28 | October | 2008 | Organizations and Markets

Nair, Trendowski, and Judge on Penrose

| Peter Klein |

The October 2008 AMR features an essay by Anil Nair, Joseph Trendowski, and William Judge on Edith Penrose’s seminal Theory of the Growth of the Firm (1959), written in the form of a book review. The essay is gated, but you can get a flavor from the conclusion:

Many economists call the unexplained variance in a regression equation the “Penrose effect.” According to Barney, it was left to strategy scholars to propose that the Penrose effect comprises the intangible resources and capabilities that are the source of sustained competitive advantage, and while these phenomena may be difficult to measure directly, the implications of these phenomena for firms’ operations and performance could be tested. After reviewing the passionate and prolific research that has attributed its intellectual roots to Penrose’s book, it is clear to us that her work was successful in rallying scholars who sought an alternative to the standard structure-conduct-performance model within strategy. However, scholars should be careful that Penrose’s theory (and the book) does not become a Rorschach blot on which they impose their own biases.

Here is a paper that links Penrose to Austrian concepts of subjectivism and capital heterogeneity. Penrose was of course a student of Fritz Machlup, himself a student of Mises. Apparently at one point the book was to be a joint project with Machlup; in Murray Rothbard’s papers is a memo Rothbard wrote for the Volker Fund evaluating a 1953 grant proposal by Machlup and Penrose for a “Growth of the Firm” project. (Rothbard’s assessment was unfavorable; he was, however, a fan of Penrose’s earlier paper on “Biological Analogies in the Theory of the Firm,” which he cites favorably in “The Mantle of Science.”)

28 October 2008 at 11:51 pm Peter G. Klein Leave a comment

Tooth-Fairy Economics

| Peter Klein |

Art Laffer offers this succinct summary of Bernankeconomics:

No one likes to see people lose their homes when housing prices fall and they can’t afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house’s value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

But here’s the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn’t create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don’t believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they’ll do with Wall Street.