Organizations and Markets

| Peter Klein |

A special report from Knowledge@Wharton:

While the credit crunch has put a damper on headline-grabbing large buyouts, private equity firms have found other ways to discover value in the current market. In this special report, produced in cooperation with the Wharton Private Equity Club, Knowledge@Wharton looks at how funds are adapting to changes in the credit environment, what opportunities exist in the developed markets of Europe and Japan, and the ways that proposed changes in taxation may affect the industry. Also included is a roundtable discussion on setting up a first-time fund in the current market, as well as an interview with David Rubenstein, co-founder and managing director of The Carlyle Group.

Get the report here. For more on private equity see the proceedings from last fall’s AEI conference.

Incidentally, I used Jensen’s “Eclipse of the Public Corporation” in my strategy class this semester amd continue to be impressed with Jensen’s insight and prescience in that piece, now nearly twenty years old. Still an excellent introduction to the organizational economics of private equity.

| Peter Klein |

Next Tuesday, 13 May, is the proposal deadline for the 2008 Kauffman Symposium on Entrepreneurship and Innovation Data. I participated in the 2007 version and got a lot out of it. This year’s event takes place in Washington, DC instead of Kauffman headquarters in Kansas City.

Documents from the 2007 symposium can be reviewed at SSRN.

A personal note: While driving to last year’s symposium I found myself on Kansas City’s Volker Boulevard, named for the great philanthropist William Volker, whose support was instrumental in the rebirth of Austrian economics in the US during the 1950s and 1960s. The Volker Fund paid all or part of the salaries of Mises at NYU and Hayek at Chicago and employed Murray Rothbard as a consultant, book reviewer, and talent scout while he was writing Man, Economy, and State and America’s Great Depression. Wikipedia has some background information on the Volker Fund; you can find more in Hülsmann’s Last Knight (pp. 867-68 and passim) and Brian Doherty’s Radicals for Capitalism (pp. 181-87 and passim). In Kansas City Volker is remembered as a generous philanthropist who supported schools and hospitals, developed a program for prison reform, and was a major benefactor of the University of Kansas City (now the University of Missouri - Kansas City).

It would be nice to have a full-scale Volker biography. Anybody up to the task? Volker’s company and foundation records are housed at UMKC. Herb Cournelle wrote a short biography in 1951, Mr. Anonymous: The Story of William Volker, but I haven’t been able to locate a copy.

| Peter Klein |

From Marshall Jevons I just learned about the Authors@Google lecture series. Lots of good stuff there. The O&M crowd may especially enjoy the talks by Ian Ayres, Larry Lessig, Bob Litan, Richard Florida, John Searle, Daniel Solove, Steven Pinker, Robert Frank, Don Tapscott, Bill Easterly, and Tom Perkins.

Update: If you like this sort of thing check out TED as well (thanks to Art Carden for the pointer). The first person I saw when I visted the site yesterday was Yochai Benkler, whose book The Wealth of Networks I happen to be reviewing for The Independent Review.

| Peter Klein |

I finally got around to seeing No Country for Old Men, which I enjoyed despite unrealistically high expectations (movies too suffer from the winner’s curse). Javier Bardem’s Anton Chigurh surely belongs with Darth Vader, Hannibal Lecter, Dr. Christian Szell, Nurse Ratched, and Max Cady on the list of all-time great movie villains. The movie is in one sense a meditation on the role of chance in human affairs, so naturally I started thinking about risk, uncertainty, choice, delegation, and other issues near and dear to our organizational hearts. 

Chigurh, the cold-blooded killer, likes to flip a coin before deciding whether to kill someone, forcing the victim to call the toss. This reminded me that risk and Knightian uncertainty aren’t mutually exclusive determinants of economic outcomes. Entrepreneurs choose to invest in risky projects, but project selection itself reflects the bearing of Knightian uncertainty. Richard von Mises gives the example of champagne bottles that burst while in storage with predictable frequencies. The champagne producer can quantify the risks associated with bottling and storage. But the choice of producing one variety or another, hiring one type of laborer or another, and even being in the champagne business at all, involves another kind of uncertainty, one that cannot be described with mathematical precision. The decision to enter the champagne business involves Knightian uncertainty, but once that decision has been made, some of the variation in outcome can be characterized as probabilistic risk. Think of it in terms of mixed strategies; the specific move is random, but the decision to play a mixed strategy is not. Likewise, Chigurh can hardly claim that his victims’ deaths are random. A coin flip determines their fate, but he chooses to flip the coin — and that choice cannot be explained by a known probability distribution. (more…)

