EconTalk this week

Austin Frakt of Boston University and blogger at The Incidental Economist talks with EconTalk host Russ Roberts about Medicaid and the recent results released from the Oregon Medicaid study, a randomized experiment that looked at individuals with and without access to Medicaid. Recent released results from that study found no significant impact of Medicaid access on basic health measures such as blood pressure and cholesterol levels, but did find reduced financial stress and better mental health. Frakt gives his interpretation of those results and the implications for the Affordable Care Act. The conversation closes with a discussion of the reliability of empirical work in general and how it might or might not affect our positions on social and economic policy.

Will "big data" be big?

What effect will the increasing use of very large data sets have on economics? Liran Einav and Jonathan D. Levin look a the effects of "big data" on economic analysis in a new NBER working paper The Data Revolution and Economic Analysis.

There is little doubt that "big data" will change the landscape of economic policy and economic research. Something worth noting however is that big data will not be a substitute for common sense, economic theory, or the need for careful research designs. This may come as a shock to many economics students who these days are taught that all economics amounts to is pushing the "regress" button and picking whatever results confirm your prejudices. Data is a complement to real economics. In the case of "big data" how exactly remains to be seen. Einav and Levin look at the opportunities, as well as challenges, that come with the ongoing data revolution.

The abstract reads

Many believe that "big data" will transform business, government and other aspects of the economy. In this article we discuss how new data may impact economic policy and economic research. Large-scale administrative datasets and proprietary private sector data can greatly improve the way we measure, track and describe economic activity. They also can enable novel research designs that allow researchers to trace the consequences of different events or policies. We outline some of the challenges in accessing and making use of these data. We also consider whether the big data predictive modeling tools that have emerged in statistics and computer science may prove useful in economics.

Interesting blog bits

1. Yasuyuki Todo on Estimating the effect of the TPP on Japan’s growth
   

   Japan looks set to participate in the Trans-Pacific Partnership (TPP) negotiations. Reflecting the current debate in Japan, this column assesses what effect the Partnership will have on Japan’s growth. Evidence suggests that the economic effects may be far bigger than the current consensus suggests.

2. Richard Wellings makes The case for raising speed limits
   

   If major roads were privately owned and freed of government regulation, the setting of speed limits would be a commercial decision. Entrepreneurs would seek to attract customers to their routes in order to maximise toll revenues, and one way of doing so would be to offer fast journey times by allowing high speeds.

3. Jeffrey Chwieroth and Andrew Walteron on Banking crises and political survival over the long run – why Great Expectations matter
   

   The economic consequences of financial crises have been systematically explored. Their political consequences haven’t. This column argues that without paying attention to politics, crises will remain poorly understood. After all, politics shapes policy choices, market sentiment and, ultimately, economic outcomes. Evidence from the effects of banking crises over the past century show that crises have a dramatic impact on the survival prospects of governments.

4. Steve Davies argues Free banking was robust and effective
   

   In an earlier blog post, Philip Booth discussed the likely scenarios for Scottish monetary policy in the event of Scottish independence and the difficulties, both political and economic, associated with these. What can be very useful is to add historical perspective and to see how things worked out in the past, given that Scotland has an interesting monetary and banking history which is very different from that of England.

5. Bas van Der Vossen on Libertarian Human Rights?

   When you read about the philosophy of human rights it’s hard to not to notice the nearly complete absence of libertarian input. This post is a call for a libertarian take on human rights.

6. Balázs Égert on France’s weak economic performance: Sick of taxation?
   

   France has recorded one of the lowest real per capita income growth levels in the OECD over the last 20 years or so. One of the many structural weaknesses causing this weak performance is the French tax system. This column argues that complexity, instability and non-neutrality coupled with very high effective tax rates in many areas of the French tax system put a heavy burden on the economy.

7. Tatiana Didier and Sergio Schmukler on Finance and growth in China and India: Have firms benefited from the capital-market expansion?
   

   The growth of China and India’s financial sectors is hard to ignore. This column presents a new dataset on domestic and international capital raising activity and performance of the publicly listed firms in China and India. The data suggest that expanding capital markets might tend to directly benefit the largest firms – those able to reach some minimum threshold size for issuance. More widespread direct and indirect effects are more difficult to elucidate.

