury account at the Fed” (Garbade et al. 2005)

Stalin’s Economist Eugen (Jenő) Varga is the subject of André Mommen’s very interesting book. Varga (as the title suggests) was a very important economic adviser to Stalin and even managed to survive all the purges. I was particularly interested in this book as more evidence of how the ignorance of money and monetary theory shaped the early soviet union. What I previously didn’t know was who Varga was and how seemingly important he was to that trajectory:
“Varga’s treatise on money was largely based on Hilferding’s Finance Capital...During the war, Varga argued, the Hungarian population had lost confidence in the magic value of money because goods were bartered, not exchanged for money. He thought that money could be banned from the coming socialist society and replaced by a simple accounting system for all transactions. Varga’s utopia – or his so-called dream of a better world – was based on Engels’ Anti-Dühring and, of course, on Karl Kautsky’s (1892) Erfurt Programme from 1891, both qualifying the liquidation of commodity production as a task of equal rank with the changing of ownership relations” (Mommen 2011 page 21)

On an interesting but unrelated note this section shocked me:

“Varga, who still believed in a revolutionary crisis in the defeated countries, influenced the debates into the direction of making of Germany an agrarian country (Laufer n.d.). In his first memorandum completed on 10 November 1943, Maiskiy wrote that it was precisely that ‘Germany and its satellites must give the USSR a definite quantity of labour units of particular skills (including the highest) which, in the form of something like labour armies, will carry out tasks assigned to them under the command of the NKVD’ (quoted in Filitov 1996: 7). For Churchill, Germany’s economic demise was not Britain’s preferred war aim. Hence, his war economist Nicholas (Miklós) Káldor preferred working out reconstruction scenarios (Kaldor and Joseph 1943) based on Germany’s industrial capacities. Even Lord Keynes, who was favourable to the Hans Morgenthau Plan (Peter 1997; Markwell 2006: 221–63) criticised Varga’s ideas as being ‘very dangerous’ (Keynes to Nigel Ronald, 2 December 1943, Archives FO 371–35309). Free French politician Pierre Cot reported from Moscow that negotiations on reparation payments would lead to annual payments in kind (industrial equipment) worth between US$1 and US$2 billion. In addition, the Soviet Union hoped obtaining between four and five million German workers (Cot 1974: 260). All these negative reactions must have inspired Molotov to drop any overemphasis on labour (Filitov 1996: 17).” (Mommen 2011 page 21).

I had no idea that Soviet elites had so seriously considered demanding a forced labor army of germans numbered in the millions in the midst of the war.

References

Berle, Adolf Augustus, and Gardiner Coit Means. "Modern corporation and private property." (1932).

Garbade, Kenneth D. "Origins of the Federal Reserve Book-Entry System." Federal Reserve Bank of New York Economic Policy Review 10.3 (2004): 33.

Garbade, Kenneth, and Jeffrey Ingber. "The treasury auction process: Objectives, structure, and recent adaptations." (2005).

Lee, Frederic S. Post Keynesian price theory. Cambridge University Press, 1999.

Liozu, Stephan. The pricing journey: the organizational transformation toward pricing excellence. Stanford University Press, 2015.

Liozu, Stephan M. "State of value-based-pricing survey: Perceptions, challenges, and impact." Journal of Revenue and Pricing Management 16.1 (2017): 18-29.

Means, Gardiner. Industrial Prices and Their Relative Inexibility. Senate Document no. 13, 74th Cong., 1st sess., Washington, DC: Government Printing Office, 1935

Means, Gardiner Coit. "Pricing power & the public interest." (1962).

Means, Gardiner Coit, Warren J. Samuels, and Frederic S. Lee. A monetary theory of employment. ME Sharpe, 1994.

Mommen, André. Stalin's economist: the economic contributions of Jenö Varga. Routledge, 2011.

Provines, Christopher D. "Value-based pricing meets twenty-first century procurement." Journal of Revenue and Pricing Management 16.1 (2017): 4-17.
​

Tumbe, Chinmay. "Towards financial inclusion: The post office of India as a financial institution, 1880–2010." The Indian Economic & Social History Review 52.4 (2015): 409-437.

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John Oliver is Dumb and Wrong About Central Bank Independence

10/17/2016

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Because of the excellent coverage at MarketWatch - featuring quotes from my partner-in-crime Rohan Grey and the great economist at UMKC Scott Fullwiler- I made myself watch John Oliver’s coverage of third parties. It was as boring and annoying as I thought it was going to be when i stopped watching the video this morning a few minutes in. Okay I lied- I slogged through the automatic youtube transcripts because I couldn’t bear to hear any more marginally informed smarm from him. There are a lot of ways to criticize what he had to say, but to me the important thing was his drive by defense of central bank independence:

...only the Federal Reserve does and it does not take marching orders from the White House because that would be extremely dangerous you don't want to give presidents the power to just create new money whenever they want

He goes on to illustrate how “dangerous” it is using a frivolous example of a stunt presidential candidate “creating” money for his own use. The problem with this should be obvious- we don’t have to choose between the Federal Reserve having complete autonomy and a president unilaterally spending money on whatever he or she desires. That’s why there’s this centuries long thing called administrative law that deals with how authority is delegated to government agencies and the extent to which it is delegated. The idea that the delegation of some spending authority to administrative agencies or the presidency is crazy and allows them to go hog wild but the ability to buy and sell unlimited amounts of a variety of financial assets and change interest rates- to 20%+ ,as actually happened under Volcker, isn’t enormous power is absurd. This kind of thinking shows either an ignorance of monetary policy or a complete and utter servility to the status quo.

