Archive for September, 2009

Elgar Companion to Transaction Cost Economics

| Peter Klein |

Mike Sykuta and I are editing a volume for the Elgar Companion series, The Elgar Companion to Transaction Cost Economics. The volume is currently in production with an expected publication date in mid-2010. We’ve created a page here on O&M with more information, including a table of contents and some sample chapter drafts. Enjoy!

30 September 2009 at 11:41 am 2 comments

The Most Interesting Scholar in the World

| Peter Klein |

With apologies to Dos Equis:

His work would pass peer review . . . if he had peers.

Students take his classes, just because they find them interesting.

His main intellectual predecessor . . . is himself.

His Erdős number is negative.

He once rejected one of his own articles, just to see how it felt.

He reads Sanskrit . . . in mathematics.

A man came out of a coma after touching one of his books.

Football players at his university have season tickets to his lectures.

Stay thirsty for knowledge, my friends.

29 September 2009 at 7:20 am 6 comments

Alchian and Demsetz (1972), Dallas Cowboys Edition

| Peter Klein |

In Alchian and Demsetz’s (1972) nexus-of-contracts approach to the firm, bosses don’t necessarily hire workers; workers may just as easily hire bosses. Recall Cheung’s (1983, p. 8) famous illustration: “My own favorite example is riverboat pulling in China before the communist regime, when a large group of workers marched along the shore towing a good-sized wooden boat. The unique interest of this example is that the collaborators actually agreed to the hiring of a monitor to whip them.” In Alchian and Demsetz’s example, the employee can “fire” his employer by quitting, just as I can “fire” my grocer by shopping at a different store.

Here’s the Onion applying this logic to the NFL’s Dallas Cowboys:

IRVING, TEXAS — In an attempt to cut the franchise’s losses and “move forward in a positive direction,” the Dallas Cowboys severed ties with controversial owner Jerry Jones Monday, ending their tumultuous 20-year relationship with the divisive figure.

According to sources within the Cowboys organization, the decision to release Jones was influenced by the lack of any playoff victories in more than 12 years, the owner’s distracting sideline antics, and his selfish, “me first” attitude, which many said was having a cancerous effect on the clubhouse.

“We value Jerry’s contributions to the Cowboys over the past two decades, but it has become painfully clear that we just don’t share the same priorities,” Cowboys public relations director Richard Dalrymple said. “This wasn’t an easy choice to make, but we’re confident it is a decision that can only make our team better.”

I can see it now: “An NFL owner has no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting between any two football players. . . .”

27 September 2009 at 2:18 pm 5 comments

Nerd Rap

| Peter Klein|

Weird Al’s version — already deconstructed by our friends at orgtheory.net — has style, but the CERN Rap has substance. As do these econ vids.

26 September 2009 at 5:32 pm Leave a comment

QWERTY in the Long Run

| Dick Langlois |

The new issue of Industrial and Corporate Change has an article by Andreas Reinstaller and Werner Hölzl called “Big Causes and Small Events: QWERTY and the Mechanization of Office Work.” Although it’s an interesting paper in many respects, I think it fails in its avowed aim to defend Paul David against the attack of Liebowitz and Margolis. Mostly, they don’t get L&M right (and explicitly get them wrong in footnote 1). The issue is whether the QWERTY keyboard is an example of what L&M call “third-degree” path dependency, that, is path dependency leading to an outcome that is both regrettable ex post and would somehow have been remediable ex ante. The criterion of “remediable” to R&H seems to be whether contemporaries “knew about” superior alternatives. That’s not quite right, of course: the real issue is whether any alternative institutional structure could have done a better job of choosing a standard under the conditions of knowledge at the time. Their only example is the existence of a French “Ideal” keyboard layout (which some people “knew about”) that was swept aside by the tidal wave of the American QWERTY standard (and became AZERTY in France). But they have no evidence about how much better this keyboard was — or if it was better at all. In footnote 1 they cite Donald Norman’s interesting book on design to the effect that the Dvorak keyboard is 10 per cent faster than QWERTY. But (A) Norman’s point in the book is how insignificant this difference is and (B) that doesn’t demonstrate third-degree path dependency, since no one “knew about” the Dvorak keyboard until Dvorak invented it (an extremely laborious process, according to Norman).

