Comments on: It Was Only a Matter of Time . . .

By: SkepticProf

SkepticProf — Sun, 19 Jun 2011 23:02:59 +0000

Khurana’s vita is very interesting. He has several AJS’s and a JEL…but they’re all BOOK REVIEWS. Afraid of peer review much, I wonder?

http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=pub&facId=6921

By: spostrel

spostrel — Sun, 11 Jan 2009 03:02:03 +0000

1) The value-merit distinction is one that Hayek and many, many others have made. Even Ayn Rand, for crying out loud, thought it was great for Elvis Presley to get paid lots of money even though she thought his music lacked merit. So the strongest ethical defenders of capitalism do not pretend that payments = individual merit.

2) Meritorious distributions of wealth may or may not be ethical, even if we could agree on what was merit. It depends on how much you value a lot of other things, like material satisfaction, freedom, equality, etc. in addition to just economic deserts.

3) The above hardly matters because in no way do we have anything like a consensus on what is meritorious. Even within narrow frames, such as professional basketball, there are people who think the selfless role players who glue the team together are more meritorious than the superstar scoring machines. In broader frames, such as American life, seeking consensus on merit is hopeless. Except that everything I do is great, of course.

By: Peter Klein

Peter Klein — Fri, 02 Jan 2009 14:31:03 +0000

Whittaker, do you have any evidence that, beyond a certain level of wealth, individuals no longer respond to incentives, do not weigh costs and benefits at the margin, ignore the future consequences of their actions, break contracts at will, and so on? Does this model apply to professional athletes and entertainers — many of whom earn vastly more than all but the highest-paid CEOs — or only to business executives? How about wealthy heiresses like Ariana Huffington or Caroline Kennedy? How about wealthy politicians?

By: whittaker

whittaker — Fri, 02 Jan 2009 13:17:05 +0000

Here’s what I’m getting at:with the amounts of money controlled by modern CEOs and boards of directors, the restraints imposed by the notions of honor and fiduciary duty are often too weak to be effective. The concept of agency breaks down in this environment.

Is the performance of the agent monitored? Yes. Does the agent care? No, because if he can abscond with the money, or some of it, under some pretense, he’s set for life. He may or may not be able to get similar engagements in the future, but he’s so far down the utility curve that it doesn’t matter that much.

By: David Hoopes

David Hoopes — Fri, 02 Jan 2009 09:00:37 +0000

Gosh. It’s amazing how much people read into capitalism. No one ever said the results are “fair.” It is simply supposed to be a way of each person getting closest to his/her wants. Granted, many do not get what they want. But, surprise, they won’t get want they want under a planned economy either. You get what someone else thinks you should want.

Also, how many people think markets are perfect? This is an assumption that allows a theorist to isolate other phenomena. I review simple micro based on price theory to all my strategy classes. But I don’t claim any markets are “perfect.” Quite the contrary. Still, price theory is incredibly useful for discussing any number of business and economic topics.

I get so tired of people who clearly don’t understand simple microeconomics 101 and who probably do not have degrees from business schools telling everyone what “economics” means and what business schools teach.

Yikes.

You could probably write a book or paper based on comments posted at O&M on how economics is so commonly misconstrued.

By: Peter Klein

Peter Klein — Fri, 02 Jan 2009 05:00:19 +0000

Whittaker, I’m not sure exactly what you’re getting at. Neither agency theory nor TCE has much to say specifically about the last part of your hypothetical. Agency theory addresses your contractual relationship with the stranger — is his performance monitored? Does he have an incentive to deliver the bundle rather than abscond with it? Does he expect to be hired for similar errands in the future, and is there a mechanism for disseminating information about his performance to potential future employers? What is the nature of your contractual relationship with the stranger? Etc. More generally, economic approaches to organization and governance tend to take the “trustworthiness” of agents as given, and focus on incentive alignment, mechanisms to mitigate opportunism, and the like. The “performativity” crowd would argue that teaching students about opportunism makes them opportunistic, but the theory and evidence strike me as pretty weak.

By: whittaker

whittaker — Fri, 02 Jan 2009 01:02:04 +0000

OK, you guys, I have a simple hypothetical.

Let’s say I have some emergency where I need $1000 in cash to be delivered ASAP to my mother 5 blocks away. I approach a stranger and ask him to deliver the cash, and offer him an extra $100 to keep for himself in return for his help.

Now, if the stranger accepts the mission, I think you would say he has a fiduciary duty to take care of the money as best he can, and deliver it safely. But he also has his own self-interest, and thus a temptation to abscond with some or all of it. So we have an agency problem, right? What are the odds that this problem will be overcome and the cash will all get delivered? Maybe 80%, maybe 90%, but certainly less than 100%.

Now suppose the stranger has worked all his life strategizing and jockeying for position in order to get to be entrusted with this mission. Is he more, less, or equally as likely to be trustworthy?

By: Joseph Mahoney

Joseph Mahoney — Mon, 29 Dec 2008 22:23:32 +0000

Peter,

Feel free to report me to the society for the prevention of cruelty to strawmen.

You may think I am beating a dead horse, but the number of folks who believe fully in the ethical basis of capitalism suggests this dead horse still has a strong kick.

By: Peter Klein

Peter Klein — Mon, 29 Dec 2008 16:47:34 +0000

Joe, in my managerial economics and strategy courses I teach about asymmetric information, search costs, economies of scale, sunk costs, externalities, and positive transaction costs, among other topics. Who doesn’t? Are there really any business schools that teach that prices are “perfect signals of resource allocation from an efficiency perspective,” that people “deserve” (in some ethical sense) what the market offers, or — a fortiori — that the price system should be “the complete arbiter of social life”?

I’d call Fishman and Khurana’s argument a straw man but this would be an insult to straw men!

By: Joseph Mahoney

Joseph Mahoney — Mon, 29 Dec 2008 16:40:05 +0000

There is a large market failures literature:

Asymmetric information and search costs;
Economies of scale and sunk costs;
Externalities and positive transaction costs

Under these circumstances, prices are not perfect signals of resource allocation from an efficiency perspective.

In terms of “deserving” what the market offers. A person may serve the poor in a soup kitchen for minimum wage, while another person may obtain $100 million over 10 years to jam a basketballl through a hoop. Does any reflective person maintain that all schools of thought in the history of philosophy would place the ethical basis of capitalism as fully secure?

Finally, in opposition to the Chicago school philosophy of “let them be bribed” — a philosophy held by my play-for-pay governor, Rod Blagovich — I maintain the view expressed by Kenneth Arrow in THE LIMITS OF ORGANIZATION that the price system should not be the complete arbiter of social life.