Archive for September, 2006

Albert Fishlow and the New Economic History

| Peter Klein |

Previous posts have touched on cliometrics or the “new economic history” (not quite so new anymore). For interesting reflections on the cliometric revolution see John Majewski’s recent commentary on Albert Fishlow’s 1965 book American Railroads and the Transformation of the Ante-bellum Economy (part of a clever “Classic Reviews in Economic History” series; I’d love to see similar series for management, industrial organization, etc.). As Majewski notes, the “book’s forty-year career is a window from which one can glimpse the transition from the ‘Old Economic History’ to the ‘New Economic History.’” (more…)

25 September 2006 at 11:25 am Leave a comment

Call for Papers — Special Issue of Human Resource Management

| Nicolai Foss |

With my CBS colleague Dr. Dana Minbaeva and Professor Scott Snell from the School of Industrial and Labor Relations, Cornell University, I will be editing a special issue of the HRM field’s flagship journal, Human Resource Management (!), published by the UMichigan Business School.  Here is the Call for Papers.

The subject of this special issue is “Human Resource Management and Knowledge Processes.” The aim is to build theory and conduct empirical work relating to how human resource management practices influence the sharing, building and integration of knowledge in firms. How “people” (and the organizational framework they interact in, including HRM practices) may contribute to the creation of competitive advantage is an increasingly important issue in strategic management. It is also a subject that transaction cost scholars should potentially be able to contribute significantly to.  We hope to receive contributions from not only “traditional” HRM scholars but also from strategic management and other scholars with an interest in these issues.

To stimulate interest in the special issue, my Center organized a two-day workshop last week. The program and most of the papers are here.

25 September 2006 at 9:01 am Leave a comment

Demise of the Public Intellectual

| Peter Klein |

Mark Oppenheimer bemoans the demise of “public intellectuals,” scholars who write for the general reader or for academic researchers in other specialty areas. These intellectuals — people who write for periodicals like The New York Review of Books, The New York Times Book Review, Dissent, Partisan Review, Commentary, The New Criterion, and First Things — are still around, but few in academia are aware of them. Among Oppenheimer’s suggestions:

I have long believed that admissions committees at graduate schools should work very differently. Instead of asking for letters of recommendation from undergraduate thesis advisers, admissions committees should try to figure out if an applicant is an intellectual. They should ask: “What do you read outside your proposed field of study? What are your favorite books? Where would you most like to travel, and why? What periodicals do you read?” If a student has no aspirations to travel, doesn’t seem to read much except within her undergraduate major, and shows no interest in academic debates — well, that’s a bad candidate for academe.

Of course, in today’s climate of increasing hyper-specialization, such students are probably at a competitive disadvantage for completing the PhD, finding a job, getting tenure, etc. (Thanks to Teppo for the pointer to Oppenheimer.)

24 September 2006 at 4:50 pm Leave a comment

Earmarks and Transparency

| Peter Klein |

The US Congress is under increasing pressure to curb “earmarking,” the practice of inserting appropriations for special projects — typically in the sponsoring member’s home district — into general funding bills. Last week Congress passed a bill authorizing the creation of a public, online, searchable database of federal grants, contracts, and earmarks, listing all sponsors, on the theory that greater transparency will reduce the number of frivolous or corrupt awards for legislators’ favorite pet projects.

As several commentators have pointed out, such a database may add little value, because it’s already easy to figure out who sponsored a particular earmark, simply by looking at whose district the money goes to.

In some cases, however, it’s even easier: the sponsor puts his name on the project. The University of Missouri recently dedicated the Christopher S. Bond Life Sciences Center, a $60 million facility (at right) devoted to interdisciplinary research in the life sciences. Christopher “Kit” Bond is Missouri’s senior senator and member of the Senate Appropriations Committee. Bond personally provided $34 million of the center’s budget through Congressional earmarks. It’s a beautiful building, not far from my office. Bond’s name is right on the front, above the main door, in case anyone entering the building should forget where the money came from.

