In the preceding post we find the 5 1/2 page reading list for Richard Nelson’s 1973 unconventional graduate economics course at Yale on industrial organization. After posting that reading list, I discovered another artifact for the course providing both a motivation for and a preview of the course. Incidentally I did not take the course, but was able to acquire these materials late in my undergraduate pack-rat days.
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RESUMÉ AND PREVIEW OF ECONOMICS 140A
Mr. Nelson
Fall Semester 1973
This is a course about the organization and public control of economic activity. In the past few years the much debated issues have included: Is there a public interest in assuring that Lockheed will not go through bankruptcy? Are our large corporations really private or are they social assets?
Should ITT be forced to divest certain recent acquisitions? Are our anti-trust laws on this and other matters in need of rethinking?
Should we abandon rate regulation of truck and rail transportation? What if anything can and should be done about the erosion of passenger rail service? Would abandonment of “regulated competition” and establishment of a quasi-public monopoly help? Should it be subsidized?
How can we enable consumers to be better informed about the likely cost and quality of a repair job they procure at different T.V. repair shops or automobile mechanics? More generally, how can we make consumer choice more effective?
What kind of a system of taxes, subsidies, and prohibitions should be established to deal with pollution? How should such a regulatory system be organized and administered?
Are educational vouchers a good idea? How would such a system work? Is public subsidy of day care for young children a good idea? How should extra-family day care be organized in the United States?
Should we establish a system of National Health Insurance and, if so, what should the system be like? Need we complement this change with some reorganizations on the supply side?
Should the nation significantly increase its funds for cancer research? Should a National Cancer Institute be established that is independent of the National Institutes of Health System? Should public funds be used to subsidize the development of power reactors for civilian use? How should these funds be spent?
The list of important economic organization issues obviously is much longer than this sample. The second semester of this course – 140B – will consider certain classes of these questions in detail. Economics 176 (ISPS 690) is a workshop for advanced graduate students where research on these kinds of questions can be undertaken. This semester’s course will be dedicated to developing tools and concepts for looking at these questions. While some examples from the list will be used as illustrations, we will not consider any particular policy issue in any detail.
Economic organizational questions of the sort illustrated above are regarded by many people as the key public policy decisions that shape the future of the nation. Like all decisions these involve articulating values and choosing from some set of alternatives. And, like all decisions, these require mechanisms to get the choice carried out. But the organizational decisions are meta decisions. They involve establishing or modifying the machinery that will make choices (demand) and carry these out (supply) over a considerable time horizon. In a society as large and complex as our own most of decision making and administration is delegated and decentralized. Public policy decisions that are resolved at a high national level generally must be and are few in number. And the most important of these decisions tend to be organizational decisions — decisions about the manner in which a class of decisions will be made and effected for some time in the future.
There are various intellectual perspectives on the economic organization question. Various parts of the political science literature are concerned with public choice (economists also have contributed to this discussion) and public administration. From this perspective one can view the sectoral economic organization problem as that of selecting a form of governance, and often we will find it convenient to look at the problem this way. However, very little literature within this tradition has been focused specifically on particular economic sectors.
The comparative economic systems literature views the economic organization question writ large. At least since the Mises-Lange dialogue of the 1930’s the economic systems tradition has developed in appreciation of the vast multi-dimensional nature of the nation’s wants and capabilities, and of the enormous informational and computational requirements to make sensible decisions regarding what, how, and for whom. The organizational analysis and alternatives have tended to be defined in terms of general economy wide organizational modes, like consumer choice to set priorities and a regime of private and for profit firms to supply the goods and services in question, versus central planning to establish priorities and make decisions and public agencies to carry them out. Other alternatives considered have included “market socialism” and the Yugoslav model. The mode of general formal theorizing has been that of general equilibrium.
The industrial organization tradition tends to be less sweeping. Analysis within this tradition generally assumes a general background national solution to the organizational problem and focuses on the details of organization of particular sectors, industries, or activities. Predominantly a western intellectual tradition (and largely American) the general organizational background is assumed to be consumer choice plus private market supply, although it is recognized that many sectors are not so organized. The analysis considers a particular sector, say manufacturing or transportation, or a particular industry, say the aluminum or the aircraft industry and explores how that sector is organized and how it performs, and the public policy actions that might make it perform better. The basic analytic perspective is partial equilibrium with the operation of the rest of the economy subsumed under the specification of the supply curves of factors of production and the demand curves for the products of that industry.
