O&M co-founder Nicolai Foss will give the 2012 Sherlock Hibbs Distinguished Lecture in Business and Economics Tuesday, 6 March 2012, 10:00-11:30am, in 205 Cornell Hall on the University of Missouri campus. The title is “Open Entrepreneurship: The Role of External Knowledge Sources for the Entrepreneurial Value Chain.” The lecture is sponsored by the Hibbs Professors of the University of Missouri’s Trulaske College of Business and the University of Missouri’s McQuinn Center for Entrepreneurial Leadership (which I direct).

The full announcement (with Nicolai’s impressive bio) is below the fold. The lecture is free and open to the public, so all are welcome!

The Hibbs Professors of the University of Missouri’s Trulaske College of Business and the University of Missouri’s McQuinn Center for Entrepreneurial Leadership invite you to the 2012 Sherlock Hibbs Distinguished Lecture in Business and Economics:

Open Entrepreneurship: The Role of External Knowledge Sources for the Entrepreneurial Value Chain

Nicolai J. Foss
Copenhagen Business School and Norwegian School of Economics and Business

Tuesday, March 6, 2012
205 Cornell Hall
10:00 – 11:30am

Sponsored by the Hibbs Professors of the University of Missouri’s Trulaske College of Business and the University of Missouri’s McQuinn Center for Entrepreneurial Leadership, the lecture is free and open to the public.

Nicolai J. Foss is a Professor of Strategy and Organization at the Copenhagen Business School, a part-time Professor of Knowledge-based Value Creation at the Norwegian School of Economics and Business Administration, and the Head of Department of the Department of Strategic Management and Globalization at CBS. He also holds part-time and visiting professorships at the Lund University, Luiss Guido Carli-Roma, and Agder University. He founded the Center (now Department) of Strategic Management and Globalization at the Copenhagen Business School in 2005, building it from a center with 5 faculty members to a full department with 17 faculty members along with postdocs and PhD students.

He is author or editor of 22 books, 136 journal articles, and 81 book chapters. His work has appeared in the Academy of Management Review, Academy of Management Journal, Organization Science, Strategic Management Journal, Journal of International Business Studies, Journal of Management Studies, Strategic Organization, Strategic Entrepreneurship Journal, Industrial and Corporate Change, Organization Studies, and other leading academic journals. His articles and books have been translated into Chinese, Russian, and Spanish. His newest book, Organizing Entrepreneurial Judgment: A New Approach to the Firm (with Peter G. Klein), is forthcoming from Cambridge University Press.

Foss was a founder of the Danish Research Unit for Industrial Dynamics and a co-founder of the industry-funded Center for Policy Studies, the most influential privately funded Danish think tank. Since 2000 he has raised over €2 million in external funding as research leader and has participated in many additional funded research projects. He is a panel member of the European Research Council and serves as a member of the three-person management group of the Norwegian Center for Service Innovation at the Norwegian School of Economics and Business Administration, which is supported by a €20 million, 8-year grant.

Educated as an economist from the Copenhagen University (1989), Foss his received his PhD from the Copenhagen Business School in 1993, where he has been Assistant, Associate and Full Professor.

The second review article in the latest issue of AMR by Venkataraman, Sarasvathy, Dew, and Forster (VSDF) is more ambitious than the first by Shane, discussed in Part 1. In fact one might describe the ambition motivating the article as grandiose. VSDF “seek to recast entrepreneurship as a science of the artificial” an entirely new way of looking at entrepreneurship in the interest of uncovering (what I take to be universal) principles that can serve as the basis of a new empirical and policy-useful science of entrepreneurship. [I see this article as a companion piece to the article by Sarasvathy and Venkataraman (SV) in ET&P January, 2011, in which this grandiose vision is even more apparent.]

The science of the artificial(supposedly a distinct category of science from natural or social science) is derived from the work of Herbert Simon (1996).

As a theory develops it splits into two streams: (1) “basic” research that continues to refine the causal explanations and (2) “applied” research that seeks to alter the variables of explanation. At that point the phenomenon of interest has become an artifact. …

A science of the artificial is interested in phenomena that can be designed [and controlled]. … Design lies is the choice of the boundary values; control lies in the means to change them. (24).

