Posts filed under ‘Austrian Economics’

Measuring Tacit Knowledge

subject-knowledge-brain| Peter Klein |

The concept of tacit knowledge — knowledge that is difficult or impossible to parameterize, or to express in words or numbers — is central to organization theory, as well as philosophy (Polanyi) and social theory more generally (Hayek). Most of the research literature on tacit knowledge is conceptual and theoretical, such as Hayek’s famous “Use of Knowledge in Society” (1945) or more recent pieces like Jensen and Meckling’s “Specific and General Knowledge, and Organizational Structure” (1992). Empirical studies of tacit knowledge are rare, which is not surprising given the idiosyncratic, personal, subjective, and often ephemeral nature of such knowledge.

An interesting new NBER paper by David Chan estimates the effects of tacit knowledge using matched pairs of physician trainees with similar levels of explicit knowledge but different levels of experience and hence accumulated know-how. The hospital setting allows for some clever tricks, e.g., exogenous sorting into occupational roles by experience, rather than ability. Measuring outcomes via spending is problematic to me, though standard in the medical economics and management literatures. Check it out:

Uncertainty, Tacit Knowledge, and Practice Variation: Evidence from Physicians in Training
David C. Chan, Jr
NBER Working Paper No. 21855, January 2016

Studying physicians in training, I investigate how uncertainty and tacit knowledge may give rise to significant practice variation. Consistent with tacit knowledge accruing only with experience, and empirically exploiting a discontinuity in the formation of teams, experience relative to a peer substantially increases the size of variation attributable to the physician trainees. Among the same physician trainees, convergence occurs for patients on services driven by specialists, where there is arguably more explicit knowledge, but not on the general medicine service. This difference is unexplained by formally coded patient information. In contrast, rich physician characteristics correlated with preferences and ability, and quasi-random assignments to high- or low-spending supervising physicians explain little if any variation.

2 February 2016 at 5:21 pm Leave a comment

Baylor University PhD Program in Entrepreneurship

| Peter Klein |

bbusiness_green_w-1iyteaaMuch as I hate to use this blog for self-promotion, … Hahahahaha. OK, seriously. As many of you know I joined Baylor University this fall and will be heavily involved with Baylor’s new PhD program in Entrepreneurship. Prospective students interested in entrepreneurship, strategy, organizational economics, innovation, creativity, institutions, business history, governance, the theory of science, Austrian economics — i.e., the regular topics of this blog — should consider applying. Detailed information about the program, including application materials and instructions, are on the program website. The formal deadline for Fall 2016 admission is next Friday, January 15, so time is short! I’m happy to answer any questions.

6 January 2016 at 1:41 pm 8 comments

Review of Organizing Entrepreneurial Judgment

| Peter Klein |

OrganizingEntrepreneurialJudgmentBook2David 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.

12 February 2015 at 10:05 am 3 comments

The Medieval Enlightenment in Economic Thought

| Dick Langlois |

Attending academic presentations as a spectator – a pure consumer – can be great fun. On November 20, I drove up to Boston for one day of a wonderful conference, put together by the Business History program at Harvard Business School, on the History of Law and Business Enterprise (which probably merited its own separate blog post). This is an area that I am starting to get interested in. The conference was in many ways a showcase for the GHLR perspective on the history of corporate organization – the acronym referring to the work of Timothy Guinnane, Naomi Lamoreaux, Ron Harris, and Jean-Laurent Rosenthal, all of whom were there. The conference took place across the street from Harvard Stadium on the weekend of the Harvard-Yale game. Harvard won the football game (alas), but the conference was a Yale rout.

And last week I attended a presentation here at UConn that was even more vicarious fun. Our Humanities Institute invited Joel Kaye from Barnard to talk about his new book, A History of Balance, 1250-1375: The Emergence of a New Model of Equilibrium and Its Impact on Thought, which has just appeared from Cambridge. I was the token economist in the audience, even though two of his chapters are about economics. His argument is that medieval scholastic thought changed radically over this period, and produced by its end a different and arguably more sophisticated model of how the economic world works. This “new” model is not the standard Aristotelian version we are normally told about but was in fact something far closer to the views of the Scottish Enlightenment. (Needless to say, his telling of this was far more nuanced.) In addition to Nicole Oresme, whom I had heard of, he relies heavily on the work of Peter John Olivi, an earlier Franciscan theologian, whom I had never heard of. In Kaye’s telling, Olivi came close to something like the idea of the invisible hand. I took a quick look at standard history-of-thought texts, and nobody mentions Olivi at all – except Murray Rothbard, who credits him with discovering the subjective theory of value.