| Peter Klein |

Quantitative analysis leads to superior decision making, says Ian Ayres in Supercrunchers. Enthusiasts for expert systems are skeptical of “intuitive” reasoning. And most contemporary social scientists can’t conceive of a world without econometrics, sociometrics, psychometrics, and fill-in-the-blank-ometrics. Even management scholars are getting into the act. Of course, quantitative analysis is only as good as the assumptions that go into it. And economists such as Knight and Mises maintain that some kinds of human decision-making defy quantification and systematization and are fundamentally qualitative, or verstehende (explaining why some entrepreneurs earn profits while others make losses).

Wharton’s Gavin Cassar studies nascent entrepreneurs (defined here as firm founders) and finds, surprisingly, that those who use common accounting practices such as budgeting, sales forecasting, and financial planning are more likely to overestimate future performance than those who rely on qualitative, intuitive projections. “[T]hose individuals who adopt an inside view to forecasting, through the use of plans and financial projections, will exhibit greater ex-ante bias in their expectations. Consistent with inside view adoption causing over-optimism in expectations, I find that the preparation of projected financial statements results in more overly-optimistic venture sale forecasts.” In other words, quantitative analysis may exacerbate, rather than mitigate, cognitive bias. Worth a read (and see this summary in Knowledge@Wharton).

| Peter Klein |

June is an exciting month for O&Mers looking for research conferences. First up is ACAC 2008, 12-14 June in Atlanta. ACAC, which has received high marks on this blog, is an annual workshop organized by Rich Makadok emphasizing the “big issues” in strategic management. Next is the DRUID 25th Anniversary Conference, 17-20 June in Copenhagen, with the theme of “Entrepreneurship and Innovation.” The distinguished participant list includes Rajshree Agarwal, Carliss Baldwin, Bo Carlsson, Kathy Eisenhardt, Maryann Feldman, Bronwyn Hall, Steve Klepper, Anita McGahan, Joanne Oxley, Olav Sorenson, Scott Stern, Sid Winter, and some Foss guy. Immediately afterward is ISNIE’s 12th annual meeting, 20-21 June, in Toronto. I am on the program committee, working with president-elect Scott Masten, and we got a bunch of great submissions this year. Barry Weingast and Robert Ellickson are keynoters. The preliminary program should be up on the ISNIE website soon.

Also, for graduate students in economics, history, philosophy, political science, business administration, and related disciplines there’s the Rothbard Graduate Seminar, 13-18 June in Auburn, Alabama. The RGS is an intensive workshop and research seminar on Austrian economics that uses Murray Rothbard’s Man, Economy, and State as its core text. I am one of the discussion leaders.

If I could teleport I’d attend all four!

| Peter Klein |

Almost every recent paper on networks, clusters, agglomeration economies, and the like mentions Alfred Marshall’s concept of the “industrial district” and gives the obligatory cite to Book IV of Marshall’s Principles (Marshall’s term was the more colorful “thickly peopled industrial district”). But what exactly were Marshall’s views on industrial districts, and on industrial economics more generally? Attend this workshop to find out:

International Workshop: “Marshall and the Marshallians on Industrial
Economics”

March 15-16th 2008, Mercury Tower, Hitotsubashi University, Tokyo (more…)

| Nicolai Foss |

The latest issue of the European Management Review features an article (here, scroll down to “Project Report”), “Knowledge Governance in a Dynamic Global Context: the Center for Strategic Management and Globalization at the Copenhagen Business School,” which details the history of said Center (SMG). I happen to be the Director of the SMG. The article tells a rosy story of a talented cohort of CBS PhD students whose careers followed convergent paths, eventually leading to the establishment of the SMG, and raves about the ambitions and current accomplishments of the members of the Center. Oh, did I mention that I am the author of the article?

