Archive for February, 2009

Pixar’s HR Strategy

| Peter Klein |

Mostly, it’s about hiring ultra-nerds with good communication skills. To wit: You want people who have become exceptional at a tiny discipline, no matter how obscure or dorky, since it’s that compulsion to truly master something that predicts how they’ll handle a new task. (Wannabe Pixar employees: Don’t bury your unicycle or juggling skills on your resume.) Another idea is looking for people who have failed and overcome — as [HR chief Randy] Nelson puts it, “The core skill of innovators is error recovery not failure avoidance,” which is key if you’re asking someone to solve a never-before-solved problem. But perhaps the squishiest trait is the ability to make others around you better, through communication and camaraderie.

From Kottke via Fast Company. See also “How Pixar Fosters Collective Creativity” from last September’s HBR.

16 February 2009 at 11:21 pm 2 comments

Economist Quote of the Day

| Peter Klein |

John Nye gets the honor, quoted in a St. Louis Post-Dispatch story on the newfound popularity of economists (via Travis):

For economist John Nye, the financial crisis has meant new questions at dinner parties and children’s birthday parties.

But Nye, a former Washington University professor who now teaches at George Mason University in Virginia, noted an irony in his profession’s new-found popularity. He said most people — including government officials — seemed to ignore economists during the good times, but they are turning to economists now, even though there is little consensus among economists about what to do.

“We’re confused,” said Nye, “and yet folks want to listen to us even more.”

I sometimes think that being an economist today is like being an epidemiologist during the Black Plague. Everybody has questions, but nobody likes the answers.

16 February 2009 at 11:13 am Leave a comment

Accounting Rules and Spontaneous Order

| Peter Klein |

David Albrecht thinks the US should not replace its accounting rules (GAAP) with the new, international standard (IFRS).

A language evolves to fit its culture.  Language is not static.  Moreover, there is no one best way for a language to be. . . .

If Americans wish to speak to a person from Peking, they can get their communication translated.  The translation comes at a cost.  The benefit from avoiding this cost by switching [to Chinese] would be much less than the huge opportunity costs of educating everyone in the U.S. to speak another language.  If we continued using English, the translation to Chinese would (and is) a trivial expense, and a minor inconvenience.

Similarly, there is no good reason for anyone to have the U.S. discontinue using its accounting language (GAAP) and switch over to IFRS.  Having multiple accounting languages in the world is a minor inconvenience and translation expenses are, in the grand scheme of things, trivial.  Moreover, GAAP seems to fit our culture, economy and system of financial markets. . . . 

Who would benefit if the U.S. switched to IFRS?  Certainly not investors, for the same reason that they would not benefit if the country moved immediately to Chinese.  The beneficiaries would be the accounting firms that would teach us the new IFRS, and company executives. (more…)

15 February 2009 at 2:08 pm 4 comments

The Onion or Reality: Marketing Edition

| Peter Klein |

pepsi-energy-fieldsCheck out the 27-page marketing proposal
(6MB PDF) for Pepsi’s recent logo redesign, which references Euclid, Feng Shui, Da Vinci, the Möbius strip, Le Corbusier, perimeter oscillations, the Earth’s magnetic field and gravitational pull, the speed of light, and space-time relativity. I kid you not. (Gawker via Fast Company.)

Remember, this is the proposal Pepsi liked.

14 February 2009 at 9:05 am Leave a comment

An Empirical Test of Williamson’s Adaptation Theory

| Peter Klein |

We’ve noted before, following Bob Gibbons, how Williamson’s transaction-cost approach can be called an adaptation theory of the firm. Vertical integration, in this context, is seen as an efficient means of adjusting a production process to unanticipated changes in market conditions, regulation, or technology.

Most of the empirical TCE literature focuses on the equilibrium rent-seeking version of the story, however (perhaps more influenced by Klein, Crawford, and Alchian’s interpretation). Vertical integration is viewed as an efficient means of mitigating holdup in the presence of asset specificity — and, in equilibrium, holdups don’t occur, so there is nothing to mitigate. Hence the typical TCE empirical paper which compares observed organizational forms to observed transactional characteristics (e.g., the degree of asset specificity). Newer studies attempt to test the relationship between efficient alignment, in the sense above, and long-term performance or survival, but few study the process of adaptation itself. (Exceptions include Mayer and Argyres, 2004 and Argyres and Mayer, 2007.)

