Business History « Organizations and Markets

Posts filed under 'Business History'

An Industry Study for the Beautiful People

| Peter Klein |

It’s Beauty Imagined: A History of the Global Beauty Industry by Geoffrey Jones (Oxford University Press, 2010). From the blurb:

This book provides the first authoritative history of the global beauty industry from its emergence in the nineteenth century to the present day, exploring how today’s global giants grew. It shows how successive generations of entrepreneurs built brands which shaped perceptions of beauty, and the business organizations needed to market them. They democratized access to beauty products, once the privilege of elites, but they also defined the gender and ethnic borders of beauty, and its association with a handful of cities, notably Paris and later New York. The result was a homogenization of beauty ideals throughout the world.

Sounds like a great study of entrepreneurship, industry dynamics, clustering and network effects, and the relationship between business and culture. Reviewer Ingrid Giertz-Mårtenson says it’s “one of the more fascinating stories in modern business history,” the journey of an industry once seen as “fickle, superficial, and feminine” to a “brand-driven global power house.” The book should make a beautiful addition to your collection!

Add comment 26 August 2010

Texting Victorians

| Peter Klein |

I knew that the Victorians had their own Internet, that information goods and open innovation are old hat, and that S-curves go back a hundred years. But apparently the Victorians used texting language too! We instruct our students to avoid it, but apparently Victorian poets thought writing I “love U 2 X S” or “U R virtuous and Y’s” was exceedingly clever. LOL! (Discovery! via Gizmodo.)

1 comment 24 August 2010

The (Very) Early History of Financial Economics

| Peter Klein |

The latest issue of the History of Economics Review contains Geoffrey Poitras and Jovanovic’s interesting paper, “Pioneers of Financial Economics: Das Adam Smith Irrelevanzproblem?” (published version not available online; working-paper version here, presentation slides here). Despite the subtitle the paper isn’t about Adam Smith, but the (very) early history of financial economics. Here’s an excerpt:

In the case of financial economics, the roots of this field stretch back to antiquity, involving the valuation of financial transactions, such as determining payment on a loan or distributing profits from a partnership. Poitras (2000) uses the late fifteenth century as a starting point for the early or pre-classical history of financial economics, more than three centuries prior to the publication of the [Wealth of Nations]. As early as Fibonacci (1170?-1250?), elements of financial economics were being disseminated among the merchant classes in the commercial arithmetics that, by the fifteenth century, formed the core of the reckoning school curriculum, e.g., Swetz (1987). A fundamental historical demarcation point appears with Christian Huygens’s (1629-1695) seminal introduction of the modern theory of expectations.

From this point, until the appearance of the WN, the founding work of classical political economy, financial economics underwent a dramatic transformation. By the time the Theory of Moral Sentiments appeared, sophisticated methods for pricing contingent claims, such as the life annuities sold by various individuals, municipalities and national governments in western Europe, had been developed and were being applied to the establishment of actuarially sound life insurance plans and pension funds. Hald (1990), Poitras (2006), Lewin (2003) and Rubinstein (2003) among others identify the earliest pioneers of modern financial economics, the beginning of classical financial economics, from the contributors that developed these pricing methods. As such, there is a close connection between the classical histories of financial economics, statistics, and actuarial science.

In other words, this is a field in which theory and practice appear to have co-evolved quite closely, which raises interesting questions for the performativity crowd. Modern financial economics is in many ways similar: theories of market efficiency were both shaped by, and helped to shape (e.g., through options-pricing formulas) actual market behavior.

1 comment 12 August 2010

The Noir Institutional Economics

| Dick Langlois |

The Visible Hand

By Raymond Chandler

It was eight o’clock in the morning, sharp, with the sun not shining and a look of hard wet rain on the Manhattan pavement. I was wearing my heavy gray flannel suit, with rounded collar, display handkerchief, and gold tie with streamlined mechanical shapes on it. As always, I was neat, clean, shaved and sober, and I didn’t care who knew it. I was everything the well-dressed professional manager ought to be. I was calling on the head of General Motors.

From two blocks away I stared at the GM building at 57th and Broadway, its terra cotta façade now etched gray as the pavement, as it wrapped itself around the gothic fantasy of the Broadway Tabernacle at 56th Street. I knew which one was really the cathedral. I didn’t get to inspect the building’s interior for as long as I had the outside. The minute I walked through the front door I was met by a tall, striking female, platinum blonde in finger waves. She wore a cardigan jacket over a skirt and sweater. Her eyes were slate-gray, and had almost no expression when they looked at me.

“Mr. Sloan?”