| Nicolai Foss |

Peter and I (well, mostly Peter) have often contrasted the Knightian notion of entrepreneurial judgment with other notions of entrepreneurship, mainly Kirzner’s concept of alertness (here). In “Entrepreneurship: From Opportunity Discovery to Judgment” (download from this page), we provide what is no doubt the definitive statement on the issue. The paper is a draft of chapter 2 in our forthcoming book, Entrepreneurial Judgment and the Theory of the Firm, and constructive criticism is most appreciated. Here is the abstract:

Entrepreneurship has become a fast-growing subfield in management research, and is increasingly appearing in economics, finance, and even law. We survey a number of approaches to entrepreneurship in the economics and management literatures, and argue that modern research in this area need to be focused around ideas from Austrian economics and Frank Knight on entrepreneurial judgment. We critically discuss the recent opportunity discovery literature in management, and argue that it has partially misunderstood the Austrian origins of the theory, and fails to adequately distinguish between opportunity identification and opportunity exploitation.

UPDATE: You can also download the paper from SSRN.

| Nicolai Foss |

Suppose all capital were what Robert Solow called “Shmoo” (after a Lil’ Abner cartoon; check this for some Shmoo info), that is, a homogenous substance. In such a world, the (intertemporal) coordination problem deals only with selecting the intensity of the input services that must be supplied over time to match consumer preferences. All capital assets are substitutes, so there is no path-dependence. Asset prices are presumably instantaneously equilibrated. In such a world, there are no coordination problems and no Misesian “calculation” problems. Many decision problems disappear as there are no costs of inspecting, measuring, and monitoring the attributes of capital assets. Decision makers do not reach the bounds of their rationality. In sum, a world of homogeneous capital  is a world where there nothing (or very little) for entrepreneurs to do. (more…)

| Peter Klein |

Scott Shane is interviewed in today’s Business Week on his new book, The Illusions of Entrepreneurship. The book is a treasure-trove of empirical data on startups, much of which is familiar to specialists but completely unknown in the business press and in popular culture (e.g., that industry explains most of the variation in failure rates). See also this guest post by Scott on Guy Kawasaki’s blog for more on the basic thesis.

Of course, when Scott writes here about the value of entrepreneurship to society defines entrepreneurship narrowly as busines startups, not some broader notion of creativity, innovation, alertness, or (to ride one of this blog’s favorite hobby-horses) judgment.

| Nicolai Foss |

I have noticed that an increasing number of colleagues build up and afterwards desperately try to manage increasingly large portfolios of paper projects. It is very common to have paper portfolios that encompass more than 20 ongoing projects. At any rate, that’s about the size of my own current portfolio.

I have also noticed that a lot of these paper ideas don’t seem to ever come to be written, or, at best exist in a fragmentary form.  I can relate many anecdotes (some from personal experience!) relating to substantial regret over set-up costs (aka pissing your would-be co-author off). It is possible that this may increasingly become a management problem, certainly on the level of the individual scholar, but perhaps also on the level of university managers (mainly dept. heads).

The question is: Is this (personally and socially) wasteful?  The basic problem is that in order to end up with a suitable amount of published papers a certain amount of exploration is necessary.  Co-authoring papers is a Hayekian discovery process. It is pretty hard, perhaps particularly for younger, unexperienced colleagues, to make reasoned decisions on how many papers one should initiate and with whom (given the costs of experimentation, i.e., set-up costs, the risk of ruining your reputation, etc.).  Reputation mechanisms work imperfectly. Big, but lazy, guys may exploit this, hoping for the rookie to do the job. Problems of procastination and melioration may complicate the decision problem. Etc. 

From another point of view,  however, not much has really changed. Whereas scholars in the past may have spent much time discussing research issues over the lunch table, etc., the publication pressure that most of us are subject to nowadays means that many discussions that would previously have simply ended over the lunch table are now turned into paper ideas.  If that is the case, the process appears much less wasteful — and, importantly, in need of less intenvention by well-intentioned, but (naturally!) misguided university bureaucrats.

| Steve Phelan |

 I just had lunch with the general counsel of an internet retailer, which is headquartered here in Las Vegas. He was bemoaning the fact that the biggest headache in his job is patent infringments… (more…)

| Peter Klein |

Some interesting papers from the ASSA Meeting in New Orleans, where I’ll be spending the next couple of days. (I don’t have links, so you’ll have to do your own Googling to find the texts.)