Arnaud Costinot, Lindsay Oldenski, and James Rauch have written what I think is the first large-N empirical paper on the adaptation theory, “Adaptation and the Boundary of Multinational Firms.”They construct an occupation-level measure of “routineness” — whether a job involves mainly routine tasks or more creative, problem-solving activities — and show that routineness and vertical integration are negatively correlated. An interesting operationalization of the theory. Abstract:

What determines the boundary of multinational firms? According to Williamson (1975), a potential rationale for vertical integration is to facilitate adaptation in a world where uncertainty is resolved over time. This paper offers the first empirical analysis of the impact of adaptation on the boundary of multinational firms. To do so, we first develop a ranking of sectors in terms of their “routineness” by merging two sets of data: (i) ratings of occupations by their intensities in “problem solving” from the U.S. Department of Labor’s Occupational Information Network; and (ii) U.S. employment shares of occupations by sectors from the Bureau of Labor Statistics Occupational Employment Statistics. Using U.S. Census trade data, we then demonstrate that, in line with adaptation theories of the firm, the share of intrafirm trade tends to be higher in less routine sectors. This result is robust to inclusion of other variables known to influence the U.S. intrafirm import share such as capital intensity, R&D intensity, relationship specificity, intermediation and productivity dispersion. Our most conservative estimate suggests that a one standard deviation decrease in average routineness raises the share of intrafirm imports by 0.26 standard deviations, or an additional 7% of import value that is intrafirm.

13 February 2009 at 11:51 am 2 comments

Extreme Decentralization at Walmart

| Peter Klein |

A fascinating NY Post story on Walmart by a reporter who went undercover and got hired as an entry-level worker. The story reveals a surprising amount of decentralization for a firm sometimes regarded as some kind of Taylorite dinosaur. (Thanks to Rafe Champion for the pointer.) Excerpt:

Having pledged ourselves, we encountered the aspect of Wal-Mart employment that impressed me most: The Telxon, pronounced “Telzon,” a hand-held bar-code scanner with a wireless connection to the store’s computer. When pointed at any product, the Telxon would reveal astonishing amounts of information: the quantity that should be on the shelf, the availability from the nearest warehouse, the retail price, and (most amazing of all) the markup.

All of us were given access to this information, because — in theory, at least — anyone in the store could order a couple extra pallets of anything, and could discount it heavily as a Volume Producing Item (known as a VPI), competing with other departments to rack up the most profitable sales each month. Floor clerks even had portable equipment to print their own price stickers. This was how Wal-Mart detected demand and responded to it: by distributing decision-making power to grass-roots level. It was as simple yet as radical as that.

We received an inspirational talk on this subject, from an employee who reacted after the store test-marketed tents that could protect cars for people who didn’t have enough garage space. They sold out quickly, and several customers came in asking for more. Clearly this was a singular, exceptional case of word-of-mouth, so he ordered literally a truckload of tent-garages, “Which I shouldn’t have done really without asking someone,” he said with a shrug, “because I hadn’t been working at the store for long.” But the item was a huge success. His VPI was the biggest in store history — and that kind of thing doesn’t go unnoticed in Arkansas.

11 February 2009 at 4:06 pm Leave a comment

Markets in Everything, Valentine’s Revenge Edition

| Peter Klein |

A local bar is hosting a “Valentine’s Day Massacre” party this weekend. The centerpiece is a commercial tree shredder. Patrons can bring mementos or personal effects from old boyfriends and girlfriends (and, I guess, former spouses) and have them pulverized into tiny bits. “We’ve even had a wedding dress!” says the radio ad. Presumably more extreme scenarios, like that depicted in the famous wood-chipper scene in Fargo, are prohibited.

11 February 2009 at 1:02 pm 1 comment

Demand for Commodities Is Not Demand for Labor

| Peter Klein |

Minnesota engineering professor David Levinson (via Mankiw), on the “shovel-ready” criterion for stimulus spending:

In the 1930s, when you were literally building with shovels, that might have made sense. That was largely unskilled labor. Today, it’s blue collar, but it’s not unskilled. . . . The guy brushing the asphalt back and forth is unskilled, but the guy operating the steamroller isn’t. And there’s an assumption out there that construction workers are interchangeable between residential and highway projects. But a carpenter isn’t a whole lot of help in building a road.

Modern Keynesian economics, which retains the Master’s belief in  homogeneous labor and capital and his focus on macroeconomic aggregates, treats a worker as a worker as a worker. Lending and spending – on anything, it doesn’t matter what — brings idle resources into gainful use. Notes Hayek:

John Stuart Mill’s profound insight that demand for commodities is not demand for labor, which Leslie Stephen could in 1878 still describe as the doctrine whose “complete apprehension is, perhaps, the best test of a sound economist,” remained for Keynes an incomprehensible absurdity (Collected Works, vol. 9., p. 249).