8. Gary Becker on Alternatives to the War on Drugs
   

   The 40 year-old American “war on drugs” has been a colossal failure. No progress in dealing with drugs can be expected until that basic truth is recognized. Every conceivable approach has been tried to help the war succeed, such as long prison terms for persons convicted of selling or using drugs, trying to prevent drugs from entering the US from Mexico and other countries, and confiscating huge quantities of drugs (remember The French Connection?). At some point all wars that fail are terminated, and alternative approaches explored. The two main alternatives to the war on drugs are decriminalization and legalization of drugs. Decriminalizing drugs means that using drugs would no longer be a criminal activity, while trafficking in drugs would remain a crime. Legalization of drugs means that trafficking in drugs as well as using drugs would not be a crime.

9. Richard Posner asks is there a Breakthough in the War on Drugs?
   

   The publication of a White House “National Drug Control Strategy” is an annual event, which wordily (the 2013 version is 95 pages long) heralds nonexistent progress and makes false promises of more to come. The General Accountability Office has evaluated the 2013 version and found it wanting, noting the government’s lack of progress toward achieviing the goals of diminished drug use stated in the 2010 version.

Did FDR end or extend the depression?

Thanks to NotPC I came across this video in which Lee Ohanian, Professor of Economics at UCLA, challenges this conventional wisdom that President Franklin Roosevelt's "New Deal," rescued America from the Great Depression of the 1930's.

The knowledge problem

One thing anti-market types don't seem to get is the importance of being able to coordinate diffuse private knowledge. Markets are surprisingly good at this, governments are not. This is part of what is known as the "Knowledge Problem". The knowledge problem in fact has has two main components:

• Complexity knowledge problem: The difficulty of coordinating individual plans and choices in the ubiquitous and unavoidable presence of dispersed, private, subjective knowledge
• Contextual knowledge problem: The epistemic fact that some knowledge relevant to such coordination does not exist outside of the market context; such knowledge is either created in the process of market interaction, tacit knowledge that is not consciously known, or inarticulate knowledge that is difficult to express or aggregate.

Lynne Kiesling of Northwestern University and the Knowledge Problem blog has a recent article surveying the literature on the Knowledge Problem. The abstract reads,

Hayek's (1945) elaboration of the difficulty of aggregating diffuse private knowledge is the best-known articulation of the knowledge problem, and is an example of the difficulty of coordinating individual plans and choices in the ubiquitous and unavoidable presence of dispersed, private, subjective knowledge; prices communicate some of this private knowledge and thus serve as knowledge surrogates. The knowledge problem has a deep provenance in economics and epistemology. Subsequent scholars have also developed the knowledge problem in various directions, and have applied it to areas such as robust political economy. In fact, the knowledge problem is a deep epistemological challenge, one with which several scholars in the Austrian tradition have grappled. This essay analyzes the development of the knowledge problem in its two main categories: the complexity knowledge problem (coordination in the face of diffuse private knowledge) and the contextual knowledge problem (some knowledge relevant to such coordination does not exist outside of the market context). It also provides an overview of the development of the knowledge problem as a concept that has both complexity and epistemic dimensions, the knowledge problemʼs relation to and differences from modern game theory and mechanism design, and its implications for institutional design and robust political economy.

A debate about the patent system

A debate about patent law between the Honorable Judge Richard Posner (7th Circuit) and Professor Richard Epstein (the Hoover Institution & New York University School of Law).

Christchurch stadium, again

The issue of a new sports stadium for Christchurch in in the news again with a couple of recent articles on Stuff ("Stadium concept 'would be money maker'" and "New stadium plan 'smart, bold'"). Fortunately there are those at Massey who are on the ball when it comes to stadiums. Massey economist Sam Richardson writes at his blog Fair Play and Forward Passes:

A stadium will only ever be used sparingly. That is reality. Westpac Stadium is used for between 40-50 event days per year - and it has been making operating surpluses since it has been opened. Westpac Stadium was also built with a mere 1/3 of its funding from local and regional government. It is not clear yet where exactly the funding for Christchurch's stadium plans is coming from, but it is fair to say that it will be largely funded by taxpayers - locally, regionally and nationally to some degree. As such, if my taxpayers money is going into funding a stadium, I would like to see some evidence that this amenity is going to be at least self-sustaining, and should not be detrimental to the local area. The idea that office buildings will make the stadium profitable is missing the point. If the office blocks are the profit-making parts of the venture, why not just build the office blocks? If they must be built as part of a stadium plan, we have to acknowledge that the rents earned by stadium offices will simply be transferred from other office spaces elsewhere within the city. It may well be the case that office space is at a premium in Christchurch, in which case the stadium offices may be beneficial to the city of Christchurch in that clients who were previously unable to obtain office space may now be able to do so. If, however, the offices are simply populated by clients who relocated from the suburbs, then this isn't making money (nor necessarily welfare enhancing either) at all - it is merely redistributing the rents on office space from the suburbs back into the CBD.

