Hazlett Reflects in Financial Times on the Passing of Economist Kahn

"Professor Alfred Kahn served as living proof that there need be nothing dismal about the science he loved," writes Professor Thomas Hazlett in a Financial Times op-ed examining the legacy of economist Alfred Kahn, who passed away this week at the age of 93.

While substantial credit has been given Kahn for his key role in the deregulation of U.S. Airline fares in the 1970s, Hazlett suggests Kahn's contributions to electricity regulation and telecommunications policy may even eclipse the deregulation for which he is best known.

As head of the New York City Public Service Commission (PSC), Kahn "upended many regulatory inefficiencies at the PSC with reforms that rippled nationwide. Consumers, the environment, and the economy benefited," says Hazlett.

In addition, Hazlett points out that Kahn spent much of his last three decades analyzing communications policy. The strength of Kahn's economic logic caused the DC Circuit  to toss out the FCC’s ill-crafted network-sharing rules created under the 1996 Telecommunications Act, says Hazlett, resulting in cable operators building out “digital phone” services. "Today, the US residential market features nearly ubiquitous head-to-head fixed-line phone competition. This, and mobile rivalry – another deregulatory bonus – may far exceed the consumer gains delivered to air travellers."

Fred Kahn's First-Class Flight, Financial Times, December 31, 2010. By Thomas W. Hazlett.

"Thanks to a superb, Pulitzer Prize-winning history of Kahn’s career, Thomas McCraw’s 1984 'Prophets of Regulation,' as well as Kahn’s own two-volume magnum opus, 'The Economics of Regulation' (2nd Ed., 1988), and his papers and speeches on a variety of regulatory topics, we have a rich, full-bodied view of the colourful life of a remarkable man.

"Alfred Kahn liked to boast that he was the last living doctoral student of Joseph Schumpeter, the classic exponent of capitalist 'creative destruction.' But the young scholar was not so warm for the charms of the market. His initial work channelled Thorsten Veblen, who was critical of consumers’ choices and heralded wide scope for government regulation.

"But Kahn studied on. He was surprised to find that markets accommodated productive forces that eluded the immaculate models of economic analysis. He saw that that government regulation was no deus ex machina. Administrators faced challenges of their own; buffeted by political lobbying, they often raised prices for customers. Theory said that market forces should push prices down to marginal cost, and that regulators could help supply some oomph when competitive pressures were weak. But Kahn found electricity regulators fixing charges at the same level no matter the time of day. Analogising to the butcher shop, Prof. Kahn asked: 'What would happen if everything that came out of the cow – steak, hamburger, suet, bones, and hide – were priced at average cost per pound?'

"Kahn came to conclude 'that society’s choices are always between or among imperfect systems.' But markets generated a dynamism lacking elsewhere, giving them an edge: 'Wherever it seems likely to be effective, even very imperfect competition is preferable to regulation.'”

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