Archive for November, 2006

We Always Suspected It …

| Nicolai Foss |

… but we are not sure we like it — “it” being the fact that O&M has now received certification that we belong to the  distinct group of “heterodox newsletters and weblogs” along with “Actuel Marx” and “Lettre de la Regulation.”  Hmmmm …

20 November 2006 at 11:09 am 2 comments

Can Prices Be Owned?

| Peter Klein |

Harold Mulherin, my former colleague Jeff Netter, and James Overdahl taught us that prices are property. That is, the information embodied in price quotations on financial markets does not pre-exist, but must be created by entrepreneurial activity, through the creation of organized financial exchanges. Financial exchanges are firms, and their assets are defined and governed by a complex set of contractual relations. (Like any firms, exchanges can expand, contract, reorganize, and try to acquire their rivals.)

But can an individual price — the number itself, not a trading institution — be owned? David Levine reports that a website posted some Best Buy Thanksgiving Day sale prices, and was subsequently served by Best Buy with a copyright infringement notice, demanding that the page be removed on the grounds that the prices were protected by the Digital Millenium Copyright Act (a truly odious piece of legislation).

More reason to be against intellectual property.

20 November 2006 at 10:45 am 5 comments

Another Journal Jere(h)miad

| Nicolai Foss|

A feuilleton here at O&M is what Omar at (see here) has christened our “jerehmiads” (aka “jeremiads”) concerning journals. The implication is that we are grumpy old men who moralistically denounce the rationality of the journal institutions (e.g., here, here, here, and here). Whatever that may be here is another, errr, observation on our journals:

All journals that I know of require that for the final submission of a manuscript, it must be submitted in a certain format, including meeting rules for spacing, margins, maximum number of words, etc.  Many, and perhaps most, journals also formally require that first submissions must stick to such a format, usually specified under “Instructions to Authors.”

However, at least until recently, very few journals would desk-reject a submission that did not follow the specified format (save for manuscripts that were obviously too long), and no reviewer would dream of complaining about manuscripts not following the journal’s specified format. (more…)

20 November 2006 at 8:16 am 3 comments

More on Economics and Ideology

| Peter Klein |

Henry at Crooked Timber asks if economics is a form of “right-wing indoctrination.”

For some of our views see here, here, here, and here.

19 November 2006 at 11:22 pm Leave a comment

Democracy Explained

| Peter Klein |

My student Christos Kolympiris sends along a version of the heaven and hell joke in which the protagonist is a US senator. The punch line: “Yesterday we were campaigning. . . . Today you voted.”

I personally like the definition — often attributed to Benjamin Franklin, probably mistakenly — that “democracy is two wolves and a lamb voting on what to have for dinner,” while “freedom is a well-armed lamb contesting the vote.”

If you like political cynicism, it’s hard to top this passage from the great H. L. Mencken, writing in 1920:

The larger the mob, the harder the test. In small areas, before small electorates, a first-rate man occasionally fights his way through, carrying even the mob with him by force of his personality. But when the field is nationwide, and the fight must be waged chiefly at second and third hand, and the force of personality cannot so readily make itself felt, then all the odds are on the man who is, intrinsically, the most devious and mediocre — the man who can most easily adeptly disperse the notion that his mind is a virtual vacuum.

The Presidency tends, year by year, to go to such men. As democracy is perfected, the office represents, more and more closely, the inner soul of the people. We move toward a lofty ideal. On some great and glorious day the plain folks of the land will reach their heart’s desire at last, and the White House will be adorned by a downright moron.

19 November 2006 at 12:29 am Leave a comment

If At First You Don’t Secede, Try, Try Again

| Peter Klein |

We referred earlier to some interesting work on the natural boundaries of states. Today I learn that a majority of my Scottish kinsmen want to secede from the United Kingdom. The Scottish National Party (sorry, in Gaelic: Pàrtaidh Nàiseanta na h-Alba) is gaining ground on Labour and threatens, if it takes power, to hold a referendum on Scottish independence.

As Mises wrote in his great 1927 book Liberalism:

The right of self-determination in regard to the question of membership in a state thus means: whenever the inhabitants of a particular territory, whether it be a single village, a whole district, or a series of adjacent districts, make it known, by a freely conducted plebiscite, that they no longer wish to remain united to the state to which they belong at the time, but wish either to form an independent state or to attach themselves to some other state, their wishes are to be respected and complied with. This is the only feasible and effective way of preventing revolutions and civil and international wars.

