I spent Thursday evenings and Fridays at UCLA events in memory of one of my main mentors, the late Harold Demsetz. The event ended with a push yesterday afternoon: keynote speech by MIT economist Paul Josco (pictured above) It was the first rate.
Throughout the day different people have talked about the importance of different articles in Harold. Joskow focuses on his 1968 article Journal of Law and Economics, “Why control utilities?” Josco noted that the basic insight in that article is that even if an industry is naturally exclusive, it does not imply that natural exclusive pricing and output need government control to get a competitive price. Instead, Demsetz argued, you can compete for the market instead of competing within the market. How is that? Different companies can compete with the price for the right to be the sole producer.
Josco noted that that insight seemed obvious, but when Demsetz came up with it, it wasn’t clear at all. He mentions his MIT colleague Jean Tirol, who devoted 70 pages to his textbook insights with Jean-Jacques Lafont. Josco told Tyrol that he used 70 pages to say what Harold Demsetz said on page 11. Tirol replied, “Yes, but we have more equations.”
A large part of Josco’s speech was to determine how broad the application of Demsetz’s insights has been to both the local US government and poor countries.
He led a story about Brooklyn in his Massachusetts city. He pointed out exactly how leftist Brooklyn is. It was one of the last cities in Massachusetts to get rid of rent controls. In the last presidential election, 88% of voters voted for Biden. Etc.
But a few years ago, there was a choice between setting it out for an ambulance service or competitive bidding run by the city government. The government has chosen the latter. The results were so good that the Brooklyn government later put out bids for garbage collection.
Jasco’s statement, of course, shows that even some left-wing governments understand the power of competition, which can be a natural monopoly.
He then set a record in poor, developing countries. In many of these countries, governments are doing what Demsetz recommends: competitive bidding to become a producer in the natural monopoly industry.
Josco also noted that economists critical of Demsetz’s article would correctly point out that such contracts have potentially major problems related to uncertainty, the cost of sinking during restructuring, and more. But, he noted, many of these critics do not point to the difficult problems that governments deal with in the old fashioned way, either with government production or with natural monopoly control. When comparing standard government regulations with the reality of competitive bidding, they are not tested. In doing so, they are to blame for what Demsetz has said, in another path-breaking article, the Nirvana Method. (I forgot whether Josco used the term. Many economists have been referring to that insight all day. To one person, they have called it the “nirvana error.”) Cult, Bob Topel of the University of Chicago, and I reminded us that Demsetz actually called it the “Nirvana Method.” Harold doesn’t seem to have persuaded anyone to spell the word correctly.)
Josco then started talking about how natural exclusivity is considered between different industries, there are some elements that are not there. He gave the example of electric utility, which many have given. Electricity can be generated competitively.
He finished with two points. First, he noted, a natural monopoly is not necessarily a natural monopoly forever. So it is important to pay attention to how the technology develops so that we can reduce the parts that the government has to bid and the rest depends on regular competition in the market.
The final point that Josco has made is that the great quotation count in Harold’s article is a major underestimation of its impact. Citations measure references to other academic articles. But when governments in other countries make clear decisions based on Demsetz’s insights, it is not seen in quotations. But, he said, in these countries, “the name that is always mentioned is Harold Demsetz.”
I deal with the natural exclusive A Brief Encyclopedia of Economics Entry, Monopoly, by George Stigler. This is the end of his article. I don’t discuss, but should have discussed, Demsetz’s insights.
Steve Globerman and I, in our recent book, The Essential UCLA School of Economics, Discuss the method of putting Nirvana in some length. You can download the book here.
This is my biography of Harold A Brief Encyclopedia of Economics.