23 September 2006 at 1:26 pm Leave a comment

Peter Kurrild-Klitgaard New Professor at Copenhagen University

| Nicolai Foss |

I suspect that quite a number of the readers of this blog will know Peter Kurrild-Klitgaard, or at least know his work. Peter is a Danish political scientist, who has spent a number of years in the US (mainly at Columbia), he is the European editor of Public Choice, a co-editor of Advances in Austrian Economics, and the author of numerous fine rational choice papers in political science and economic history. He is also an acknowledged expert on heraldry. In addition, Peter has been a libertarian/classical liberal activitist for many years, being one of the founders of the Danish Center for Political Studies. He is a columnist for one of the major Danish newspapers.  In other words, Peter is possessed of a truly incredible energy.

Yesterday, Peter formally assumed a full professorship of political science at Copenhagen University, one of the most prestiguous chairs in Danish social science. (more…)

23 September 2006 at 10:36 am Leave a comment

The Pareto Criterion and Ethics

| David Gordon |

Some economists defend use of the Pareto criterion in welfare economics in this way: Value judgments are subjective, so it would be unscientific for an economist to use them in recommending policy. But the Pareto criterion is a value-free statement. All it says is that if one person in society is made better off by a change, and no one is made worse off, then social welfare has increased. Of course, there is a problem with exclusive reliance on the criterion. Very few changes count as Pareto improvements, and thus situations that intuitively are unjust, such as a regime of slavery, count as Pareto optimal. Nevertheless, it is alleged, in the few cases where a Pareto superior change is possible, we have a value-free reason to support such changes.

This contention seems to me incorrect. The criterion is neutral about the preferences of people in society: it doesn’t say that only certain preferences, and not others, count as increases in social welfare. But preference-neutrality does not make the criterion value-free. The claim that people’s preferences, other things being equal, should be satisfied, is itself a value judgment. Someone could consistently deny it; suppose, e.g., that one thinks it bad that people get what they want, or bad that certain classes of people get what they want. Some people might think it obvious that these opinions are mistaken, but their truth is not here at issue. The point rather is that they, and their denials, are value judgments. If so, the Pareto criterion is a value judgment as well.

22 September 2006 at 7:31 pm 1 comment

The Envelope Paradox

| Lasse Lien | 

Here’s something to annoy you over the weekend. If you already know the envelope paradox, don’t read on. If you do not, and you are a bit of a nerd, I guarantee you’ll be facinated. The following version of the paradox is cynically stolen from  Amos Storkey’s homepage.  

You are taking part in a game show. The host introduces you to two envelopes. He explains carefully that you will get to choose one of the envelopes, and keep the money that it contains. He makes sure you understand that each envelope contains a cheque for a different sum of money, and that in fact, one contains twice as much as the other. The only problem is that you don’t know which is which.


22 September 2006 at 5:02 am 6 comments

Evidence That Demands A Verdict

| Peter Klein |

The first time I heard the term evidence-based management I was bewildered. What other kind of management is there? Faith-based management? A priori, praxeological, apodicticly certain management? The concept seems empty and trite, akin to “faith-based religion” or “water-based boating.”

Imagine my surprise to discover that evidence-based management (EBM) is an established approach, or school of thought, in management theory. Its major proponents, Stanford’s Jeffrey Pfeffer and Robert Sutton, write that EBM “means finding the best evidence that you can, facing those facts, and acting on those facts — rather than doing what everyone else does, what you have always done, or what you thought was true.” Hard to disagree with that. But can this be said to constitute a theory? A conceptual approach? A movement?

Evidence-based management is certainly a catchy phrase, generating a Harvard University Press book and articles in such journals as the Academy of Management Review and Harvard Business Review. Nice work if you can get it!

21 September 2006 at 8:28 pm 6 comments

Returns to University Biotech-Transfer Programs

| Peter Klein |

The Milken Institute has released a new study, “Mind to Market: A Global Analysis of University Biotechnology Transfer and Commercialization.” The study ranks the biotech-transfer programs of North American, European, and Asian universities by a variety of critera. Some general findings:

  • Among U.S., Canadian and European universities, the United States leads in invention disclosures, patents filed and granted, licenses executed and licensing income. However, European universities surpass their U.S. counterparts in startups established.
  • Research activity has a high rate of return. Each 10-point increase in our research papers score contributes an additional $1.7 million in annual licensing income.
  • Investments into offices of technology transfer (OTT) also offer high returns. For every $1 invested in OTT staff, the university receives a little more than $6 of licensing income.

