Archive for March, 2011

Confusing Definitions of Entrepreneurship

| Peter Klein |

Some of you have heard me complain before about the confusing ways “entrepreneur” and its cognates are used in the literature. Sometimes entrepreneurship refers to an outcome or phenomenon (startups, self-employment, high-growth firms), other times to a behavior or attribute (creativity, alertness, innovation, judgment, adaptation). I find the occupational, structural, and functional taxonomy useful, but other organizing schemes may be useful too. In any case, reading the entrepreneurship literature can be a frustrating experience.

I’m glad I’m not the only one who thinks so:

[T]he book’s diversity of approaches and styles is both a strength and also an inherent weakness. Some chapters offer comprehensive descriptions over long periods of time (e.g., Hudson, Hau, Wengenroth, Chan), while others focus on narrow aspects of entrepreneurship (e.g., Yonekura and Shimizu, Mokyr, Wolcott). The first kind appears to be written for a broad audience of noneconomic historians, whereas the second type tends to be drier and more technical. Some authors follow Baumol and distinguish between productive and redistributive entrepreneurship (e.g., Hudson, Mokyr, Cain, Lamoreaux), while others use very broad definitions of entrepreneurship (e.g., Kuran, Casson and Godley, Gelderblom), and yet another group of authors associates entrepreneurship with innovation (e.g., Yonekura and Shimizu, Graham). This extreme diversity of definitions and approaches can overwhelm the reader. As a result, the volume’s ambition of tracing “the history of entrepreneurship throughout the world since antiquity” (p. vii) ends up being an interesting patchwork of insights drawn from different times and places rather than a unifying and synthetic history.

That’s from Michaël Bikard and Scott Stern’s Journal of Economic Literature review of The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times (ed. David S. Landes, Joel Mokyr, and William J. Baumol, Princeton, 2010), which we blogged about earlier. Obviously in a work of this scope, a common definition of entrepreneurship is likely to be elusive. But the wide variety of meanings in this lone volume give you a sense of the challenge in making sense of the wider literature.

30 March 2011 at 3:55 pm 8 comments

FAIL

| Peter Klein |

Check out AdmittingFailure.com,

an open space for development professionals who recognize that the only “bad” failure is one that’s repeated. Those who are willing to share their missteps to ensure they don’t happen again. It is a community and a resource, all designed to establish new levels of transparency, collaboration, and innovation within the development sector.

Thanks to Josh Gans for the tip and some interesting discussion of failure in other contexts. (I’m not sure I’d use the term “missing market,” though; M&As, bankruptcy court, and indeed any asset markets could be described as markets for failure!)

Here’s an interesting paper by Rita McGrath on entrepreneurial failure. And of course there are huge academic literatures on divestitures, bankruptcies, and the like. At O&M we’ve often criticized bailouts and stimulus policy for retarding Schumpeterian competition by making it more difficult to identify, rectify, and learn from failures.

28 March 2011 at 11:54 pm 2 comments

Information versus Knowledge

| Peter Klein |

[T]here’s enough information coming at us from all sides to leave us feeling overwhelmed, just as people in earlier ages felt smothered by what Leibniz called “that horrible mass of books that keeps on growing.” In response, 17th-­century writers compiled indexes, bibliographies, compendiums and encyclopedias to winnow out the chaff. Contemplating the problem of turning information into useful knowledge, Gleick sees a similar role for blogs and aggregators, syntheses like Wikipedia, and the “vast, collaborative filter” of our connectivity. Now, as at any moment of technological disruption, he writes, “the old ways of organizing knowledge no longer work.”

But knowledge isn’t simply information that has been vetted and made comprehensible. “Medical information,” for example, evokes the flood of hits that appear when you do a Google search for “back pain” or “vitamin D.” “Medical knowledge,” on the other hand, evokes the fabric of institutions and communities that are responsible for creating, curating and diffusing what is known. In fact, you could argue that the most important role of search engines is to locate the online outcroppings of “the old ways of organizing knowledge” that we still depend on, like the N.I.H., the S.E.C., the O.E.D., the BBC, the N.Y.P.L. and ESPN.