And here’s Craig Pirrong:

There is no such thing as “aggregate output.” There are many industries, many goods, many sectors, all of which rely on specialized resources that are not readily redeployable among them. Directing — via coercion — spending to one sector or another is likely to worsen resource misallocations, rather than mitigate them. I find it particularly bizarre that some of the stimulus appears to be directed at supporting industries and sectors that resources should leave (e.g., construction, automobiles). We almost certainly built too many houses (due to perverse monetary policy, as John Taylor explains it), so resources should leave that business. Why stimulate it?

10 February 2009 at 9:05 pm 8 comments

Alex Rodriguez Admits to Personal Stimulus Package

| Peter Klein |

NEW YORK — Yankees’ star third baseman Alex Rodriguez admitted to receiving a series of personal stimulus packages from 2001 to 2003. “My trainer said my actual output was well below my potential output so we needed to pursue an expansionary nutritional policy.” Now suffering from a debilitating disease caused by prolonged exposure to stimulus, Rodriguez said he had “little choice” but to ask the trainer for even more stimulus, as well as putting every aspect of his personal and professional life under the trainer’s control. “Bold action is needed,” said a spokesperson for Major League Baseball. “We cannot depend on stimulus alone to create home runs or long-term athletic growth, but at this particular moment, only stimulus can provide the short-term boost necessary to lift Alex from a recession this deep and severe.”

Rodriguez’s trainer said he was pleased with his new authority and blamed the player’s health problems on “lack of oversight” by baseball officials. “We didn’t have enough regulation,” he complained. Baseball analyst Paul Krugman said he supported additional stimulus and the trainer’s new powers but worried that the plan “doesn’t go far enough.”

10 February 2009 at 10:16 am 2 comments

The Future of the Textbook

| Peter Klein |

Cliff Kuang at Fast Company points us to smARThistory, which looks very nice, and asks:

Why the hell are we still teaching kids from textbooks? Granted, the system works. But you’d at least expect more experiments in the genre, along the lines of smARThistory. For one, textbooks for each student routinely cost hundreds, even thousands per year — and a massive chunk of those costs aren’t in the production of the material, but rather its printing and distribution. Better to give kids laptops, and dynamic textbooks with high production values (like smARThistory). You could arrange them with assigned lessons that require modules to be checked off. A system of clicks or periodic questions could ensure that the kids are engaged. And what about flash animations that illustrate physics or math concepts? The list goes on. If done right, a virtual textbook would far outshine any print textbook we’ve ever cracked.

In economics and management we sometimes use online simulations, experiments, and other interactive learning tools, but the traditional textbook (or set of journal articles) reigns supreme. Do the newer tools work? Which are most effective? And, most important, what clever names can we give them? huMANresources? pricECONnections?

10 February 2009 at 1:27 am 2 comments

Regime Uncertainty

| Peter Klein |

Much wisdom in John Taylor’s piece in today’s WSJ. The housing boom and crash were caused primarily by monetary policy and a government-induced relaxation of borrowing standards. Policymakers mistakenly diagnosed the problem as a lack of liquidity and tried to increase loan volume as early as 2007. Further “stimulus” and even lower federal-funds rates came in 2008, followed by a set of arbitrary interventions (selective bank bailouts, the inexplicable TARP). Taylor places special blame on Bernanke and Paulson for creating regime uncertainty:

On Friday, Sept. 19, the Treasury announced a rescue package, though not its size or the details. Over the weekend the package was put together, and on Tuesday, Sept. 23, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified before the Senate Banking Committee. They introduced the Troubled Asset Relief Program (TARP), saying that it would be $700 billion in size. A short draft of legislation was provided, with no mention of oversight and few restrictions on the use of the funds. . . .

The realization by the public that the government’s intervention plan had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen in the next few weeks. And this was likely amplified by the ad hoc decisions to support some financial institutions and not others and unclear, seemingly fear-based explanations of programs to address the crisis. What was the rationale for intervening with Bear Stearns, then not with Lehman, and then again with AIG? What would guide the operations of the TARP?

I argued before that the whole “credit crunch” may be a kind of self-fulfilling prophecy. Taylor suggests that more generally, the government, having created the crisis, is now deepening and prolonging it by trying to “fix” the problem is made, a classic example of Mises’s theory of interventionism.

