Archive for February, 2010

Jargon Watch

| Peter Klein |

This week’s entries in our continuing series:

27 February 2010 at 9:52 am Leave a comment

Quote of the Day: Bartley on the Marketplace of Ideas

| Peter Klein |

I happened to be looking today through Unfathomed Knowledge, Unmeasured Wealth by W. W. Bartley, III, who passed away shortly after this book was published. Bartley, a student and colleague of Karl Popper and the Founding Editor of The Collected Works of F. A. Hayek, was a brilliant and penetrating thinker whose work is not very well known outside of a few  professional circles. Unfathomed Knowledge, a book about higher education (with the subtitle “On Universities and the Wealth of Nations”), was written for a general audience and is full of insights about the crazy business of academia. Here’s one passage:

Analogies have often been drawn between a free market in ideas and free markets in goods and services. Yet intellectuals tend to dislike such comparisons. They see the free market in ideas as something on a higher plane, qualitatively different from free markets in commodities and the like. Many of them indeed even hate the marketplace as traditionally conceived, and would want nothing to do, even analogically, with a free market in coal, housing, fish, or petroleum.

Take a few examples. Several scholars, including Edward Shils, of the University of Chicago, strongly protested the analogy when it was drawn by Michael Polanyi at the Congress for Cultural Freedom. One called Polanyi’s comparison between free markets in goods and in ideas “clever but questionable” in that a man who offers commodities in the free market “is not bound by anything” whereas in science one is bound to an objective method. Shils added that members of the scientific community, by contrast to businessmen and traders, act in accordance with overriding standards, a “common law” above and beyond individuals.

Such a position does not withstand examination. Someone offering commodities in a market — far from being “not bound by anything” — is governed by enforceable law relating to fraud, credit, contract and such like. The analogy does have limits, but of a different sort: in the marketplace of ideas, fraud, plagiarism, theft, false advertising (including false claims to expertise and the whole mystique of expertise), “conspiracies of silence,” casual slander and libel, breach of contract, deceit of all sorts are more common than in business — simply because there are few readily enforceable penalties against offenders, whereas “whistle-blowers” are severely punished. This is so especially in those areas (the humanities, social sciences, the arts — as opposed to the profitable fields) where the transaction costs of enforcing such things as property rights, priority claims, or even accurate report5ing usually outweigh the advantage in doing so, and where the transaction costs of trying to defend oneself against such things as slander are prohibitive.

25 February 2010 at 12:44 am 7 comments

New Issue of QJAE

| Peter Klein |

The new issue of the Quarterly Journal of Austrian Economics (volume 12, no. 3) has several papers of likely interest to O&Mers. For instance:

Jack High, “Entrepreneurship and Economic Growth: The Theory of Emergent Institutions”

This paper enlarges Menger’s theory of the origins of money by making explicit the role of entrepreneurship in the theory and by extending the theory to market institutions other than money. Drawing on the research of anthropologists, archaeologists, and historians, the paper considers the origins of three institutions that underlie economic growth — the division of labor, monetary accounting, and private property. Menger’s generalized theory of the origins of institutions is used to interpret each of these institutions.

Laurent A.H. Carnis, “The Economic Theory of Bureaucracy: Insights from the Niskanian Model and the Misesian Approach”

Governmental interventions in the economy take numerous forms, and they require the existence of a public authority, a bureaucracy, to implement them. This article proposes an analysis of the origins and the dynamics of bureaucracy, and discusses means of escaping bureaucracy’s disadvantages. I will proceed by means of a comparison between the theories of Niskanen and Mises, two impressive and very representative works from the Public Choice School and the Austrian School of economics. Although Mises and Niskanen share a common analysis of the defect of bureaucratic management, there are strong disagreements between the two authors about the reasons for the existence of bureaus and about their functioning and their deficiencies. Inevitably, the means proposed by Niskanen and Mises for escaping the disadvantages of bureaucracy are different and cannot be reconciled.

Check out the rest!

24 February 2010 at 12:13 pm Leave a comment

Scott Galloway Is My New Hero

| Peter Klein |

For this brilliant performance in his Brand Management class at NYU (via Cliff). Says he to whiny MBA student:

You state that, having not taken my class, it would be impossible to know our policy of not allowing people to walk in an hour late. Most risk analysis offers that in the face of substantial uncertainty, you opt for the more conservative path or hedge your bet (e.g., do not show up an hour late until you know the professor has an explicit policy for tolerating disrespectful behavior, check with the TA before class, etc.). . . .

In addition, your logic effectively means you cannot be held accountable for any code of conduct before taking a class. For the record, we also have no stated policy against bursting into show tunes in the middle of class, urinating on desks or taking that revolutionary hair removal system for a spin. However, xxxx, there is a baseline level of decorum (i.e., manners) that we expect of grown men and women who the admissions department have deemed tomorrow’s business leaders.

