The Nature of the Firm and the limits of Economics.

     

Ronald Coase

University of Chicago Law School

via Wikimedia Commons

https://tinyurl.com/26ffzfkp

This week's Economist includes an article by their Free Exchange columnist, regarding the "The Nature of the Firm," Ronald Coase's classic 1937 work. Despite the belief in the 1990s that economics could command a unified science of business, three decades later, it has not progressed in understanding the inner workings of firms. Neoclassical economic theory primarily focuses on markets and the allocation of scarce resources, but it does not account for the fact that much of the allocation of resources in economies occurs within firms, where employees are directed by administrative fiat rather than price signals. The theory that firms are profit-maximizers is also challenged by the reality of "bounded rationality," as no business could process all the information needed to extract maximum profit.

Economists have made strides in understanding firms through concepts such as team production, incomplete contracts, and the principal-agent problem. However, these theories still fall short of providing practical advice on corporate strategy. Economics often fails to capture the importance of corporate culture, shared values, and pride in the workplace, which are essential to a flourishing business. Moreover, economics is limited in its ability to address the specificity of business problems, as they require detailed knowledge of various fields outside the discipline. While economic ideas can offer some insights, the study of business remains an outpost that economics is unlikely to conquer fully.

It was beyond the scope of the article, but a government agency (or, as a shorthand, an "agency") can also be viewed as a firm responsible for providing public goods or services and implementing policies. Like traditional firms, government agencies coordinate resources and make decisions under the principle of "bounded rationality." The major difference is that these agencies differ in their objectives, as they aim to maximize social welfare and address market failures, rather than seeking profit maximization, but which I would note, makes the insights of the Free Exchange column even more trenchant. Further, because government agencies also face unique challenges in terms of bureaucracy, political influences, and accountability, their efficiency and decision-making processes are even less susceptible to an economics-based analysis. 

While apocryphally attributed to Twain, William S. Burroughs' advice to "write about what you know" leads me to look at my home in light of this. I note, over and over, that the critical issues my community encounters are almost always decided in an interchange and an interplay between firms and agencies. If anything, economics is something of a base meridian used to calibrate during the continuing conversations with multiple actors that are directed by fiat using bounded rationality to either pursue profit or improve social welfare, a problem only marginally susceptible to economics-based analysis. 

Almost all of the important questions instead require detailed knowledge of various fields outside of economics. Indeed, to the extent that economics is used after the point-of-reference stage, it is of limited utility by itself. The dozen other factors noted above, including but not limited to corporate culture, shared values, pride in a workplace, bounded rationality, team production, incomplete contracts, the principal-agent problem, political influence, bureaucracy, accountability, market failure, and social welfare, are generally the factors to address in any analysis of the (for lack of a better phrase) political economy of most local decision-making that I have encountered -- a nice checklist for future reference. 

Carriage Court in Santa Rosa.

"A mobile home park in West Miami, Florida"

By Dr Zak 

https://tinyurl.com/22c4uctp

In Wikipedia, CC BY-SA 3.0

https://tinyurl.com/2y9chhga 

Carriage Court, a mobile home park for seniors in Santa Rosa, it is reported today by the Press Democrat's Marisa Endicott, is being converted to an all-ages park by new management company Harmony Communities. The company claims that the change is necessary for the park to stay afloat and make a profit. However, residents are concerned about potential displacement and culture shift, as many of them rely on fixed incomes and have limited options if costs increase. The change comes in response to Santa Rosa's new mobile home rent control ordinance, which limits how much park owners can raise rent, according to Nick Ubaldi, regional manager for Harmony Communities. 

Residents are also worried about Harmony Communities' track record of litigation over evictions and rent increases. The company is involved in multiple lawsuits across the state and has a reputation for strict rule enforcement and eviction attempts. The Golden State Manufactured-home Owners League has noted that Harmony's "reputation is terrible." The director of communications for Harmony Communities identifies as a crude epithet, Heywood Jablóm, a false name and a classic sign of a bad actor. Indeed, Mariah Thompson, a staff attorney with California Rural Legal Assistance, noted that Harmony Communities will "often just see what they can get away with[.]” 

Mobile home parks, especially in American culture, are stereotypically viewed as lower-income housing for occupants living at or below the poverty line who have low social status. As Wikipedia notes, despite the advances in trailer home technology, the image survives. Residents, especially the elderly, can be targets for unscrupulous business practices. 

Here, Ubaldi is contending that an updated rent control ordinance, designed to protect senior citizens, is in fact the source of senior citizens' distress. This is an obvious attempt to reverse victim and offender, which is harmful to the democratic process, beyond the specific harm it inflicts on the residents of Carriage Court. Sowing confusion and undermining accountability only weakens the norms we all rely upon to effectively address our housing crisis, which is bad and getting worse. Ideas, like housing, are more of a public good, like a forest, than a commercial context, like a marketplace.  We all must recognize that public discourse is vulnerable to the same damage that can be suffered by the woods should the balance between individual advantage and long-term sustainability be violated callously.