The basic perspective taken in this course will be that of the industrial organization tradition but we shall depart form that subject as traditionally defined in three key ways. First, research within the industrial organization tradition has focused almost exclusively on sectors where demand is generated by the decisions of individuals to purchase or not purchase a particular item, and where supply is generated by private firms who are expected to be maximizing profit, perhaps subject to a regulatory constraint. The principal policy issues considered have largely involved the appropriate role of anti-trust and regulation. Very little attention has been given to public policy issues regarding the articulation of values and demand when full-blown individual consumer sovereignty may not be appropriate. Thus, the tradition has not concerned itself much with problems of inadequate consumer information, or of how to organize to control or internalize externalities. Many externalities are public goods, or bads, and the industrial organization tradition, with few exceptions, has ignored the organizational issues in making collective demand or regulatory decisions leaving these questions to the public finance field (where they have not been handled adequately). Relatedly, the tradition has tended to shy away from analysis of sectors where supply is organized governmentally, or through not-for-profit private entities.
Thus the traditional industrial organization literature really has not gripped many of today’s most pressing policy issues relating to sectors organized largely by private demand and for-profit supply, and has paid limited attention to sectors not so organized which comprise a large share of this nation’s economy. It seems important to broaden the perspective. Thus in addition to considering the traditional industrial organization literature, this course also will explore literature in such fields as public choice, public administration, and the scattered material on other kinds of organization of demand and supply. The sectors we shall consider will be not only manufacturing and public utilities (on which the traditional literature has focused) but also such sectors and activities as medical care, day care for children, and scientific research.
Second, the course will be particularly concerned with the state of existing theory of how organizations behave under different conditions of sectoral organization, exploring both generally prevailing theory, and various proposed amendments and reformulations. To repeat the point stressed earlier, decisions regarding sectoral organization or reorganization are meta decisions. Choice among possible organizational alternatives should rest on understanding of how the sectors will behave under the different regimes.
Existing positive economic theory is quite limited in the range of circumstances under which it can make definite predictions. Regarding market forms, we have a theory of behavior in which we rest some confidence only for sectors organized along the lines of perfect competition (and there is some reason to be less than fully confident even in that theory). Most market sectors do not evolve such a structure. Often the sectors turn out to be oligopolistic, usually the sector is regulated in some way or another. Often the units include not-for-profit organizations or public agencies. Until recently these public or quasi-public sectors were ignored by economists, and economists still often seem to believe that because they are “public” they can be predicted to work as the public, or the president or congress, dictates. This clearly is wrong. The way the decision to establish a public corporation to run passenger rail service will work out will depend largely on Amtrack. One might think that in cases of direct government spending the connection of order to result would be more direct. But the Atomic Energy Commission will not itself produce power reactors. These will be obtained (if at all) through contracts with private organizations and the cost and effectiveness of the system will be influenced heavily by the behavior and performance of these contractors. Between the provision of federal subsidy to day care and the objective of more or better provision of day care services lies a layer of local governmental bodies who must monitor the funds, a network of day care centers, and the parents who must decide to use day care.
Sensible resolution of the question of how to organize a sector, or how to manipulate the incentives within the sector, to achieve an agreed upon public purpose requires ability to predict response that economists presently do not have. This is so even regarding market sectors. The “anatomy of market failure” is highly sensitive to how firms and individuals actually behave. Various theories of behavior predict different things about the problems that will occur under different organizational regimes and about how to deal with these problems. And we have very little in the way of a theory of public or non-profit organizations. A good part of this course will be concerned with attempting to lay out the pieces from which a better theory perhaps can be built.