I admitted as much.

“Follow me, please.”

Following her was easy. She led me into a black-and-gilt elevator. Like all New York elevator men, the operator was small and pinched but looked as though he knew something we didn’t. He brought us up to the top floor, where the cast iron grille of the elevator opened onto an anteroom of the inner-sanctum. When I glanced back, the blonde had already disappeared. I walked in. (more…)

4 comments 2 August 2010

Rothbard Quote of the Day: Theory and History

| Peter Klein |

I stumbled recently upon this passage from Murray Rothbard’s review of Unemployment in History by the distinguished historian John A. Garraty. Rothbard’s review, published in 1978, raised an issue that has come up in previous discussions of the Freakonomics phenomenon (1, 2, 3, 4): Can a little theory, without accompanying real-world knowledge, be a dangerous thing?

After chiding Garraty for writing about unemployment without knowing the basics of business-cycle theory, Rothbard adds:

My strictures against history which lacks any sound theoretical base are not meant to be an act of intellectual imperialism on behalf of economics and against history or other disciplines. Quite the contrary; the economist who ventures into the historical arena armed only with a few equations and mathematical razzle-dazzle has wreaked far more damage than the uninspired and slightly bumbling historian. For the economist, particularly the latter-day “cliometrician,” aims to flaunt his arrogant “scientific” pretensions of encompassing and explaining all of world history by means of a few mathematical symbols. The economist who knows no history understands far less than his opposite number in the historical profession; but his claims are far greater. Therefore, he is much wider off the mark.

3 comments 30 July 2010

Incentives Matter, Soviet Edition

| Dick Langlois |

As economists like Benito Arruñada and Eric Hilt have shown, fishing and whaling have always used an incentive system in which crew members are paid a share of the profits of the voyage. Recall that Ishmael in Moby Dick contracted for a 300^th lay, a 300^th “part of the clear nett proceeds of the voyage, whatever that might eventually amount to.” This provides relatively high-powered incentives, in that it is a reward based on results, though it works only when team members can monitor each other easily and when the market for workers is competitive. (This contrasts with the reward system in, say, professional sports, where one is rewarded on the basis of one’s own performance rather than on that of the team. But that may be changing.)

I was surprised to discover that even Soviet factory ships used a similar system, as described in the Martin Cruz Smith novel Polar Star — a work of fiction but clearly well researched and probably accurate. “The Polar Star’s pay was shared on a coefficient from 2.55 shares for the captain to 0.8 share for a secondclass seaman. Then there was a polar coefficient of 1.5 for fishing in Arctic seas, a 10 percent bonus for one year’s service, a 10 percent bonus for meeting the ship’s quota, and a bonus as high as 40 percent for overfulfilling the plan. The quota was everything. It could be raised or lowered after the ship left dock, but was usually raised because the fleet manager drew his bonus from saving on seamen’s wages. Transit time to the fishing grounds was set at so many days, and the whole crew lost money when the captain ran into a storm, which was why Soviet ships sometimes went full steam ahead through fog and heavy seas.”

Presumably, however, the share was not of profit but of some fixed amount. The incentive came from the quota bonuses, which, as the novel details, were subject to political manipulation. Interesting nonetheless that the system used incentives of the broadly traditional kind, and that it explicitly rewarded workers differently for different skill level and status.

3 comments 14 July 2010

The History of Nikola Tesla

| Peter Klein |

Saturday was Nikola Tesla’s birthday. Here’s Jeremiah Warren’s video in Tesla’s honor:

Tesla was, of course, the great inventor whose technical achievements outshone those of his great rival, Thomas Edison, but who was unable to commercialize any of his discoveries. Tesla, unfortunately, put his faith in intellectual property-rights protection, while Edison emphasized management and marketing. As Danny Quah puts it, “Public relations and entrepreneurial savvy trump the raw intellectual idea.”

1 comment 12 July 2010

More on Managerial Coordination and the Vanishing Hand

| Dick Langlois |

Many many thanks to Mari Sako and Susan Helper for taking the time to comment on my post about their paper in ICC. To give the discussion more visibility, I am elevating my response to a new post.

My Vanishing Hand argument is an attempt to explain theoretically the demise of the large multi-unit Chandlerian enterprise, the essence of which was managerial coordination across vertically integrated stages of production. That is to say, my argument was about vertical disintegration. To assert that a more-disintegrated system still uses managerial coordination across firm boundaries is not to resurrect Chandler’s vision; it is to back away from Chandler’s vision. (I document Chandler’s vision, and its intellectual roots, with more care in the book than in the original “Vanishing Hand” paper.) My argument is fundamentally about vertical integration, and I have no problem with the idea that managerial coordination is often exercised across the boundaries of firms. I’ll return to this point in a second.