I’m not sure what explains the US-European differences. Incidentally, there are healthy and robust literatures on technology transfer from both transaction-cost and resource-based perspectives. I recommend in particular the work of Rachelle Sampson, Janet Bercovitz, and Joanne Oxley (all of whom were influenced by David Teece’s pioneering papers in this area).

21 September 2006 at 3:52 pm Leave a comment

Integrating Hirschman and TCE

| Peter Klein |

Another interesting paper from the May 2006 issue of Economic History Review is Tetsuji Okazaki’s “‘Voice’ and ‘Exit’ in Japanese Firms During the Second World War: Sanpo Revisited.”  The “Sanpo” was a government-sponsored labor-bargaining organization for large firms. “This article examines the role of sanpo, using prefecture-level and firm-level data, based on a framework integrating the ‘voice view’ of unionism and transaction cost economics.”

Incidentally, Williamson has an interesting discussion of voice in “Calculativeness, Trust, and Economic Organization” (JLE, April 1993; ch. 10 of The Mechanisms of Governance). Responding to the claim that TCE (and the economic notion of “calculative trust” more generally) elevates exit over voice, Williamson writes:

First, if voice in the absence of an exit option is relatively ineffective, which evidently it is (Hirschman, 1970), then voice really does have a calculative aspect. Second, voice works through mechanisms, and those mechanisms are often carefully designed. . . . The voice mechanics are often defined by the terms of the contract. . . . Plainly, the procedures through which voice is expected to work [in a contract] are laid out in advance. Again, therefore, calculativeness is implicated in the design of ex post governance (voice).

In TCE, therefore, the “importance of voice is not in the least discredited. Instead, voice is encompassed within the extended calculative perspective” (pp. 255-56).

21 September 2006 at 12:16 am 2 comments

Should Universities Do Research?

| Peter Klein |

It is usually taken for granted that scientific research is a public good, is undersupplied by the market, and must therefore be provided by government. I think the argument for public funding is actually much weaker than is typically assumed. (More on that in a subsequent post.) Regardless of the funding source, however, what is the optimal delivery vehicle? Should universities be the main centers of scientific research?

For over two-thirds of the 370 year history of Harvard University, that institution was considered to be predominantly an undergraduate teaching institution. Only at the end of the 19th century did the German research university model find its way to the U.S., first at Johns Hopkins University, and then rapidly at other schools throughout the land.

There are other places at which research is performed, and the relative importance of these other research venues is substantial. . . . Yet universities have been considered the dominant provider of basic research — discovering new insights into the human condition and physical phenomena. In 2003, about 55 percent of basic research was university conducted.

The great advantage of university funded basic research is that there are sometimes economies of scale and cross-fertilization of ideas by having research conducted in a learning community where students mingle with faculty. The students transition to becoming mature researchers by assisting the senior researchers while studying. Yet there are other research models that work well — private firm research centers, government research labs, and in the social sciences, think tanks. More research is needed into the relative costs and benefits of these alternative forms of research delivery.

This is from Richard Vedder, whose blog offers excellent, provocative commentary on the problems facing contemporary higher education.

20 September 2006 at 2:46 pm Leave a comment

First-Mover (Dis) Advantage

| Lasse Lien |

Whether you are interested in competitive advantage, entrepreneurship, innovation, regulation, or several other issues, the concept of first-mover (dis)advantage will probably be of considerable importance. The literature has, of course, supplied a number of important insights on what might account for both advantages and disadvantages from moving early. Nevertheless, browsing through this literature, I get a sneaking feeling that it tends to produce somewhat loosely structured lists of possible mechanisms. A possible avenue of attack for adding more structure to these insights might be to reduce the problem to the basic asymmetries between the first and later movers, and from there gradually introduce the effects of resource heterogeneity, asymmetric motivation, strategic interaction, etc. But what, then, might count as the basic asymmetries? (more…)