Third, particular stress will be placed on the long-run performance of a sector, in the context of the evolution of the economy more generally. Major policy decisions regarding the organization or a sector of activity are not made, or re-made, very often. These policy decisions thus must be made with a long time horizon. In a world of change, of evolving opportunities and problems, adequate sectoral behavior requires at the least that the sector respond effectively to changing patterns of demand and cost, and that it seize new opportunities created outside the sector. A major complaint about the railroads and about the public school system, is that they have not met these minimal requirements. We would hope that sector would go beyond this minimal standard and be creative and innovative. Much of the discussion regarding the organization of cancer research, and the aircraft industry, involves how to reorganize to better seize and manage the rapid flow of innovative ideas.
To a considerable extent the microeconomic policy issues of today are the result of the pace and the pattern of economic development the United States has experienced. Some, as power reactors, cancer research issues, involve technologies and scientific understanding that did not exist two· decades ago. The rise, current problems, and the policy issues surrounding Lockheed obviously involve modern technology and its management. The conglomerate merger problem certainly is related to the improvement in communication, transportation and management techniques that have made such diversified companies possible; the central policy issue is whether these companies are an efficient form in the new regime of technology. Part of the issue relating to public schools and delivery of medical care is that productivity in these sectors has risen slowly relative to other sectors. Thus as factor costs have risen with rising average productivity, the relative costs of an educational day or a hospital day have soared. The policy issue of pollution clearly has been generated by past economic and demographic trends. Sectoral organizational changes are essential aspects of how the political economy generates and responds to change. And public policy decisions regarding these changes are the key policy decision guiding the economic evolution of the nation in the future.
Part 1 of this course will consider the sectoral economic organization question broadly, and examine some of the particular assumptions of the industrial organization tradition. Part 2 will consider the “private demand, for-profit firms” mode of organization, reviewing the arguments for its merit, some of the basic problems and limitations of this mode, and examine some of the tools of microeconomic policy traditionally treated in a course in industrial organization. The central policy issues introduced in this section will be considered in more detail in Econ 140 B.
Part 3 will be concerned with the present ability of microeconomic theory to predict the behavior of sectors organized in different ways. The standard theory rests heavily on the assumption that firms maximize profits. A different theory of the behavior of economic organization leads in many cases to a different appraisal of the situations that are likely to warrant intervention, and the kinds of interventions that can work. We survey a number of different departures taken recently by microeconomic analysis, and consider their implications for microeconomic policy. One strand of literature explores different motivational assumptions. A second strand employs a radically different kind of theorizing based on organization theory. Each of these avenues of analysis indicates that some of the instances of market failure under the traditional approach may not be serious problems under different views of the nature and behavior of firms, and some problems that do not appear under the traditional theory do appear under different models. And these richer models clearly are necessary if we are to model non-market sectors.
In Part 4 we study the characteristics of the economic change process, with particular focus on technological advance. Explicit recognition of the essential qualities of a dynamic world requires, we argue, certain major modifications of the theory of the firm, the role of markets, and of competition. We begin by considering these and the issues involved. Then we turn to examine technological change as a process, and dynamic processes more generally. The focus shifts away from “optimal decision making” toward problem solving, learning, and adjustment mechanisms, and from competitive equilibrium and its attributes toward a view of competition and diffusion as dynamic processes.
In Part 5 we return to certain problems and instruments of public policy and consider these from a richer perspective. One topic will be a reconsideration of decision making with particular focus on problems of externalities and on the evolving interest in social experiment and evaluation. Second, we will consider problems of control of public sector and non-market organized economic activity. Third, we will examine how micro economic policy issues come about and various theories about how they are resolved.
Obviously the course is an unorthodox treatment of “industrial organization.” We are persuaded that the conceptualization and the literature studied provide the graduate student with a better set of tools to deal with the industrial organization questions of the future than is provided in a more conventional course. However many topics treated in the standard courses that we will not have time to consider, are interesting and important. We strongly urge all students to familiarize themselves with that literature. American Industry: Structure, Conduct and Performance by Richard Caves provides an excellent brief overview. Serious students should read carefully F.M. Scherer, Industrial Market Structure and Economic Performance. Those planning to take comprehensives in industrial organization will be expected to know this material.
There will be a mid-term examination and a final. Upon agreement with the instructor a paper may be substituted for the final.
Source: Copy from the private papers of Irwin Collier.