Sako and Helper argue that, if minimum efficient scale is falling, the size of firms should be falling. And Giovanni Dosi and his coauthors claim that firm size isn’t falling. Well, first of all, MES determines plant size not firm size. It sets a lower bound on firm size; it doesn’t guarantee a smaller firm size. But the real point here is: what does “size” mean? As I pointed out in my response to Dosi et al., their evidence is at best about firm size in the sense of price theory: number of widgets per unit time. My argument is about firm size in the sense of Coase: number of activities undertaken within the boundaries of the firm. Vertical disintegration is perfectly consistent with larger firm size in the sense of price theory; in fact, we might expect it. (more…)

5 comments 3 July 2010

Bailouts in Historical Perspective

| Peter Klein |

O&M has been consistently anti-bailout, whether recipients are banks, manufacturing firms, or homeowners. Besides encouraging moral hazard, bailouts also stymie the fundamental market process of moving productive assets from lower- to higher-valued uses. A market economy, after all, is a profit-and-loss system. Without losses, what’s the point?

A new edited volume, Bailouts: Public Money, Private Profit (Columbia University Press, 2010), explores bailouts in historical perspective, going back as far as the US financial crisis of 1792. Editor Robert Wright and his contributors try to steer a middle course, with Wright endorsing Hamilton’s Rule (formerly Bagehot’s Rule) of providing public loans to failing firms only if they have good collateral, and at “penalty” interest rates. Still, as Wright notes in his introduction, “There is no statistical evidence, however, that bailouts [of any kind] can speed economic recovery. In fact, bailouts can slow recovery by creating policy uncertainty, distorting market incentives, and in extreme cases fomenting sociopolitical unrest.”

Add comment 23 June 2010

In the Pink

| Dick Langlois |

A propos Peter’s recent post about behavioral economics, I discovered this interesting video illustrating Daniel Pink’s book Drive (thanks, Steve). I don’t think there is anything about it that is particularly inconsistent with what we know about the economics of organization, but others may disagree.

I once heard Pink speak, at the 2002 Business History Conference meeting, just after his book Free Agent Nation (about the rise of self-employment) appeared. He was one third of a panel on the New Economy, the rest of which consisted of two extremely far-left twits. It was amusing to hear Pink, a former speechwriter for Al Gore, gamely hold up a sensible position, though I remember thinking what greater fun it would have been if they had invited Virginia Postrel.

Add comment 13 June 2010

The “Knowledge Filter” and the New Economy

| Dick Langlois |

I recently ran across a paper by Bo Carlsson, Zoltan Acs, David Audretsch, and Pontus Braunerhjelm called “The Knowledge Filter, Entrepreneurship, and Economic Growth.” It’s actually a 2007 paper, part of a series these authors in various combination have been writing about the idea of a “knowledge filter.” The standard story about knowledge (in the new growth theory, but long before that as well) is what I think of as the R&D sausage-machine: one pours inputs like capital and labor into the meat grinder of R&D and out comes knowledge, which shifts the production function. In a series of papers, Carlsson et al. have argued that there is a “filter” somewhere within the meat grinder that determines how effectively the inputs get turned into useful knowledge. Although I’m sympathetic to criticism of the sausage machine story, you can imagine why I don’t think the knowledge-filter idea helps much: it’s just another black box that can be sized to fit whichever facts (stylized or real) one has at hand. Why not do away with the model altogether and instead think hard about the structure of knowledge and how it has interacted with institutions and organizational forms?

In fact, of course, that is what the authors actually do to some extent in this paper: one can read it without having to buy into the “filter” part. What caught my attention, in fact, is that this paper is ultimately an argument about the causes of the New Economy, and I am a collector of such arguments. The authors seem completely innocent of the large Post-Chandlerian literature on this topic, and they try to explain the transition from the large Chandlerian firm to more specialized entrepreneurial units strictly in terms of trends in R&D and knowledge creation.

[T]he industrial revolution was based in part on turning knowledge into economically useful knowledge and … university education and research in the United States became practically and vocationally oriented (in comparison with European universities), partly through the land-grant universities established in the mid- to late 19th century. In the early part of the 20th century, corporate research and development labs began to emerge as major vehicles of basic industrial research. Virtually all of the funded research prior to World War II was conducted in corporate or federal labs. In conjunction with a rapidly increasing share of the population with a college education, this made for high absorptive capacity on the part of industry and, as a result, a “thin” knowledge filter. In subsequent sections we discuss the emergence of the research university, the dramatic increase in research and development spending, and the shift of basic research toward the universities, especially during and following World War II. During the 1960s and 1970s, this led to a thickening of the knowledge filter in the form of an increasing need to “translate” basic (academic) research into economic activity. New firms have increasingly become the vehicle to translate research into growth; this can be seen in the greater role of small business and entrepreneurship from the 1970s onward.