That’s Geoffrey Nunberg reviewing James Gleick’s new book, The Information (Random House, 2011). Gleick burst onto the scene with 1987′s Chaos: The Making of New Science, which introduced the butterfly effect, Mandelbrot sets, fractal geometry, and the like into popular culture. (Don’t blame Gleick for the silly Ian Malcolm character in Jurassic Park, or the even sillier Ashton Kutcher movie.) I haven’t gotten my hands on a copy of The Information (gotta  love the definite article, as in “the calculus”) but, as best as I can tell from the Google books version, Gleick doesn’t get into the Hayekian-Polanyian distinctions between parameterizable “information” and tacit knowledge that particularly interest O&M readers. (Another good quote from the review: “[T]here’s no road back from bits to meaning. For one thing, the units don’t correspond: the text of ‘War and Peace’ takes up less disk space than a Madonna music video.”) Still, the book should be worth a read.

27 March 2011 at 1:17 pm 1 comment

An Early Example of a Hold-up. . .

| Scott Masten |

. . . in which two Irishman sweep fifteen or thirty Italians into an open ditch.

The context is a dispute over a contract for the supply of water to Bayonne, NJ., circa 1896, as reported in The First History of Bayonne, NJ (1904: 92):

At the mayoralty election in the spring of 1895, Egbert Seymour, on the Democratic ticket, was elected Mayor. Several of the Councilmen who were elected at this election, and two or three city officials, were opposed to the new water contract, and attempted a “hold-up.” The trouble reached its height one day during the first year of Seymour’s administration. While employees of the water company were tapping the old mains to make the necessary water connection, some city officials arrived on the scene. Immediately there was trouble.

The New York Times article (Nov. 24, 1896) on the right (click to enlarge) elaborates, amusingly, on the manner in which the holdup was executed.

I have not yet been able to verify it but, according the previous source, “The matter was taken before the Supreme Court of the United States by the water company, and an injunction was obtained against the city. United States marshals were stationed at the scene until the work was completed, to arrest any city official who interfered.” The city eventually bought out the company in 1918.

(Wish that I had found that quotation before completing this.)

25 March 2011 at 8:56 pm Leave a comment

Women and Children First

| Peter Klein |

Everything you ever wanted to know about the Titanic disaster. Well, everything behavioral economists want to know, namely who survived — a case study in “Behavior under Extreme Conditions” (Journal of Economic Perspectives, Winter 2011). Bruno Frey, David Savage and Benno Torgler note that the “common assumption . . . that in such situations, self-interested reactions will predominate and social cohesion is expected to  ate and social cohesion is expected to disappear. . . . However, empirical evidence on the extent to which people in the throes of a disaster react with self-regarding or with other-regarding behavior is scanty.” Fortunately (?), the sinking of the Titanic provides “a quasi-natural field experiment to explore behavior under extreme conditions of life and death.”

Examining data on the social and demographic characteristics of survivors and non-survivors they find that women and children were more likely to survive, other things equal, as well as the wealthy and those in a stronger social network (traveling with family members, or being  part of the crew). A morbidly interesting paper, to be sure.

25 March 2011 at 10:11 am 3 comments

McQuinn Center for Entrepreneurial Leadership

| Peter Klein |

Earlier this academic year I assumed the Directorship of the McQuinn Center for Entrepreneurial Leadership here at the University of Missouri. My colleague (and former O&M guest blogger) Randy Westgren retains the position of McQuinn Chair. The McQuinn Chair was established in 2004 through a generous gift from Al and Mary Agnes McQuinn, and the Center was created soon afterwards by Bruce Bullock, the inaugural McQuinn Chair.

