Organizations and Markets

| Peter Klein |

Jim Surowiecki’s latest New Yorker column focuses on Toyota and makes several important points about innovation.

• Process innovation is at least as important as, though less visible than, product innovation.
• Innovation can be an incremental process in which “the goal is not to make huge, sudden leaps but, rather, to make things better on a daily basis.”
• Process innovations often bubble up from the bottom, rather than the top, of the hierarchy.
• Cumulative, bottom-up, process innovation is really hard to imitate. “[T]he fundamental ethos of kaizen — slow and steady improvement — runs counter to the way that most companies think about change. Corporations hope that the right concept will turn things around overnight. This is what you might call the crash-diet approach: starve yourself for a few days and you’ll be thin for life. The Toyota approach is more like a regular, sustained diet — less immediately dramatic but, as everyone knows, much harder to sustain.”

These points are well known in the innovation literature but Surowiecki’s succinct and elegant presentation is well worth a read, even by specialists.

See also Steve Postrel’s earlier post on Toyota.

| Peter Klein |

It’s Hayek-Klein Day, and bloggers are sharing their favorite Hayek quotes (Boudreaux, Horwitz). Here’s one of mine:

The typical intellectual . . . need not possess special knowledge of anything in particular, nor need he even be particularly intelligent, to perform his role as intermediary in the spreading of ideas. What qualifies him for his job is the wide range of subjects on which he can readily talk and write, and a position or habits through which he becomes acquainted with new ideas sooner than those to whom he addresses himself.

That’s from “The Intellectuals and Socialism,” published in 1949. (See this for an elaboration of Hayek’s argument.) Substitute “blogger” for “intellectual” and the passage could have been written today!

| Peter Klein |

A special report from Knowledge@Wharton:

While the credit crunch has put a damper on headline-grabbing large buyouts, private equity firms have found other ways to discover value in the current market. In this special report, produced in cooperation with the Wharton Private Equity Club, Knowledge@Wharton looks at how funds are adapting to changes in the credit environment, what opportunities exist in the developed markets of Europe and Japan, and the ways that proposed changes in taxation may affect the industry. Also included is a roundtable discussion on setting up a first-time fund in the current market, as well as an interview with David Rubenstein, co-founder and managing director of The Carlyle Group.

Get the report here. For more on private equity see the proceedings from last fall’s AEI conference.

Incidentally, I used Jensen’s “Eclipse of the Public Corporation” in my strategy class this semester amd continue to be impressed with Jensen’s insight and prescience in that piece, now nearly twenty years old. Still an excellent introduction to the organizational economics of private equity.

| Peter Klein |

Did you catch the list of Top Business Gurus in Monday’s WSJ? Based on Google, Lexis-Nexis, and academic citation indexes, it puts Gary Hamel at the top, followed by Tom Friedman, Bill Gates, Malcolm Gladwell, and Howard Gardner. Our own Jeff Pfeffer checks in at #11. Click the picture below for the entire list. Hamel, Stephen Covey, Michael Porter, Clayton Christensen, and Tom Peters are obvious candidates for Guru Status, though the ranking algorithm produces some unlikely results too, such as Robert Reich and Myron Scholes.

| Peter Klein |

If you troll our comments threads you may notice that each commentator is identified by a little image, what WordPress calls an Avatar. Registered WordPress users can upload custom images to serve as their Avatars. Otherwise, each commentator is now represented by an Identicon, which is not a kind of alien Transformer but a math-based image derived from a user’s IP address. Hope you like your new online self!

| Randy Westgren |

Before enplaning for Vancouver, I spent a great day at the University of Missouri with Peter Klein and his (local) colleagues. I discovered that Peter and I share a common interest in the fiction of Richard Powers, a novelist whose works draw from the biological, physical, cognitive, and information sciences. Moreover, Peter acknowledged that his favorite Powers novel is The Gold Bug Variations; it’s my favorite as well. I finished my second reading on the airplane and found a passage that incites this post:

The world we know, the living, interlocked world, is a lot more complex than any market. The market is a poor simulation of of the ecosystem; market models will never more than parody the increasingly complex web of interdependent nature. (First edition, p. 411)

I agree that market models are pale abstractions compared to any ecosystem. But I have studied a great many models of ecosystems (dynamic system simulations, agent-based simulations, statistical models of species interactions, analytical models of populations) and find them to be pale abstractions of ecosystems, as well. I will propose — for refutation — that most market models I see are less interesting than ecosystem models; they are still undersocialized in the Granovetter sense. The ecological models seem to require more attention paid to the social interactions of the individuals.

Just a thought.

| Peter Klein |

Next Tuesday, 13 May, is the proposal deadline for the 2008 Kauffman Symposium on Entrepreneurship and Innovation Data. I participated in the 2007 version and got a lot out of it. This year’s event takes place in Washington, DC instead of Kauffman headquarters in Kansas City.

Documents from the 2007 symposium can be reviewed at SSRN.

A personal note: While driving to last year’s symposium I found myself on Kansas City’s Volker Boulevard, named for the great philanthropist William Volker, whose support was instrumental in the rebirth of Austrian economics in the US during the 1950s and 1960s. The Volker Fund paid all or part of the salaries of Mises at NYU and Hayek at Chicago and employed Murray Rothbard as a consultant, book reviewer, and talent scout while he was writing Man, Economy, and State and America’s Great Depression. Wikipedia has some background information on the Volker Fund; you can find more in Hülsmann’s Last Knight (pp. 867-68 and passim) and Brian Doherty’s Radicals for Capitalism (pp. 181-87 and passim). In Kansas City Volker is remembered as a generous philanthropist who supported schools and hospitals, developed a program for prison reform, and was a major benefactor of the University of Kansas City (now the University of Missouri - Kansas City).

It would be nice to have a full-scale Volker biography. Anybody up to the task? Volker’s company and foundation records are housed at UMKC. Herb Cournelle wrote a short biography in 1951, Mr. Anonymous: The Story of William Volker, but I haven’t been able to locate a copy.

| Randy Westgren |

I have been hunkered down in Vancouver for several days, teaching the final module of an executive education course. One of the amusing elements of the course is that it migrates from Halifax, Nova Scotia, to Vancouver, British Columbia during the year, with intermediate stops in Calgary and Niagara Falls. Execs and instructors get to spend time in some innovative, entrepreneurial firms outside their own regions (and escape the classroom).

From the Listel Hotel on Robson Street, one can reach 29 Starbucks stores within a 2 km by 2.5 km area of downtown. There are seven Starbucks on Robson Street alone, between the 400 and 1700 blocks — a 20 minute walk. Among these are the stores at 1099 Robson and 1100 Robson; they face each other kitty-corner across Thurlow Street. One of the execs stated that this constitutes a unique phenomenon within the Starbucks chain — two stores so closely juxtaposed.

1. Has anyone seen or heard of a similar situation in another city?

2. Has someone written about this (apparent) strategy of location-packing Starbucks stores?

BTW, if you are a Starbucks-hater, there twice as many direct competitors in the same 5 square km area, including 13 Blenz Coffee outlets, which is a local competitor with international ambitions (www.blenz.com). The best thing they do isn’t coffee; they will make you Japanese ceremonial green tea while you wait — bamboo whisk and all.

| Peter Klein |

In my list of Cowles monographs I forgot to include several classics by Herbert Simon, including his 1951 paper “A Formal Theory of the Employment Relationship,” issued by Cowles as a discussion paper in 1950. Here’s the full set of Simon materials at Cowles. Also, from a commentator over at orgtheory.net I learn that several of Edward Banfield’s books, including The Moral Basis of a Backward Society (1958) and The Unheavenly City (1970) are available as PDFs at this site.