Attendance, Housing, and Basic Aid.

 Sonoma County's 40 public school districts continue to see attendance declines. The lack of housing and a steadily declining birth rate are among the factors contributing to the decline. Sonoma County is predicted to experience a 16.9% enrollment drop by 2031, the fourth worst in California, as reported by the Press Democrat. In the past five years, Sonoma Valley has already experienced an 18.9% decrease in attendance, and as a trustee, I am familiar with the very profound changes that can cause. 

The article elides past some distinctions that are worth noting. First, school funding in California is based on attendance (the so-called "ADA," or average daily attendance), not enrollment (ADA is usually about 90% of enrollment, although there is a lot of variation).  Paying attention to the attendance figure will be the more reliable indicator of the state of school finance going forward in Sonoma County. 

Second, and related to the first point, is that as of November 2022, 16 of the 40 school districts in Sonoma County were "basic aid" districts, whose revenues do not change with either attendance or enrollment. In 2021‑22, the state had 118 basic aid school districts (about 13 percent of all districts).  As attendance continues to drop, more and more Sonoma County districts will become basic aid. Basic aid will increasingly be the default rule in Sonoma County. These districts (like Sonoma Valley) will ironically end up with more money per student given declining attendance, which is why many of these districts may very well not be interested in district consolidation intended to cut costs, as such consolidation would in fact reduce per-student funding.  There are a number of these districts in San Mateo, Santa Clara, and Marin counties, those counties having had many of the same housing issues as Sonoma County for a longer period of time, and the trend in those counties has generally been against consolidation of districts.   

A final point, which comes up here from time to time. "Affordable Housing" is a term of art in many respects, and while there is a shortage of housing that can be afforded in Sonoma County by most people, that is different from "Affordable Housing." Sonoma County just lacks housing, period. Narrowing the issue using the term of art is probably not the most helpful, because it obscures the fact that the response to the crisis needs to be comprehensive.

Green Checkmate.

Today Fred Allebach, a member of the Sonoma Valley Collaborative and a friend, shared his thoughts on affordable housing and the challenges faced in Sonoma Valley and beyond with me via email. He provides a historical context of the 2020 Sonoma Urban Growth Boundary (UGB) issue, and how it continues to impact affordable housing projects. Allebach identifies the "Green Checkmate," a dynamic that hinders progress in the development of affordable housing by preserving low-density zoning and maintaining property value advantages for existing homeowners.

Fred also discusses the tension between environmental justice and social justice, pointing out that environmentalists (and those aligned with) tend to use green arguments to justify preserving a low-density, high-property-value status quo. He explains how affordable housing development is caught in a series of impossible arguments, resulting in the de facto segregated status quo.

Allebach advocates for a more inclusive approach to housing development that balances sustainability and social equity. He suggests supporting lower-income housing projects in unincorporated urban service areas and strategic affordable housing projects in non-urban service areas, especially where there are substantial job opportunities nearby. He also recommends considering the establishment of a City of Sonoma Valley to better address the collective housing needs of the region's population.

I have long appreciated Fred's work and his keen attention to and expertise regarding housing. Over time, Fred, and a group of like-minded, pragmatic reformers, with their continued focus on this difficult problem, are building the necessary muscles in the community to allow change to occur in the face of what can only be described as obstructive hostility. Fred's work shows how, rather than inspiration or enlightenment, it is grit that is the essential element in pursuit of justice.

The Mandela Rules.

Nelson Mandela. (1994, Oct. 4).

© John Mathew Smith 2001

Use by Permission, Wikipedia.

Approximately 90 inmates at the Sonoma County Main Adult Detention Facility (the county jail, sometimes abbreviated "MADF") recently participated in a 10-day hunger strike (Press Democrats, paywalled) to demand more time out of their cells, improved visitation hours, and lower commissary costs. The strike was initiated by the G module on March 23, whose out-of-cell time is limited, sometimes to an hour or less each day, which family members and friends say is insufficient for them to shower, make calls, or prepare meals from commissary items. Visitation and communication have also been impacted, with limited hours and staff shortages affecting both visitation and out-of-cell time. 

The jail has faced previous criticism for its management of inmate communication. A June 2021 civil grand jury investigation revealed high phone call costs and commissary markups. It also noted that there had been a diversion of funds intended for jail programming to staff salaries and other purposes.

As Nelson Mandela observed, "[n]o one truly knows a nation until one has been inside its jails. A nation should not be judged by how it treats its highest citizens, but its lowest ones." Sonoma County should strive to meet the standards set by the Nelson Mandela rules. The grand jury investigation and the hunger strike have brought attention to at least six separate rules (22-23, 42-43, 58, 103) that appear to have been violated in this area. 