ROBERT GIBBONS and REBECCA HENDERSON, Massachusetts Institute of Technology — What Do Managers Do? Suggestive Evidence and Potential Theories about Building and Managing Relational Contracts

CLAUDE MENARD, ATOM - University of Paris Pantheon-Sorbonne — The Governance of Interfirm Agreements: A Relational Contract Perspective

RICARD GIL, University California-Santa Cruz, and JEAN-MICHEL OUDOT, ATOM - University Paris Pantheon-Sorbonne — Contractual Completeness and Ex-post Efficiency: Trade-Offs between Ex-Ante and Ex-Post Costs in Contract Design

LUIS GARICANO and PAUL HEATON, University of Chicago — Information Technology, Organization, and Productivity in the Public Sector: Evidence from Police Departments

DANIEL SPULBER, Northwestern University — Entrepreneurs in the Theory of the Firm (more…)

| Peter Klein |

“Pimps and Ferrets: Copyright and Culture in the United States, 1831-1891,” by Eric Anderson (Bowling Green State University, American Culture Studies/History, 2007). Abstract:

How did people think about copyright in the nineteenth century? What did they think it was? What was it for? Was it property? Or something else? How did it function? Who could it benefit? Who might it harm? Pimps and Ferrets: Copyright and Culture in the United States, 1831-1891 addresses questions like these, unpacking the ideas and popular ideologies connected to copyright in the United States during the nineteenth-century.

This era was rife with copyright-related controversy and excitement, including international squabbling, celebrity grandstanding, new technology, corporate exploitation, and ferocious arguments about piracy, reprinting, and the effects of copyright law. Then, as now, copyright was very important to a small group of people (authors and publishers), and slightly important to a much larger group (consumers and readers). However, as this dissertation demonstrates, these larger groups did have definite ideas about copyright, its function, and its purpose, in ways not obvious to the denizens of the legal and authorial realms.

This project draws on methods from both social and cultural history. Primary sources include a broad swath of magazine and newspaper articles, letters, and editorials about various copyright-related controversies. Examining these sources — both mainstream and obscure — illustrates the diversity of thinking about copyright issues during the nineteenth century, and suggests alternative frameworks for considering copyright in other times.

Via Bill Stepp, who says the “study fills a yawning gap in copyright history, and offers a radically different focus on the development of this institution from the dominant legal perspective.” You’ll have to download the searchable PDF to find the meaning of the title.

| Steve Phelan |

John Mathews recently sent me a conference paper on Kirznerian, Schumpeterian, and Ricardian approaches to entrepreneurial dynamics.

Aside from questioning the resource-based theory of entrepreneurship, the paper also attempts to resolve the Kirznerian/Schumpeterian schism in entrepreneurship — namely whether entrepreneurs drive the economy towards equilibrium (Kirzner) or disequilibrium (Schumpeter). (more…)

| Steve Phelan |

In a recent paper in the Journal of Business Venturing, Sharon Alvarez attempts to construct a theory of entrepreneurship and the firm. The central question is why new resource combinations are sometimes carried out by entrepreneurs starting new ventures rather than within established firms. (more…)

| Steve Phelan | 

Strange story in the NY Times on Dec 6 (HT: Freakanomics).

Some of the highlights:

The report, compiled by Julie Logan, a professor of entrepreneurship at the Cass Business School in London, found that more than a third of the entrepreneurs she had surveyed — 35 percent — identified themselves as dyslexic.

And…

“Entrepreneurs are hands-on people who push a minimum of paper, do lots of stuff orally instead of reading and writing, and delegate authority, all of which suggests a high verbal facility,” Mr. Dennis said. “Compare that with corporate managers who read, read, read.”

Indeed, according to Professor Logan, only 1 percent of corporate managers in the United States have dyslexia.