| Peter Klein |

A few years ago Greg Mankiw coined the term Pigou Club, a label for those (like himself) who advocate higher Pigouvian taxes on gasoline consumption and other high-carbon-footprint activities. Personally, I don’t find the Pigouvian analysis very convincing, in this or the more general case. First, the idea of efficient Pigouvian taxes and subsidies ignores subjective value and the Hayekian knowledge problem. How can government officials possibly choose tax or subsidy amounts that compensate for the actual harm suffered by, or benefit enjoyed by, all possible third parties for all activities generating externalities? The problem is several orders of magnitude more complex than what is typically described in the the textbooks. As a mechanism design problem, it is as difficult as the general socialist calculation problem itself (and you know how I feel about that). Second, the Pigouvian approach ignores comparative institutional analysis altogether. What are the efficiency consequences of establishing, empowering, and funding a government agency to compute and implement Pigouvian taxes and subsidies? Where will the tax revenues go? How will the subsidies be financed? What are the effects of these distortions?

My preference is to treat “negative externalities” as torts, with property titles assigned by the homesteading principle rather than Coasean wealth maximization criteria. (Essentially the Rothbardian view.)

But my main beef with today’s Pigouvians is that they cherry-pick a case here and there — taxes on gasoline, primarily — without fully pursuing the implications of the analysis. If increasing gasoline taxes is efficient, why stop there? What other market failures should the state be empowered to remedy? Here’s my question, specifically:

Please name the activities you believe deserve Pigouvian subsidies. For each activity provide the efficient subsidy amount, explain how this was calculated, and say how the revenues should be raised.

I don’t recall Mankiw discussing Pigouvian subsidies on his blog. Greg, help us out!

| Peter Klein |

Today’s Weekend Article from the Mises Institute is “The Sphere of Economic Calculation,” an excerpt from chapter 12 of Mises’s Human Action. (Check out the super-cool graphic!) The article expands on Mises’s pathbreaking 1920 paper on the need for prices in any system that aims at a rational allocation of resources.

Mises’s theory of factor pricing and its role in cost accounting — what he calls the problem of ”economic calculation” — is near and dear to my heart, having written one of my first published articles on the subject. It’s also received a bit of attention here at O&M (1, 2, 3, 4, 5).

| Peter Klein |

Not at all, says Gary Richardson, in a new NBER paper, “Brand Names Before the Industrial Revolution.” Branding has long been the target of largely uncomprehending critique from the likes of Veblen, Galbraith and sociologists such as Daniel Bell but its role in maintaining quality and reliability and securing contractual performance is now generally understood. Importantly, shows Gary (my former grad-school classmate), the use of seller-specific markers was widespread even before the Industrial Revolution and played an important role in facilitating the emergence of long-distance trade:

In medieval Europe, manufacturers sold durable goods to anonymous consumers in distant markets, this essay argues, by making products with conspicuous characteristics. Examples of these unique, observable traits included cloth of distinctive colors, fabric with unmistakable weaves, and pewter that resonated at a particular pitch. These attributes identified merchandise because consumers could observe them readily, but counterfeiters could copy them only at great cost, if at all. Conspicuous characteristics fulfilled many of the functions that patents, trademarks, and brand names do today. The words that referred to products with conspicuous characteristics served as brand names in the Middle Ages. Data drawn from an array of industries corroborates this conjecture. The abundance of evidence suggests that conspicuous characteristics played a key role in the expansion of manufacturing before the Industrial Revolution.