So a useful theory is itself an artifact something that can be used to understand and (importantly) control aspects of the (social) world. And, I suppose, the new science of entrepreneurship will eventually develop such artifacts. [At the end of the article they talk about “recasting opportunities as artifacts” – so I am not sure how this is all connected.]

My lack of expertise regarding the work of Herbert Simon (something which I am now more encouraged to remedy) prevents me from pronouncing with confidence on this part of the article. Suffice it to say that the meaning and contribution of this new “science of the artificial” is far from clear to me. I am left with a feeling that if it is indeed such an important and path-breaking meta-scientific turn, the authors should be able to explain it better. It should be more accessible and transparent. I am left highly skeptical, but I urge readers of this post to read the article and perhaps enlighten me and others.

VSDF claim new ground in three areas 1) understanding opportunities as made as well as found, 2) moving beyond new combinations to transformations 3) developing a new nexus around actions and interactions. In each of these I find their arguments in part unclear or unpersuasive or both, and where I see something of value I don’t see it as new.

They are strongest on the first category – seeing opportunities as made as well as found. They have a nice analysis of the proverbial $100 bill on the sidewalk waiting to be found. Is this an opportunity found (discovered) or made (created) or both? As they point out, in order for this to be an opportunity at all the bill has to exist, someone has to find it (objective conditions), the finder has to know it is $100 bill (subjective interpretation) and other people have to acknowledge its value and be willing to accept it (intersubjective considerations). For an opportunity to exist, certain actions and preconditions must be fulfilled – “actions and interactions that constitute the atomic units of ‘making’ a market opportunity” (26). They proceed to point out that this applies to all opportunities regardless of their degree of objectivity or “creativeness.” Indeed, I believe this is true, and I like the phrase “made or found” – but I don’t think their resolution is new. Isn’t this is line with the sort of thing that Peter Klein and others (among whom I would like to count myself) have been saying for some time? In a fundamental sense “made or found” is irrelevant. What matters is that entrepreneurs take actions that add value above and beyond what was expected or seen before.

This relates to the second category – moving beyond new combinations to transformations. Here they seem to be arguing (I say ‘seem’ because there is a fog of verbiage obscuring the bottom line argument) that successful entrepreneurship involves something transcendental. It is more than simply the reorganization of existing resources. Well, yeah! What about all the recent discussion of ‘emergence’ and similar ideas. Moreover, I think they go wrong in their treatment of the concept of “new combinations.” They see this idea as coming from the natural sciences, like chemistry. But I take it to come from Schumpeter, and later, and more clearly, from Lachmann, where it means something entirely different from the notion of physical transformation. VSDF may be falsely attributing a materialist fallacy to the notion of “new combination”.

At the heart of all this is the importance of an understanding of all resources as types of economic capital. [In the final  section of the article VSDF talk about artifacts “embodying knowledge” and come close to a capital-theoretic approach without quite getting there or mentioning capital]. What makes something capital is not its physical nature per se, but, rather, the value of the function it can perform. The conservation laws of physics ensure that matter-energy cannot be created or destroyed. The whole point of capital theory, as pointed out clearly by Böhm-Bawerk, is that while the entrepreneur can never create anything in the physical sense, he can add value to what exists. In fact he talks about the transformation of resources into more useful forms and combinations. Physical transformations may or may not be involved. An interesting issue is whether capital accumulation necessarily involves technological change, something about which Böhm-Bawerk was ambiguous and about which Hayek and Lachmann wrote a lot. This theme is evident in the huge recent literature on the relationship between production and design and related themes like modularity. VSDF talk about design as an element of entrepreneurial action without addressing the large volume of work on this – for example Baldwin and Clark’s Design Rules.

VSDF see the distinction between combination and transformation as adding empirical traction to the study of entrepreneurial events, and they give some examples of each. They characterize transformative actions as ones that entail the freedom to choose one’s ends and well as one’s course of action. I don’t know – is this new? Is this helpful? It leaves me a bit exasperated because I just don’t see it.