18 November 2006 at 2:03 pm 2 comments

Are Profitable Firms Always Founded?

| Nicolai Foss |

No, says Matthias Kräkel. Here is the abstract of his recent neat paper, “On the ‘Adverse Selection’ of Organizations“:

 According to New Institutional Economics, two or more individuals will found an organization, if it leads to a benefit compared to market allocation. A natural consequence will then be internal rent seeking. We discuss the interrelation between profits, rent seeking and the foundation of organizations. Typically, we expect that highly profitable firms are always founded but it is not clear whether the same is true for firms with less optimistic prospects. We will show that internal rent seeking may lead to a completely reversed result. The impact of internal rent seeking on overall investment and the implications of firm size and competition on the foundation of organizations are also addressed.

Admittedly, Kräkel’s stark result, that highly profitable firms may not be founded because of the prospect of heavy internal rent seeking, only holds for the situation where technology is exogeneosly given (he does relax this assumption and obtains other interesting results, however) and begs the question why exactly it is that rational cooperating individuals cannot constrain internal rent-seeking. However, there is a wider message in his paper, particularly for the resource-based approach in strategic management which — with the exception of the work of Russ Coff (see his 1999 Org Science paper and his 1997 AMR paper), Lippman and Rumelt (their 2003 SMJ paper on bargaining), and more recently Joe Mahoney (check Joe’s work on stakeholder theory) — has neglected internal bargaining processes in firms, including rent-seeking. Thus Kräkel’s work suggests that even if a projected venture controls resources that are strategic in the RBV sense, the venture may not materialize because of fear of rent-seeking in the second stage of the game (after the firm is actually founded). 

18 November 2006 at 6:45 am Leave a comment

The Economics of Maps

| Peter Klein |

I’ve always loved maps. Maybe I should have specialized in economic geography, like my friend Pierre Desrochers. Anyway, I enjoyed reading this EH.Net review of Mary Sponberg Pedley’s The Commerce of Cartography: Making and Marketing Maps in Eighteenth-century France and England (University of Chicago Press, 2005). Maps are information goods, characterized by strong increasing returns and frequently sold through unorthodox marketing strategies. Economists have studied competition among telephone directories — part of an interesting “nothing-new-under-the-sun” theme — but I don’t recall seeing anything on competition among cartographers.

Excerpt from Susan Danforth’s review:

As a map curator, I recall students and researchers over the years who felt certain that as soon as a new place was “discovered,” as soon as a significant event was reported, it would certainly appear on a map, because it made sense that the “public” would demand and support the publication of scientifically accurate, up-to-date maps. So it is interesting to read that the French cartographer Guillaume Delisle was praised by his contemporaries for adding new information to his maps slowly, so as not to shock his public. Other eighteenth-century commentators were happy to see that mapmakers left outdated information on maps “just in case.” Perhaps the island in the middle of the Pacific that hadn’t been seen in fifty years was there after all. What mapmaker would want to be responsible for a shipwreck? “In the end,” Pedley says, “what sold maps was price. A copy or counterfeit was as good as the real thing to the consumer.”

17 November 2006 at 5:10 pm Leave a comment

Strategic Entrepreneurship Journal

| Peter Klein |

Teppo Felin offers some thoughts on the new Strategic Entrepreneurship Journal. (Of course, you read about it here first.)

17 November 2006 at 3:51 pm Leave a comment

More on Quantitative Methods in Social Science

| Peter Klein |

Thanks to Cliff Grammich for his reading suggestions in the comment below. Let me add some details and links:

Richard Lewontin’s “Sex, Lies, and Social Science” (New York Review of Books, April 20, 1995; online version for NYRB subscribers only), savages three books on sex by sociologists. The resulting replies and rejoinders (here and here) make for interesting reading. In one rejoinder, Lewontin describes “the central methodological issue” raised by one set of authors under review:

It is their view that, although people may lie or exaggerate in autobiographies because they are trying to create a public persona, they will tell the truth in anonymous interviews, because there is no motivation to manipulate the impression that strangers have of us. Is it really true that quantitative sociologists are so divorced from introspection and so insensitive to social interactions that they take such a naive view of human behavior? Do they really believe all those things they hear from the person on the next bar stool or the seat next to them in the airplane? The Yellow Kid, who made a living from fleecing the gullible, used to say that anyone who could not con a banker ought to go into another line of work. Maybe, but before giving up, they should try professors of sociology.