See also Gary’s EH.Net Encyclopedia entry on guilds.

| Peter Klein |

The Mises Institute continues to have the best library of free e-books on economics and related subjects (new additions: Say’s Treatise on Political Economy, Mencken’s Notes on Democracy, the 1960 collection Essays in European Economic Thought, Lachmann’s Macro-economic Thinking and the Market Economy). Michael Greinecker points out that the Cowles Foundation monographs are also available online. Classics include Marschak and Radner’s Economic Theory of Teams, Markowitz’s Portfolio Selection, Arrow’s Social Choice and Individual Values, and, for those whose tastes run to such things, Debreu’s Theory of Value. Viva la Revolución Digital!

| Peter Klein |

First Matthew Stewart, now Simon Blackburn — philosophers writing about management without actually knowing anything about management. Muses Blackburn:

People can be persuaded, and ordered, given incentives and penalties, suppressed and killed, but not managed. Human affairs can be administered, but administration is not management. One administers to people and their needs. One tries to manage them by ignoring whichever of their needs is inconvenient and by treating them as a mere means to your own ends. But, mirabile dictu, people treated like that become irritable and subversive and quite quickly unmanageable.

Daniel Davies tries valiantly to deconstruct this passage and concludes, rightly I think, that Blackburn hasn’t the slightest idea what he’s talking about. I find Davies’s own definition of “management” too narrow, focusing on routine administration and small-group leadership but excluding the activities of the general manager, but I think he gets Blackburn right. Philosophers, please stick to examining thyselves!

| Peter Klein |

As a student of Austrian economics, I hope to inherit not only the clarity of thought, insight, originality, and productive habits of the great Austrians, but also their longevity. Carl Menger, founder of the Austrian school, lived to be 81 (fathering a son, the mathematician Karl Menger, Jr., at age 62). Mises died at 92, having taught his graduate seminar at NYU well into his eighties. Hayek made it to 93. Böhm-Bawerk died relatively young, at 63, though Wieser lived to be 75. I also admire Ronald Coase, still going strong at 97, and Armen Alchian, who turned 94 this month (and is still serving on PhD dissertation committees). So hopefully I have many good years left (unlike some people).

This came to mind when reading Steve Levitt’s account of his attempt to get a referee report out of a former Chicago economist:

[W]hen I asked the octogenarian economist if he could referee a paper for me, here is the response I received:

Much as I would like to do a review of this paper, my schedule looking ahead for as much as a year is just too crowded. Maybe next time!!

I hope when I am in my eighties “too busy” is the reason I am turning things down! 

| Peter Klein |

The University of Colorado invites law professors to a one-day workshop, 11 June 2008, on the new institutional economics. Speakers are Lee Alston, Lynne Kiesling, Gary Libecap, Henry Smith, and Tom Ulen. Contents include:

(1) an introduction to NIE and why it matters to legal scholarship, particularly for property and intellectual property law; (2) an introduction to behavioral economics and experimental economics, including a simulation exercise that will demonstrate how experimental economics can be used to examine institutions in practice; and (3) an interactive discussion where all participants examine some case studies to evaluate the payoffs of using NIE and experimental economics to evaluate the merits of different legal regimes.

Sounds like fun (but where’s the theory of the firm?). Thanks to Thom Lambert, one of the lucky attendees, for the heads-up.

| Peter Klein |

So I wake up about 2:30 this morning to the sounds and lights of emergency vehicles outside my house. I look out the front window and see my neighbor’s house, across the street and two houses down, engulfed in flames. Firefighters are already on the scene, hooking up their hoses. Flames are shooting 25 feet into the air. The occupants, a young couple without children, are outside already, and no one is hurt. The husband says they were asleep in the bedroom when smoke started pouring out of the ceiling vents. My next-door neighbor said he heard loud pops and cracks, like fireworks.

The wife is shaking and crying, asking if she can go in and look for her wedding photos. I begin to wonder, if this happened to me, once my wife and children were safely outside would I foolishly run back in to retrieve my laptop, or my signed first edition of Risk, Uncertainty, and Profit, or my CDs with old Compustat data? My Blackberry? (I wouldn’t want to miss an important email while standing outside watching my house burn down.) What would you do?