Interesting. But I see two serious problems with this. First off, it misunderstands and vastly oversells the research labs of the mid-twentieth century. In most cases these were not drivers of innovation but absorbers of ideas invented outside the company by networks of smaller inventors — much like today. And when they did perform genuinely basic research, as in the case of Bell Labs, they were not at all tightly coupled to application. These labs were good at systemic development, that is, developing technologies that required a lot of disparate pieces to be created and put together. Color TV at RCA is an example. But they were not good at generating genuinely new useful knowledge or at more modular kinds of innovation — or, at least, weren’t as good as diffuse networks of inventors. In fact, as I mentioned in my previous post, the concentration of research (and patents) in the labs of RCA arguably slowed innovation in radio and consumer electronics generally. This leads to my second point: it’s not clear that one can explain everything just by looking at knowledge and R&D. There is actually a lot similarity between the regime of government funding of research through Land Grant institutions and the post-War grant system of Vannevar Bush: it was always channeled through the universities. Changes in government funding thus can’t really explain why there were large R&D labs at one time and small entrepreneurial firms at another. For that one has to think about issues of organization that go beyond the R&D function.

3 comments 28 May 2010

Intellectual Steam

| Dick Langlois |

There’s nothing like a rousing academic argument, especially when it deals with an intriguing historical case. “The Fable of the Keys” by Liebowitz and Margolis is the paradigm here. I recently stumbled upon another example, the (apparently ongoing) dispute that pits George Selgin and John Turner against Michele Boldrin and David Levine on the question of to what extent James Watt’s steam-engine patents retarded innovation in steam technology and slowed the British industrial revolution.

The Newcomen steam engine was a low-pressure device that, by using steam to create a vacuum, actually used air pressure to drive the engine. Watt invented and patented an improvement to the vacuum engine that involved a separate condenser to cool the steam, thus increasing efficiency. On the strength of his patent, Watt was bankrolled by the industrialist Matthew Boulton, and together they licensed the technology to others and did their best to block competing technology. Boldrin and Levine claim that the Watt patent constituted a wide-scope blocking patent, of the kind described by Merges and Nelson, which slowed development of rival technologies, including the high-pressure steam engine that was to be crucial in textiles and elsewhere. As a result, the Boulton-Watt patents and legal stratagems “delayed the industrial revolution by a couple of decades.” Selgin and Turner take issue with both facts and conclusions, arguing that patent law at the time, which derived from the 1625 Statute of Monopolies, actually forbade the patenting of a general idea and insisted that an innovation be instantiated in specific technology, in this case in the form of the condenser. In other words, they argue that patent scope was kept sensibly low in eighteenth-century Britain, something of which Merges and Nelson would approve. Thus Boulton and Watt could not, and in fact did not, slow the development of high-pressure steam through intellectual property, though they may have had an effect on the culture of contemporary inventors, who doubted the economies and feared the dangers of high-pressure steam at a time when complementary metallurgical technology was not yet up to the task. (Note to Selgin and Turner: here is a better reference on the dangers of high-pressure boilers in American steamboats.) (more…)

4 comments 19 May 2010

The Invention of Enterprise: Reviews

| Peter Klein |

If you haven’t yet had a chance to read Landes, Mokyr, and Baumol’s 600-page baby, The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times, here are reviews by Mansel Blackford and Reuven Brenner. Blackford is impressed; Brenner, not so much. Brenner is worth quoting at length:

[L]arge chunks of the book are more about the topic of inhibitions to enterprise and both the variety of ideas people came up with to rationalize them and the institutions rulers and governments put in place to enforce these ideologies. . . .

Unfortunately most of the chapters dealing with the topic of inhibitions miss the forest from the trees, as not one addresses what is to me the basic issue when examining “the invention of enterprise.” There is nothing more threatening to an established order — any order — than opening up, deepening, democratizing capital markets — accountably, allowing people to leverage their inventive, enterprising spirit. True, this would also disperse power — political power in particular. The deeper capital markets would also threaten established industries and commerce. Entrepreneurs, brilliant and ambitious as they might be, are not a threat. They can be sent to Siberia, forced into complacency by the Maos of this world, and the opportunistic ones will channel their ambition through the established powers.

