Posts filed under ‘Business/Economic History’

Contracts as Technology

| Peter Klein |

That’s the title of an interesting new law review article by Kevin Davis (New York University Law Review, April 2013). Just as we can treat organizational structure as as sort of technology, and study the introduction and diffusion of new organizational forms with the same theories and methods used to study technological innovation and diffusion, we can think of contracts as structures or institutions that emerge, are subject to experimentation and competition, and evolve and diffuse. Here’s the abstract:

If technology means, “useful knowledge about how to produce things at low cost”, then contracts should qualify. Just as mechanical technologies are embodied in blueprints, technologies of contracting are embodied in contractual documents that serve as, “blueprints for collaboration”. This Article analyzes innovations in contractual documents using the same kind of framework that is used to analyze other kinds of technological innovation. The analysis begins by laying out an informal model of the demand for and supply of innovative contractual documents. The discussion of demand emphasizes the impact of innovations upon not only each party’s incentives to collaborate efficiently, but also upon reading costs and litigation costs. The analysis of supply considers both the generation and dissemination of innovations and emphasizes the importance of cumulative innovation, learning by-doing, economies of scale and scope, and trustworthiness. Recent literature has raised concerns about the extent to which law firms produce contractual innovations. In fact, a wide range of actors other than law firms supply contractual documents; including end users of contracts, specialized providers of legal documents, legal database firms, trade associations, and academic institutions. This article discusses the incentives and capabilities of each of these potential sources of innovation. It concludes by discussing potential interventions such as: (1) enhancing intellectual property rights, (2) relaxing rules concerning the unauthorized practice of law and, (3) creating or expanding publicly sponsored clearinghouses for contracts.

See also Lisa Berstein’s comment. (HT: Geoff Manne)

17 March 2014 at 3:49 pm 1 comment

Creativity and Age

old-lady| Peter Klein |

A common myth is that successful technology companies are founded by people in their 20s (Scott Shane reports a median age of 39). Entrepreneurial creativity, in this particular sense, may peak at middle age.

We’ve previously noted interesting links between the literatures on artistic, scientific, and entrepreneurial creativity, organization, and success, with particular reference to recent work by David Galenson. A new survey paper by Benjamin Jones, E.J. Reedy, and Bruce Weinberg on age and scientific creativity is also relevant to this discussion. They discuss the widely accepted empirical finding that scientific creativity — measured by high-profile scientific contributions such as Nobel Prizes — tends to peak in middle age. They also review more recent research on variation in creativity life cycles across fields and over time. Jones, for example, has observed that the median age of Nobel laureates has increased over the 20th century, which he attributes to the rapid growth in the body of accumulated knowledge one must master before making a breakthrough scientific contribution (the “burden of knowledge” thesis). Could the same hold through for founders of technology companies?

4 February 2014 at 11:47 am Leave a comment

Focused Firms and Conglomerates: Let a Thousand Flowers Bloom

| Peter Klein |

A renewed interest in conglomerates has brought forth a HBR blog post from Herman Vantrappen and Daniel Deneffe, “Don’t Write Off the (Western) Focused Firm Yet.” As they rightly point out, the choice between a focus and diversity “depends on the context in which the business operates. Specifically, focused firms fare better in countries where society expects and gets public accountability of both firms and governments, while conglomerates succeed in nations with high public accountability deficits.” I would put it slightly differently: the choice between focused, single-business firms and diversified, multi-business enterprises depends on the relative performance of internal and external capital and labor markets. The institutional environment — the legal system, regulatory practices, accounting rules — plays a huge rule here, but social norms, technology, and the competitive environment also affect the efficient margin between between intra-firm and inter-firm resource allocation.

The point is that all forms of organization have costs and benefits. There is no uniquely “optimal” degree of diversification or hierarchy or vertical integration or any other aspect of firm structure; the choice depends on the circumstances. Instead of favoring one particular organizational form we should be promoting an environment in which entrepreneurs can experiment with different approaches, with competition determining the right choice in each  context. Let a thousand flowers bloom!