Look for a slate of exciting programs and activities about entrepreneurship, organization, innovation, strategy, and more in the coming months. To keep you up to date on the Center’s activities, as well as news and information from the wider world of entrepreneurship, we’re blogging as well at entrepreneurship@McQuinn.

23 March 2011 at 3:02 pm Leave a comment

Coasian or Coasean?

| Peter Klein |

For years I described things relating to Ronald Coase as “Coasian.” Walter Block continually needled me about this, insisting the proper spelling was “Coasean,” but I resisted. Now I see more people using the latter spelling, and I’ve started using it myself. But which is correct? I beats e, but not by much, in a Googlefight. But I think a more targeted crowdsourcing arrangement is warranted. So, dear O&M readers, which do you prefer? Vote below.

Addendum: Thanks to Scott for pointing out that this was debated before at Volokh, where many of the critical issues — and the most obvious snarks — were already presented. To me, the fact that Coase himself, and people at Chicago Law, use “Coasian” seems a pretty strong argument in favor of the non-standard spelling. But one can make a good case for either.

20 March 2011 at 10:00 pm 17 comments

If You’re Not a Cynic Yet, this Might Help…

| Lasse Lien |

Revolving Door Lobbyists
Jordi Blanes i Vidal, Mirko Draca, Christian Fons-Rosen.

Abstract: Washington’s “revolving door” — the movement from government service into the lobbying industry — is regarded as a major concern for policy-making. We study how ex-government staffers benefit from the personal connections acquired during their public service. Lobbyists with experience in the office of a US Senator suffer a 24% drop in generated revenue when that Senator leaves office. The effect is immediate, discontinuous around the exit period and long-lasting. Consistent with the notion that lobbyists sell access to powerful politicians, the drop in revenue is increasing in the seniority of and committee assignments power held by the exiting politician.

By See the full paper here.

18 March 2011 at 11:33 am 2 comments

Paper Titles I Wish I’d Written

| Peter Klein |

“Schumacher meets Schumpeter” by Raphael Kaplinsky (Research Policy, March 2011). Asks if tech innovation benefits mostly the wealthy or the poorest in society as well. Great alliteration. (Thanks to Christos Kolympiris for the tip.)

I could still write books on Herbert Simon’s contributions (Simon Says), new developments in the resource-based view (Barney and Friends), or Marxist eschatology (Serf’s Up).

17 March 2011 at 9:11 am 6 comments

Management Textbooks Bungle Weber

| Peter Klein |

Most management scholars, like most economists, have little interest in doctrinal history, so it’s not surprising they don’t pay much attention to the history of management thought. But Stephen Cummings and Todd Bridgman’s “The Relevant Past: Why the History of Management Should Be Critical for Our Future” (Academy of Management Learning and Education, March 2011) is an eye-opener. Focusing on Max Weber, Cummings and Bridgman document a series of whoppers that appear consistently in leading management texts, such as the belief that “ideal type” means best or optimal; that Weber did his major work in the 1940s (Parsons’s translation of Wirtschaft and Gesellschaft appeared in 1947, 27 years after Weber’s death); that Weber personally admired bureaucracy (In Search of Excellence avers that Weber “pooh-poohed charismatic leadership and doted on bureaucracy”); and other gross misunderstandings. FAIL.

16 March 2011 at 8:38 am 4 comments

Stockman on the Crisis that Wasn’t

| Peter Klein |

I’ve been complaining since 2008 that the justification for TARP and other forms of monetary and fiscal stimulus was never clearly stated. “The financial system would have collapsed” if Paulson and Bernanke had not made their unprecedented moves. But there was never any serious analysis or argument for this, just a series of bold (bald?) assertions.

This weekend’s ASC speech by former Reagan OMB Director David Stockman took the same line:

Based on the panicked advice of Paulson and Bernanke, of course, the president had the misapprehension that without a bailout “this sucker is going down.” Yet 30 months after the fact, evidence that the American economy had been on the edge of a nuclear-style meltdown is nowhere to be found. . . .