The third category – developing a new nexus around actions and interactions.  They talk about some interesting case studies and make some astute observations. What this adds up to, again, I am not sure. But I will leave that for now.

In revisiting the ontology and epistemology of “opportunity,” VSDF draw on the interesting work of the philosopher Donald Davidson. Every action involves the objective, the subjective and inter-subjective. A new tripod? By inter-subjective (no reference to Shutz) they mean not merely the total of all shared meanings and understandings that permit us to act, but, apparently, something more particular about the action itself, more idiosyncratic I guess. But, again, this is not new nor particularly well handled. So much has been written about the role of institutions in human action. How is this different and how does the difference matter. Ten years after Promise more promise?

As I said initially I think what this is all about is the question of entrepreneurship as an empirical science in the sense of the discovery of universal elements that can be useful for policy or entrepreneurial action itself – a very old theme. Austrian economists, in discussing the business cycle,  for example,  have had to face the perennial question of “what makes an entrepreneur?” – how are some individuals better able to perceive opportunities for value-creation? I don’t see how this question can be answered. It goes to the heart of the working of the market process – a complex-adaptive system that defies description in mechanical terms. Yet, in the end, it is that which VSDF (and probably many others) are seeking. See for example, Table 1 of SV in which they compare their  new entrepreneurial science with natural science, suggesting that the former has still to develop an understanding of the key elements of entrepreneurship so that they can be taught and learnt by anyone! I guess on this we will just have to agree to disagree, at least until time proves one of us wrong.

The January 2012 issue of the AMR (available here for subscribers or those with academic access) features two review articles assessing the progress of the “Promise” examined in the well-known article by Scott Shane and Sankaran Venkataraman (AMR 2000: The Promise of Entrepreneurship as a Field of Research) — one from each of the original co-authors. The first is an interesting, if somewhat pedestrian, article by Scott Shane. The second is a much more profound and ambitious contribution by Venkataraman together with Saras Sarasvathy, Nicholas Dew, and William Forster.

In the decade since that article there has, indeed, been a significant shift in the focus of research in entrepreneurship. Most notable, perhaps, is the focus on entrepreneurial “opportunities” — familiar to Austrian economists from the work of Israel Kirzner, but by now a standard element in the story. Each of the articles spends considerable time revisiting questions about the nature of entrepreneurial opportunities and provides its own resolutions. Here I will provide just a quick overview of this part of Shane’s article. (I intend to provide one for the second article soon).

In considering the “nexus of opportunities and individuals” offered originally in “Promise” as a reason to shift attention from the person to the function, Shane addresses the question of whether entrepreneurial opportunities should be considered “objective” or “subjective” — a question that has proliferated in this research stream, albeit with varying focus and terminology. The problem is, it seems to me, that the notion of “opportunity” is one that depends on the formation of a mental image by some individual or individuals. Opportunity implies plan — a plan of action to use, transform, combine, existing resources in a profitable way. Without the plan there is just the world. So how can “opportunity” be objective? This is related to the question: are opportunities “discovered” (Alvarez and Barney: Organizaҫões em Contexto, 2007) or are they created; or in the words of Venkataraman, et. al. are they made or found?

Shane thinks now that the whole debate was probably unnecessary and that opportunities must be objective. If not, then there is no way to talk about unsuccessful entrepreneurial action. If, as asserted by our esteemed host Professor Peter Klein (Strategic Entrepreneurship Journal, 2008), opportunities are “imagined” and “are inherently subjective — they do not exist until profits are realized” (180) — “then unsuccessful entrepreneurship is a logical impossibility. No entrepreneur can fail to generate an entrepreneurial profit” (Shane, 16). No profit, no opportunity really existed.

Shane resolves this by making a distinction between entrepreneurial opportunities and business ideas. The latter are subjective. Juxtaposing the two rescues the notion of failed entrepreneurship.