Mises, as many of you know, lost virtually his entire personal library, and most of his notes and research materials, when the Nazis entered Vienna in 1938. (The papers ended up in Moscow,  where they were discovered in the early 1990s.) Mises arrived in the US in 1940, a refugee without an academic position, without substantial personal funds, and having lost most of a lifetime’s worth of accumulated books and materials. Can you imagine starting over, at age 59, under such circumstances?

| Randy Westgren |

One of the profoundly valuable benefits of recently giving up an administrator’s position is that I have time to read. I sat down with a stack of journals, biographies, fiction, and cookbooks that has grown since last summer. In the first pass through the stack, I found a couple pieces that echo one of the themes of this blog: how our training affects our perceptions of theory, facts, and phenomena.

One piece is an article by two young, interesting colleagues, Brianna and Arran Caza, who write about “Positive Organizational Scholarship” (POS) in the March 2008 issue of the Journal of Management Inquiry . They argue that the bulk of research on organizations, as highlighted by the top-cited articles in three years of ASQ and AMJ, begin with negative framing of organizational issues — what Brianna and Arran call a deficit model approach. They propose the need for research based on positive framing — not exclusively — as necessary to advance theory and practice in the organizational sciences. The POS paradigm is unabashedly post-modern (up periscope!), but it serves us all when alternative lenses are trained on issues that we all observe from our particular perspectives. (more…)

| Peter Klein |

It’s a pleasure to welcome Randy Westgren as our newest guest blogger. Randy is Professor of Business Administration and Professor of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign. A specialist in the economic organization of food sector, Randy’s interests span strategic management, strategic marketing, governance, Austrian and evolutionary economics, supply-chain management, and much more. Randy describes himself as someone who “switches from econ to management and back and forth” and “studies such peculiar things as agent-based modeling, cooperative member commitment, the foodie culture, and biotechnology supply chains.” In explaining his diverse set of interests, Randy quotes this passage from Ralph Waldo Emerson (”Self-Reliance,” from Essays: First Series, 1841):

There will be an agreement in whatever variety of actions, so they be each honest and natural in their hour. For of one will, the actions will be harmonious, however unlike they seem. These varieties are lost sight of at a little distance, at a little height of thought. One tendency unites them all. The voyage of the best ship is a zigzag line of a hundred tacks. See the line from a sufficient distance, and it straightens itself to the average tendency. Your genuine action will explain itself, and will explain your other genuine actions.

Randy has been one of our regular readers, and frequent commentators, from the beginning, showing that he is also a discriminating consumer of blogiana. Welcome, Randy!

| Peter Klein |

That’s the claim of this startling paper by Jeremy Edwards and Sheilagh Ogilvie, “Contract Enforcement, Institutions and Social Capital: The Maghribi Traders Reappraised.” Avner Greif’s influential papers (1989, 1993) and book argue, based on documentary evidence from the Cairo Geniza, that the medeival Maghribi traders developed an elaborate, informal network of trading relationships without central coordination or state enforcement. Close social ties, repeated interaction, and careful record-keeping allowed the Maghribi to overcome the prisoner’s dilemma — a perfect example of order without law. 

Edwards and Ogilvie, returning to the primary sources, dispute this account. They claim that (1) the Maghribi relied primarily on the Jewish and Muslim state legal systems, not private enforcement, for settling disputes; (2) the Maghribi traded heavily with non-Maghribi; and (3) communications channels were too slow and unreliable to support the social-sanction mechanism proposed by Greif. In short, while reputation effects could be important for individual traders, there is no evidence of the broad Maghribi coalition described by Greif.

I don’t know the primary sources well enough to have an opinion on the merits of this critique, but it strikes me as a very serious critique indeed. Of course, we Hayekians have known about “spontaneous order” long before Greif set pen to paper (or fingers to keyboard), so losing this example wouldn’t be a devastating loss for the theory of decentralized social institutions, any more than losing the Fisher-GM example would wipe out the asset-specificity theory of vertical integration. But it’s important to get the details right.

| Peter Klein |

How can anyone doubt the value added of mainstream economics research:

• Jeffrey S. DeSimone, “Fraternity Membership and Drinking Behavior,” NBER Working Paper No. W13262, July 2007.