Update: From Joe Mahoney I learn that not only was Chairman Mao’s actual exhortation “Let a hundred flowers blossom,” but also he may have meant it sarcastically: “It is sometimes suggested that the initiative was a deliberate attempt to flush out dissidents by encouraging them to show themselves as critical of the regime.” My usage was of course sincere. :)

28 January 2014 at 10:54 am 1 comment

The Modular Kimono

| Dick Langlois |

I recently ran across this interesting paper on vertical integration and subcontracting in the Japanese kimono industry of the late nineteenth and early twentieth centuries. By this period, most of the Japanese silk (and cotton) industries had adopted the factory system. But there remained a few industrial districts that relied on the putting-out system. This paper is most interested in presenting a risk-aversion model that explains why “premier subcontractors” got relational contracts in the putting-out system. I’m not sure I buy it, but in any case what caught my eye was something else — a modularity story:

In the weaving industry of Kiryu, the factory system equipped with hand looms had been chosen to weave the luxury fabrics, while the putting-out system had been used for most other fabrics, until the factory system equipped with power looms became dominant for most kinds of fabrics in the 1910s and later. Instead of being replaced, the putting-out system developed and dispersed within Kiryu, especially from the 1860s to the 1900s, when the main products of Kiryu were yarn-dyed silk fabrics. “Yarn dying” means material yarn is dyed before weaving. For the luxury fabrics that were dyed after weaving, the cleaning and finishing processes undertaken after weaving were important, and those processes were conducted inside the manufacturers’ workshops. In contrast, in the production of the yarn-dyed fabrics, dying, arranging warps, cleaning yarn, throwing, re-reeling, and other preparation processes were essential. Because those processes needed special skills, the craftsmen who specialized in each process were organized as subcontractors by manufacturers. … With the moving weight from production of traditional piece-dyed (dyed-after-weaving) fabrics to production of yarn-dyed (dyed-before-weaving) silk fabrics, the throwing process, the finishing process, and the designing process, as well as the weaving process, came to be put-out. Manufacturers decreased the production inside of their workshops and established subcontracting relations with independent artisans. This case suggests that the technological change induced by the change of products from piece-dyed fabrics to the yarn-dyed fabrics affected production organization.

This has a bit of a Christensen flavor to it. When “performance” needs were high — high-end kimonos — the industry used a non-modular technology (dyed-after-weaving) and an integrated organization. When performance needs were lower — lower-quality kimonos — it used a modular technology (dyed-before-weaving) and a vertically disintegrated structure.

14 January 2014 at 12:50 pm 1 comment

Top Posts of 2013

| Peter Klein |

It’s been another fine year at O&M. 2013 witnessed 129 new posts, 197,531 page views, and 114,921 unique visitors. Here are the most popular posts published in 2013. Read them again for entertainment and enlightenment!

  1. Rise of the Three-Essays Dissertation
  2. Ronald Coase (1910-2013)
  3. Sequestration and the Death of Mainstream Journalism
  4. Post AoM: Are Management Types Too Spoiled?
  5. Nobel Miscellany
  6. The Myth of the Flattening Hierarchy
  7. Climate Science and the Scientific Method
  8. Bulletin: Brian Arthur Has Just Invented Austrian Economics
  9. Solution to the Economic Crisis? More Keynes and Marx
  10. Armen Alchian (1914-2013)
  11. My Response to Shane (2012)
  12. Your Favorite Books, in One Sentence
  13. Does Boeing Have an Outsourcing Problem?
  14. Doug Allen on Alchian
  15. New Paper on Austrian Capital Theory
  16. Hard and Soft Obscurantism
  17. Mokyr on Cultural Entrepreneurship
  18. Microfoundations Conference in Copenhagen, June 13-15, 2014
  19. On Academic Writing
  20. Steven Klepper
  21. Entrepreneurship and Knowledge
  22. Easy Money and Asset Bubbles
  23. Blind Review Blindly Reviewing Itself
  24. Reflections on the Explanation of Heterogeneous Firm Capability
  25. Do Markets “React” to Economic News?