Still, the urban legend persists that in September 2008 the payments system was on the cusp of crashing, and that absent the bailouts, companies would have missed payrolls, ATMs would have gone dark and general financial disintegration would have ensued.

But the only thing that even faintly hints of this fiction is the commercial-paper market dislocation. Upon examination, however, it is evident that what actually evaporated in this sector was not the cash needed for payrolls, but billions in phony book profits, which banks had previously obtained through yield-curve arbitrages that were now violently unwinding.

Stockman argues (persuasively, in my view) that the commercial-paper market was going through a much-needed correction, and that the best response would have been to let the loan market adjust, according to market forces. After all, “nowhere was it written that GE Capital or the Bank One credit-card conduit, to pick two heavy users of the space, had a Federal entitlement to cheap commercial paper — so that they could earn fat spreads on their loan books.”

15 March 2011 at 9:50 am 3 comments

Miscellaneous Links

| Peter Klein |

14 March 2011 at 4:33 pm 1 comment

Interesting New NBER Papers

| Peter Klein |

Matching Firms, Managers, and Incentives
Oriana Bandiera, Andrea Prat, Luigi Guiso, Raffaella Sadun
January 2011

We exploit a unique combination of administrative sources and survey data to study the match between firms and managers. The data includes manager characteristics, such as risk aversion and talent; firm characteristics, such as ownership; detailed measures of managerial practices relative to incentives, dismissals and promotions; and measurable outcomes, for the firm and for the manager. A parsimonious model of matching and incentive provision generates an array of implications that can be tested with our data. Our contribution is twofold. We disentangle the role of risk-aversion and talent in determining how firms select and motivate managers. In particular, risk-averse managers are matched with firms that offer low-powered contracts. We also show that empirical findings linking governance, incentives, and performance that are typically observed in isolation, can instead be interpreted within a simple unified matching framework.

Business Failures by Industry in the United States, 1895 to 1939: A Statistical History
Gary Richardson, Michael Gou
March 2011

Dun’s Review began publishing monthly data on bankruptcies by branch of business during the 1890s. This essay reconstructs that series, links it to its successors, and discusses how it can be used for economic analysis.

The Consequences of Financial Innovation: A Counterfactual Research Agenda
Josh Lerner, Peter Tufano
February 2011

Financial innovation has been both praised as the engine of growth of society and castigated for being the source of the weakness of the economy. In this paper, we review the literature on financial innovation and highlight the similarities and differences between financial innovation and other forms of innovation. We also propose a research agenda to systematically address the social welfare implications of financial innovation. To complement existing empirical and theoretical methods, we propose that scholars examine case studies of systemic (widely adopted) innovations, explicitly considering counterfactual histories had the innovations never been invented or adopted.

14 March 2011 at 8:54 am Leave a comment

Something to Ruin Your Weekend

| Lasse Lien |

On a Monday morning, a professor says to his class, “I will give you a surprise examination someday this week. It may be today, tomorrow, Wednesday, Thursday, or Friday at the latest. On the morning of the examination, when you come to class, you will not know that this is the day of the examination.”

Well, a logic student reasoned as follows: “Obviously I can’t get the exam on the last day, Friday, because if I haven’t gotten the exam by the end of Thursday’s class, then on Friday morning I’ll know that this is the day, and the exam won’t be a surprise. This rules out Friday, so I now know that Thursday is the last possible day. And, if I don’t get the exam by the end of Wednesday, then I’ll know on Thursday morning that this must be the day (because I have already ruled out Friday), hence it won’t be a surprise. So Thursday is also ruled out.”

The student then ruled out Wednesday by the same argument, then Tuesday, and finally Monday, the day on which the professor was speaking. He concluded: “Therefore I cannot get the exam at all; the professor cannot possibly fulfill his statement.” Just then, the professor said: “Now I will give you your exam.” The student was most surprised, but the professor seems to have kept his word.