20 September 2006 at 3:56 am Leave a comment

Has Marketing Advanced Beyond the 17th Century?

| Peter Klein |

The Spanish Jesuit Baltasar Gracián y Morales (1601-58) could teach an MBA course in marketing:

Know how to sell your wares, Intrinsic quality isn’t enough. Not everyone bites at substance or looks for inner value. People like to follow the crowd; they go someplace because they see other people do so. It takes much skill to explain something’s value. You can use praise, for praise arouses desire. At other times you can give things a good name (but be sure to flee from affectation). Another trick is to offer something only to those in the know, for everyone believes himself an expert, and the person who isn’t will want to be one. Never praise things for being easy or common: you’ll make them seem vulgar and facile. Everybody goes for something unique. Uniqueness appeals both to the taste and to the intellect.

OK, a bit of a cheap shot against marketing theory, I admit. Then again, if it weren’t for the marketing department — with its “Five Ps” approach to analysis — who would the other business-school departments have to look down on?

Seriously, some of the best work in transaction cost economics has been done by marketing scholars such as Erin Anderson and George John. Erin’s papers “The Salesperson as Outside Agent or Employee: A Transaction-Cost Analysis” (Marketing Science, 1985) and “Integration of the Sales Force: An Empirical Examination” (with David Schmittlein, RAND Journal, 1984) are classics. (HT to Jordan Ballor for the Gracián quote.)

19 September 2006 at 9:46 pm Leave a comment

Simon on Hierarchy

| Nicolai Foss |

I have always been surprised and somewhat disturbed by the tendency in Herbert A Simon’s work to elevate hierarchy and organization over markets. Of course, Simon was a liberal democrat – but he was also a great scientist.  

The most visible expression of this tendency is probably Simon’s heavily cited 1991 paper in the Journal of Economic Perspectives, “Organizations and Markets.” Another manifestation of the tendency is Simon’s even more (in fact, much more) famous 1962 paper, “The Architecture of Complexity,” in which hierarchical structure is seen as the master-principle for understanding “the architecture of complexity.”

In an interesting paper, “Hierarchy and History in Simon’s ‘Architecture of Complexity’,” UCLA professor Philip Agre argues that Simon’s paper arose as a critique of general systems theory and its attempt to elevate self-organization over any hierarchical principles. He furthermore sees Simon’s argument as very strongly reflecting the general tenor of the times, what may be called McNamaraism (tellingly, Chandler’s Strategy and Structure was also published in 1962); thus, “… the patterns that Simon discerned became visible within the larger context of the time.”

19 September 2006 at 1:31 pm 3 comments

More on Elite Universities

| Peter Klein |

We reported previously on Kim, Morse, and Zingales’s paper “Are Elite Universities Losing Their Competitive Edge?” The paper documents a sharp reduction in the marginal benefits to faculty of being affiliated with top research universities. Monday’s W$J has some anecdotal evidence on the value of elite universities to their students. It turns out that most CEOs of major US companies did not attend Ivy League schools, but rather their local state university or a smaller, less-known college. Wal-Mart’s H. Lee Scott went to Pittsburg State University in Kansas, Intel’s Paul Otellini to the University of San Francisco, Costco’s James Sinegal to San Diego City College, and Accenture’s Bill Green to Dean College in Massachusetts. Warren Buffet attended the University of Nebraska. And we all know about Bill Gates.

Commentator Richard Tedlow notes that “A lot of people who earn degrees from tier-one universities and business schools aren’t willing to start at the bottom of a huge company,” working their way up and learning important lessons along the way. Says Proctor and Gamble’s A. G. Lafley, who went to Hamilton College, “I learned to think, to communicate, to lead, to get things done.” For this, “Any college will do.”

19 September 2006 at 12:03 pm 3 comments

Conference on Social Science Statistics

| Peter Klein |

Attention, _______ometricians (econ, psych, soci, cli . . . ). The University of Missouri is hosting the Winemiller 2006 Conference on Methodological Developments of Statistics in the Social Sciences, October 11-14. Topics include structural equations modeling, multilevel models, cluster analysis, social networks, measurement theory, Bayesian methods, survey data analysis, computational issues, and missing data.

