Posts filed under 'Evolutionary Economics'
Economic Institutions of Strategy
| Peter Klein |
That’s the title of a forthcoming volume of Advances in Strategic Management edited by Jackson Nickerson and Brian Silverman. You’ll recognize the allusion to a certain classic book. Like that book, this volume maps out an ambitious agenda for new scholarship on institutions and organizations, particularly within the field of strategic management. The chapters provide critical reviews and syntheses of various strands of the strategy literature, intended to support and to challenge new and established scholars starting work in these areas. (They should make excellent readings, for example, for doctoral courses in strategy and the economics of organization.)
Lasse and I contributed a chapter, “Diversification, Industry Structure, and Firm Strategy: An Organizational Economics Perspective,” that you can download on SSRN. Here’s the abstract:
We review theory and evidence on corporate diversification, industry structure, and firm strategy from an organizational economics perspective. First, we examine the implications of transaction cost economics (TCE) for diversification decisions. TCE is essentially a theory about the costs of contracting, and TCE sheds light on the firm’s choice to diversify into a new industry rather than contract out any assets that are valuable in that industry. While TCE does not predict much about the specific industries into which a firm will diversify, it can be combined with other approaches, such as the resource-based and capabilities views, that describe which assets are useful where. We also discuss the transaction-cost rationale for unrelated diversification, which focuses on the potential efficiencies from exploiting internal capital markets. We review this argument as it emerged in the transaction cost literature in the 1970s and 1980s and, more recently, theoretical and empirical literature in industrial organization and corporate finance. We then discuss how diversification decisions, both related and unrelated, affect industry structure and industry evolution. Here, the stylized facts suggest that diversifying firms have a crucial impact on industry evolution because they are larger than average at entry, grow faster than average, and exit less often than the average firm. We conclude with thoughts on unresolved theoretical, methodological, and empirical issues and problems and provide suggestions for future research.
Add comment 20 April 2009
Railway Gauges and Path Dependency
| Dick Langlois |
You’ve all read the viral email asserting that the railroad gauge we have today — and, in some versions, the size of the space shuttle fuel tanks, which had to be transported by rail — is a direct result of the wheel gauge of Roman chariots. Not surprisingly, the real story is more complex, and many gauges coexisted (and to some extent continue to coexist) in the U.S. and around the world. My former colleague Doug Puffert tells this story in full detail in his new book, Tracks across Continents, which has just appeared from the University of Chicago Press. The book is a useful addition to the catalog of case studies of path-dependent technology.
The book came out of Doug’s thesis at Stanford, where he worked with Paul David and Brian Arthur. He was a visitor at UConn in the 1988-89 academic year. I can still remember his seminar presentations, which involved simulating the evolution of railways on a Macintosh of the era. (One thing you probably won’t learn in Doug’s official bio is that, before coming to UConn, he won a car on Wheel of Fortune. I always tell students about this when I teach the QWERTY story — a student of Paul David who really knew his letter frequencies.)
1 comment 20 March 2009
Irrational Behavior and Rational Addiction
| Dick Langlois |
In 1962, Gary Becker published an article in the JPE called “Irrational Behavior and Economic Theory,” which prompted an interchange with Israel Kirzner (here, here, and here). Becker had tried to argue that one could derive the law of demand without recourse to an assumption of rationality: when relative prices change, the budget constraints of consumers will also change, making some previously available combinations infeasible. This will mean that, in the aggregate, consumers will demand less of the good that has become relatively more expensive. Kirzner pointed out that Becker still hadn’t eliminated rationality, since he is assuming that the consumers are price takers and that the prices are set on the supply side, presumably by firms who notice and respond rationally to price changes. (I discussed the issues here in some detail back in my 1986 book, which, by the way, is back in print in paperback thanks to the new technology of on-demand printing.)
I thought of the Becker-Kirzner exchange recently when I saw the abstract of this article: “So You Want to Quit Smoking: Have You Tried a Mobile Phone?”
Tobacco use, which is rising quickly in developing countries, kills 5.4 million people a year worldwide. This paper explores the impacts of mobile phone ownership on tobacco consumption. Indeed, mobile phone ownership could affect tobacco consumption because individuals might pay for their communication with money they would have spent on tobacco. Using panel data from 2,100 households in 135 communities of the Philippines collected in 2003 and 2006, the analysis finds that mobile phone ownership leads to a 20 percent decline in monthly tobacco consumption. Among households in which at least one member smoked in 2003, purchasing a mobile phone leads to a 32.6 percent decrease in tobacco consumption per adult over the age of 15. This is equivalent to one less pack of 20 cigarettes per month per adult. The results are robust to various estimation strategies. Further, they suggest that this impact materializes through a budget shift from tobacco to communication.
I leave it as an exercise to the reader to decide whether this sheds any light on the Becker-Kirzner exchange. Extra credit: what does this say about Becker’s theory of rational addiction?