But entrepreneurs with access to different, independent sources of risk capital — now that’s threatening, be they Brin and Page, Jobs or Milken at the time (quickly taking away much of the banks’ bread and butter of providing loans). Understanding this, even if not wanting to articulate it, provides enough incentives for those in power to subsidize, spread, and promote ideas and institutions inhibiting the deepening of capital markets under a wide variety of jargons, and thus inhibiting the invention and reinvention of enterprises. With time, people get accustomed to these institutions, their origins lost in the mist of time, inhibiting entrepreneurship and business for centuries. Today this may be happening a bit before our eyes. Suddenly, everything becomes a “bubble” — Internet, oil, houses, gold, bonds. Guess what: if everything is — why have capital markets to start with? If pricing no longer offers guidance to allocate capital; if stock and bond markets are not there to help correct mistakes faster — why should they continue to exist? And if they do not exist, who else remains but politicians, bureaucrats and the academics surrounding them — none of whom ever worked in a business even one day in their lives — who would then tax and borrow and subsequently allocate capital and “invent enterprises” based on — well — whatever.

2 comments 6 May 2010

Greenstein on Innovation

| Peter Klein |

One of my regular lectures at the Mises University deals with the economics of networks and information technology, with a particular focus on the history of the internet. A few years ago I wrote up my notes for a Mises.org daily article, which appeared as “Government Did Invent the Internet, But the Market Made It Glorious.” Shane Greensteinn’s new NBER paper could used the same title, though he chose something meatier: “Nurturing the Accumulation of Innovations: Lessons from the Internet.” Okay, the paper is a bit meatier too. Check it out:

The innovations that became the foundation for the Internet originate from two eras that illustrate two distinct models for accumulating innovations over the long haul. The pre-commercial era illustrates the operation of several useful non-market institutional arrangements. It also illustrates a potential drawback to government sponsorship — in this instance, truncation of exploratory activity. The commercial era illustrates a rather different set of lessons. It highlights the extraordinary power of market-oriented and widely distributed investment and adoption, which illustrates the power of market experimentation to foster innovative activity. It also illustrates a few of the conditions necessary to unleash value creation from such accumulated lessons, such as standards development and competition, and nurturing legal and regulatory policies.

5 comments 1 May 2010

ICC Special Issue on Alfred Chandler

| Dick Langlois |

The most recent number of Industrial and Corporate Change is a special issue: Management Innovation-Essays in the Spirit of Alfred D. Chandler, Jr. Guest editors are Bill Lazonick and David Teece. Some interesting articles and definitely many interesting contributors. Yours truly was not involved — indeed, I didn’t learn about it until the table of contents appeared in my inbox. But I am cited in at least four of the papers. Indeed, the paper by Susan Helper and Mari Sako, both of whom I admire greatly, spends considerable time comparing my argument with Chandler’s. For the most part, I don’t disagree with their assessment except in respect of spin (more on which in a moment); but at one point they make an assertion that had me scratching my head.

Some argue that as a central tendency, the buffering and coordination functions of management are devolving to the mechanisms of modularity and the market — informational decomposition, flexibility, and risk spreading (Langlois, 2003: 377). In contrast, in Chandler’s world, “Increased specialization must, almost by definition, call for more carefully planned coordination if the volume of output demanded by the mass market is to be achieved” (Chandler, 1977: 490). The disagreement lies in different assumptions made. Langlois assumes that thickness of the market is exogenously given or that it is already established, while Chandler assumes that the mass market is something that has to be developed. Chandler’s view seems more correct here. (Helper and Sako 2010, p. 420)

Hello? One can argue that I have spent most of my career making precisely the point they attribute to Chandler: it’s the basis of the theory of dynamic transaction costs. Neither markets nor firms snap into existence but evolve slowly and — as I often quote Brian Loasby as pointing out — both require managerial coordination. (more…)

4 comments 19 April 2010

Mundaneum: The Google of 1910

| Peter Klein |

Fascinating article by Molly Springfield in Triple Canopy on the Mundaneum, an effort by two Belgian lawyers to collect and classify all the world’s information, using notecards and an innovative filing system. Information scientist Paul Otlet “was the first to imagine all the world’s knowledge as one vast ‘web,’ connected by ‘links’ and accessed remotely through desktop screens, and because of this he can be seen as the kooky grandfather of the Internet.” Unfortunately, the analog technology of the early twentieth century was not up to the task. (Here’s the wiki on the Mundaneum, which incidentally might make a good title for my next book.)

See also: The Victorian Internet by Tom Standage.