If you don’t do quantitative research come anyway and join me for a protest rally outside the conference facility, where we’ll chant “Case Studies Forever!” and burn a stack of SAS manuals. (Not really.) 

NB: On structural equations modeling see this and this.

19 September 2006 at 9:48 am 7 comments

New Online Journal — COPE

| Nicolai Foss |

As we all know, acronyms are of the essence, and COPE — Critique of Political Economy — has cleverly chosen one that is very close to HOPE, History of Political Economy, and ROPE, Review of Political Economy. So, all you prospective authors, let it be known that “when there is no HOPE there is the ROPE unless you can COPE.” (more…)

19 September 2006 at 7:31 am 3 comments

Paper on Freedom and Entrepreneurship

| Nicolai Foss |

With Christian Bjørnskov I have written “Economic Freedom and Entrepreneurial Activity: Some Cross-Country Evidence.  Here is the abstract:

While much attention has been devoted to analyzing how the institutional framework and entrepreneurship impact growth, how economic policy and institutional design affect entrepreneurship appears to be much less analyzed. We try to explain cross-country differences in the level of entrepreneurship by differences in economic policy and institutional design. Specifically, we use the measures of economic freedom to ask which elements of economic policy making and the institutional framework that are responsible for the supply of entrepreneurship (our data on entrepreneurship are derived from the Global Entrepreneurship Monitor). The combination of these two datasets is unique in the literature. We find that the size of government is negatively correlated with entrepreneurial activity but that sound money is positively correlated with entrepreneurial activity. Other measures of economic freedom are not significantly correlated with entrepreneurship.

Drop me a mail if you want a copy.

19 September 2006 at 6:06 am 1 comment

Does Bounded Rationality Justify Paternalism?

| Peter Klein |

Herbert Simon’s notion of “bounded rationality” has long been an important concept in organization theory (March and Simon, 1958; Cyert and March, 1963). More recently, bounded rationality is invoked by Oliver Williamson to explain why real-world contracts are incomplete, and why specialized “governance structures” are needed to handle the coordination and incentive problems produced by unanticipated change. But does bounded rationality have political implications?

John Cassidy’s recent New Yorker article on “neuroeconomics” suggests that because of bounded rationality, and cognitive biases more generally, individuals cannot be trusted to act in their own best interests, and that paternalistic measures such as forced savings and mandatory “cooling off” periods before making large purchases protect people from making foolish and irrational decisions.

Ed Glaeser doesn’t buy it: “[F]laws in human cognition should make us more, not less, wary about trusting government decisionmaking. After all, if humans make mistakes in market transactions, then they will make at least as many mistakes in electing representatives, and those representatives will likely make mistakes when policymaking.” He’s right, of course — a straightforward application of comparative institutional analysis. (Via Russ Roberts)

NB: For some implications of bounded rationality for the modern theory of the firm see this article.

Update: Listen to Glaeser discuss “soft paternalism” here.

18 September 2006 at 5:48 pm 2 comments

Kuhn and Scientific Realism

| David Gordon |

As Peter noted, Thomas Kuhn made an important point about the history of science. Established scientists often reject revolutionary theories, and these theories become dominant only when a new generation of scientists replaces the old guard. The new theories, Kuhn also thought, were not necessarily better in all respects than the ones they replaced; rather, they asked different questions.

Kuhn’s views influenced Murray Rothbard’s An Austrian Perspective on the History of Economic Thought. (Incidentally, this is my favorite of Rothbard’s books — it’s enormously learned and insightful.) Like Kuhn, Rothbard rejected the Whig view of science as continually progressing by small advances. Rather, he thought that knowledge could be lost. In his view, this is exactly what happened in the nineteenth century when Ricardian economics eclipsed the discoveries of the Spanish Scholastics and other subjectivists. (more…)

18 September 2006 at 11:07 am 4 comments

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Our Recent Books

Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).


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