| Peter Klein |
An interesting piece in The Economist: “Economic history is dead; long live economic history?”
Last weekend, Britain’s Economic History Society hosted its annual three-day conference in Telford, attempting to show the subject was still alive and kicking. The economic historians present at the gathering were bullish about the future. Although the subject’s woes at MIT have been echoed across research universities in both America and Europe, since the financial crisis there has been something of a minor revival. One reason for this may be that, as we pointed out in 2013, it is widely believed amongst scholars, policy makers and the public that a better understanding of economic history would have helped to avoid the worst of the recent crisis.
However, renewed vigour can be most clearly seen in the debates economists are now having with each other.
These debates are those about the long-run relationship between debt and growth initiated by Reinhart and Rogoff, about the historic effectiveness of Keynesian monetary and fiscal policy, and about the role of global organizations like the IMF and World Bank in promoting international coordination.
I guess my view is closer to Andrew Smith’s, that while history should play a stronger role in economics (and management) research and teaching, it probably won’t, for a variety of professional and institutional reasons. Of course, there is a difference between, say, research in economic or business history and “papers published in journals specializing in economic or business history.” In the first half of the twentieth century, quantitative economics was treated as a specialized subfield; now virtually all mainstream economics is quantitative. (The same may happen to empirical sociology, to theorizing in strategic management, and in other areas.)
| Peter Klein |
Jeffrey Selingo raises an important point about the distinction between “public” and “private” universities, but I disagree with his analysis and recommendation. Selingo points out that the elite private universities have huge endowments and land holdings, the income from which, because of the universities’ nonprofit status, is untaxed. He calls this an implicit subsidy, worth billions of dollars according to this study. “Such benefits account for $41,000 in hidden taxpayer subsidies per student annually, on average, at the top 10 wealthiest private universities. That’s more than three times the direct appropriations public universities in the same states as those schools get.”
I agree that the distinction between public and private universities is blurry, but not for the reasons Selingo gives. First, a tax break is not a “subsidy.” Second, there are many ways to measure the “private-ness” of an organization — not only budget, but also ownership and governance. In terms of governance, most US public universities look like crony capitalists. The University of Missouri’s Board of Curators consists of a handful of powerful local operatives, all political appointees (and all but one lawyers) and friends of the current and previous governors. At some levels, there is faculty governance, as there is at nominally private universities. In terms of budget, we don’t need to invent hidden subsidies, we need only look at the explicit ones. If we include federal research funding, the top private universities get a much larger share of their total operating budgets from government sources than do the mid-tier public research universities. (I recently read that Johns Hopkins gets 90% of its research budget from federal agencies, mostly NIH and NSF.) And of course federal student aid is relevant too.
So, what does it mean to be a “private” university?
| Peter Klein |
Two of my favorite writers on the economic organization of science, Terence Kealey and Martin Ricketts, have produced a recent paper on science as a “contribution good.” A contribution good is like a club good in that it is non-rivalrous but at least partly excludable. Here, the excludability is soft and tacit, resulting not from fixed barriers like membership fees, but from the inherent cognitive difficulty in processing the information. To join the club, one must be able to understand the science. And, as with Mancur Olson’s famous model, consumption is tied to contribution — to make full use of the science, the user must first master the underlying material, which typically involves becoming a scientist, and hence contributing to the science itself.
Kealey and Ricketts provide a formal model of contribution goods and describe some conditions favoring their production. In their approach, the key issue isn’t free-riding, but critical mass (what they call the “visible college,” as distinguished from additional contributions from the “invisible college”).
The paper is in the July 2014 issue of Research Policy and appears to be open-access, at least for the moment.