Again, I don’t want to be too hard on R&H: I think there’s a lot that’s interesting in the paper, especially the discussion of the mechanization of office work. What really struck me in this context, however, is how irrelevant, or at least dated, the QWERTY saga is. And I say this not for the usual reason: that computers now allow us to have any keyboard layout we like. Rather, what struck me is that the production of documents has long since become demechanized, making even more-than-nominal differences in typing speed irrelevant. Since we now all (or almost all) compose right on the computer, and never send our documents out to the typing pool, manuscript production has become a craft again. What is slowing us down is how quickly we think of something to say, not how fast we can type. And I doubt that, fifties nostalgia notwithstanding, we are unlikely to see the return of the typing pool anytime soon. So, from a historical perspective, QWERTY will have been technically inefficient (though not therefore economically inefficient) only for that brief historical period between the invention of Dvorak and the coming of the personal computer.

The same issue of ICC also has a paper by Ashish Arora and coauthors that’s worth a look.

25 September 2009 at 1:20 pm 3 comments

The Soviets Really Did Have a Doomsday Machine

| Peter Klein |

000strangeloveAccording to the new issue of Wired (via the Economist), the Soviets really did have a doomsday machine and, as in Dr. Strangelove, didn’t tell anyone about it. Interestingly, the interpretation is that the Soviets, like Schelling’s rational addict, were directing the credible commitment not toward their opponents, but toward themselves:

The silence can be attributed partly to fears that the US would figure out how to disable the system. But the principal reason is more complicated and surprising. According to both Yarynich and Zheleznyakov, Perimeter was never meant as a traditional doomsday machine. The Soviets had taken game theory one step further than Kubrick, Szilard, and everyone else: They built a system to deter themselves.

By guaranteeing that Moscow could hit back, Perimeter was actually designed to keep an overeager Soviet military or civilian leader from launching prematurely during a crisis. The point, Zheleznyakov says, was “to cool down all these hotheads and extremists. No matter what was going to happen, there still would be revenge. Those who attack us will be punished.”

This wouldn’t deter a Jack D. Ripper type, I suppose. Still, fascinating discussion for those who teach about strategic commitment.

25 September 2009 at 12:08 am 4 comments

Page and Reference Counts: AER versus AJS

| Peter Klein |

Thanks to Teppo for linking to these interesting graphs. Since 1960, the page count and reference list of the average American Journal of Sociology article have risen dramatically, while those for the American Economic Review have remained about the same. I’d be curious to see these figures for the Academy of Management periodicals as well. What explains these trends? Are sociologists simply more verbose than economists?

Update: Here are some more graphs, this time including ASQ and Management Science, as well as some additional sociology journals. ASQ and MS appear to be somewhere in the middle.

24 September 2009 at 11:42 am 5 comments

John Gray on the Greenspan-Bernanke Economy

| Peter Klein |

From Gray’s April 2009 NYRB review of Margaret Atwood’s Payback: Debt and the Shadow Side of Wealth:

Concepts of debt figure centrally in Western religion, while the notion that debt is something to be avoided, or incurred with caution, has long been important in Western capitalism. Without institutions facilitating borrowing, capitalism would not have developed to the degree that it has; but the belief that debt could be dangerous was until recently also an important part of capitalism. It is only lately, Atwood notes, that debt has been celebrated as positively benign, “a thing we’ve come to feel is indispensable to our collective buoyancy.” From being a necessary tool in productive enterprise, debt came to be viewed as an instrument of wealth creation. Using cheap credit, hedge funds and investment banks were able to multiply their profits, while society at large — including some in its poorest groups — came to see taking on large amounts of debt as a way of building up capital. Now that this structure of debt is unwinding, older ideas may be on their way back: “We seem to be entering a period in which debt has passed through its most recent harmless and fashionable period, and is reverting to being sinful.”

Latest news from Washington: “The Federal Reserve said Wednesday that it would keep short-term interest rates near zero for the foreseeable future, even though the central bank acknowledged that the economy was recovering from its long downturn.”

24 September 2009 at 8:47 am 1 comment

Uncle Miltie on Economic Communication

| Peter Klein |

No, not Milton Friedman, but John Milton. See “Areopagitica: Milton’s Influence on Classical and Modern Political and Economic Thought” by Isaac M. Morehouse in the excellent new online journal Libertarian Papers. Says Morehouse:

Milton’s work has something to teach economists not only in its content but in its style and strategy. Milton did not restrict his theories on free speech to scholarly journals. Though his rhetorical style hardly seems accessible to the masses today, he intentionally wrote a short pamphlet with conscious allusions to popular sentiment in order to communicate rather complex ideas to the body politic. Economists who lament the lack of economic knowledge among the “man on the street” and the preponderance of antigrowth economic policy which result have much to learn from Milton. He wrote his work because he truly wanted change. For that reason, he made it accessible to the people whose hearts and minds he would have to win to see change come about. Modern economists would do well to more frequently attempt communication with more than a handful of scholars.