It is exactly the same argument as the claim that stadiums generate conference revenues too - which is only beneficial if the conferences wouldn't have been held in the city in the first place without the stadium conference spaces.*

Sure, the office rents may make the bottom line of the stadium better (if indeed things pan out as projected). But from a wider (city or regional) perspective, is it really regenerating or simply redistributing? That's the question that ratepayers need to be asking of their policymakers.

One further question I would ask is about the opportunity cost of any taxpayer money used for the stadium. There are many other (better?) things to use money on in Christchurch right now. Sam's response to that question is,

Is a stadium an essential or luxury for Christchurch? I know they have the 'temporary' stadium, but surely there are more compelling alternative uses of scarce government funds at this time. Decisionmakers should at least be open about the fact that it is highly unlikely to be a money maker for the city. If you build it for public good purposes, show us the value of the public goods it will generate.

I have to agree with Sam about seeing evidence about the value of any public goods a stadium will provide. Off the top of my head I can't think of any. So those backing the stadium need to front-up with details as to what the real reasons for the stadium are.

Hogan on cricket

Ignore Jeremy at the beginning, Hogan comes in at about the 3:50 mark.

• What if economics could help cricket teams win matches? And what if teams employed economists alongside their sports psychologists, conditioning coaches and physiotherapists?

• Why is it that New Zealand traditionally punches above its weight in the One Day International (ODI) format of the game?

• Why has the batting powerplay had so little effect on team ODI scores on average?

• And how is economics remotely related to cricket anyway?

Sports teams are increasingly using detailed statistical analysis to help give them an advantage over their opposition. In contrast, the economics of sport mostly focuses on sport as a business rather than on-field strategy. During this session, I am going to discuss how ODI cricket is a natural subject for the application of economics reasoning and how this reasoning can be a useful tool both for helping teams think about strategy and for informing spectators about the state of a game as it's played out.

EconTalk this week

William Bernstein talks with EconTalk host Russ Roberts about his latest book, Masters of the Word. Bernstein traces the history of language, writing, and communication and its impact on freedom. The discussion begins with the evolution of language and the written word and continues up through radio and the internet. A particular focus of the conversation is how tyrants use information technology to oppress their people but at the same time, technology can be used to liberate people from oppression.

Schmidt & Cohen, from Google, talk about their visit to North Korea

Google Chairman Eric Schmidt and Jared Cohen, director of Google Ideas, talk with WSJ's John Bussey about what they hoped to accomplish from a visit to North Korea, and their observations about the country's technological potential and its likelihood of embracing the Internet.

Friedman on Walras

From Milton Friedman, "Leon Walras and His Economic System", American Economic Review, December 1955.

I am tempted, in concluding this rather discursive commentary, to paraphrase Mill's comment that "A person is not likely to be a good economist who is nothing else." A person is not likely to be a good economist who does not have a firm command of Walrasian economics; equally, he is not likely to be a good economist if he knows nothing else.

Seems a reasonable point.

State-owned enterprises in the global economy

Some state-owned enterprises have become global players and the subject of much policymaking concern. There is a widespread perception that they may be acting differently when competing with private firms in the global market place. A new column at VoxEU.org, "State-owned enterprises in the global economy: Reason for concern?" introduces a new database on state-owned firms that shows that more than one in ten of the world’s largest firms are state-owned.

The article, by Max Büge, Matias Egeland, Przemyslaw Kowalski and Monika Sztajerowska, argues,

The rise of state capitalism – the spread of a new sort of business in the emerging world will cause increasing problems” argued a January 2012 special issue of The Economist. State-owned enterprises have always been an important element of most economies, including the most advanced ones. However, the state sector has traditionally been characterised by orientation towards domestic markets and often lagging business performance. Today, some contemporary state-owned enterprises are among the largest and fastest expanding multinational companies. They increasingly compete with private firms for resources, ideas and consumers in both domestic and international markets.

This new trend has attracted the attention of the media which reports regularly on large cross-border deals sealed by state-owned firms. It has also been noticed by policymakers and business, many of whom are calling for a 'levelling of the playing field' in international trade and investment. The discussions of new state-owned enterprises disciplines in the ongoing Trans-Pacific Partnership negotiations and the implementation of stricter national investment screening mechanisms for state-owned enterprises in some countries are testimony to this.