9 comments 6 March 2009
More Evidence Against the QWERTY Effect
| Peter Klein |
Via MR, an experimental study on path dependence finds that subjects do not get stuck using second-best technologies, even in the presence of network effects:
In this paper, we offer new evidence regarding the economic importance of QWERTY type outcomes. We use laboratory experiments to study platform competition. Experiments have several advantages in studying platform competition: the identity of the inferior platform is clearly defined; the degree to which a platform has a “head start” is controlled; and the “life cycle” of platform competition is reproducible. So far as we are aware, we are the first to study QWERTY in the lab.
We can easily summarize our results: Somehow, the market always manages to solve the QWERTY problem. In sixty iterations of dynamic platform competition, our subjects never got stuck on the inferior platform — even when it enjoyed a substantial first-mover advantage.
For more on path dependence, network effects, and QWERTY see this, this, and this. The more I learn about so-called QWERTY effects the more I’m convinced that they have no economic significance (and even less policy signficance).
1 comment 19 January 2009
The Emergence of English Commercial Law
The English system of commercial law or the lex mercatoria has been described as an example of “spontaneous order,” a set of rules that emerged without central direction and yet provided remarkable stability and favorable institutional environment for trade. Harold Berman and Bruce Benson, among others, have written extensively on this. Here’s an interesting paper by Daniel Klerman on the early history of English commercial law, framed as a comparison of the English and Ottoman systems:
Thirteenth-century England was a commercial backwater whose trade was dominated by foreigners. To accommodate and encourage foreign merchants, England modified its legal system by creating legal institutions which were available to both domestic and foreign traders. Among the most important of these institutions were streamlined debt collection procedures and mixed juries composed of both Englishmen and foreigners. By introducing institutions which treated locals and foreigners equally, England created a level playing field which enabled English merchants to become increasingly prominent in the later Middle Ages. England’s ability to modernize its law was facilitated by the secular nature of English law, the representation of merchants in Parliament, and legal pluralism. Medieval England contrasts sharply with the early modern Ottoman Empire. The latter created special institutions for foreign merchants, which eventually put Ottoman Muslims at a competitive disadvantage.
1 comment 5 November 2008
Rival Teams and Non-Rival Knowledge
| Dick Langlois |
A recent issue of the Journal of Quantitative Analysis in Sports, an all-electronic Bepress journal, carried a piece provocatively titled “Quantifying NFL Coaching: A Proof of New Growth Theory” by Kevin P. Braig. The paper is a rambling mix of sports anecdotes and goofy math. My favorite of the latter is:
| lim f(x) = 1 first down
x→10 |
But the piece is amusing reading and does make some interesting points.
The title is more than a bit fatuous, of course. What the author has in mind is that one can increase output not only by increasing the inputs but by learning to reorganize the way those inputs are combined. This was the growth theory of Smith and Marshall, of Rosenberg and Mokyr. The only contribution of the New Growth Theory has been to cram a diminished and mechanized version of these ideas into the formalism of the production function — and, of course, to receive credit in the popular mind for the very notion that growth is about the search for new “recipes.” Braig is on firmer ground when he associates himself with Carliss Baldwin’s notion of designs.
What has this got to do with sports? Consider baseball, which is probably the most modular of major (American) sports. In baseball, the only real way to be more successful is to improve the quality of the players, what Braig likes to call their human capital. This is because the way players interact is relatively hard-wired and invariant among teams. Small adjustments are possible — shifts, bunting strategy — but no one ever redefines how to turn a double play. The so-called moneyball approach has been to find better statistical measures of the effectiveness of player human capital — not to reorganize how the players interact. (In testimony to the almost mystical numerology of this article, Braig finds wonder in the fact that average on-base percentage has remained nearly constant over the live-ball era at about 0.331, exactly the ratio one gets by recognizing that “the hitters’ needs (4 bases) exceed their resources (2 outs) by a 2-to-1 margin.” But this presumes that human capital in batting should somehow exactly keep pace with human capital in pitching — even though there is arguably more room for innovation in pitching. I think a closer examination would find that baseball rulemakers have tweaked subtle rules like the size of the strike zone or the height of the mound to keep the ratio constant.) (more…)
3 comments 11 August 2008
Notes from the Schumpeter Society Conference
| Dick Langlois |
I’m in Rio De Janeiro, where the biennial conference of the International Joseph A. Schumpeter Society has just finished up. I was involved in, among other things, a plenary session on the first day with Dick Nelson and Carliss Baldwin on “Varieties of Knowledge in the Economy.” The session was organized by Peter Murmann, who promises to post the slides and notes eventually on his very interesting website.