Thanks to all of you for your patronage, commentary, and support!

31 December 2013 at 7:55 am 1 comment

Business Groups in the US

| Peter Klein |

Diversification continues to be a central issue for strategic management, industrial organization, and corporate finance. There are huge research and practitioner literatures on why firms diversify, how diversification affects financial, operating, and innovative performance, what underlies inter-industry relatedness, how diversification ties into other aspects of firm strategy and organization, whether diversification is driven by regulation or other policy choices, and so on. There are many surveys of these literatures (Lasse and I contributed this one).

Some of the most interesting research deals with the institutional environment. For example, many US corporations were widely diversified in the 1960s and 1970s when the brokerage industry was small and protected by tough legal restrictions on entry, antitrust policy frowned on vertical and horizontal growth (maybe), and a volatile macroeconomic environment encouraged internalization of inter-firm transactions (also maybe). After the brokerage industry was deregulated in 1975, the antitrust environment became more relaxed, and the market for corporate control heated up, many conglomerates were restructured into more efficient, specialized firms. To quote myself:

The investment community in the 1960s has been described as a small, close-knit group wherein competition was minimal and peer influence strong (Bernstein, 1992). As Bhide (1990, p. 76) puts it, “internal capital markets … may well have possessed a significant edge because the external markets were not highly developed. In those days, one’s success on Wall Street reportedly depended far more on personal connections than analytical prowess.” When capital markets became more competitive in the 1970s, the relative importance of internal capital markets fell. “This competitive process has resulted in a significant increase in the ability of our external capital markets to monitor corporate performance and allocate resources” (Bhide, 1990, p. 77). As the cost of external finance has fallen, firms have tended to rely less on internal finance, and thus the value added from internal-capital-market allocation has fallen. . . .

Similarly, corporate refocusing can be explained as a consequence of the rise of takeover by tender offer rather than proxy contest, the emergence of new financial techniques and instruments like leveraged buyouts and high-yield bonds, and the appearance of takeover and breakup specialists like Kohlberg Kravis Roberts, which themselves performed many functions of the conglomerate headquarters (Williamson, 1992). A related literature looks at the relative importance of internal capital markets in developing economies, where external capital markets are limited (Khanna and Palepu 1999, 2000).

The key reference is to Amar Bhide’s 1990 article “Reversing Corporate Diversification,” which deserves to be better known. But note also the pointer to Khanna and Palepu’s important work on diversified business groups in emerging markets, which has also led to a vibrant empirical literature. The idea there is that weak institutions lead to poorly performing capital and labor markets, leading firms to internalize functions that would otherwise be performed between firms. More generally, firm strategy and organization varies systematically with the institutional environment, both over time and across countries and regions.

Surprisingly, diversified business groups were also common in the US, in the early 20th century, which brings me (finally) to the point of this post. A new NBER paper by Eugene Kandel, Konstantin Kosenko, Randall Morck, and Yishay Yafeh studies these groups and reaches some interesting and provocative conclusions. Check it out:

Business Groups in the United States: A Revised History of Corporate Ownership, Pyramids and Regulation, 1930-1950

Eugene Kandel, Konstantin Kosenko, Randall Morck, Yishay Yafeh
NBER Working Paper No. 19691, December 2013