I guess we can call this a compensatory theory of entrepreneurship. Professors are doomed as readers, too, I guess.

| Peter Klein |

Gordon Smith and Darian Ibrahim’s paper “Entrepreneurs on Horseback: Reflections on the Organization of Law,” is up on SSRN. The paper surveys the emerging field of law and entrepreneurship and urges legal scholars to pay closer attention to the entrepreneurship literature. “In making our case, we argue that research at the intersection of entrepreneurship and law is distinctive. In some instances, legal rules and practices are tailored to the entrepreneurial context, and in other instances, general rules of law find novel expression in the entrepreneurial context.”

(The paper’s title alludes to an inside joke about the mythical “law of the horse,” a hyper-specialized branch of legal theory no serious law school would include in its curriculum. Law and entrepreneurship, in other words, is not quite as silly as the law of the horse.)

| Steve Phelan |

In his recent NY Times op-ed, Paul Krugman railed against the evils of financial innovation:

How did things get so opaque? The answer is “financial innovation” — two words that should, from now on, strike fear into investors’ hearts.

O.K., to be fair, some kinds of financial innovation are good. . . . But the innovations of recent years — the alphabet soup of C.D.O.’s and S.I.V.’s, R.M.B.S. and A.B.C.P. — were sold on false pretenses. They were promoted as ways to spread risk. . . . What they did instead — aside from making their creators a lot of money, which they didn’t have to repay when it all went bust — was to spread confusion, luring investors into taking on more risk than they realized.

Folsom’s (1991) “Myth of the Robber Barons” contrasts “political entrepreneurs,” who basically engage in rent-seeking, from “market entrepreneurs,” who seek entrepreneurial rents and improve social welfare. (HT: Rafe Champion.) I’m wondering if we need a new category of entrepreneurs?
(more…)

| Peter Klein |

Scott Shane’s PhD seminar in entrepreneurship takes place twice this summer, 23-27 June and 4-8 August 2008. Two of my PhD students have gone in recent years and each came back with a glowing report. (I wouldn’t mind seeing some of these papers on the reading list, but hey, nobody’s perfect!)

| Peter Klein |

Our most popular tag here at O&M seems to be ephemera, but occasionally we write a “big think” post (e.g., this one). Today I’ll offer another. A colleague recently asked me to write down, for a research project we’re sketching out, some “fundamental questions about organizations.” He wanted my off-the-cuff response, not a carefully crafted set of ideas. Here’s what I came up with:

1. Does organizational form matter? How much does it really affect performance, however measured? Organizational form might not be that important because (a) its effects on performance are small relative to the performance effects of technical or allocative efficiency; (b) organizational form is easily changed and always chosen optimally to fit the circumstances; or (c) organizational form is merely a legal distinction without any economic significance. (more…)

| Peter Klein |

In the Spring of 2005 I attended a terrific workshop on “The Entrepreneurial Theory of the Firm,” organized by Sharon Alvarez and Jay Barney and held at Ohio State University. Participants included Mark Casson, Dick Langlois, Sid Winter, Ulrich Witt, Ivo Zander, Simon Parker, Todd Zenger, Steve Michael, Bill Schultze, and several others. The papers and discussions explored a variety of approaches for linking the theory of entrepreneurship to the economic and strategic theory of the firm, a subject near and dear to our hearts here at O&M.

The workshop papers have now been published as a special issue of the Journal of Management Studies (volume 44, number 7, November 2007), edited by Sharon and Jay. A special contribution from Brian Loasby, who wasn’t able to attend the workshop, is included. And don’t miss this paper from an unusually structured joint-spousal team.

| Peter Klein |

Former O&M guest blogger Dick Langlois reviews Thomas McCraw’s Schumpeter biography, Prophet of Innovation, for EH.Net.

McCraw is at his best in conveying Schumpeter the man, providing an engaging and beautifully written portrait of this larger-than-life and often tragic figure. McCraw also works hard at weaving Schumpeter’s economics into the life story and at making the ideas supply their share of the drama. The result deepens our understanding of a fascinating and complex man and of the difficult times in which he lived, even if it does not necessarily sharpen our understanding of his economics or add much that is new to his biography.