9 February 2009 at 4:14 pm 2 comments

Viral Marketing

| Peter Klein |

My friend Tom Woods has written a new book, Meltdown, that explains the economic crisis from an “Austrian” perspective. Tom is a historian by training but has an excellent grasp of economic theory and policy (disclaimer: I consulted on the book). The book is aimed at the intelligent lay reader and was produced very quickly (Tom writes faster than I read) to take advantage of today’s unique educational moment. The book went on sale today.

Tom is promoting the book via the usual means (scholarly and popular websites and blogs, email lists, some TV and radio appearances) and some of his admirers have launched a viral marketing campaign, based at GetTomonTV.com. Can viral marketing work to promote a quasi-academic book? Will policy wonks, economic journalists, and concerned citizens blog, text, and twitter like Blair Witch groupies or Christian Bale fans? How does one promote books (and, for that matter, journal articles) in the Web 2.0 world? Most important, how do I use this knowledge to promote myself?

9 February 2009 at 11:27 am 3 comments

ESNIE 2009

| Peter Klein |

The European School on New Institutional Economics is taking applications for its 2009 Summer Institute, 18-22 May in Corsica. Speakers include Kenneth Binmore, Peter Murrell, John Wallis, Peter Maskell, Scott Masten, John de Figueiredo, Jackson Nickerson, Florencio Lopez-de-Silanes, and Antonio Estache. PhD students and junior faculty are encouraged to apply. Deadline is 8 Mar 2009.

9 February 2009 at 9:58 am Leave a comment

Econ Courses at Open Yale

| Peter Klein |

Robert Shiller on financial markets and Ben Polak on game theory. Thanks to Joshua for the pointer and a link to Academic Earth, an aggregator for free online courses from several top US universities.

7 February 2009 at 4:01 pm 2 comments

Speaking of Executive Compensation. . . .

| Peter Klein |

Chris Manion has a dream:

Obama Cuts Salaries for Presidents of Universities that Receive Federal Money

$100,000 annual cap enrages literati, “Violates academic freedom,” one president declares, from his limousine’s satellite phone.

Obama Limits Baseball Salaries to $100,000 per Player per Year

Administration points to baseball’s antitrust exemption as authority; “This could force our players to gamble on the side and maybe throw the world series even” says players union president.

Obama Limits Salaries of Former Government Employees

$100,000 a year ceiling enrages lobbyists, retired generals, and Trent Lott.

Obama Caps Federal Retirement Pensions

“These benefits should be no higher than those of the private sector taxpayers who pay the taxes to support them,” President says. Government Employee Union president threatens a general strike, scratches his head for a moment, and then retracts statement “pending further discussions.”

And then I woke up.

In my dream the President announces a cap on compensation for TV and movie stars, recording artists, writers, Hollywood directors and producers, celebrity speakers, and investors. “In this time of economic hardship, for Tom Cruise to earn millions for Valkyrie, even though Lions for Lambs was a total flop, for President Clinton to pick up $500,000 for recycling the same boring speech, and for George Soros to rack up interest and dividends even though he completely missed calling the financial crisis, is the height of irresponsibility. It is shameful. And I will not tolerate it as President.”

6 February 2009 at 10:37 pm Leave a comment

Google: Too Big to Fail?

| Peter Klein |

It’s horrible to contemplate, but is Google a future candidate for subsidization and regulation under the essential facilities doctrine? Matt Asay wonders. It’s right to ask these questions, but I think people who worry about the catastrophic effects of a Google failure on the economy underestimate how quickly market participants adapt to changes in product offerings, even in the presence of network effects.

6 February 2009 at 10:24 am Leave a comment

Business 101

| Peter Klein |

In announcing his caps on executive compensation this morning the President noted his outrage that Wall Street executives have “paid themselves customary lavish bonuses.” Apparently he is unaware that executive pay in large companies is set by a compensation committee, and typically by a formula determined well before performance results are realized. I guess he thinks executives just decide how much to pay themselves, based on whatever they feel like. He’s also upset about “executives being rewarded for failure,” suggesting he doesn’t know the difference between absolute and relative performance evaluation. Don’t they teach Business Organizations at Harvard Law?