• Jay Pil Choi, “Up or Down? A Male Economist’s Manifesto on Toilet Seat Etiquette.” Working Paper, Department of Economics, Michigan State University, 2002.

• Robert Oxoby, “On the Efficiency of AC/DC: Bon Scott versus Brian Johnson,” Economic Inquiry, forthcoming (via Lasse). The abstract’s worth quoting in full:

We use tools from experimental economics to address the age-old debate regarding who was a better singer in the band AC/DC. Our results suggest that (using wealth maximization as a measure of “better”) listening to Brian Johnson (relative to listening to Bon Scott) resulted in “better” outcomes in an ultimatum game. These results may have important implications for settling drunken music debates and environmental design issues in organizations.

Note that I’m not completely innocent in this area either.

See also: “Economics: Puzzles or Problems?”

| Peter Klein |

O&M went live 25 April 2006, exactly two years ago. Introducing ourselves to the world, we wrote:

We started this blog for two reasons. First, while there are many excellent blogs on economics, law, and public policy, there are relatively few on organization, strategy, and management, our main areas of research. Organizations and Markets hopes to help fill this gap. Second, we think we have a unique and interesting perspective on many of these issues, and we thought it would be fun to share this perspective with the world.

We may or may not be interesting (or fresh), but we think we’re still unique. While the econo-blogosphere has become thickly populated, only a few blogs focus on managerial and organizational issues. (Our blogroll includes most of our personal favorites.)

In the last two years we’ve written 1,275 posts in 32 categories (the most popular being Institutions, Management Theory, Methodology/Theory of Science, Strategic Management, Entrepreneurship, and, of course, Ephemera). We’ve hosted 283,822 unique visitors from dozens of countries (including, during just the last week, Slovenia, Iraq, Cameroon, Malaysia, and Guam). Thanks to our readers (students in particular), regular commentators, and former guest bloggers for their continued enthusiasm and support.

We’re planning significant changes to the site in the coming weeks. Watch this space for details!

| Peter Klein |

It’s Zachary Schrag’s “How Talking Became Human Subjects Research: The Federal Regulation of the Social Sciences, 1965-1991,” forthcoming in the Journal of Policy History.

In universities across the United States, institutional review boards, or IRBs, claim that they have the moral and legal authority to control the work of researchers in the humanities and social sciences. While IRBs may claim powers independent of federal regulations, they invariably point to these regulations as a key source of their authority. This article draws on previously untapped manuscript materials in the National Archives to trace the history of the federal regulation of social science research. Officials raised sincere concerns about dangers to participants in social science research, especially the unwarranted invasion of privacy as a result of poorly planned survey and observational research. On the other hand, the application of the regulations to the social sciences was far less careful than was the development of guidelines for biomedical research. Regulators failed to define the problem they were trying to solve, then insisted on a protective measure borrowed from biomedical research without investigating alternatives.

See also Schrag’s valuable Instituitional Reveiw Blog.

IRB oversight is particularly strong at the University of Missouri, across all departments, partly the result of a federal investigation in 1999 that came down hard on the medical school. One might wonder what this has to do with social-science research, but there you go.

| Peter Klein |

Gordon Smith shared an interesting report on a recent Georgetown conference, “The Future of the Global Law Firm.” Apparently there is a healthy literature in legal scholarship examining the boundaries and internal organization of law firms. Writes Gordon:

The participants seem to have reached a few points of consensus. First, the legal profession has changed dramatically in the past two decades and it remains under significant stress, meaning that more change is on the way. Second, the rules that constrain change (e.g., prohibition of non-lawyer ownership, rules relating to conflicts, non-competition rules) should be changed sooner rather than later. Third, the traditional legal form (partnership) is largely irrelevant to the current practice of law, even if law firms want to create an organizational structure that encourages the collegiality of a traditional partnership. Fourth, the law firms that will succeed in the future are those that get the organizational structure right.