This strikes me as unacceptably ad hoc, to say the least. I think Shane does not really understand what “subjectivism” is all about and, as a result, his treatment is rather superficial. Nevertheless, he may be incidentally right in suggesting that aspects of the debate are unnecessary. I refer to the ontological status of “opportunity.”  Subjectivism in economics and related fields is an epistemological issue, not an ontological one. Accordingly, I would say as follows: Opportunities originate as perceptions — perceptions of what can be done to earn a profit. (Klein says “imagined” which I think is essentially the same as perceived.) Perceptions are both real and subjective. These perceptions may turn out to be right or wrong. The “discovery” of an opportunity is, strictly speaking, the formation of a perception, a plan involving real (objective) resources. So, action in pursuit of a perceived (discovered, created) opportunity is entrepreneurial action and may be successful or unsuccessful.

Alvarez and Barney — Academy of Management Annals, 2010 — blurring epistemology and ontology, want to make a distinction between exogenously and endogenously generated opportunities. I am not sure this is a viable or profitable distinction. To repeat, all opportunities are about perceptions that can be right or wrong.

TBC: Part 2.

I am not sure if this book has already been review on this blog space — I haven’t seen it. Similarly, I haven’t seen any other reviews, so these are my fresh impressions. The book is Keynes Hayek: The Clash that Defined Modern Economics by Nicholas Wapshott (W. W. Norton: 2011).

With the growing interest in Hayek as the antidote to the resuscitated Keynes, this book is timely providing for the reader lively insight into the life and times of these two key individuals. In terms of the details of the lives of Keynes and Hayek the book appears to be well researched. I learned a few things from it — interesting details about events and personalities. On Keynes particularly one gains a sense of the power of the man and how a whole generation of economists at the LSE and Cambridge were won over by his revolutionary vision. Though Wapshott provides a lot of material on Hayek, I could not fight the impression that it was Keynes who captured his interest (and admiration?) most. Hayek is presented in all of his aspects, including the not so wholesome ones. The picture of Keynes seems less forthcoming, or differently spun to cast a more favorable light. But maybe that is just me and my biases.

When it comes to the economics, however, the case is much clearer. Wapshott is very weak on this part of the story, especially when it comes to Austrian economics. He is able to do a fairly good job of Keynesianism, again positively spun — including the story of multiplier. It adds to the plausibility of Keynes’s appeal. But when it comes to explaining the essence of Hayek’s opposition, his treatment is very inadequate at best and complete wrong at worst. Like Keynes himself, Wapshott does not understand capital theory and the time structure of production. So he gets the story of the business cycle wrong. He simply parrots in a formulaic way the ingredients of Hayek’s case. His treatment of Mises is almost a caricature. He does not understand the nature of the Austrian turn from classical economics and has some misleading things to say about the concept of “value.” Likewise he does not understand the differences and similarities between the economics of the Austrians  and the Monetarists and invents bogus differences. I found this part of the book frustrating.

So, the question in my mind is: do I recommend this book to my macro/money students? I think I probably will, with suitable warnings, just because it is such a vital and interesting story.

Matthew Yglesias has found a killer argument against the Austrian theory of the business cycle:

[T]he Austrian story of investment booms and busts doesn’t actually explain recessions and unemployment. Spending patterns shift all the time without sparking a recession. People stop buying BlackBerrys and they buy iPhones instead. Or people stop buying boot-cut jeans and buy skinny jeans instead. Across sectors, maybe people go see fewer movies and with the money they save they eat out at nicer restaurants. A business that curtails its investment spending should have extra money to pay out as dividends. Or if they want to horde the cash, it sits in a bank for someone else to lend out.

I once heard a lecture by the sociologist Steven Goldberg about his work on male social dominance, expressed in his books The Inevitability of Patriarchy (1974) and Why Men Rule (1993). I remember him saying that whenever he presents his dominance thesis, someone invariably raises the objection, with a smug and self-satisfied expression, “What about Indira Gandhi?” or “What about Margaret Thatcher?” He went on (I’m paraphrasing): “Right. . . . Like I’m going to devote three years of my life to researching and writing a book called The Inevitability of Patriarchy, and someone’s going to say ‘What about Indira Gandhi,’ and I’m going to slap my forehead and say, ‘Oh, crap, why I didn’t think of that!’” Goldberg was a funny guy, with a great Brooklyn accent too. (His books point out that Gandhi-led India and Thatcher-led Britain were male-dominated societies, particularly in matters of state.)