Along these lines I have to admit that I admire Paul Krugman, not because of the substance of arguments, which I find puerile and unformed, or his writing style, which is haughty and shrill, but because he tries to write for a popular audience, not just to his fellow specialists. (OK, actually, Krugman seems to have quit doing or writing about serious economic research, and doesn’t seem to have read a journal article in the last 15 years, but you get my point.)

Update: See also “Heroic Milton, Happy Birthday” from the NYRB.

23 September 2009 at 8:43 am 5 comments

Another Economist Gets a Genius Award

| Peter Klein |

This year it’s Esther Duflo, leader in the experimental approach to poverty reduction. She joins past economist-MacArthur fellows Matt Rabin, Avner Greif, Kevin Murphy, Nancy Folbre, Michael Kremer, and (way back in 1983, Alice Rivlin).

22 September 2009 at 9:05 am Leave a comment

Niche Markets for Obsolete Technologies

| Peter Klein |

recordOne of the most interesting papers I saw presented at this year’s ACAC meeting was Ron Adner and Daniel Snow’s “‘Old’ Technology Responses to ‘New’ Technology Threats: Demand Heterogeneity and Graceful Technology Retreats.” They show how incumbents sometimes react to disruptive innovation by repositioning the old technology as a niche product, aimed at specialized users or enthusiasts. Their examples are fascinating. One-way pagers, for example, are still popular in hospitals because their low-powered signals work better around, and interfere less with, complex medical equipment. Many audiophiles prefer vinyl records, with their rich, analog sound, to digital media. (Needles for high-end turntables sell for thousands of dollars.) Calligraphers prefer fountain pens to ball-point pens. And so on. Adner and Snow present a taxonomy of “reactive” strategies by incumbents facing innovative entrants and characterize the benefits and costs of each strategy. Here’s the abstract:

We explore the implications of a real and common alternative to attempting the transformation required to embrace a new, dominant, technology — the choice to maintain focus on the old technology. In considering this choice we distinguish between ‘racing’ strategies, which attempt to fight off the rise of the new technology by extending the performance of the old technology, and ‘retreat’ strategies, which attempt to accommodate the rise of the new technology by repositioning the old technology in the demand environment. Underlying our arguments is the observation that the emergence of a new technology does more than just create a substitute threat — it can also reveal significant underlying heterogeneity in the old technology’s broader demand environment. This heterogeneity is a source of opportunities that can support a new position for the old technology, in either the current market or a new one. Using this lens we explore the decision to stay with the old technology as a rational, proactive choice rather than as a mark of managerial and organizational failure. We then consider the distinctive challenges and organizational dynamics that arise in technology retreats, and their implications for the ways in which managers and scholars should approach questions regarding the management of capabilities, lifecycles, and ecosystems.

I came across another example this summer, in a NY Times piece on a Dutch firm resurrecting the Polaroid camera. And there was the 2006 Darren Aronofsky film The Fountain, which used a low-tech combination of soap bubbles, oils, and other liquids rather than digital technology to create its unusual visual effects.

21 September 2009 at 12:57 pm 5 comments

Bankrupt Bankruptcy

| Glenn MacDonald |

The US bankruptcy process is designed to be an orderly way to preserve any value that is left in the bankrupt business, and treat the creditors fairly and consistent with their contractual rights. This process has been honed through use and generally functions highly effectively. The point of preserving value is obvious enough. Fair treatment of creditors is not about fairness per se, but rather about investor investor protection generally, i.e., in the US, to promote efficient credit markets, investors are generally well protected, including in bankruptcies. The recent GM bankruptcy is an interesting case of how this process can be made to fail, mainly through rushing the process and dictating its outcome rather than by letting the process do what it was designed to do.

Specifically, much value was wasted. For example, among car aficionados, there are few brands more revered than the Pontiac GTO; this persists despite the weak offering brought out in 2004. Where is the GTO? On the scrap heap with the rest of Pontiac. A more deliberate bankruptcy would have preserved this value, e.g., by folding parts of Pontiac into Chevrolet. Second, GM’s creditors rightly claimed they were wronged by allowing the sale of all good GM assets to the new GM, owned mostly by the government and the UAW, and denying them the rights to argue their case to the bankrupcy court. They correctly argue they were robbed.

Who are the main beneficiaries of this mess? To the extent that despite the poor reorganization, GM is actually worth something, obviously the Federal government and the UAW benefit from the treatment of creditors. But more importantly, this is terrific for GM’s competitors, who have much to gain from GM’s remaining value being wasted through a weak product line, politically driven lack of cost reduction as inefficient facilities are retained, etc.