See also our previous comments on McCraw and Schumpeter more generally.

| Peter Klein |

Can anyone point me to biographical or bibliographical resources on Bert F. Hoselitz? He is known to Austrian economists as the translator (with James Dingwall) of Menger’s Principles of Economics, but he was also an accomplished Chicago development economist who founded the journal Economic Development and Cultural Change. He was trained in Vienna (according to this brief note) but did not apparently have much contact with the Austrian school. I’m particularly interested in Hoselitz’s contributions to entrepreneurship theory.

| Peter Klein |

At the Kauffman data symposium participants were given little notebooks with the Kauffman logo and a quote from Hayek — “Society’s course will be changed only by a change in ideas” — on the cover. It’s a nice line and certainly in the spirit of Hayek’s views on social change as expressed in The Road to Serfdom, “The Intellectuals and Socialism,” and other works, though the exact quotation does not seem to appear in Hayek’s writings. (The line is attributed to Hayek by John Blundell, recounting a conversation between Hayek and IEA founder Antony Fisher. In “The Rediscovery of Freedom,” written in 1983, Hayek puts it this way: “A young English pilot who had returned from the war and had made a great deal of money in a few years as an entrepreneur came to me [around 1947] and asked me what he could do to thwart the ominous growth of socialism. I had considerable trouble persuading him that mass propaganda was futile and that the task consisted rather of convincing intellectuals.”)

The Kauffman Foundation focuses on entrepreneurship, not opposition to socialism, so I started thinking about the influence of Hayek on entrepreneurship research. Kirzner’s theory of entrepreneurial discovery builds directly on Hayek’s notion of an economy characterized by dispersed, tacit knowledge, an economy in which “competition” is a process of coordination and equilibration, rather than a set of conditions (as in Walrasian competitive general equilibrium). However, Hayek did not develop a theory of the entrepreneur per se. (more…)

| Peter Klein |

I head to Kansas City today for the Kauffman symposium on entrepreneurship and innovation data, where Mike Sykuta and I will give a presentation on the CORI contracts library. Descriptions of all the data sets to be presented are available at SSRN.

I’m curious to see how the participants will address the issues of measurement and definition that are particularly thorny in entrepreneurship research.

| Peter Klein |

Last week’s McQuinn Center conference on entrepreneurship in Kansas City was a great success, with some 75 participants from places like Nepal, Norway, the UK, and Peru as well as the US and Canada. Keynoters Cornelia Flora, Pierre Desrochers, Sandy Kemper, and Randy Westgren challenged and inspired the group and the papers and discussions highlighted a variety of innovative entrepreneurship research topics, theories, and methods. Papers and presentations are now available on the conference website.

I had the pleasure of offering introductory and closing remarks, and I’ll share here some reflections about the state of the field and suggestions for moving forward. (more…)

| Peter Klein |

The Journal of Economics and Management Strategy, founded and edited by Dan Spulber, seeks papers for a special issue on “Entrepreneurship: Strategy and Structure.” Thomas Hellmann and Scott Stern are editing the special issue.

While submissions from a wide range of perspectives and topics are welcome, we specifically invite theoretical and empirical papers on the following:

• The sources of value creation by entrepreneurial ventures
• Game-theoretic approaches to the organization of new firms, and the impact of entrepreneurs on market outcomes
• The determinants of entrepreneurial activity across industries and locations
• The determinants and consequences of the structure of entrepreneurial finance
• The impact of formal and informal networks (including strategic alliances) on the structure and conduct of entrepreneurial firms
• The impact of innovation policy, including intellectual property rights policy, the tax system, and the legal system, on the formation and strategic impact of new ventures

Here are the submission guidelines. Deadline is 15 November 2007. 

| Peter Klein |

Here is a terrific resource: the World Freedom Atlas, a “geovisualization tool” — i.e., cool interactive map — for world statistics. It includes the most important variables used by economists including income and purchasing power from the Penn World Table, legal origin from LLSV, economic freedom from the Fraser Institute and the Heritage Foundation, policy constraints from Witold Henisz, the World Bank’s governance indicators, and a host of other variables from Acemoglu, Johnson and Robinson; Barro and Lee; Easterly and Levine; Persson and Tabellini; and several others. All that’s missing is links to the original datasets. Still, an impressive tool. (HT: Mike Kellermann)