The article goes on to ask, Why do these international SOESs matter and what policy tools are available to deal with any problems they may cause? There does seem to be one obvious way of dealing with such SOEs, have the home countries of the SOEs privatise them. The article continues,

The significant extent of state ownership among the world’s top companies raises a question about its impact on the global competition. The triple role of the government as a regulator, regulation enforcer and owner of assets opens a possibility of favourable treatment granted to state-owned enterprises in some cases. These advantages can take the form of, for instance, direct subsidies, concessionary financing, state-backed guarantees, preferential regulatory treatment, exemptions from antitrust enforcement or bankruptcy rules. They may well be justified in a domestic context, for example, to correct market failures, provide public goods, and foster economic development. But if their effects extend beyond borders, they may undermine the benefits from international trade and investment, which are predicated on the basis of non-discrimination and respect for market principles. Two recent OECD workshops on the issue (one in 2012 and in 2013) gathered numerous representatives of global firms and governments revealed this is indeed a serious concern.

Given these potential anti-competitive effects of state ownership on the global market, what tools are available to address them? We look at those in detail in our paper, surveying existing regulatory frameworks at the national, bilateral or multilateral level, and consider their relative strengths and weaknesses. For example:

• National antitrust law can in principle be used to deal with the abuse of dominant position by state-owned enterprises, including in the international context, or to prevent anticompetitive effects associated with merger and acquisition activities of state-owned enterprises.

However, traditional antitrust standards apply to profit maximising firms and are not aimed at preventing subsidies and artificially low prices –except where these are manifestly motivated by predatory strategies [...].

• Competitive neutrality arrangements introduced by some OECD jurisdictions aim to mitigate or eliminate competitive advantages of state-owned enterprises, including with respect to taxation, financing costs and regulation [...].

Some of these frameworks refer specifically to state-owned businesses (e.g. in Australia) while others are ownership-neutral. In the EU, for example, the state interactions with private and state-owned firms alike are governed by a set of special rules in the areas of antitrust, state aid and transparency.

• WTO rules are generally ownership-neutral (except for the notable exceptions in the Accession Protocols of China and Russia).

The disciplines that they impose on government regulations and actions do not distinguish between situations where the provider of the goods or services covered by the regulation or action is a public or a private entity. They can nevertheless discipline some government policies and actions involving state-owned enterprises, for example, when they receive trade-distorting state subsidies. Violation of national treatment or most-favoured nation principles, granting of subsidies or other forms of influencing trade by state-owned enterprises themselves can also be covered by WTO disciplines if these enterprises can be proven to be “vested with or performing a governmental function”. Yet, some of the definitional ambiguities have rendered application of these disciplines uncertain and some provisions allow countries to exempt state-owned enterprises’ actions from certain WTO disciplines (e.g. in the GATS).

• Many existing preferential trade agreements and bilateral investment treaties include specific provisions on state-owned enterprises, attempting to fill gaps in existing multilateral provisions;

Some explicitly specify that their provisions apply similarly to state-owned enterprises, clarify some of the definitional lacunae in the WTO context, or include additional state-owned-specific disciplines. As mentioned at the outset, state-owned enterprises provisions are currently being discussed in the ongoing Trans-Pacific Partnership negotiations.

Some of these regulatory frameworks have been used to contest actions or advantages of state-owned enterprises [...]  and in some of these cases the relevant ruling bodies have found that governments have indeed pursued state-owned enterprises strategies inconsistent with these frameworks. Yet, in some cases these challenges were found to be without merit.

The article's conclusion,

Our understanding of the recent emergence of international trade and investment by state-owned enterprises, and thus policy responses, are still in the early stages of development. International trade and investment by state-owned enterprises could well continue to increase as countries with significant state-owned enterprise sectors grow and become more internationalised, or because of advantages state-owned enterprises may enjoy – even though nascent privatisation programmes in some countries pull in the opposite direction. A better understanding of the implications of state-owned enterprises’ trade and investment for the functioning of international markets is needed to help governments formulate informed and balanced policy responses.

The first best answer would seem to be to encourage these "nascent privatisation programmes". Regulation in the overseas countries is second best, at best.

Economic stupidity? Yes ..... by the Greens

From TV3 we learn,

The Green Party is criticising the latest sale of land to foreign investors, calling it "economic stupidity".