Source: http://www.paradoxes.co.uk/#tweedledum

11 March 2011 at 3:24 pm 6 comments

Creative Destruction in Popular Culture

| Peter Klein |

Thanks to Thomas B. for forwarding links to US Sen. Rand Paul’s Monday-night appearance on the Daily Show (part 1, part 2, part 3). At the start of part 3, while discussing government bailouts, Paul uses the words “creative destruction,” and Jon Stewart bursts out laughing, apparently hearing the term for the first time. I guess Schumpeter is not as culturally relevant as I thought!

The show had some interesting moments, but I found the discussions (in the parts I watched) pretty shallow. Stewart was grilling Paul on his “free-market” views, focusing on health, safety, and environmental regulation. Both Paul and Stewart took the milquetoast position that sure, some of this type of regulation is needed, but it shouldn’t be “too much.” They didn’t get into a serious discussion of theory or evidence, however, or explore specific trade-offs. There are huge political economy and public-choice literatures on the FDA, EPA, OSHA, etc., showing that these organizations are easily captured, tend to retard innovation, fail to weigh marginal benefits and costs, and so on. The Journal of Law and Economics under Coase’s leadership made its bones on these kinds of studies in the 1970s. The FDA has been a particular target. The Stewart view also ignores comparative institutional analysis — e.g., the role of private ordering (third-party certification, reputation, etc. ) in the protection of health and safety.

At least Paul didn’t say he intended to become the best Senator, horseman, and lover in all Washington!

9 March 2011 at 12:37 pm 2 comments

Kuhn’s Ashtray

| Peter Klein |

You know about Wittgenstein’s Poker. But have you heard of Kuhn’s ashtray?

We began arguing. Kuhn had attacked my Whiggish use of the term “displacement current.” I had failed, in his view, to put myself in the mindset of Maxwell’s first attempts at creating a theory of electricity and magnetism. I felt that Kuhn had misinterpreted my paper, and that he — not me — had provided a Whiggish interpretation of Maxwell. I said, “You refuse to look through my telescope.” And he said, “It’s not a telescope, Errol. It’s a kaleidoscope.” (In this respect, he was probably right.)

The conversation took a turn for the ugly. Were my problems with him, or were they with his philosophy?

I asked him, “If paradigms are really incommensurable, how is history of science possible? Wouldn’t we be merely interpreting the past in the light of the present? Wouldn’t the past be inaccessible to us? Wouldn’t it be ‘incommensurable?’ ”

He started moaning. He put his head in his hands and was muttering, “He’s trying to kill me. He’s trying to kill me.”

And then I added, “…except for someone who imagines himself to be God.”

It was at this point that Kuhn threw the ashtray at me.

The account comes from filmmaker Errol Morris, then Thomas Kuhn’s graduate student at Princeton, who adds that “I had imagined graduate school as a shining city on a hill, but it turned out to be more like an extended visit with a bear in a cave.” (HT: Pete Boettke). I have not used Kuhn’s particular technique with my own students, though I admit it has a certain visceral appeal. Nor have I been on the receiving end of such behavior, though a conference participant once opened his presentation by saying, “My paper is basically devoted to refuting everything in Klein’s paper.” (Fortunately, I was the moderator, and responded immediately, “Thank you, your time is up.”)

Back to students: I do keep this decorative item by the entrance to my office, placed for all to see:

7 March 2011 at 10:56 am 4 comments

Chairman Mao and Comparative Institutional Analysis

| Peter Klein |

Coase? Williamson? No, Mao Tse-Tung:

Concrete analysis of concrete conditions, Lenin said, is “the most essential thing in Marxism, the living soul of Marxism.” Lacking an analytical approach, many of our comrades do not want to go deeply into complex matters, to analyse and study them over and over again, but like to draw simple conclusions which are either absolutely affirmative or absolutely negative. The fact that our newspapers are lacking in analytical articles and that the habit of analysis is not yet fully cultivated in the Party shows that there are such shortcomings. From now on we should remedy this state of affairs.

(Thanks to Pablo for the tip.)