4 February 2009 at 11:11 pm 13 comments

New Theoretical Developments in Strategic Management

| Mike Sykuta |

“New Theoretical Developments in Strategic Management: Opportunities for Research Contributions” is the topic of an interactive online seminar Thursday, 26 February, 12:00-1:30pm EST. The speaker is Michael Hitt, Distinguished Professor of Management and the Joe B. Foster Chair in Business Leadership and the C.W. and Dorothy Conn Chair in New Ventures at Texas A&M University. During the 90-minute seminar participants will explore theoretical developments in strategic management including the resource-based view, institutional theory, and a new concept of strategic entrepreneurship, and will offer updates on how more established theories such as TCE and agency theory are being applied.

The seminar is sponsored by the Agribusiness Economics & Management (AEM) Section of the Agricultural & Applied Economics Association (AAEA). The AEM Section has sponsored online seminars previously on topics that may be new or less familiar to its members, one of the more valuable contributions any professional society provides. Although many of the “new theoretical developments” described above may not seem quite so new to frequent O&M readers, they are certainly more novel in the context of agribusiness research.

You can register for the conference as an individual or as a host location for as many people as can fit into your local class or conference room. This is an especially good opportunity for graduate students and faculty to learn more about the research opportunities in this area. I expect several of our Missouri colleagues and grad students will be participating. Check out the conference website for information about technical requirements and registration.

4 February 2009 at 5:33 pm Leave a comment

“We Are All Monetarists Now”

| Peter Klein |

“We are all Keynesians now,” Milton Friedman famously remarked in 1965. He meant that all mainstream macroeconomists, regardless of political persuasion, accepted the basic aggregate income-expenditure framework (and assumption of homogeneous capital) that underlies the neo-Keynesian model. How this model came to displace its predecessors, and how it remains in force today, despite the New Classical revolution and New Keynesian counterrevolution, is one of the most interesting stories of twentieth-century intellectual history. Greg Mankiw’s warm fuzzy for Bob Lucas — really a poke at Paul Krugman — is instructive in this regard. As is this anecdote shared by Steve Medema:

I was attending the small Claremont-Bologna monetary conference about a decade ago, and the participants included Friedman, Modigliani, Tobin, and Samuelson. I was sitting in a shuttle van that would take us to dinner, talking with Milton and Rose Friedman. Modigliani approached the van, saw Friedman, shook his hand vigorously, and exclaimed, “Milton, I’m a monetarist now!”

Keynesian, New Keynesian, Monetarist, and New Classical macroeconomics are variations on a theme. The capital-based macroeconomics of the Austrian school represents an entirely different approach, one I hope to blog more about soon. (See also: “Revenge of the Aggregates.”)

Update: Even Dick Armey, writing in today’s WSJ, gets it:

Keynes’s thinking was a decisive departure from classical economics, because arbitrary “macro” constructs like aggregate demand had no basis in the microeconomic science of human action. As Hayek observed, “some of the most orthodox disciples of Keynes appear consistently to have thrown overboard all the traditional theory of price determination and of distribution, all that used to be the backbone of economic theory, and in consequence, in my opinion, to have ceased to understand any economics.”

As Keynes’s Cambridge colleague Gerald Shove supposedly remarked (according to Joan Robinson), “Maynard never spent the half hour necessary to learn price theory.” Sadly, the same seems true of many of Keynes’s modern disciples.

4 February 2009 at 2:44 pm 4 comments

The Recipe for Recovery Is Revealed

| Mike Sykuta |

The Obama administration has apparently revealed its recipe for economic recovery. Based on the rhetoric and policy proposals fronted thus far, the recipe appears as follows:

  1. Do everything possible to discourage potential high-value executives from working in troubled industries by capping executive pay in struggling industries.
  2. Eliminate high-powered market-based incentives for mid-level employees to perform their jobs well.
  3. Encourage distressed companies to renege on long-term contracts that populist politicians find offensive (or consider easy to target so as to appear they are being responsible with taxpayers’ money).
  4. Dole out a trillion dollars of taxpayer funds to pet projects and interest groups in the name of “economic stimulus” (enabled by the perception of “responsibility” created by their railing against the targets of #1-3).
  5. Ignore the economic consequences of the incentives created (or destroyed) in #1-3 as well as the fact that someone at some point will have to pay that trillion dollar bill.
  6. Half-bake under the heat of political pressure and serve to the masses who are starved for quick-fix solutions that only impose costs on “that other guy” or “the rich fat-cats of corporate America.”

I don’t know about you, but I think it will be interesting to see how quickly the soufflé crashes . . . though I’m not looking forward to it being force-fed.

4 February 2009 at 11:11 am 21 comments

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
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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).
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Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
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