Add comment 29 March 2010

Jobs Of Yesteryear: Obsolete Occupations

| Peter Klein |

A fascinating pictorial from NPR on jobs made obsolete by technological innovation. Great illustrations of the labor-market side of creative destruction. (Planet Money via Russ Roberts.)

5 comments 5 March 2010

The Best and the Brightest

| Dick Langlois |

I read Peter’s post about paternalism — and the limits of smart people in government — just after I read about the death of Carl Kaysen, long-time MIT economist and one-time Kennedy advisor. Obituaries praise Kaysen for his role as a policy intellectual of great scope, especially in the area of nuclear non-proliferation. But they either fail to mention, or mention with considerable approval, Kaysen’s pivotal role in the famous 1954 United Shoe Machinery case. Kaysen’s view of the case, and of the role of economic analysis in antitrust, is a key example of what Williamson calls the “inhospitality tradition” — that any kind of contract we don’t understand must therefore be anticompetitive. In the eyes of many present-day economists, Kaysen is implicated in having destroyed the American shoe machinery industry and with it the American shoe industry. (The post-mortem is by Masten and Snyder.) Not exactly McNamara in Vietnam, but worth mentioning amid the hagiography of Kaysen, not to mention the reawakened culture of elitist decision-making in Washington.

3 comments 20 February 2010

New Issue of ICC

| Dick Langlois |

A new issue of Industrial and Corporate Change is out (TOC here) with a bunch of interesting articles. Prominent among them is a well-researched and nicely written piece by Pierre Desrochers that argues a politically unpopular view about corporations and the environment. Free speech in action?

Add comment 25 January 2010

Corporations Are People Too

| Craig Pirrong |

Legally, in some respects, anyways. That was a key issue in the recent Supreme Court decision re McCain-Feingold (see Dick’s post). I don’t have a lot to say about the specifics of the decision, as campaign finance law is way too arcane for me. Suffice it to say that I am inherently skeptical about any regulation regarding elections designed by incumbent politicians. People yammer about conflicts of interest all the time, but there’s a colossal one for you.

I just wanted to make a quick point about a debate between Stevens and Scalia carried out in the opinion and the dissent. Stevens noted that the Founders were deeply skeptical of corporations. Indeed so. Scalia noted that there are so many corporations today. Also true. The interesting question is how we got from A (Stevens) to B (Scalia).

The story is told in the North, Wallis and Weingast natural-state book Violence and Social Orders I’ve blogged about several times over at Streetwise Professor, mostly in the context of Russia. The relevant chapter is primarily based on John Wallis’s work. The basic story is that hostility to corporations — reflected very well in Adam Smith’s Wealth of Nations — was due to the fact that historically, English corporations were created by the crown, and were essentially very profitable favors provided to the politically connected. They were, in NWW terms, part of the “closed order” of the natural state, in which access to certain contracting forms was limited to a select powerful few. This animus towards corporations was inherited in the United States, but in the early years of the 19th century, state legislatures confronting issues associated with the financing of new infrastructure turned the corporate form into a prop of an open-order system in which this contracting form was made available to all. Rather than limit the right of incorporation to an elite, they made it available to everybody. The system changed from one in which legislatures had to grant every incorporation, to one in which pretty much anybody could incorporate if they met a set of general, universally applicable requirements. Hence, the proliferation of corporations. (more…)

2 comments 25 January 2010

Call for Applications: “International Business in Historical Perspective: The Emergence of Global Entrepreneurship”

| Peter Klein |

The Henley Business School at the University of Reading and the Institute for Economic and Social History at the Georg August University of Göttingen are organizing a Conference/Summer School on “International Business in Historical Perspective: The Emergence of Global Entrepreneurship,” 19-20 March (conference) and 21-25 March (summer school) 2010. Details here. “During the combined conference and summer school, scholars and students will explore the concept of entrepreneurship applied to historical examples in an international context. Topics include, for instance, the performance of multinationals in foreign markets, immigrant entrepreneurship, international family firms, and the institutional framework in which entrepreneurial decisions were made.”

