Archive for February, 2010

Do Social Scientists Misuse the Term “Natural Experiment”?

| Peter Klein |

Richard Nielsen thinks so:

I’m on board with using the language of experiments, but I’ve also seen more than a few recent papers framed as “natural experiments” that are really just observational studies with no particular claim to special status. The spread of experimental language into observational studies may have downsides as well as benefits.

Until recently, I basically assumed that when people said they had a natural experiment, what they really meant was that they had a credible instrument: a variable that breaks the link between treatment assignment and the potential outcomes for some or all of the units. However, the lead [Political Analysis] article places difference-in-differences, regression discontinuity, and matching methods under the tent of natural experiments. While I like (and use) these techniques and find them compelling, only some of them explicitly rely on an IV-type argument. Maybe I have more to learn.

The problem with any randomization that isn’t controlled by the researcher is that extreme skeptics like me can then try to spin complicated stories about how confounding could occur.

Nielson is talking about political-science research, but economists and management scholars also use  the term “natural experiment” more loosely (e.g., to include difference-in-differences models). But Nielson (if I understand him correctly) seems to be mixing the specific method of analyzing the natural experiment with the presence or absence of a credible instrument. In other words, he’s concerned that people are using the term “natural experiment” to mean “any situation in which variation is introduced by nature,” rather than “a situation in which I can tell a convincing story about identification.” I don’t think economists are guilty of using it in the former way. As Angrist and Krueger put it, “A common criticism of the natural experiments approach to instrumental variables is that it does not spell out fully the underlying theoretical relationships. . . . [But] there is usually a well-developed story or model motivating the choice of instruments.” And if this story is persuasive, then discontinuity analysis or differences-in-difference modeling should be fine. Right?

5 February 2010 at 9:18 am Leave a comment

“I, Pencil,” Updated

| Peter Klein |

Like many instructors, I rely on Leonard Read’s classic “I, Pencil” to illustrate the vast network of impersonal, voluntary exchanges that make up the market system. One problem, however, is that many of today’s students have never seen a yellow wooden pencil. Thanks to Ed Lopez, I now have an updated version.

3 February 2010 at 10:15 pm 2 comments

Brad’s Bloviations, Part #2,235

| Peter Klein |

Brad DeLong accuses non-Keynesians (Austrians, Chicagoites, and other sensible people) of “los[ing] themselves amidst their early-nineteenth century books, one hundred and seventy years behind the state of the art in economics,” just because they think public spending and deficits might be crowding out private-market activity, making it difficult — impossible, actually — to come up with meaningful estimates of “jobs saved” by stimulus spending. If you can get past Brad’s adolescent writing style (anyone citing Bastiat, for example, is “a truly clueless idiot”), you find that he is indeed very “progressive” in his thinking — he’s made it all the way to 1950. Brad, like most Keynesians, is stuck in the C + I + G world of undergraduate macro. His argument is that the stimulus can’t be crowding out private-sector jobs because (a) wages aren’t rising (implying that stimulus-funded workers aren’t being bid away from other potential opportunities) and (b) T-bill prices aren’t falling (suggesting that private employers aren’t competing with the Feds for credit).

Leave aside for the moment that Brad has no idea what wages and bond prices would be in the absence of stimulus. The key problem with Brad’s argument, noted by Russ Roberts, is its reliance on crude macroeconomic aggregates. As pointed out here many times, heterogeneity matters. Sensible economists care not about the aggregate unemployment rate, but the effect of stimulus activity on individual labor markets. Stimulus affects the composition of employment, not just its level. (more…)

3 February 2010 at 3:08 pm 8 comments

Stuck on the Methodological Hamster Wheel

| Craig Pirrong |

I’ve read John Cassidy’s New Yorker article (not available online) in which he described his journey to the freshwater provinces in his attempt to see whether the financial crisis had caused Chicago economists to reject their reactionary views. (With one exception, the answer is blessedly “no.”) I’ve also read his paean to Pigou in the WSJ. So I pretty much knew what to expect when I picked up his How Markets Fail. Let’s say I wasn’t disappointed, in the sense that my very low expectations were met.

The book is a very conventional, Stiglitz-esque critique of market economics and those who defend markets. The latter are always described with Homer-esque modifiers, just so you’ll know that they [we!] are retrograde knuckle draggers. (more…)

3 February 2010 at 12:50 pm 4 comments

The Backchannel

| Peter Klein |

Cliff Atkinson’s new book (summarized here) makes me think I should use a private Twitter window during lectures. “Presenters can use the backchannel to extend a presentation and engage the audience inside and outside of the room. The backchannel can also destroy a presentation when the audience posts negative feedback online for the world to see, or changes the mood in the room entirely.” Maybe I should rethink my policy against tweeting in class?

3 February 2010 at 9:32 am Leave a comment

Kauffman Economic Outlook

| Peter Klein |

Here’s the inaugural release of the Kauffman Economic Outlook, based on a survey of distinguished economics bloggers (including Yours Truly). “America’s top economics bloggers represent a diverse group of writers with wide-ranging intellectual and political vantage points on one of the most important issues of the day — the economy. As independent thinkers who are immersed in discourse through the innovation of blogging, these economics writers have a unique voice and perspective, and potentially profound influence.” Take that, Old Media!