Yesterday the Overseas Investment Office approved the sale of more than 14,000 hectares of prime forestry land, previously owned by the New Zealand Superannuation Fund, to a company owned by the Chinese government.

The blocks of land are located in Kaipara, Coromandel, Waikato, Rotorua, Gisborne and Wairarapa.

Speaking on Firstline this morning, Green MP Steffan Browning said the sale would send profits offshore, and make it harder for Kiwis to own New Zealand land.

"Every time we sell off some land to foreign interests, we are stopping New Zealanders being able to do that purchase," says Mr Browning.

"It automatically cranks the price up that New Zealanders would have to pay, and for New Zealanders to be able to stay on the land whether they be foresters or farmers."

As to the money goes overseas bit I have said this before but let me say it again: Let us assume for a moment that evil foreigners make a NZ$1 profit which, in an effort to piss-off Steffan Browning, they wish to take it back to, say, China. How do they do it? Clearly a New Zealand dollar isn't worth anything in China so the Chinese holder of NZ currency will have to sell their NZ$1 to buy Yuan. But why would anyone want to buy said NZ$1? The only use for a NZ$s is to buy something made in NZ. Thus the buyer of the NZ$s must want it to buy a NZ export of some kind. What is Steffan Browning's problem with this? The NZ$1 doesn't go overseas in any meaningful way, it gets spent on New Zealand produced goods and services no matter who gets the profits from the ownership of local firms. If a New Zealander gets the profits they spend them on New Zealand made goods and services, if a foreigners gets the profits they sell the NZ$s to someone who wants to buy New Zealand made goods and services.

Also to the bit about "it automatically cranks the price up that New Zealanders would have to pay", that is exactly the point, the New Zealand Superannuation Fund sold the land to the Chinese company because they got a better price. If we had stopped foreigners from being able to buy land the New Zealand Superannuation Fund would have gotten a lower price. How does that help the fund and the New Zealanders who rely on it for an income in old age?

You have to ask, Why do people sell assets to the highest bidder? One reason is that it allocates those assets to whoever thinks they can utilise them most productivity. You pay a higher price for an asset than another bidder because you think you can use that asset in a way which in more productive than the other bidder. Your knowledge and skills are such that you can produce more at a given cost or produce a given amount of output at a lower cost. Methods of production and asset utilisation that are highly productive are what makes a country "rich" and thus exactly what New Zealand needs. So let us sell land to those most likely to use it most productively, no matter where they come from.

I do have to ask, Just who are the Green's economic advisors and why do they think that xenophobic scaremongering is a reasonable basis for making good economic policy?

Just for fun: theory of the firm 13

As has been noted previously the theory of the firm is not well developed within Austrian economics. But his does not mean there have been no attempts at formulating an Austrian approach to the firm. One such attempt is that of Nicolai Foss and Peter Klein in their book Organizing Entrepreneurial Judgment: A New Approach to the Firm.

The classic questions in the theory of the firm are, Why do firms exist, what determines a firm's boundaries and how are firms organised internally? To see Foss and Klein's answers lets begin with the one-person firm. For Foss and Klein the explanation for such a firm lies in the fact that markets for judgement are incomplete. A combination of two factors result in an entrepreneur having to form a one-person firm. To begin, entrepreneurs may know their ideas are "good risks" but my not be able to communicate this to the capital markets. A similar problem arises in a more standard model in Rabin (1993). Rabin works within an adverse selection framework and shows that the adverse selection problems can be such that, in some cases, an informed party has to take over the firm to show that their information is indeed useful. For Rabin an informed party has information about how to make a firm more productive but can't reveal the information to the owners of a current firm. If the information is revealed the current firm can produce using it without any payment to the informed party. If the information is not revealed why should the firm believe the information is in fact useful? Within the Rabin framework it is suggested that firms are more likely to trade through markets when informed parties are also superior providers of productive services that are related to their information. But if, on the other hand, information is a firm’s only competitive advantage, it is likely to obtain control over assets, possibly by buying firms that currently own those assets or setting up his own firm. Second, Foss and Klein argue that entrepreneurship represents judgement under "genuine" uncertainty and such judgement can not be assessed in terms of its marginal product and thus it can not be be paid a wage. This idea is more innovative since standard models of the firm work, at best, within environments of risk, rather than uncertainty. In short, there is no market for the judgement and therefore exercising judgement requires the person with judgement to control the firm. Foss, Klein and Linder (2013: 25-6) explain an implication of this incompleteness of the judgement market,

Exercising judgment implies [...] asset ownership, for judgmental decision-making is ultimately decision-making about the employment of resources, that is: to arrange or organize the capital goods the entrepreneur owns (or has influence over). Obtaining ownership rights over tangible and intangible assets also strengthens the bargaining position. Ownership rights—as stressed in organizational economics—allow parties to “fill in the blanks” of a contract, including the right to exclude others from accessing or using an asset [...]. It thus also ensures that the entrepreneur can appropriate rents from his/her entrepreneurial idea.