And the life lesson:

Getting a good job, working long hours, keeping your skills relevant, navigating the politics of an organization, finding a live/work balance . . . these are all really hard, xxxx. In contrast, respecting institutions, having manners, demonstrating a level of humility . . . these are all (relatively) easy. Get the easy stuff right xxxx. In and of themselves they will not make you successful. However, not possessing them will hold you back and you will not achieve your potential which, by virtue of you being admitted to Stern, you must have in spades. It’s not too late xxxx. . . .

Bravo!

22 February 2010 at 11:19 pm 3 comments

Industry-Level Effects of Government Spending

| Peter Klein |

A consistent theme of this blog’s postings on the financial crisis and recession is that the Keynesians focus on too high a level of aggregation. As economists and management scholars we care primarily about industries, firms, and individuals, not abstract macroeconomic aggregates like GDP, the “price level,” etc. Heterogeneity matters, and the way stimulus programs affect the allocation of resources across firms and industries is as important, or more important, than their economy-wide effects.

A new NBER paper by Christopher Nekarda and Valerie Ramey uses disaggregated industry-level data to examine the effect of the current US stimulus program on output, employment, real wages, and productivity. They find, not surprisingly, that increases in government spending directed toward a specific industry raise that industry’s short-term output and employment but — contrary to New Keynesian predictions — reduce that industry’s real wages and productivity.

Nekarda and Ramey note that stimulus spending has been directed disproportionately to durable-goods manufacturing and that these industries have higher returns to scale than other industries, possibly explaining how reductions in industry-level productivity could look like productivity gains in the aggregate. In other words, stimulus spending reduces efficiency in all industries, but directs resources toward industries that were more efficient to begin with, giving the appearance of a positive aggregate effect. Thoughtful and provocative.

22 February 2010 at 1:26 pm 1 comment

The Best and the Brightest

| Dick Langlois |

I read Peter’s post about paternalism — and the limits of smart people in government — just after I read about the death of Carl Kaysen, long-time MIT economist and one-time Kennedy advisor. Obituaries praise Kaysen for his role as a policy intellectual of great scope, especially in the area of nuclear non-proliferation. But they either fail to mention, or mention with considerable approval, Kaysen’s pivotal role in the famous 1954 United Shoe Machinery case. Kaysen’s view of the case, and of the role of economic analysis in antitrust, is a key example of what Williamson calls the “inhospitality tradition” — that any kind of contract we don’t understand must therefore be anticompetitive. In the eyes of many present-day economists, Kaysen is implicated in having destroyed the American shoe machinery industry and with it the American shoe industry. (The post-mortem is by Masten and Snyder.) Not exactly McNamara in Vietnam, but worth mentioning amid the hagiography of Kaysen, not to mention the reawakened culture of elitist decision-making in Washington.

20 February 2010 at 3:41 pm 3 comments

Comparative Institutional Analysis and the New Paternalism

| Peter Klein |

Comparative institutional analysis — defined as the assessment of feasible organizational or policy alternatives — is at the heart of the new institutional economics. Most economists and management scholars recognize, at least implicitly, that individuals and organizations don’t think, act, and choose with reference to some kind of global optimum, but are always evaluating trade-offs among imperfect alternatives. Yet, when it comes to public policy, even trained economists and strategy scholars easily lapse into Nirvana mode. Recent examples discussed her at O&M include the debate over Fed independence, the role of financial regulators more generally, and the “soft” or “libertarian” paternalism favored by Obama’s man Cass Sunstein, among others.

The new paternalism literature suggests that private actors suffer from biases and cognitive limitations such as lack of willpower or self-control, status quo bias, optimism bias, and susceptibility to framing effects leading them to make decisions that are inconsistent with their own preferences. By making marginal changes to the options available to market participants (“nudges”), the private benefits and costs of various actions, and the informational environment in which choices are made, market participants can be led to make “better” choices without reliance on heavy-handed, top-down regulation. The problem, of course, is that this literature virtually ignores the cognitive and behavioral limitations affecting policymakers. Incentive problems are an obvious example, along with the “slippery-slope” problem: the vulnerability of new paternalist proposals “to slippery slopes that can lead from modest paternalism to more extensive paternalism” (Rizzo and Whitman, 2009, p. 667).

Mario Rizzo and Glen Whitman’s have written an excellent set of papers on the new paternalism, the latest of which focuses on the knowledge problem, and how dispersed, tacit knowledge about preferences and constraints limits policymakers’ ability to plan paternalist policies that actually make people better off. The paper is here, and Mario blogs about it here. Highly recommended!

19 February 2010 at 12:08 pm 22 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).
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