Lots of interesting charts. And who says economists don’t agree?

Despite being a balanced panel in terms of political alignment (16 percent Republican, 19 percent Democratic, 47 percent independent, and roughly 18 percent libertarian/other), there is a strong consensus around many policy recommendations. Seventy-one percent of economics bloggers think the U.S. government is “too involved in the economy,” with only 17 percent calling for greater involvement. When asked what the government should be doing, the only policies with more than 50 percent support are: 1) to increase high-skill immigration (63 percent), and 2) to increase legal immigration at all skill levels (57 percent). Two policies stood out sharply with near-unanimous opposition: increasing business regulation (9 percent) and increasing tariffs (4 percent). . . .

According to economics bloggers, the top three variables that policymakers should emphasize in a model of economic growth are human capital, innovation, and economic freedom. In a related question, bloggers were asked to rate the beneficial importance of numerous key players in the U.S. economy. One hundred percent of the panel rate entrepreneurs as “important” or “very important,” and innovation also had unanimous support. Only slightly less important are free trade and education, with nearly all respondents rating them as “important” or “very important.” In contrast, only 30 percent of economics bloggers think labor unions are important, and nearly 70 percent rate them as “unimportant” (numbers may not add to 100 due to non-responses and rounding). Opinion is decidedly mixed on manufacturing, while there is mild support for the importance of big business.

2 February 2010 at 12:07 pm Leave a comment

Cooperation and the Team Problem

| Nicolai Foss |

Alchian and Demsetz’s famous 1972 paper on the team problem and how resolving that problem may call for the “classical capitalist firm” is one of my teaching favorites. Students like the stark, stylized reasoning in the paper, and the team problem is a great way to introduce agency theory, among other things, because it so directly links to what is usually the only piece of game theory they know, namely the PD game.

However, I often experience that some students (particularly those who are following an OB or HRM class) are worried about the reasoning in Alchian and Demsetz, and are not convinced by the argument that it is basically counterfactual (provided they understand this point). I usually also explain that experimental evidence from the public goods literature suggests that cooperativeness declines over time (e.g., here) unless cooperation is backed up by various flanking arrangements (a recent Nobel can now be invoked in support of this).

A recent experimental paper, “Not just hot air: normative codes of conduct induce cooperative behavior,” — written by a German team (Thomas Lauer, Bettina Rockenbach, and Peter Walgenbach), and published in the newly founded Review of Managerial Science — suggests that the verbal framing of a work environment with cooperative connotations may go a long way towards inducing cooperativeness in team settings. In their experiments, the authors implement five “treatments” that differ only in terms of the framing, specifically in the extent to which reference is made to a cooperative firm context.

The basic experimental setup is team production with teams of four members that each have to make decisions on whether to invest or not in a team project. Each unit invested generates a benefit of 1.6 units for the team — but those benefits are divided equally among all team members. In this setting, changes in framing dramatically influence outcomes. I recommend the paper as a fascinating example of the emerging intersection of the economics of the firm, OB, and experimental methods.

2 February 2010 at 7:13 am Leave a comment

Interview with a Randian CEO

| Peter Klein |

Today is Ayn Rand’s birthday, so in her honor we direct you to the December 2009 issue of Academy of Management Learning and Executive, which features an interview with BB&T Bank CEO John Allison, a follower of Rand. Access appears to be restricted to AoM members (manuscript version here, published version here). Sample:

After I went to work I began to read philosophy, in search for the answers to the big questions of life. I became interested in what I consider to be the great reason/reality based philosophers — Aristotle, Thomas Aquinas, John Locke, Thomas Jefferson and Ayn Rand.

That philosophical background combined with my own observations, which I call my inductions from life, together with my family upbringing, formed my philosophical framework as a young adult and executive. In 1993 or 1994 I read Objectivism: The Philosophy of Ayn Rand by Leonard Peikoff. This book really integrated everything for me. It enabled me to focus my thinking. By this time, I had been CEO of BB&T for a few years and we were in the midst of a merger of equals. It was very important that we have a clearly defined value system. Two large organizations with cultures that had some differences had to come together with a single value system. Peikoff’s book put everything together for me. We had some of the basics of a value system — honesty, integrity, traditional conservative business values, but we also held a number of contradictions. What Rand’s philosophy did for me was to provide a framework for how to integrate all the disparate pieces. I could see everything in a different way than I had seen before. Rand’s philosophy provided an ordering. It also clarified concepts. For example, people often mix up justice with mercy. From Rand I learned that justice requires that you reward those who contribute the most with the most, which implied that paternalism is unjust; failing to deal with non-performance is unjust. Also, rationality is the foundation for values, and rationality can not be compromised.

NB: BB&T has funded a number of professorships in the last few years.

2 February 2010 at 4:02 am 2 comments

Rethinking the Diversification Discount

| Peter Klein |

A very good summary by Don Sull of recent literature on diversification. I like points #1 and #4 the best. He missed a few of the seminal papers (1, 2, 3) but nobody’s perfect. Note also that Sull is focusing on the corporate finance literature, which generally ignores inter-industry relatedness. In the strategic management literature, by contrast, relatedness (and its measurement) has been a central concern (see the references here).

1 February 2010 at 3:18 pm 1 comment

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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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