Similarly the standard property rights approach to the firm sees asset ownership at the centre of the explanation of the firm. Both the Rabin(1993) adverse selection model type model and the related moral hazard model of Brynjolfsson (1994) utilise the property rights framework and both result in the informed party (the entrepreneur) owning the firm (controlling the physical assets of the firm) so they can appropriate rents.

But what of the multi-person firm? As many attributes of capital only become apparent via using those assets, experimentation in an effort to discover the best uses for the particular assets the firm owns is needed.

Given the interdependence that typically exists in a multi-state value chain and involving different inputs, the best time and place to use a particular asset depend on the specification of the uses of all other assets that are needed in value delivery [...] Thus, entrepreneurs need a contractual set up that allows them to experiment at low cost. (Foss, Klein and Linder 2013: 26).

Such experimentation can lead to hold-up problems if a market contract is used to coordinate collaborators. The basic argument Foss and Klein (2012) make is that foregoing the market as a means of coordination in favour of a firm lowers the costs of experimentation. Under market contracting collaborators have the power to veto changes in the experimental set-up which allows them to extract extra quasi-rents from other collaborators in return for their agreement to make the changes to the set-up. Within a firm, a hierarchical relationship, the entrepreneur can redefine and reallocate decision rights among the collaborators, who are now employees, and can sanction those who do not utilise their decision rights efficiently. The use of a firm therefore allows the entrepreneur to experiment without enduring the costs, bargaining and drafting costs, of constant contract renegotiation. For Foss and Klein (2012) this provides the basic rationale for the multi-person firm.

When considering the boundaries of the firm, Foss and Klien (2013) argue that Austrian ideas developed in the socialist calculation debate suggest that when organizations are large enough to conduct activities that are exclusively internal – so that no reference to the outside market is available – they will face a calculation problem. That is the firm's size is limited by the fact that the more a firm does internally the fewer genuine market prices in has as a basis for rational rational judgements about the scarcity of the resources and whether an entrepreneurial profit exists.

With regard to the internal organisation of firms Foss and Klein (2012) note a problem arises in that the entrepreneur will typically lacking information or knowledge to make optimal decisions. One way to deal with this dispersed knowledge is for the entrepreneur delegate decision rights to managers who have better information. This delegation allows the firm is able to exploit the locally held knowledge without having to codify it for internal communication or motivating managers to explicitly share their knowledge. There is however a trade-off with such delegation.

Unlike independent players in markets, managers within firms never possess ultimate decision rights and thus there are incentive limits to the extent to which market principles can be applied within firms [...] This gives rise to problems of motivation, i.e. moral hazard – to use the organizational economics terminology. Managers and employees may use the delegated decision-rights in both productive, that is, functional or value-enhancing from the owners’ perspective, and destructive (i.e. dysfunctional or value-diminishing) ways [...]. They may pursue new profitable business opportunities or engage in developing new forms of exploiting (quasi)-rents from the firm by creating new forms of hold-ups etc (ibid.). Yet, delegation may also imply risks of duplication of effort due to a lack of coordination of activities. The benefits of delegation in terms of better utilizing dispersed knowledge thus need to be balanced against the costs of delegation due to problems of interest alignment (what organizational economics would call “agency costs”) and coordination [...]  (Foss, Klein and Linder 2013: 29-30)..

This means entrepreneurs need to exercise judgement about other people's judgement in insofar as they must evaluate employees according to their ability to use delegated decision rights properly.

One point that Austrians share with their mainstream counterparts has been the reluctance until recently to open the "black box" of the firm. The judgement-based approach suggest that the Austrians have much to offer now that the box is has been opened.

Refs.:

• Foss, Nicolai J., and Peter G. Klein (2012). Organizing Entrepreneurial Judgment: A New Approach to the Firm. Cambridge: Cambridge University Press.
• Foss, Nicolai J., Peter G. Klein and Stefan Linder 2013. 'Organizations and Markets', SMG Working Paper No. 8/2013 April, Department of Strategic Management and Globalization, Copenhagen Business School.