The Committee for Economic Development- a business-run center right think tank that is about as mainstream as you can get- even funded research in the late 1950s “... that openly contemplated varying even tax rates within ranges set by Executive decree, bringing it much closer to the progressive Keynesian ideas of the late forties” (Costantini 2015). Giving the president the authority to, say, spend up to 100 billion dollars if he or she has evidence that there is a recession is some discretion but not unlimited discretion. You could limit the types of spending the President could do to particular categories such as “necessary infrastructure maintenance” or community services, higher unemployment insurance etc and then review her or his spending choices over the following year. These are perfectly reasonable ways of delegating fiscal policy powers and not "very dangerous".

I’ll go further- there is no inherent reason why congress couldn't disallow discretionary changes to interest rates by the Federal Reserve and rely on some delegation of fiscal policy authority as the government's primary discretionary stabilization policy. For example, like the CED research above suggests, you could give the IRS authority to change certain marginal tax rates within particular set ranges. In fact, I think this would be much, much less discretionary authority than the Federal Reserve has now. In other words, just because creating fiscal authorities out of administrative agencies as an alternative to Federal Reserve independence isn’t a mainstream policy idea now doesn’t mean it is inherently crazy. I’m all for making green party analysis more technically correct- but it is obvious to everyone that most people who criticize Jill Stein aren’t interested in that. Oliver himself hit her on this point in the context of a general broadside against third party candidates. In other words, if you’re nitpicking on technicalities to justify your own milquetoast liberalism- at the very least be right.

Which brings us to the issue that so much of what he says here is just wrong and not just misleading or disingenuous. He says it would be crazy for the President to be able to get the Fed to buy and forgive the debt. However, he doesn’t discuss at all that the Department of Education may be able to directly forgive debt- or declare a moratorium on payments- and the President could tell them to do so. This isn’t the place to get into the specifics or technicalities of administrative law but the fact that this never seems to occur to him- or that this would be functionally the same thing as a Fed purchase and forgiveness- reveals basic ignorance of the subject, which is frustrating coming from someone posturing as “more knowledgeable-than-thou”. Sometimes being a left wing policy wonk is frustrating because you have to endure all these “serious” criticisms of left wing politicians that are chock full of this kind of nonsense.

Speaking of nonsense, this all skips over the fact that the example he proffers is particularly absurd because the Federal Reserve already does discretionary fiscal policy and isn’t budgeted by congress (Conti-Brown 2015)! No one told the Federal Reserve to run a full employment program for economists-yet it basically does. This year the Federal Reserve Board alone- meaning not including the budgets of the twelve regional Federal Reserve banks- is spending over $136 million dollars on “monetary policy” research and analysis. In 2009 alone a Federal Reserve spokeswoman told the Huffington post that the Federal Reserve overall was budgeted to spend $433 million dollars on research into “monetary and economic policy”.

Even Milton Friedman, in an interview to Bloomberg July 7th, 1993, was reported as saying:

“the Fed’s relatively enhanced standing among the public has been aided ‘by the fact the Fed has always paid a great deal of attention to soothing the people in the media and buying up its most likely critics' Recognizing that the Fed employs ‘probably half of the monetary economists in the U.S. and has visiting appointments for two-thirds of the rest’ he [Friedman] saw few among the academic community who were prepared to criticize the Fed policy.”

I promise you that Federal Reserve spending on economists and economic research is a frivolous expense with a bigger negative effect on how the economy works than a 1000 tiger themed orgies - and hell it probably costs a lot more money too. That isn’t to besmirch the research- a lot of it is quite good in my experience. However, the fact that it is doled out autocratically by the Fed and without congressional review means these economists are under undue influence. Not to mention it completely distorts government research priorities. If all the research money the government spends is put together, I suspect that monetary policy is very over represented given the priorities of most americans. How much necessary research spending was cut and never refunded after the sequester?

Yet very few people are aware of this, let alone debating it. It’s true that if the Federal Reserve just outright started spending tens of billions of dollars congress would notice and reign it in- but that’s precisely the point. If all that’s constraining “frivolous” discretionary spending from the Federal Reserve is Congressional sanction- presumably this is the same thing could constrain the President. Critics of discretionary fiscal authority vested in an administrative agency besides the Federal Reserve and/or an agency under the control of the President need to explain how this is at all consistent. If they don’t think it is and want the Federal Reserve’s operational budget to be congressionally appropriated, they should spend their time on that much more important issue rather than taking pot shots at Jill Stein or third party candidates. Further, they need to explain why unlimited discretionary policy over setting interest rates is a less important power than moderate fiscal policy discretion vested in another independent agency or the President/a dependent agency. As of now, the only method i see here is hippie punching.

P. Conti-Brown, 2015, the Institutions of Federal Reserve Independence, 32 Yale J. on Reg., p. 273, available at http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=1412&context=yjreg

Costantini, O. (2015). The cyclically adjusted budget: history and exegesis of a fateful estimate. Institute for New Economic Thinking Working Paper Series, (24). available at https://www.ineteconomics.org/uploads/papers/WP24-Costantini.pdf

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