"I say to you, Comrades. . . . No more blackboard economics!"

6 March 2011 at 7:02 pm 2 comments

Freedom to Trade and the Competitive Process

| Dick Langlois |

That’s the promising-sounding title of a new NBER Working Paper by Aaron Edlin and Joseph Farrell. Unfortunately, the argument turns out, in my opinion, to be extraordinarily wrongheaded. Here is the abstract.

Although antitrust courts sometimes stress the competitive process, they have not deeply explored what that process is. Inspired by the theory of the core, we explore the idea that the competitive process is the process of sellers and buyers forming improving coalitions. Much of antitrust can be seen as prohibiting firms’ attempts to restrain improving trade between their rivals and customers. In this way, antitrust protects firms’ and customers’ freedom to trade to their mutual betterment.

The promising part is that they talk explicitly about the competitive process.

The freedom-to-trade perspective . . . stresses the freedom of buyers and sellers to change their trading partners whenever that is mutually beneficial. The aspect of the competitive process that we study here is buyers and sellers exercising this freedom and forming improving coalitions (i.e., new configurations of trading partners). In a highly competitive market a seller who does not give its customers good deals will find that rivals offer better deals to attract these customers. The process of firms fighting over customers and offering them better and better deals raises consumers’ utility skyward. This competitive process is closely aligned with what Schumpeter called creative destruction.

As anyone who has read Schumpeter knows, of course, this is not even close to what he actually meant by creative destruction. (more…)

4 March 2011 at 4:46 pm 3 comments

Citizenship and Biopower

| Dick Langlois |

That’s the title of seminar scheduled somewhere in the University later this month. I’m sure the ideas will be of great interest to readers of this blog.

What happens to the state under globalization? This often-asked but still relevant question has produced competing responses. Some scholars have re-theorized the nation-state and citizenship while others have jettisoned the nation-state as a category altogether, instead turning to Foucauldian theories of biopower to explain how power extends beyond the law-based operations of the state, managing life through the production of norms, and in so doing, relegates even greater populations to death and devastation.

Dr. Grace Hong’s presentation will argue that the shift into globalization must be contextualized within a history of gendered racial capital. She situates the decolonization/liberation movements in Asia and Africa and the new social movements in the US as turning points that marked the triumph, but also the limits of nationalism. In articulating alternatives to nationalism, Dr. Hong looks to women of color feminism and queer of color critique in texts by Cherrie Moraga, Frances Beal, and the Combahee River Collective, to theorize the newly complicated relationship between race, gender, sexuality, and vulnerability to death in the wake of the transnational turn.

What I want to know is whether the third sentence of the first paragraph counts as a paraprosdokian, “a figure of speech” — and I here quote from a humorous junk email I received recently — “in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect, sometimes producing an anticlimax.” Perhaps in this case the latter part of the sentence retheorizes the first part.

4 March 2011 at 2:40 pm 3 comments

Oxford Handbook of Human Capital

| Peter Klein |

I just received a copy of the Oxford Handbook of Human Capital, edited by Alan Burton-Jones and J.-C. Spender, and it looks terrific. The concept of “human capital” came from developments in macroeconomics and labor economics (and, it is often forgotten, entrepreneurship) but is increasingly influential in organization and strategy research. (Witness, for example, the new SMS Strategic Human Capital Interest Group.) These Handbook chapters “reveal the importance of human capital for contemporary organizations, exploring its conceptual underpinnings, relevance to theories of the firm, implications for organizational effectiveness, interdependencies with other resources, and role in the future economy,” says the cover blurb. O&M readers may especially like the section on “Human Capital and the Firm,” with chapters on TCE (by Foss), agency theory (Spender), the RBV (Jeroen Kraaijenbrink), entrepreneurship and the theory of the firm (Brian Loasby), and the knowledge-based theory of the firm (Georg von Krogh and Martin Wallin). Check it out!

2 March 2011 at 11:10 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).
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