17 November 2006 at 10:17 am 2 comments

Easterly versus Sachs on Hayek

| Peter Klein |

William Easterly takes Jeff Sachs to task in Wednesday’s W$J  for failing to understand Hayek’s Road to Serfdom (regular version; version for muzzy management types).

Hayek’s great book is all about the dangers of large-scale state economic planning, courageously written in 1944 when Soviet central planning, technocratic socialism and administrative control of the wartime economy appealed as a peacetime model to many New Dealers, celebrity economists and policy wonks of all stripes.

The countries that are now rich subsequently listened enough to Hayek and to common sense to avoid the road to serfdom. Yet today, Mr. Sachs (in his book “The End of Poverty”) is peddling his own administrative central plan — 449 steps in all — to end world poverty. In his plan, the U.N. secretary-general (to whom he is an adviser) would supervise and coordinate thousands of international civil servants and technocratic experts to solve the problems of every poor village and city slum everywhere. Mr. Sachs is not in favor of central planning as an economic system, but he offers it as a solution, anyway, to the multifold problems of the world’s poorest people.

NB: The editor’s decision to accompany the essay with a picture of Salma Hayek, while aesthetically pleasing, is a bit silly. After all we know Fritz beats Salma hands down.

17 November 2006 at 12:09 am 1 comment

Friedman on Method

| Peter Klein |

There is a huge secondary literature on Friedman’s 1953 essay “The Methodology of Positive Economics” (one summary of the various debates is here), and I have little to add to it. Two quick notes, however:

1. Samuel Brittan’s lengthy and informative obituary in today’s Financial Times includes this interesting remark:

The very modernity of Friedman meant that he was vulnerable in his technical findings to new researchers claiming to refute his work by still more up to date statistical methods. Indeed, Friedman lived long enough to see a reaction against basing economics on discoverable numerical relationships and the revival of so-called Austrian methods which concentrated on predicting general features of interacting systems on the lines of biology and linguistics.

2. Hayek reports (Hayek on Hayek, p. 145), that “one of the things I most regret is not having returned to a criticism of Keynes’s [General Theory], but it is as much true of not having criticized Milton Friedman’s [Essays in] Positive Economics, which in a way is quite as dangerous a book.”

16 November 2006 at 5:44 pm 1 comment

Micro-Foundations and Realism

| Nicolai Foss |

As readers of O&M know, I have often endorsed the search for the badly missing micro-foundations in management research (e.g., here, here and here). Building micro-foundations means providing accounts (whether formal or verbal-logical) of how human action and interaction produce collective outcomes (whether intended or unintended).

To me such an approach is inherently mechanism-oriented. Accordingly, I tend to think of methodological individualism and mechanismic explanation as close philosophical allies. I also think that in terms of theorizing, attention to micro-mechanisms rooted in individual action and interaction requires close attention to behavioral assumptions. Apropos Milton Friedman the one part of his thinking that I have never made peace with is his methodological instrumentalism.

Until recently, I thought that virtually nobody in management research — with the exception of Teppo Felin — entertained similar views (OK — a bit over the top, but not much), until, that is, the advent of the November issue of  the Strategic Management Journal features an article, “Behavioral Assumptions and Theory Development: The Case of Transaction Cost Economics,” by Eric Tsang that is explicit about how behavioral assumptions link to realistic explanation. (I just noticed that Tsang also has an earlier paper on critical realism).   (more…)

16 November 2006 at 3:42 pm Leave a comment

Milton Friedman Has Died

| Nicolai Foss |

Under the heading Requiescat in Pace, Economist.Com briefly and concisely notes:

MILTON FRIEDMAN has died.  An economics giant, he not only revolutionised monetary theory, but singlehandedly did more than almost any economist in history to advance the cause of free markets.  He was not merely an accomplished economist, but an accomplished popular writer; his Newsweek columns remain gems of clarity and brilliance decades later.  We will not soon see his like again.

Peter and I both expect to blog on Friedman and his contributions in the near future.