Modelling science as a contribution good
Terence Kealey, Martin Ricketts
The non-rivalness of scientific knowledge has traditionally underpinned its status as a public good. In contrast we model science as a contribution game in which spillovers differentially benefit contributors over non-contributors. This turns the game of science from a prisoner’s dilemma into a game of ‘pure coordination’, and from a ‘public good’ into a ‘contribution good’. It redirects attention from the ‘free riding’ problem to the ‘critical mass’ problem. The ‘contribution good’ specification suggests several areas for further research in the new economics of science and provides a modified analytical framework for approaching public policy.
| Peter Klein |
Last weekend the Ronald Coase Institute held a conference, “The Next Generation of Discovery: Research and Policy Change Inspired by Ronald Coase.” The impressive lineup featured Kenneth Arrow, Oliver Williamson, Gary Libecap, Sam Peltzman, John Nye, Claude Menard, Ning Wang, Lee and Alexandra Benham, Mary Shirley, and many others. The Institute has now made both days of the program available on video. Great stuff.
| Peter Klein |
I hope to see O&M readers and friends at next week’s SMS Special Conference in Santiago, “From Local Voids to Local Goods: Can Institutions Promote Competitive Advantage?” The conference focuses on the relationships among institutions, firm strategy, entrepreneurship, and economic growth. Besides the usual paper and paper-development sessions, Tarun Khanna’s keynote and several plenary sessions should be of special interest to O&Mers.
Before heading to Santiago I will be giving talks in Rio de Janeiro and São Paulo sponsored by Mises Brasil, to celebrate a new Portuguese translation of my 2010 book The Capitalist and the Entrepreneur, as well as visiting my friends and colleagues at Insper, which among other activities is starting a doctoral program in business administration.
O&M is popular in Latin America. Nicolai and I are both on the advisory board of CORS and have given the CORS lecture; Nicolai was at USP last month to give a PhD course in strategy and organization.
| Peter Klein |
Corporate culture is hard to define and measure (Kreps’s game-theoretic version is probably the one most familiar to economists), but may play a role in explaining variation in firm performance. Of course, one should not invoke “culture” as an explanation for outcomes without specifying some microfoundations. And culture may be as much the result of firm performance as the cause.
But organizations can also serve as a sort of laboratory for understanding the links between informal institutions like culture and more formal institutions such as written rules, policies, and procedures in society at large, a very important issue for economic history, growth, public policy, etc. So say Luigi Guiso, Paola Sapienza, and Luigi Zingales in this short note:
Unlike large societies, however, corporations give hopes to identify the link between culture and formal institutions. . . . First, the creation of a firm is a moment where the founder has the power to set values on a blank slate. Identification of this moment is easier (it is recorded, it is recent) than identifying when and who sets the values of a large community (e.g. a country). Second, culture is easier to change in a corporation. Through hiring and firing corporations can select values by selecting people, avoiding the more difficult strategy of changing their minds. And can punish them if they do not adapt (e.g. by deferring promotion). In large societies only the difficult strategy is available, and slow adaptation is hard to punish, unless slow-adapters are outlawed, which makes culture and law undistinguishable. Third, it is easier to establish the link with performance. Performance is continuously recorded, for the corporation as a whole and often for its segments and divisions in order to implement compensation schemes. Hence, one can study the role of shared norms and beliefs while controlling for the power of economic incentives. Finally, because firms break up and merge much more often than countries, an observer can collect exposure of a firm to a new culture much more often than one can for larger societies.
| Peter Klein |
David Howden’s generous review of Organizing Entrepreneurial Judgment appears in the March 2015 issue of the International Entrepreneurship and Management Journal. Excerpt:
This ambitious book has a three-fold purpose. First, it seeks to clarify “entrepreneurship” in a manner amenable to both modern management and economics literature. Second, it redefines the theory of the firm in order to integrate the role of the entrepreneur more fully and give a comprehensive view on why firms exist. Finally, and most successfully, it sheds light on the internal organization of the firm, and how entrepreneurship theory can augment our understanding of why firms adopt the hierarchies they do. . . .
Organizing Entrepreneurial Judgment is a massive undertaking, and one that ambitiously spans the unnecessary divide between management studies and economics literature. For the scholar seriously contemplating exploiting this gap further, the book is highly recommended. Having thoroughly enjoyed reading this rendition of their entrepreneurial theory of the firm, it is this reviewer’s hope that Foss and Klein continue to carve out this growing niche straddling the two disciplines. Following up with a more direct and focused primer on their firm would be a welcome contribution to further the growing field.
Also, at last November’s SDAE conference, the book received the 2014 FEE Prize for best book in Austrian economics.
We have several new papers coming out that develop, extend, and defend the judgment-based perspective. Details to follow.