18 September 2009 at 7:45 am 3 comments

A New Negative Externality

| Lasse B. Lien |

If you haven’t been brilliant lately, here is a possible explanation. It’s not at all your fault, it’s just that your colleagues are too good-looking. Note, though, that this excuse can apparently only be used by men.

Abstract: The present research tested the prediction that mixed-sex interactions may temporarily impair cognitive functioning. Two studies, in which participants interacted either with a same-sex or opposite-sex other, demonstrated that men’s (but not women’s) cognitive performance declined following a mixed-sex encounter. In line with our theoretical reasoning, this effect occurred more strongly to the extent that the opposite-sex other was perceived as more attractive (Study 1), and to the extent that participants reported higher levels of impression management motivation (Study 2). Implications for the general role of interpersonal processes in cognitive functioning, and some practical implications, are discussed.

Isn’t this a classic case of a negative externality? Surely there must be some kind of taxation or side payment scheme that can reduce this burden to society.

Source: Johan C. Karremans, Thijs Verwijmeren, Tila M. Pronk, and Meyke Reitsma, “Interacting with women can impair men’s cognitive functioning,” Journal of Experimental Social Psychology 45(4), July 2009, 1041-44.

18 September 2009 at 5:16 am 5 comments

Famous Misquotes

| Peter Klein |

What are your favorite famous misquotes in social science? E.g., everybody knows Lord Acton’s dictum: “Power corrupts, and absolute power corrupts absolutely.” Except he actually wrote “power tends to corrupt, and absolute power corrupts absolutely.” Likewise, Adam Smith didn’t say that the merchant is led “as if by an invisible hand” to promote an end not his intention; he said the merchant “is in this, as in many other cases, led by an invisible hand. . . .” And, to get to the really deep thinkers, Gordon Gekko didn’t say “greed is good,” but “greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit. . . .” I love you, man!

On a related note, David Levy and Sandra Peart explain that Thomas Carlyle’s description of economics as the “dismal science” had nothing to do with Malthusian overpopulation. Carlyle actually despised the economists because they supported the emancipation of slaves and believed, in Levy and Peart’s words, “it was institutions, not race, that explained why some nations were rich and others poor.”

17 September 2009 at 4:33 pm 2 comments

Climate Change Economics

| Glenn MacDonald |

Some thoughts about how carbon emissions will evolve. Assume carbon emissions cause climate change. (Obviously this is controversial. But I have nothing new to add to this and so am willing to grant this assumption.) There are two fundamental economic forces at work. One is that emissions are a classical prisoners’ dilemma. That is, reducing emissions is costly, and the benefits to any one country are mainly enjoyed by others. Thus, in equilibrium, there will not be a lot of effort devoted to reducing emissions. Getting around this would require either some sort of external enforcement, e.g., the United Nations (pause for laughter!), or some approach based on repeated interaction; unfortunately the latter requires more patience and information than is realistic in this situation. Thus, consistent with the data, emissions will grow, and, per my assumption, climate change will ensue. Second, tastes for amenities such as clean air appear to be normal goods, maybe even luxuries. Individuals in China, eastern Europe, . . . appear to have little interest in these amenities, given what they might have to forego to have them, whereas many in the US, Canada, western Europe, . . . seem more inclined to pay a little more for green goods and services. Thus, efforts to reduce emissions will grow as more and more countries prosper sufficiently that their inhabitants are willing to forgo consumption for cleaner air, etc. So, from an economic perspective, the most realistic way to fewer carbon emissions and (per my assumption) less climate effects is through the aggressive promotion of activities that promote growth: free trade, democracy, economic freedom, reduced taxes, regulations and tariffs, protection of property rights. . . . Interestingly, freeing individuals to pursue their interests is likely the best practical/realitic approach to what, at first blush, seems like a classical case for collective action.

16 September 2009 at 9:14 am 17 comments

Introducing Guest Blogger Glenn MacDonald

| Peter Klein |

It’s a pleasure to welcome Glenn MacDonald as our newest guest blogger. Glenn is the John M. Olin Distinguished Professor of Economics and Strategy at the Olin Business School, Washington University in St. Louis, and Director of the Center for Research in Economics and Strategy. His recent research has focused on optimal compensation in competitive product markets, the impact of investor protection on entrepreneurship and economic growth, industry dynamics, and coalitional game theory foundations for strategy. His work has appeared in many journals including the Journal of Political Economy, Econometrica, American Economic Review, Quarterly Journal of Economics, and Management Science. He’s also an Associate Editor of Management Science. Welcome Glenn!