The extent to which business groups ever existed in the United States and, if they did exist, the reasons for their disappearance are poorly understood. In this paper we use hitherto unexplored historical sources to construct a comprehensive data set to address this issue. We find that (1) business groups, often organized as pyramids, existed at least as early as the turn of the twentieth century and became a common corporate form in the 1930s and 1940s, mostly in public utilities (e.g., electricity, gas and transportation) but also in manufacturing; (2) In contrast with modern business groups in emerging markets that are typically diversified and tightly controlled, many US groups were focused in a single sector and controlled by apex firms with dispersed ownership; (3) The disappearance of US business groups was largely complete only in 1950, about 15 years after the major anti-group policy measures of the mid-1930s; (4) Chronologically, the demise of business groups preceded the emergence of conglomerates in the United States by about two decades and the sharp increase in stock market valuation by about a decade, so that a causal link between these events is hard to establish, although there may well be a connection between them. We conclude that the prevalence of business groups is not inconsistent with high levels of investor protection; that US corporate ownership as we know it today evolved gradually over several decades; and that policy makers should not expect policies that restrict business groups to have an immediate effect on corporate ownership.

12 December 2013 at 11:40 am Leave a comment

Easy Money and Asset Bubbles

| Peter Klein |

Central to the “Austrian” understanding of business cycles is the idea that monetary expansion — in Wicksellian terms, money printing that pushes interest rates below their “natural” levels — leads to overinvestment in long-term, capital-intensive projects and long-lived, durable assets (and underinvestment in other types of projects, hence the more general term “malinvestment”). As one example, Austrians interpret asset price bubbles — such as the US housing price bubble of the 1990s and 2000s, the tech bubble of the 1990s, the farmland bubble that may now be going on — as the result, at least partly, of loose monetary policy coming from the central bank. In contrast, some financial economists, such as Laureate Fama, deny that bubbles exist (or can even be defined), while others, such as Laureate Shiller, see bubbles as endemic but unrelated to government policy, resulting simply from irrationality on the part of market participants.

Michael Bordo and John Landon-Lane have released two new working papers on monetary policy and asset price bubbles, “Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence,” and “What Explains House Price Booms?: History and Empirical Evidence.” (Both are gated by NBER, unfortunately, but there may be ungated copies floating around.) These are technical, time-series econometrics papers, but in both cases, the conclusions are straightforward: easy money is a main cause of asset price bubbles. Other factors are also important, particularly regarding the recent US housing bubble (I suspect that housing regulation shows up in their residual terms), but the link between monetary policy and bubbles is very clear. To be sure, Bordo and Landon-Lane don’t define easy money in exactly the Austrian-Wicksellian way, which references natural rates (the rates that reflect the time preferences of borrowers and savers), but as interest rates below (or money growth rates above) the targets set by policymakers. Still, the general recognition that bubbles are not random, or endogenous to financial markets, but connected to specific government policies designed to stimulate the economy, is a very important result that will hopefully influence current economic policy debates.

28 October 2013 at 9:40 am 1 comment

Symposium on Allen’s Institutional Revolution

| Peter Klein |

Here is a symposium on Doug Allen’s very important book The Institutional Revolution (Chicago, 2011). The symposium features essays by Deirdre McCloskey, Joel Mokyr and José-Antonio Espín-Sánchez, and our own Dick Langlois, along with a reply by Doug. The issue revolves around the role of measurement, and Doug’s thesis that reductions in measurement costs are central to improved economic performance.

My favorite line, from Doug’s reply:

I have read “The Problem of Social Cost” more times than I can recall, and study as I may, I have never found a logical error in it. But here is the point: if the author, both at the time and 30 years later, still failed to fully grasp his own perfect work, then it is an understatement to note that the ideas are subtle.

25 October 2013 at 9:24 am Leave a comment

David Landes

| Dick Langlois |

As some readers may already have heard, David Landes passed away on August 17. The New York Times has not seen fit to publish an obituary, but here is one by Landes’s son Richard.