Add comment 19 January 2010

The Division of Labor, 1886

| Peter Klein |

Another interesting passage from Graham Robb’s The Discovery of France:

Every [French] town and village was a living encyclopedia of crafts and trades. In 1886, most of the eight hundred and twenty-four inhabitants of Saint-Étienne-d’Orthe, on a low hill near the river Adour, were farmers and their dependents. Of the active population of two hundred and eleven, sixty-two had another trade: there were thirty-three seamstresses and weavers, six carpenters, five fishermen, four innkeepers, three cobblers, two shepherds, two blacksmiths, two millers, two masons, one baker, one rempailleur (upholsterer or chair-bottomer), and one witch (potentially useful in the absence of a doctor), but no butcher and no storekeeper other than two grocers. In addition to the local industries and the services provided by itinerant traders (see p. 146), most places also had snake collectors, rat catchers with trained ferrets, and mole catchers who either set traps or lay in wait with a spade. There were rebilhous, who called out the hours of the night, “cinderellas,” who collected and sold ashes used for laundering clothes, men called tétaïres, who performed the function of a breast pump by sucking mothers’ breasts to start the flow of milk, and all the other specialists that the census listed under “trades unknown” and “without trade,” which usually meant gypsies, prostitutes, and beggars (p. 99).

This book is filled with economics. Here’s a passage about repeated games:

Deceit was a particular specialty of pedlars from the Auvergne. A single piece of cloth could be made to last a whole season if it was sold with the promise that a tailor would come the next day and make up the clothes for nothing. The tailor would arrive, measure the customer, take the cloth, and never return. The drawback was that a dishonest salesman had to cover vast areas compared to a pedlar who earned the trust of his clientele (p. 150).

Add comment 16 January 2010

New Book: The Invention of Enterprise

| Peter Klein |

I’m putting this one on my Amazon wish list: The Invention of Enterprise:
Entrepreneurship from Ancient Mesopotamia to Modern Times, edited by David Landes, Joel Mokyr, and Will Baumol (Princeton, 2010). Check out the Table of Contents — an all-star lineup of entrepreneurship scholars and economic and business historians.

Add comment 12 January 2010

A Tale of Two Papers, or, Humpty Dumpty Writes About Exchanges

| Craig Pirrong |

The American Economic Association/American Finance Association Meetings are just about over. I made a quick trip there to comment on a paper. Upon returning home, I downloaded a couple of the papers presented that seemed of interest. Good call on one, bad call on the other.

The bad one is “Centralized versus Over The Counter Markets” by Viral Acharya of LBS and NYU, and Alberto Bisin of NYU. Although the motivation of the paper is admirable, the execution is execrable, and is representative of a lot of what is wrong in the profession.

The motivation is to compare the efficiencies of alternative ways of organizing derivatives trades: centralized exchanges and over-the-counter (OTC) markets. Great. Big question. I’ve written a lot about it, and would be very interested in seeing other takes thoughtful on the subject.

The paper concludes that organized exchanges are (constrained) first best efficient, and more efficient than OTC markets. A quick review of the paper makes it clear, however, that they’ve rigged the game to produce that result. (more…)

6 comments 5 January 2010

Studying Entrepreneurs

| Peter Klein |

Great opening from Robert Whaples’s EH.Net review of T.J. Stiles, The First Tycoon: The Epic Life of Cornelius Vanderbilt (Knopf, 2009):

Economists have always had a hard time dealing with entrepreneurs — as individuals and in the aggregate. We sort of know what entrepreneurship is and that it can have a profound impact on economic performance, but it’s usually just too difficult to model and measure. What we do not understand, we simply ignore and leave to others. After all, we are firm believers in comparative advantage and studying entrepreneurship — even if it is economically important — doesn’t seem to be our comparative advantage. In the view of most economic historians, it is the rules of the game — the incentives and the institutions — that really matter, not the players. American economic history has been cast as the story of millions of diligent and clever beavers working away and transforming the landscape. Take one of them away and nothing of great importance will really change. (In fact, most of us seem to believe that if you take away an entire technological complex, like the railroads, little of much importance would really change.)

Why, then, should economic historians study the careers of entrepreneurs? Not all of us should. But for some, the study of entrepreneurs will illuminate the past and the present — and put life into our cliometric narrative.

Joe Salerno has a valuable treatment of this problem in his 2008 paper “The Entrepreneur: Real and Imagined.”

Add comment 4 January 2010

The Onion on Industrialization

| Peter Klein |

At year-end the Onion is featuring “Top Ten Stories of the Last 4.5 Billion Years” and some are O&M-themed. A look at child labor is cute, if uninformed (some of them little buggers actually worked before the Industrial Revolution, believe it or not). And I liked these person-on-the-street reflections on Henry Ford:

Ethel Smith, Auto Worker: “It’s satisfying to know I’m helping to build an industry and a future for my grandchildren and great-grandchildren right here in Detroit.”

Walter Booker, Craftsman: “It’s about time. I’ve had enough of those mind-numbingly boring jobs where you have to do different things all day.”