In a follow-up email, Gordon explains that the organizational features being challenged include the partnership model, the up-or-out  ”Cravath system,” and the outsourcing of routine services (e.g., electronic discovery) to places like India. Gordon recommends Laura Empson’s Managing the Modern Law Firm for an overview of the issues. I said I thought there was some work by economists and management scholars on the economic organization of the law firm (and professional services firms more generally), but couldn’t come up with much, aside from a series of interesting papers by Luis Garicano and Thomas Hubbard (here, here, and here). Any suggestions from our readers? Is the persistence of the partnership form, for example, mainly the result of arcane professional-ethics rules or is there an underlying efficiency rationale? If consulting firms can have IPOs, why not law firms?

| Peter Klein |

The University of Missouri’s Kenneth L. Lay Chair of Economics, which we’ve written about before, has been filled, by an internal candidate, Joe Haslag. Joe is a monetary economist who, unlike many macroeconomists, does policy work (some with the controversial Show-Me Institute) and, unlike many economists, is a warm and friendly person. (Did I just write that?)

For those who think that economists, like other social-science and business academics, tend to be overly narrow and specialized, note what Joe says about his patron:

Haslag acknowledged being relatively uninformed about the Enron affair. “Actually, it’s not an episode that’s part of the economics I teach,” he said. “There isn’t anything about the story that entices me to spend a lot of time on it. I couldn’t talk about it with any amount of detail or any analysis.”

| Nicolai Foss |

Managerial and Decision Economics has become a favorite journal of mine. It has a strong econ orientation, to be sure, but the journal stresses econ that is relevant, readable, and right. In other words, there is lots of applied microeconomics, transaction cost economics, etc. Moreover, over the last few years MDE – presumably as a result of Margie Peteraf’s tenure as co-editor — has become very much of an econ-based strategic management journal, not like the Journal of Economics and Management Strategy, to be sure, but more economics-oriented than the Strategic Management Journal.

The most recent issue(s — issue 2 and 3 are bundled into one special issue) features a string of excellent papers under the heading “Frontiers of Strategic Management Research,” edited by Peteraf and Catherine Maritan. Several of the papers should be of interest to the O&M readership. For example, Kyle Mayer (with Janet Bercovitz) continues to work with his information technology service contracts dataset, this time looking at the influence of inertia on what contract clauses that are included in these kind of contracts. Maritan and Robert Florence engage in a nice modelling exercise, modelling strategic factor markets in a way that seems quite different from earlier attempts (e.g., by Rich Makadok). Michael Jacobides builds an interesting argument, linking foreign direct investment to the investing firm’s embeddedness in value chains in the home country and value chain conditions in the host country. And, of course, there is the usual handful of alliance articles. A great special issue. Highly recommended.

| Peter Klein |

From Marshall Jevons I just learned about the Authors@Google lecture series. Lots of good stuff there. The O&M crowd may especially enjoy the talks by Ian Ayres, Larry Lessig, Bob Litan, Richard Florida, John Searle, Daniel Solove, Steven Pinker, Robert Frank, Don Tapscott, Bill Easterly, and Tom Perkins.

Update: If you like this sort of thing check out TED as well (thanks to Art Carden for the pointer). The first person I saw when I visted the site yesterday was Yochai Benkler, whose book The Wealth of Networks I happen to be reviewing for The Independent Review.

| Peter Klein |

Michael Ruhlman, one of my favorite food writers, maintains that cooking is a craft, not an art. For example, writing in The Soul of A Chef about the Certified Master Chef exam, he writes:

Poetry is an art form. Cooking is a craft. (Oh, I know how the foodie blowhards — and even a lot of chefs — love to talk about food as art! But I’m sorry, noodles spun into towers and designs on plates with different-colored sauces do not equal art, so don’t talk to me about food as art or chefs as artistes.) As with any craft, there were artful levels and shared standards of excellence. The test’s very existence implied that great cooking, cooking at so-called master chef level, was not art, was only craft, the result of physical skills that were consistently measurable and comparable from one chef to the next. The Certified Master Chef exam aimed to set an objective standard of great cooking that existed regardless of this or that person’s own taste and preferences, something you could not do with an art such as poetry.