I only met Landes once, at the International Economic History Association meeting in Milan in 1994. I attended a session he chaired on the Industrial Revolution. Rondo Cameron, a real character, sat himself down in the front row near the podium. Cameron was one of the most vocal proponents of the idea that there was actually no such thing as the Industrial Revolution, based largely on the argument that income per capita did not rise dramatically during the late eighteenth and early nineteenth century (even though both the numerator and denominator were rising dramatically). Landes opened the session, and some hapless economic historian began presenting a paper on something or other during the Industrial Revolution. Cameron immediately put up his hand and announced that the presenter’s premise was mistaken – because there had been no Industrial Revolution! Landes then sprang back to the podium and delivered a wonderful extemporaneous speech on why it was indeed appropriate to talk about an Industrial Revolution, including an analysis of the word “revolution” and its first use in French. This session also sticks in memory because half-way through an audience member suffered and epileptic fit and had to be carted out to an ambulance.

I must say that, in the great debates in which Landes engaged, I most often found myself coming down on his side.

Addendum September 8, 2103: The New York Times now has an obituary here.

8 September 2013 at 7:23 am 1 comment

David Landes

| Dick Langlois |

As some readers may already have heard, David Landes passed away on August 17. The New York Times has not seen fit to publish an obituary, but here is one by Landes’s son Richard.

I only met Landes once, at the International Economic History Association meeting in Milan in 1994. I attended a session he chaired on the Industrial Revolution. Rondo Cameron, a real character, sat himself down in the front row near the podium. Cameron was one of the most vocal proponents of the idea that there was actually no such thing as the Industrial Revolution, based largely on the argument that income per capita did not rise dramatically during the late eighteenth and early nineteenth century (even though both the numerator and denominator were rising dramatically). Landes opened the session, and some hapless economic historian began presenting a paper on something or other during the Industrial Revolution. Cameron immediately put up his hand and announced that the presenter’s premise was mistaken – because there had been no Industrial Revolution! Landes then sprang back to the podium and delivered a wonderful extemporaneous speech on why it was indeed appropriate to talk about an Industrial Revolution, including an analysis of the word “revolution” and its first use in French. This session also sticks in memory because half-way through an audience member suffered and epileptic fit and had to be carted out to an ambulance.

I must say that, in the great debates in which Landes engaged, I most often found myself coming down on his side.

29 August 2013 at 11:30 am Leave a comment

Organizational Learning without Markets

| Peter Klein |

A really interesting NBER paper from Thomas Triebs and Justin Tumlinson confirms what you may suspect, that firms operating outside the market system — in this case, in the former East Germany — do not learn the capabilities for judging market signals. Triebs and Tumlinson compare East and West German firms after unification and find that East German firms did not anticipate, or respond to, market information as well as their West German counterparts, other things equal, suggesting that during the Communist period, firms lost (or failed to acquire) the ability to work within a market setting. The paper is based on a formal learning model but the empirical results seem to square with a variety of approaches, including resource-based and managerial capabilities theories.

Learning Capitalism the Hard Way—Evidence from Germany’s Reunification
Thomas P. Triebs, Justin Tumlinson
NBER Working Paper No. 19209, July 2013

Communism in East Germany sought to dampen the effect of market forces on firm productivity for nearly 40 years. How did East German firms respond to the free market after being thrust into it in 1990? We use a formal learning model and German business survey data to analyze the lasting impact of this far-reaching treatment on the way firms in former East Germany predicted their own productivity relative to firms in former West Germany during the two decades since Reunification. We find in confirmation of our formal model’s predictions, that Eastern firms forecast productivity less accurately, particularly in dynamic and uncertain markets, but that the gap gradually closed over 12 to 13 years. Second, by analyzing the direction of firm level errors in conjunction with contemporaneous market signals we find that, in the years immediately following Reunification, Eastern firms estimate the market’s role as generally less potent than Western firm do, an observation consistent with overweighting experiences from the communist era; however, over roughly 14 years both converge to the same (incorrect) overestimate of the market’s role on their productivity.