And don’t miss “Four Or Five Guys Pretty Much Carry Whole Renaissance”: “Our research indicates that da Vinci, Michelangelo, Shakespeare, and Galileo basically hoisted the entire intellectual transformation of mankind onto their shoulders while everyone else just sat around being superstitious nimrods.”

Add comment 20 December 2009

Boeing and the Higgs Effect

| Peter Klein |

In their calls for greatly expanding the Federal Reserve System’s and Treasury Department’s roles in the economy, Chairman Bernanke, Secretaries Paulson and Geithner, and their academic enablers have repeatedly emphasized the temporary nature of these “emergency” measures. “History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs. In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation,” said Bernanke in September. Yeah, no kidding. But, we are assured, the basic structure of our “free-enterprise” system remains soundly in place.

However, as Bob Higgs has taught us, “temporary,” “emergency” government measures are never that. Indeed, virtually all the major, permanent expansions of US government in the twentieth-century resulted from supposedly temporary measures adapted during war, recession, or some other “crisis,” real or imaginary. Cousin Naomi’s “disaster capitalism” thesis is exactly backward: it is socialism, or interventionism, that thrives during the crisis, and Washington, DC never looks back. I mean, does anyone seriously believe that the Fed will deny, or give back, the authority to purchase whatever financial assets it wishes at some future date when it deems the crisis officially “over”? Will the Treasury credibly commit never again to purchase equity or guarantee debt or otherwise protect some major industrial or financial firm after the economy returns to “normal”? Not a chance. Everything the authorities have done in the last two years to deal with this “emergency” will become part of the federal government’s permanent tool kit.

Today’s WSJ has a good example of Higgs’s ratchet effect, a front-pager on Boeing’s dependence on export loan guarantees from the Export-Import Bank, a federal government agency created in — you guessed it — 1934, as a temporary agency to deal with the Great Depression. “No company has deeper relations with Ex-Im Bank than Chicago-based Boeing. Without Ex-Im, aviation officials say, Boeing this year could have been forced to slash production, endangering hundreds of U.S. suppliers, thousands of skilled American jobs and billions of dollars in export contracts.” Bank official Bob Morin is described as “Ex-Im Bank’s rainmaker. His Boeing deals accounted for almost 40% of the bank’s $21 billion in business last year. To help Boeing through the credit crunch, his team has spent the past year developing government-backed bonds that promise to raise billions.” So, a massive industrial-planning apparatus, supposedly born during a temporary crisis, lives on as the lifeblood of a huge, politically connected US company.

Thank goodness all that money flowing to Goldman Sachs is only temporary!

Update: Here’s a short Higgs piece from 2000 on the Ex-Im Bank, appropriately titled “Unmitigated Mercantilism.”

1 comment 9 December 2009

The WSJ on Vertical Integration

| Peter Klein |

It’s not as bad as this 2006 piece from Slate, but Monday’s WSJ front-pager, “Companies More Prone to Go ‘Vertical,’” is underwhelming at best. It shares a few interesting anecdotes about recent vertical mergers, but falls flat on two major grounds. First, like the Slate piece, it assumes that the advances in IT over the last few decades led to some sort of tectonic shift away from vertical integration, against which firms are now reacting by “rediscovering” the benefits of vertical coordination. Actually there’s little evidence for such a shift. Second, and more important, the article doesn’t bother to mention any theories about what vertical integration is and does. There are vague references to commodity-price volatility and the need to “control” the supply chain, but no recognition that risk-management and control over inputs can be achieved through contract as well as integration. Given that one of this year’s Nobel Laureates won the prize for his work on precisely this problem, you’d think some reference to transaction costs might be appropriate. Old Media, R.I.P.

3 comments 4 December 2009

Peter Bernstein Interview

| Peter Klein |

Speaking of Peters, the McKinsey Quarterly site has a video interview with the late Peter Bernstein on risk. Bernstein was a deep thinker and an excellent writer. I once found myself on a plane next to an investment banker who was reading Bernstein’s Against the Gods. I mentioned that I too was a fan, and he told me he re-read the book at least once each year, out of professional obligation.

1 comment 18 November 2009

Masters of Finance

| Peter Klein |

The American Finance Association has assembled a terrific set of video interviews and lectures with eminent financial economists including Markowitz, Sharpe, Samuelson, Merton, Scholes, Arrow, Fama, and Myers. (HT: Fama/French.)

Add comment 8 October 2009

Posts filed under 'Business History'

Authors

Guests

Networking

Recent Posts

Recent Comments

Most Popular (Last 30 Days)

Categories

Links

Archives

Feeds

Our Recent Books