This is really a story about the Enlightenment of the High Middle Ages, which took place among academic clerics in an age of population growth, (extensive) economic growth, and urbanization. As Kaye apparently argues in an earlier book, these academics were constantly confronted with the market – especially in the thriving city of Paris – and were well versed in market practice; indeed, this knowledge of the market and money contributed to advances in physical and biological as well as social sciences. The medieval academic Enlightenment went into decline after the Black Death in the early fourteenth century. The resulting dislocations and the swing in relative prices – in favor of peasants and against landholders, including importantly the Church – reduced the centrality and authority of academic thought, even as they spurred institutional changes that would set the stage for growth in the early modern period. Population in Europe did not return to its pre-plague levels until the sixteenth or seventeenth century, and economic thought took just as long to recover. (I know this is whiggish, but I can’t help it.)

There was perhaps one connection between the two events. At HBS, Ron Harris talked about his ongoing research on the earliest history of the corporate form in the East and the West. Here the commenda contract is the centerpiece. That is presumably what schoolmen like Olivi called by the Latin term societas, which was not, however, the same institution as the societas publicanus of ancient Rome.

10 December 2014 at 5:39 pm 1 comment

It’s the Economics that Got Small

| Peter Klein |

Joe Gillis: You’re Norma Desmond. You used to be in silent pictures. You used to be big.

Norma Desmond: I *am* big. It’s the *pictures* that got small.

Sunset Boulevard (1950)

John List gave the keynote address at this weekend’s Southern Economic Association annual meeting. List is a pioneer in the use by economists of field experiments or randomized controlled trials, and his talk summarized some of his recent work and offered some general reflections on the field. It was a good talk, lively and engaging, and the crowd gave him a very enthusiastic response.

List opened and closed his talk with a well-known quote from Paul Samuelson’s textbook (e.g., this version from the 1985 edition, coauthored with William Nordhaus): “Economists . . . cannot perform the controlled experiments of chemists and biologists because they cannot easily control other important factors.” While professing appropriate respect for the achievements of Samuelson and Nordhaus, List shared the quote mainly to ridicule it. The rise of behavioral and experimental economics over the last few decades — in particular, the recent literature on field experiments or RCTs — shows that economists can and do perform experiments. Moreover, List argues, field experiments are even better than using laboratories, or conventional econometric methods with instrumental variables, propensity score matching, differences-in-differences, etc., because random assignment can do the identification. With a large enough sample, and careful experimental design, the researcher can identify causal relationships by comparing the effects of various interventions on treatment and control groups in the field, in a natural setting, not an artificial or simulated one.

While I enjoyed List’s talk, I became increasingly frustrated as it progressed, and found myself — I can’t believe I’m writing these words — defending Samuelson and Nordhaus. Of course, not only neoclassical economists, but nearly all economists, especially the Austrians, have denied explicitly that economics is an experimental science. “History can neither prove nor disprove any general statement in the manner in which the natural sciences accept or reject a hypothesis on the ground of laboratory experiments,” writes Mises (Human Action, p. 31). “Neither experimental verification nor experimental falsification of a general proposition are possible in this field.” The reason, Mises argues, is that history consists of non-repeatable events. “There are in [the social sciences] no such things as experimentally established facts. All experience in this field is, as must be repeated again and again, historical experience, that is, experience of complex phenomena” (Epistemological Problems of Economics, p. 69). To trace out relationships among such complex phenomena requires deductive theory.