I used to agree with Ruhlman, until I saw the bacon weave. Now that’s art! (Thanks to Gary.)

On a more serious note, there are of course different schools of thought on the possibility of objective standards in art (not just visual arts but also music, literature, drama, and film). I don’t think Ruhlman’s distinction between art and craft implies some kind of postmodernism. Certainly one neen’t embrace pomo to understand that essay exams are a lot harder to grade than multiple-choice tests! (But see this.)

| Nicolai Foss |

Former O&M guest blogger Dick Langlois is IMHO one of the most original thinkers in the field of economic organization. He is also one of the best writers in management and in economics. So I try to keep track of his writings and usually succeed. However, this paper, “The Austrian Theory of the Firm: Retrospect and Prospect,” written for a conference at the George Mason Law School last May, had escaped my attention until today.

Dick develops a number of related arguments. One is that Hayek (of the 1945 essay, “The Use of Knowledge in Society”) developed richer insights in economic organization than Coase.  Moreover, by pointing out the importance of dispersed knowledge, the coordination problem this raises, and the importance of ”change” for “economic problems,” Hayek anticipated the capabilities theory of the firm. In a parallel argument, Dick links his own work on the capabilities theory of the firm to Austrian capital theory (see also here and here). He ends by speculating on the future of Austrian arguments in the theory of the firm, noting various manifestations, particularly in strategic management, of these arguments (he notes that “Some work in this literature is close in spirit to my own, in some cases extremely close (Jacobides and Winter 2005)” — one agrees).  Definitely worth a read!

| Peter KIein |

You may have heard about the campaign to have John Yoo, author of the infamous Bush Administration torture memo, fired from his (tenured) position as professor of law at UC Berkeley. Brad DeLong has blogged a lot about this. (Here is Yoo’s response, last week, in Esquire, and here is a statement from Yoo’s dean.) Brad quoted something interesting on Tuesday from James Wimberly:

[T]he relevant fact [is] that . . . Professor Yoo is employed to teach a vocational subject, law. This isn’t a prestige issue. Particle physics, cultural studies and remedial English fall on one side of the vocational/non-vocational distinction; law, medicine, nursing, flying training and plumbing school on the other.

All teaching carries with it a minimum set of professional standards on plagiarism, harassment, favoritism and so on. Nobody has suggested John Yoo has violated these. But vocational education should also inculcate the specific ethical standards of the trade in question. It seems at least arguable that Yoo’s probable professional misconduct as legal enabler of war crimes taints his ability to train future advocates and judges. Should a flying school for airline pilots keep an instructor guilty of reckless flying in his own weekend plane? But the same conduct would be irrelevant to the employment of a professor of surgery.

Business administration, like law, is a vocational subject (despite the top-notch scholarship conducted by some business professors). What are the ethical responsibilities of a business professor? Clearly someone who engages in unethical business practices, or encourages students to do the same, is in danger. But what about borderline issues — say, an accounting professor who favors the liberal use of special purpose entities? A critic might even claim that Henry Manne’s endorsement of insider trading is akin to Yoo’s endorsement of “harsh interrogation techniques.” (I think the comparison is ludicrous, but wouldn’t be surprised to hear it from the bashers.) What about business conduct? Certainly a failed entrepreneur can be an entrepreneurship professor; indeed, the experience may even be an advantage. Is a business professor’s consulting activity a purely private matter, or should it have some bearing on his or her professorial standing?