Addressing these issues benefits the whole County, as maintaining a fair and just society requires the even-handed administration of the jail. This is widely recognized -- The California Democratic Platform, for example, acknowledges that family support is a key factor in determining the success of a person once they are released from prison. By investing in programs that facilitate visitation, communication, and re-entry planning, we can help improve the overall well-being of those affected by incarceration. This approach not only benefits the individuals and families directly involved but also contributes to a stronger and more resilient community.

Ultimately, the legitimacy of all our institutions hinges on their ability to treat everyone fairly, regardless of their social standing. Ensuring that Sonoma County adheres to the Nelson Mandela rules is a step toward fostering a more compassionate and just society. By addressing the grievances highlighted in the grand jury investigation and hunger strike, we can work together to create a future where every Californian's rights are respected and upheld. This will only serve to strengthen our communities and promote the values of fairness, equality, and justice.

Housing, a Public Good.

Wikipedia contributors. (2021, September 15).

Public housing.

In Wikipedia, The Free Encyclopedia.

Retrieved April 5, 2023

from https://en.wikipedia.org/wiki/Public_housing

Yesterday, the Sonoma County Board of Supervisors held a first reading of a proposed "camping" law, which seeks to ban unhoused individuals from sleeping in specific public areas, such as the Joe Rodota Trail. Sonoma County has a huge challenge on its hands, with a 2022 countywide census finding 2,800 homeless people, of which only 800 were living in shelters. More shelters, transitional housing, and affordable housing are needed, along with social services such as mental health care and substance abuse treatment. 

But I think the core of the problem is different. I think we need to see housing as a public good, and not as a market. Vienna (60%), Singapore (80%), Sweden, Hong Kong (50%), Finland (20%), and the Netherlands (30%) have all managed to house very significant parts of their population by recognizing that housing is a public good and should be the object of concerted action. 

Sonoma County should prioritize the provision of more housing to effectively address homelessness. By repurposing sites, our County could become a "net zero" employer itself, setting a powerful example. As the county's largest employer, this initiative would have a significant impact on the housing crisis and substantially benefit working and middle-class families.

Encouraging government and employers to adopt a "net zero" position in how their operations impact the local housing ecosystem would be a good start. By taking responsibility for the housing needs of their employees and community, government and employers can play an active role in addressing homelessness and providing equitable access to housing for all. We need to focus on creating long-term solutions, not just temporary fixes.

Grayer Angels.

Kim, Richard. (2012, June 22). The Nation. 

https://tinyurl.com/2j3vyfvu

In a recent Press Democrat article, Phil Barber discusses Braver Angels, an organization run and co-founded by David Blankenhorn, who was a proponent of Proposition 8, which was designed to ban same-sex marriage. Notwithstanding that, the article seeks to present Braver Angels in a positive light, discussing a recent meeting held in Petaluma. But Barber fails to address Blankenhorn's past actions, which may contribute to the very polarization the organization seeks to remedy.

Some background on Blankenhorn's work illuminates the issue. As Richard Kim noted in his piece in the Nation, Blankenhorn's Institute for American Values "has attacked single mothers, championed federal marriage promotion as welfare policy, railed against cohabitation and no-fault divorce, and opposed access to new reproductive technologies. One of his institute’s latest crusades has been against anonymous sperm donors (because they lead to “fatherless” children, an abiding preoccupation of his)." This amounts to a comprehensive assault on some of the most powerless groups in our society, with little evidence to support the positions themselves.

The article takes a one-sided approach to highlighting Braver Angels' stated mission to bridge the political divide through dialogue, empathy, and understanding. With 92 chapters and events in all 50 states, the organization seems to target an older demographic, as evidenced by its appeal to the rapidly growing gray population in America. However, this approach has obvious limitations with younger generations, who face unique challenges and navigate their social and political lives through social media and identity-driven communities.

Young people today grapple with unprecedented economic hurdles and may feel alienated by Braver Angels' workshops, which cater to an older generation that enjoyed greater economic stability. Participating in these workshops could very well exacerbate young people's feelings of financial insecurity and anxiety. Furthermore, young people often engage with political discussions through the lens of their identity, which they defend and support in online communities. Braver Angels' approach, then, might feel more like (and might indeed be) an attempt to dismantle a protective shield rather than extend a hand of understanding. There are some members of the local community, such as Mary Munat, who are involved in the organization, who are trusted, and who I think mean well. But given the group's president's past and continuing actions, and the fact that nearly 10% of the money raised by the organization goes directly to Blankenhorn, it is tough to see how such concerns can be mitigated. 

Acknowledging the unique challenges faced by younger generations, such as economic insecurities and the importance of identity, is critical in seeking to create a more inclusive and resonant political discussion. Only then can we genuinely bridge the troublesome divide that so many have come to recognize is our central challenge to furthering public trust, without which all efforts in government come to naught.