I’m reminded of Mises’s remark that entrepreneurs, in a socialist economy, learn to excel at “diplomacy and bribery.” I suspect a study like Triebs and Tumlinson’s on political capabilities or skill at political entrepreneurship might yield the opposite result.

15 July 2013 at 3:15 pm Leave a comment

Mokyr on Cultural Entrepreneurship

| Peter Klein |

I am wary of adding yet another conceptual margin for entrepreneurial action but I highly recommend a new (and for the moment, ungated) paper in the Scandinavian Economic History Review by the distinguished economic historian Joel Mokyr on “cultural entrepreneurship.” Starting from a broadly Schumpeterian perspective, Mokyr focuses on individuals who introduce and disseminate novel ideas:

[E]ach individual makes cultural choices taking as given what others believe. It is not a priori obvious how that affects one’s choices. It may affect them positively because conformism implies that there is some social cost associated with deviancy, or because people may reason that if the majority believes a certain thing, there may be wisdom in it (thus saving on information costs). But there can be a reverse reaction as well, with non-conformists perversely rebelling against existing beliefs. What matters for my purposes is that for a small number of individuals, the beliefs of others are not given but can be changed. I shall refer to those people as cultural entrepreneurs. Their function is much like entrepreneurs in the realm of production: individuals who refuse to take the existing technology or market structure as given and try to change it and, of course, benefit personally in the process. Much like other entrepreneurs, the vast bulk of them make fairly marginal changes in our cultural menus, but a few stand out as having affected them in substantial and palpable ways.

Succinctly expressed: “cultural entrepreneurs are the creators of epistemic focal points that people can coordinate their beliefs on.”

Mokyr’s focus, like Schumpeter’s, is not entrepreneurship per se, but its effects, particularly on long-run economic growth, and his entrepreneurship construct is somewhat undertheorized. But he provides fascinating examples, ranging from Mohammed and Luther to Francis Bacon, Isaac Newton, and Adam Smith. He focuses in particular on Bacon and Newton, describing Bacon’s work as “the coordination device which served as the point of departure for thinkers and experimentalists for two centuries to come. The economic effects of these changes remained latent and subterranean for many decades, but eventually they erupted in the Industrial Revolution and the subsequent processes of technological change.” Newton and the Royal Society “raise[d] the social standing of scientists and researchers as people who should be respected and supported and [provided] them with a comfortable material existence.” (Mostly good.)

I’m not an expert on cultural theory or history and am not sure how much the “cultural entrepreneur” construct ads to our understanding of cultural change (other than relabeling, a frequent worry in entrepreneurship studies). But the paper is a great read, highly provocative and informative, and addresses big questions. Check it out.

26 June 2013 at 8:43 am 4 comments

Keynes in the Spotlight

| Peter Klein |

NPG P363(14); John Maynard Keynes, Baron Keynes by Ramsey & MusprattAs the Niall Ferguson kerfuffle begins fading from memory it’s worth revisiting the underlying issue: What kind of person was John Maynard Keynes, and (how) did his social, cultural, moral, and aesthetic views affect his scientific work?

Here are a few recommended readings:

These works are not kind to ole’ John Maynard (I’m posting them, what did you expect?). Rothbard, for example, emphasizes Keynes’s “overweening egotism, which assured him that he could handle all intellectual problems quickly and accurately and led him to scorn any general principles that might curb his unbridled ego,” also referring to Keynes’s “deep hatred and contempt for the values and virtues of the bourgeoisie,” including savings and thrift. It’s hard to imagine that Keynes’s personal views on thrift could be unrelated to the now-ubiquitous, über-Keynesian idea that spending, not savings and capital accumulation, is the driver of economic growth.

On time preference, and its social and cultural causes and consequences, I recommend Time and Public Policy by T. Alexander Smith (University of Tennessee Press, 1988), which unfortunately appears to be out of print. Here is a brief review by Israel Kirzner.