16 November 2006 at 2:00 pm 1 comment

Taleb on Mathematical Economics

| Peter Klein |

More on Nassim Taleb: From Bob Murphy I learn of this passage from Taleb’s Fooled by Randomness:

What has gone with the development of economics as a science? Answer: There was a bunch of intelligent people who felt compelled to use mathematics just to tell themselves that they were rigorous in their thinking, that theirs was a science. Someone in a great rush decided to introduce mathematical modeling techniques (culprits: Leon Walras, Gerard Debreu, Paul Samuelson) without considering the fact that either the class of mathematics they were using was too restrictive for the class of problems they were dealing with, or that perhaps they should be aware that the precision of the language of mathematics could lead people to believe that they had solutions when in fact they had none. . . . Indeed the mathematics they dealt with did not work in the real world, possibly because we needed richer classes of processes — and they refused to accept the fact that no mathematics at all was probably better. (p. 177)

16 November 2006 at 10:02 am 3 comments

Randomness and the Black Swan

| Peter Klein |

I’m on a private discussion list where the subject of resampling/bootstrapping techniques, and their application to empirical social science research, is being discussed. A commentator pointed to a 1988 New York Times article in which Stanford’s Jerome Friedman calls bootstrapping “the most important new idea in statistics in the last 20 years, and probably the last 50.” Murray Rothbard invoked bootstrapping, indirectly, in a 1989 article criticizing empirical methods in economics:

As improbable as this may seem now, I was at one time in college a statistics major. After taking all the undergraduate courses in statistics, I enrolled in a graduate course in mathematical statistics at Columbia with the eminent Harold Hotelling, one of the founders of modern mathematical economics. After listening to several lectures of Hotelling, I experienced an epiphany: the sudden realization that the entire “science” of statistical inference rests on one crucial assumption, and that that assumption is utterly groundless. I walked out of the Hotelling course, and out of the world of statistics, never to return.

The “crucial assumption” to which Rothbard refers is the assumption of normality. Of course, it is possible to do statistical inference without assuming data are normally distributed, and the central limit theorem tells us not to worry about distributional properties as samples become “large.” But how large is large? (more…)

15 November 2006 at 4:16 pm 6 comments

The Intellectuals and Socialism

| Peter Klein |

Why do academics lean left? This is been a frequent topic here at O&M (1, 2, 3, 4, 5). My own modest contribution to this debate appears as today’s Daily Article at Comments are welcome below or at the Mises blog.

15 November 2006 at 3:10 pm 1 comment

Chaired Position in Entrepreneurship

| Peter Klein |

The University of Missouri’s Division of Applied Social Sciences, where I am housed, is recruiting for the McQuinn Chair of Entrepreneurial Leadership. Here is the position announcement. Economists, sociologists, management theorists, and other social scientists are encouraged to apply. I am on the search committee, so if you know any suitable candidates, please encourage them to get in touch with me. And I’d appreciate your help spreading the word to those who might be interested in applying.

14 November 2006 at 3:53 pm Leave a comment

Pomo Periscope VI: Performativity

| Nicolai Foss |

Teppo Felin at has an excellent post today on Donald MacKenzie’s An Engine, Not a Camera: How Financial Models Shape Markets — a book that has received praise from Michel Callon, Karin Knorr-Certina — and Paul Samuelson! 

As the title of the book indicates, the book puts our old friend here at O&M — reflexivity (cf. this post) — to work in the context of the interplay between financial markets and financial economics. It sounds as if this will be a great read for the Ferraro-Pfeffer-Suttons of this World. (I haven’t read the book yet myself, so I cannot judge the accuracy of what Teppo says about it).  (more…)

14 November 2006 at 12:29 pm Leave a comment

Italian Academia Goes International

| Nicolai Foss |

The universities of quite a number of European countries have reputations — well-deserved in a number of cases — of being hostile to foreign influences as well as foreigners (particularly those yanks!), nepotistic, insular, and introverted, particularly in the social sciences and the humanities. Large European countries, such as France, Italy, and Germany still run a major infrastructure of learned journals in the native tongue, and it is often understood that publishing in one of these (e.g., the Sardinian Journal of the Economics of Olive Production) may be better for one’s career than publishing in irrelevant (and, oh horror, American) journals such as Journal of Political Economy or the Strategic Management Journal.

Luckily, things are changing all over Europe concerning the internationalization of the Academy. Here is an example: The Lucca Institute for Advanced Studies, opened last year to support “PhD programs and research activities in the fields of political and social sciences, market regulations, economics, management, biorobotics, industrial and computer technologies.”  On its frontpage it stresses that among its “distinctive features” (!)  are “open and competitive selection processes” and “international faculty.” Telling!

Note also the job openings for assistant professors and post-doctoral fellows. Lucca isn’t a bad place at all to spend a part of your life!

14 November 2006 at 8:34 am Leave a comment

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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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