16 September 2009 at 9:12 am Leave a comment

Two Quotations on Profits

| Peter Klein |

Henry Hazlitt, from Economics in One Lesson:

In a free economy, in which wages, costs and prices are left to the free play of the competitive market, the prospect of profits decides what articles will be made, and in what quantities — and what articles will not be made at all. If there is no profit in making an article, it is a sign that the labor and capital devoted to its production are misdirected: the value of the resources that must be used up in making the article is greater than the value of the article itself.

One function of profits, in brief, is to guide and channel the factors of production so as to apportion the relative output of thousands of different commodities in accordance with demand. No bureaucrat, no matter how brilliant, can solve this problem arbitrarily. Free prices and free profits will maximize production and relieve shortages quicker than any other system. Arbitrarily fixed prices and arbitrarily limited profits can only prolong shortages and reduce production and employment.

The function of profits, finally, is to put constant and unremitting pressure on the head of every competitive business to introduce further economies and efficiencies, no matter to what stage these may already have been brought.

Barack Obama, from last week’s address on healthcare:

I’ve insisted that like any private insurance company, the public insurance option would have to be self-sufficient and rely on the premiums it collects.  But by avoiding some of the overhead that gets eaten up at private companies by profits and excessive administrative costs and executive salaries, it could provide a good deal for consumers, and would also keep pressure on private insurers to keep their policies affordable and treat their customers better. . . .

So, (a) profits and executive salaries are part of (avoidable) overhead, and (b) government agencies have lower administrative costs than private firms. Who knew? (Thanks to Gary for the quote.)

15 September 2009 at 3:26 am 4 comments

The Onion or Reality: Ron Kirk Edition

| Peter Klein |

Today’s installment of our series featuring statements so self-evidently absurd you wonder how anyone could have made them with a straight face focuses on US Trade Representative Ron Kirk. Here’s Captain Kirk failing Economics 101:

Following an announcement by the White House, United States Trade Representative Ron Kirk released the following statement today on the U.S. decision to impose remedies under Section 421 of the 1974 Trade Act to stop a harmful surge of imports into the U.S. of Chinese tires for passenger cars and light trucks. Following what the ITC determined was a surge, production of similar products in the U.S. dropped, domestic tire plants closed, and Americans lost their jobs. Today’s steps are designed to level the playing field for American workers in the tire market.

The three-year remedies, consisting of an additional tariff of 35 percent ad valorem in the first year, 30 percent ad valorem in the second, and 25 percent ad valorem in the third year, are being imposed after a finding by the United States International Trade Commission that a harmful surge of imports of Chinese tires disrupted the U.S. market for those products. . . .

“This Administration is doing what is necessary to enforce trade agreements on behalf of American workers and manufacturers. Enforcing trade laws is key to maintaining an open and free trading system.”

Christie Romer, where are you? Larry Summers? Austan Goolsbee? Does any economically literate person have a voice in Obama’s White House?

Mr. Kirk, please go read  “Saving the X Industry” 500 times. This may help.

12 September 2009 at 6:15 pm 3 comments

Professorial Role Models

| Peter Klein |

Mine is of course Professor Kingsfield from “The Paper Chase”:

Best line: “Loud! Fill the classroom with your intelligence.”

My co-bloggers are of course warm-and-fuzzy types. Anybody have a clip of the scene from One True Thing where the Renee Zellweger character remembers visiting her father’s classroom as a child? “So, I guess this is the last class of the semester. Thank you for taking this journey with me.” (Students all stand up and applaud, shake his hand as he walks down the aisle, etc.) Then there’s the scene from Better Off Dead with the high-school math teacher played by Vincent Schiavelli. Classic!

11 September 2009 at 9:27 am 4 comments

Skewness in Journal Rankings

| Lasse Lien |

Here is an interesting piece about journal rankings in economics (abstract below). See also Steve Phelan’s comment and link about similar issues in management (#3).

Nearly all journal rankings in economics use some weighted average of citations to calculate a journal’s impact. These rankings are often used, formally or informally, to help assess the publication success of individual economists or institutions. Although ranking methods and opinions are legion, scant attention has been paid to the usefulness of any ranking as representative of the many articles published in a journal. First, because the distributions of citations across articles within a journal are seriously skewed, and the skewness differs across journals, the appropriate measure of central tendency is the median rather than the mean. Second, large shares of articles in the highest-ranked journals are cited less frequently than typical articles in much-lower-ranked journals.

Source: Wall, Howard J. (2009), “Don’t Get Skewed Over by Journal Rankings,” The B.E. Journal of Economic Analysis & Policy: Vol. 9 (1).

10 September 2009 at 4:40 am 3 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).
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).
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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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