17 May 2013 at 2:07 pm 2 comments

AMP Symposium on Private Equity

| Peter Klein |

The new issue of the Academy of Management Perspectives features a symposium, edited by Mike Wright, on “Private Equity: Managerial and Policy Implications.” The symposium includes “Private Equity, HRM, and Employment” by Mike with Nick Bacon, Rod Ball, and Miguel Meuleman; “The Evolution and Strategic Positioning of Private Equity Firms” by Robert E. Hoskisson, Wei Shi, Xiwei Yi, and Jing Jin; and “Private Equity and Entrepreneurial Governance: Time for a Balanced View” by John L. Chapman,  Mario P. Mondelli, and me. The symposium came out very nicely, if I may say so, covering a variety of strategic, entrepreneurial, and organizational issues related to private equity firms and companies receiving private equity finance.

In his introduction Mike highlights five main contributions:

First, the papers address the need to consider the systematic evidence on the managerial and strategic aspects of PE, in relation to both portfolio firms and PE firms, which has been largely fragmented if not nonexistent. Second, the papers analyze the impact of PE during economic downturns and demonstrate the underlying resilience of PE-backed portfolio firms. Third, the symposium provides an opportunity to develop insights that compare the managerial impact of PE with different forms of ownership and governance. Fourth, the articles in this symposium highlight the heterogeneity of the private equity phenomenon. Finally, in the context of continuing public attention to PE, which has been heightened by the U.S. presidential race and the global recession, the evidence presented in this symposium paints a rather more positive view than the hyperbole of some of the industry’s critics would suggest. Taken together, these contributions indicate a need for caution in attempts to tighten the regulation of PE lest the economic, financial, and social benefits be lost.

Bonus: We are organizing a session on private equity at the upcoming Academy of Management meeting based on the ideas of the symposium. It’s scheduled for Saturday, 10 August 2013, 11:30-12:30 (location TBA). Come join us!

13 April 2013 at 4:12 pm 1 comment

Blanchard on Fed Independence

| Peter Klein |

I’ve argued before (1, 2) that the usual arguments for central bank independence aren’t very strong, particularly in the current environment where Bernanke has interpreted the “unusual and exigent circumstances” provision to mean “I will do whatever I want.” (This was a major point in my Congressional testimony about the Fed.) So it was nice to see Olivier Blanchard express similar reservations in an interview published in today’s WSJ (I assume it’s not an April Fool’s Day prank):

One of the major achievements of the last 20 years is that most central banks have become independent of elected governments. Independence was given because the mandate and the tools were very clear. The mandate was primarily inflation, which can be observed over time. The tool was some short-term interest rate that could be used by the central bank to try to achieve the inflation target. In this case, you can give some independence to the institution in charge of this because the objective is perfectly well defined, and everybody can basically observe how well the central bank does..

If you think now of central banks as having a much larger set of responsibilities and a much larger set of tools, then the issue of central bank independence becomes much more difficult. Do you actually want to give the central bank the independence to choose loan-to-value ratios without any supervision from the political process. Isn’t this going to lead to a democratic deficit in a way in which the central bank becomes too powerful? I’m sure there are ways out. Perhaps there could be independence with respect to some dimensions of monetary policy -­ the traditional ones — and some supervision for the rest or some interaction with a political process.

1 April 2013 at 12:05 pm 1 comment

The First Modern Organizational Chart

| Peter Klein |

It was designed in 1854 for the New York and Erie Railroad and reflects a highly decentralized structure, with operational decisions concentrated at the local level. McKinsey’s Caitlin Rosenthal describes it as an early attempt to grapple with “big data,” one of today’s favored buzzwords. See her article, “Big Data in the Age of the Telegraph,” for a fascinating discussion. And remember, there’s little new under the sun (1, 23).

erierr_fullmap

5 March 2013 at 12:19 pm 1 comment

The Myth of the Flattening Hierarchy

| Peter Klein |

We’ve written many posts on the popular belief that information technology, globalization, deregulation, and the like have rendered the corporate hierarchy obsolete, or at least led to a substantial “flattening” of the modern corporation (see the links here). The theory is all wrong — these environmental changes affect the costs of both internal and external governance, and the net effect on firm size and structure are ambiguous — and the data don’t support a general trend toward smaller and flatter firms.

