Saturday, June 14, 2014

Separability arguments

Great conference yesterday and today at the CMPO in Bristol, about  (broadly) "The Impact of Institutions and Regulation on Public Services." I presented a preliminary paper on "Behavioural Economics and Institutional Architecture". But the best has been, in my view, the keynote lecture by Maitreesh Ghatak from the London School of Economics. Ghatak has given an overview about the economic role of intrinsically motivated agents and organizations. He has done that in the context of the history of economic thought since Adam Smith. Smith is famous for his invisible hand statement, which is associated to the idea that economists and policy makers should let individuals pursue their individualistic material interest in most cases. Smith also acknowledged that real individuals have other motivations, but for most of the history of economic ideas since then, agents motivated by things other than material self-interest have been basically neglected. But this has been changing in the recent past. The idea that economists should focus on the pursuit of material self-interest is a consequence of a number of separation arguments that were made. Markets should allocate private goods and, separately, governments should allocate public goods and deal with redistribution. Firms should maximize profits independently (separately) from the consumption preferences of their shareholders, managers and workers. And extrinsic monetary incentives could be safely separated from intrinsic incentives that come from social norms, because they just reinforce them. But that is changing: more and more, it is recognized that governments are crucial to create and support markets, and that private organizations can also provide public goods. In some organizations, the preferences of owners cannot be separated from the objective of the firm (like in football clubs), and sometimes extrinsic incentives conflict with intrinsic ones. The relaxation of these separability arguments calls for much more interaction between public economics and organizational economics (a point I emphasize when I propose merging graduate programs in my university, but that no-one else seems to understand). In the tradition of Coase, the problems are similar. Contractibility problems in organizations and lack of property rights are related phenomena. And then the division between business economics and general economics, as many similar divisions, is artificial.

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