Does experimental economics disprove this contention? Not really. List summarized two strands of his own work. The first deals with school achievement. List and his colleagues have partnered with a suburban Chicago school district to perform a series of randomized controlled trials on teacher and student performance. In one set of experiments, teachers were given various monetary incentives if their students improved their scores on standardized tests. The experiments revealed strong evidence for loss aversion: offering teachers year-end cash bonuses if their student improved had little effect on test scores, but giving teacher cash up front, and making them return it at the end of the year if their students did not improve, had a huge effect. Likewise, giving students $20 before a test, with the understanding that they have to give the money back if they don’t do well, leads to large improvements in test scores. Another set of randomized trials showed that responses to charitable fundraising letters are strongly impacted by the structure of the “ask.”

To be sure, this is interesting stuff, and school achievement and fundraising effectiveness are important social problems. But I found myself asking, again and again, where’s the economics? The proposed mechanisms involve a little psychology, and some basic economic intuition along the lines of “people respond to incentives.” But that’s about it. I couldn’t see anything in these design and execution of these experiments that would require a PhD in economics, or sociology, or psychology, or even a basic college economics course. From the perspective of economic theory, the problems seem pretty trivial. I suspect that Samuelson and Nordhaus had in mind the “big questions” of economics and social science: Is capitalism more efficient than socialism? What causes business cycles? Is there a tradeoff between inflation and unemployment? What is the case for free trade? Should we go back to the gold standard? Why do nations to go war? It’s not clear to me how field experiments can shed light on these kinds of problems. Sure, we can use randomized controlled trials to find out why some people prefer red to blue, or what affects their self-reported happiness, or why we eat junk food instead of vegetables. But do you really need to invest 5-7 years getting a PhD in economics to do this sort of work? Is this the most valuable use of the best and brightest in the field?

My guess is that Samuelson and Nordhaus would reply to List: “We are big. It’s the economics that got small.”

See also: Identification versus Importance

23 November 2014 at 2:58 pm 8 comments

Opportunity Discovery or Judgment? Fargo Edition

| Peter Klein |

In the opportunity-discovery perspective, profits result from the discovery and exploitation of disequilibrium “gaps” in the market. To earn profits an entrepreneur needs superior foresight or perception, but not risk capital or other productive assets. Capital is freely available from capitalists, who supply funds as requested by entrepreneurs but otherwise play a relatively minor, passive role. Residual decision and control rights are second-order phenomena, because the essence of entrepreneurship is alertness, not investing resources under uncertainty.

By contrast, the judgment-based view places capital, ownership, and uncertainty front and center. The essence of entrepreneurship is not ideation or imagination or creativity, but the constant combining and recombining of productive assets under uncertainty, in pursuit of profits. The entrepreneur is thus also a capitalist, and the capitalist is an entrepreneur. We can even imagine the alert individual — the entrepreneur of discovery theory — as a sort of consultant, bringing ideas to the entrepreneur-capitalist, who decides whether or not to act.

A scene from Fargo nicely illustrates the distinction. Protagonist Jerry Lundegaard thinks he’s found (“discovered”) a sure-fire profit opportunity; he just needs capital, which he hopes to get from his wealthy father-in-law Wade. Jerry sees himself as running the show and earning the profits. Wade, however, has other ideas — he thinks he’s making the investment and, if it pays off, pocketing the profits, paying Jerry a finder’s fee for bringing him the idea.

So, I ask you, who is the entrepreneur, Jerry or Wade?

11 November 2014 at 4:53 pm 15 comments

Westgren on Entrepreneurial Opportunities

| Peter Klein |

opportunity-magnetMy colleague Randy Westgren has two thoughtful posts on entrepreneurial opportunities (1, 2). Randy shares my unease with the construct of opportunity, which began as a metaphor introduced by Israel Kirzner, only to be reified by entrepreneurship scholars looking for a central organizing construct. My own view is that the concept of opportunity is redundant at best, misleading at worst. Randy expresses the same idea: “If the opportunity is so important to the entrepreneurial process, why are there so many mediating actions and decisions between the existence and the outcomes? How much of the outcomes does the existence of the opportunity explain?” He goes on to propose some useful taxonomies for making sense of the literature. More to come.

12 July 2014 at 6:50 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).
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).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

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