This is the centennial year of Mises’s Theory of Money and Credit, published in German in 1912, the book that first presented the “Austrian” theory of business cycles. No doubt Yglesias is unaware that in the hundred years since, there have been dozens of books, hundreds of research papers, more than a few Ph.D. dissertations, and even one Nobel prize analyzing, developing, critiquing, and extending this theory. (Yglesias mistakenly attributes Hayek’s Nobel prize to his work on tacit knowledge, when in fact the prize was given for business-cycle theory.) And yet, these thousands of hours of scholarship can be blithely tossed aside because — wouldn’t you know it — people change their spending habits all the time, and it doesn’t cause a business cycle! Slap to the forehead. Why didn’t we think of that? Curse you, Matt Yglesias!

Of course, Yglesias’s breezy summary of the theory skips over the time structure of production, the difference between consumption and investment, the role of interest rates in securing intertemporal coordination, the problem of expectations, and the other basic elements of the theory, which ten minutes of Wikipedia browsing could have explained. Matt: next time, use the Google! Or ask someone who’s, you know, studied this, and you could have avoided whoppers like: “Many of the original Austrians found their business cycle ideas discredited by the Great Depression, in which the bust was clearly not self-correcting.”

Yglesias is representative of a new generation of blogger-journalists, such as Megan McArdle, Ezra Klein, and Felix Salmon, who express bold, confident opinions on all issues under the sun, without much substantive knowledge or understanding of any. These writers don’t do a lot of reporting, or investigating, but specialize in editorializing, even in what are ostensibly “news” items. Yglesias, in particular, excels in relationship reporting — which group is connected to which, who dislikes whom, what this person said about that person — but can’t take the time to learn the actual arguments under consideration.

As the wise man says, it ain’t what you don’t know that gets you into trouble, it’s what you know for sure that just ain’t so.

The idea that mainstream macroeconomic thinking focuses at too high a level of aggregation is a frequent complaint on this blog (e.g., here, here, here, and here). Our recent Strategic Organization paper hammers home this point. The level of aggregation is of course a fundamental difference between Keynesian and Austrian theorizing about economic fluctuations. But Keynesian economists don’t seem to recognize this.

The other day I posted a snarky blog entry at The Beacon, responding to a Krugman smear of Hayek (yawn). Today Mario Rizzo pens a more thoughtful response, emphasizing exactly this level-of-analysis issue:

I think the real issue is this. Hayek’s approach attacks, root-and-branch, the macroeconomic way of thinking. It is not simply a challenge to a particular theory of the determinants of mass unemployment, inflation, business cycles and the like. Hayek is not accepting the rules of the game or the parameters of the sub-discipline of modern macroeconomics. Hayek does not want to argue that the government expenditure multiplier is 0.5 instead of 2.0, for example. He does not want to discuss just how much fiscal stimulus should be undertaken and what form it should assume.

In short, he does not want to focus on aggregate spending and aggregate consequences. Hayek’s approach says: Let us pierce the veil of aggregates and look at the distortive effects on relative prices and relative output produced by boom-time credit expansions. Let us look at the distortive effects that booms leave us as we work our way through a recession. Let us concentrate on sustainable lines of expenditure both during the boom and during the road out from the bust.

It’s been fun hosting Australian writer (and frequent O&M commenter) Rafe Champion at Missouri the last couple of days. Rafe spoke to the economists about the philosophy of science (handout here), and to the graduate philosophy seminar of my colleague André Ariew on current research topics in the philosophy of biology. We’ve had many talks about Hayek, Mises, Popper, Parsons, and our mutual friend Bill Bartley, among others. Rafe  blogs at Catallaxy Files and the Critical Rationalist blog, and his website The Rathouse contains a treasure-trove of writings by, and commentary on, the most important twentieth-century philosophers of science.