Julie Wulf has a paper in the Fall 2012 California Management Review summarizing her careful and detailed empirical work on the shape of corporate hierarchies. (The published version is paywalled, but here is a free version.) Writes Julie:

I set out to investigate the flattening phenomenon using a variety of methods, including quantitative analysis of large datasets and more qualitative research in the field  involving executive interviews and a survey on executive time use. . . .

We discovered that flattening has occurred, but it is not what it is widely assumed to be. In line with the conventional view of flattening, we find that CEOs eliminated layers in the management ranks, broadened their spans of control, and changed pay structures in ways suggesting some decisions were in fact delegated to lower levels. But, using multiple methods of analysis, we find other evidence sharply at odds with the prevailing view of flattening. In fact, flattened firms exhibited more control and decision-making at the top. Not only did CEOs centralize more functions, such that a greater number of functional managers (e.g., CFO, Chief Human Resource Officer, CIO) reported directly to them; firms also paid lower-level division managers less when functional managers joined the top team, suggesting more decisions at the top. Furthermore, CEOs report in interviews that they flattened to “get closer to the businesses” and become more involved, not less, in internal operations. Finally, our analysis of CEO time use indicates that CEOs of flattened firms allocate more time to internal interactions. Taken together, the evidence suggests that flattening transferred some decision rights from lower-level division managers to functional managers at the top. And flattening is associated with increased CEO involvement with direct reports —the second level of top management—suggesting a more hands-on CEO at the pinnacle of the hierarchy.

As they say, read the whole thing.

28 January 2013 at 12:56 am 4 comments

Creative Destruction Chart of the Day

| Peter Klein |

Via John Hagel, a chart from Mary Meeker showing the percent of personal computing devices (including, today, phones and tablets) accessing the web from various operating systems. Joseph Schumpeter, call your office!

4 December 2012 at 4:36 pm 1 comment

More Genghis Revisionism

| Peter Klein |

You’ve probably heard the expression, “X is so extreme, he’s to the Right of Genghis Khan.” This basically means, “I don’t like X but have nothing intelligent to say about X or his ideas.” Mostly because we don’t know much about Genghis Khan, and what we do know presents a pretty complex picture. I mentioned before Jack Weatherford’s revisionist portrayal of the Great Khan as a somewhat progressive ruler, by the standards of his time. Now I learn, from Joe Salerno, about a paper by Andrius Valevicius “arguing that Genghis Khan’s successful empire building lay in his introduction of low taxes, stamping out of torture, and promotion of religious toleration and diversity and free scholarly inquiry in the conquered territories. The Great Khan also restricted his plundering to the wealth and property of the vanquished ruling elites while  leaving their subjects generally unmolested in their persons and property and even distributing some of the plunder among them.”

19 November 2012 at 3:43 pm 5 comments

Don’t Fear the Reaper

| Peter Klein |

An important contribution to the history of technology and the relationship between technology, organization, and strategy:

Gordon Winder’s The American Reaper is a solid and significant contribution to the history of American grain harvesting implements. Winder offers several revisionist challenges to standard accounts, both those that have treated Cyrus McCormick as a heroic inventor, as well as those that have touted the International Harvester Corporation (IHC, formed in 1902) as a path-breaking model of a vertically integrated and internationally dominant firm. . . . Reaper manufacturers forged licensing agreements, subcontracted with suppliers and branch factories, shared expert personnel and innovations, hired widely dispersed sales agents, and formed alliances to protect patent advantages in order to remain competitive.

Read the rest of the EH.Net review here.

15 November 2012 at 11:21 pm 2 comments

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
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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