The October 2011 issue of the Journal of Economic Behavior & Organization is a special issue on the work of James Buchanan, guest edited by Pete Boettke, arising out of a recent FFSO conference. In addition to Boettke, the contributors are Kliemt, Marciano, Munger, Leeson, G. Vanberg, Voigt, Horwitz, Besley, Coyne, and Horn on a variety of topics. Amartya Sen and Elinor Ostrom contributed short appreciations. This issue is full of good stuff on a variety of topics.

I focus here on the lead article by Pete Boettke somewhat clumsily entitled, “Teaching Economics, Appreciating Spontaneous Order, and Economics as a Public Science.” For my part, this article alone makes the issue worthwhile getting. Boettke presents an overview of the many facets of Buchanan’s work (and as they developed over his career) helpfully connecting and contrasting it with Hayek. Some of these ideas are directly relevant to the organization and management context.

At the risk of distorting oversimplification, we may say that whereas Hayek concentrated on the problem of rationalistic hubris, Buchanan concentrated on the problem of opportunistic behavior. Both are inevitable and related problems of social systems, and each of their works thus complements the other. In a nutshell, each is an in-depth protracted examination of the knowledge problem and the incentive problem, respectively.

As points of emphasis in their respective works, Hayek concentrated on the limits on man’s knowledge at the abstract level, and the contextual nature of the knowledge residing in the economy at the concrete level, while Buchanan stressed the institutional/organizational logic of politics and the systemic incentives that different rule environments generate. In both, however, the central message of same players, different rules, produce different games is seen throughout their work in comparative political economy. To Hayek the puzzle was how to limit the rationalistic hubris of men, to Buchanan the puzzle was how to limit the opportunistic impulse of men. Both found hope in what they called a “generality norm” embedded in a constitutional contract — no law shall be passed, or rule established which privileges one group of individuals in society.

Hayek uses an evolutionary approach and Buchanan a “veil of ignorance” contractarian approach. But both are surely applicable to organizations of all types.

Back from the SEA meetings in Washington DC, the venue for our annual SDAE conference and membership meeting. At the annual banquet we honored Leonard Liggio for his contribution to the teaching of Austrian economics. Dick Wagner gave the presidential address. Both received a standing ovation.

The panels were well attended and, from what I could tell, the quality very high. I presented my paper on Entrepreneurial Paradoxes (which has been around for a while). Young Bak Choi commented on it and presented an interesting paper on the role of entrepreneurship in economic development and development policy. David Harper and Anthony Endres presented a paper on another variation on the theme of heterogeneous capital and its structure. Perhaps most interesting was a paper by a strategic management Ph.D candidate at York University, Mohammad Keyhani (co-authored with Moren Lévesque), on “The Role of Entrepreneurship in the Market Process: A Simulation Study of The Equilibrating and Disequilibrating Effects of Opportunity Creation and Discovery.” Randy Holcombe commented. Interesting that the issue of equilibration is considered important enough to investigate with simulations. But it raises some important questions. My own current view, having spent a lifetime contemplating the issue, is that we are no nearer an answer than we ever were, and that perhaps the more important distinction is between entrepreneurial actions that add value and those that do not.

Next year’s meetings will be in New Orleans. The president-elect of the SDAE is Larry White. He will be putting together the panels. So if you have an interest in presenting a paper, discussing one, or chairing a panel, let him know (lwhite11@gmu.edu).

This coming weekend in Washington DC, the Society for the Development of Austrian Economics will hold its annual meeting and membership dinner. This year it is honoring Leonard Liggio for his contributions to the teaching and dissemination of Austrian Economics (through his dedication to the cause of classical liberalism) over many decades. A scholarship fund in Leornard’s honor will be established from the donations —  the Leonard Liggio Fellowship Fund to enable graduate students to attend the full SEA/SDAE meetings each year at reduced cost. The Earhart Foundation and Liberty Fund are major sponsors. Table sponsors include the Cato Institute, the Institute for Humane Studies, the Review of Austrian Economics, the Mercatus Institute, the Atlas Economic Research Foundation and the Koch Foundation. See here for information on the panels organized by the SDAE. I will report on the event upon my return. (I promise for next year to ensure at least one panel dedicated to management themes.)