At the conference banquet last night — in the elegant Copacabana Palace Hotel — the Schumpeter Prize was split among three recipients. One was Tom McCraw for Prophet of Innovation, his biography of Schumpeter, which Peter blogged about some time ago. (See also my review.) Another was Martin Fransman for The New ICT Ecosystem: Implications for Europe, the latest of Martin’s many interesting books on ICT industry structure and government policy. In his acceptance remarks, Martin mentioned the picture of Schumpeter that had adorned the office wall of his first (and perhaps most influential) economics teacher, Ludwig Lachmann, at the University of the Witwatersrand in South Africa. The third recipient(s) were Mario Amendola and Jean-Luc Gaffard for a book I’ve have not yet seen.
The conference was set in a beautiful part of Rio called Urca, right on the water and surrounded by giant jutting granite hills. The area houses not only some older parts of the Federal University of Rio but also a compound of military facilities and academies. There is also an edifice called the Instituto Benjamin Constant, a school for the blind, which is apparently not named, however, for the eighteenth-century Swiss liberal thinker but for a nineteenth-century army officer who was the leading Brazilian adherent to the positivism of Auguste Comte.
Add comment 5 July 2008
From Rumination to Rumelt via Dobzhansky
| Randy Westgren |
I was perusing the website of the Oxford Symposium on Food and Cookery to find the references to last year’s theme: food and morality. Some interesting reads there. I noticed that the Symposium awards the Sophie D(obzhansky) Coe Prize in Food History annually. Dr. Coe was an anthropologist who wrote on pre-Columbian diets and was the daughter of Theodosius Dobzhansky, one of “the Four Horsemen” of the modern synthesis of genetics and evolution (American Philosophical Society). Dobzhansky emigrated from the University of Kiev in 1927 to Columbia University, thence to Caltech, where he and his colleagues bred squillions of generations of fruit flies and provided the empirical basis for the mathematical models of evolution of the other horsemen: Haldane, Fisher, and Wright.
In 1937, Dobzhansky had two publications. One was his landmark book, Genetics and the Origin of Species, which was the siren song that drew Ernst Mayr and other biologists to the field of evolutionary biology. Mayr has often been credited with developing the concept of the isolating mechanism as the basis for speciation. Methinks that Mayr’s long shadow at Harvard fell on Richard Rumelt, who ported the concept to strategic management without much attribution in his 1984 and 1987 pieces. Mahoney and Pandian must be credited with the most complete exposition of the concept. (more…)
1 comment 24 May 2008
Aoki on North
| Peter Klein |
Masahiko Aoki’s contribution to a forthcoming North symposium, “Understanding Douglss North in Game-Theoretic Language,” is available on SSRN. North’s 1990 book Institutions, Institutional Change and Economic Performance, writes Aoki,
laid the foundation for New Institutional Economics by conceptualizing institutions as the rules of the game, pointing out the vital importance of effective enforcement and arguing for the crucial roles they play in determining economic performance. Thus it became a seminal book. But if the rules of the game are so crucial, then why doesn’t a lagging economy emulates the rules that prevail in more advanced economies? Why cannot the rules of the game be changed and enforced by emulation? It seemed that in his [1990] book North regarded it as the essential role of polity to change and enforce the (formal) rules of the (economic) game. But in his view, political markets are imperfect and inefficient so that better rules cannot be emulated/devised or enforced as desired. Thus a further question is raised regarding how rules of political games are determined. This problem of potential infinite regression needs to be answered by going back in historical time to the past. Thus history matters to our understanding of institutions and thus the performance of an economy. . . .
In [Understanding the Process of Economic Change, 2005], particularly in Part I, he has made critical progress toward understanding to the nature of this process. He is now more explicit and vocal about the evolutionary nature of institutional change. . . . He innovatively focuses on the evolution of belief systems that human agents hold, arguing that we perceive the “human landscape,” interpret it, discover problems within it and intend to solve them. In this way, we collectively and incrementally change the societal rules of the game. In other words, we may say that there is a coevolution of belief systems and institutions.
See also reviews of the newer book by Alex Field, Stefan Voigt and Stanley Engerman.
1 comment 16 April 2008
Fed Intervention Policy
| Steve Phelan |
Greg Mankiw reports that Myron Scholes has a novel idea to fix the credit crisis – rather than simply guaranteeing to underwrite asset losses (as they have with the JP Morgan/Bear Stearns ) Scholes proposes that the Fed takes senior equity and debt positions in a distressed bank thereby improving the capital adequacy ratio, and thus preventing a credit freeze which would damage the real economy. I like it – what do YOU think?
2 comments 17 March 2008
Upcoming Events: A Busy June
| 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!
Add comment 11 March 2008
Marshallian Industrial Economics
| 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…)
1 comment 4 March 2008
Is Britney Inefficent?
| Peter Klein |
My colleague Thom Lambert has a nice piece on Britney Spears over at Truth on the Market. Yes, really. Thom asks whether Britney’s popularity, which seems unrelated to intrinsic merit, is due to network effects — people are interested in her because other people are interested in her, and so on — leading us down an irreversible path toward Britneymania. Paul David, call your office! Britney, Thom suggests, may be like the QWERTY keyboard — grossly inefficient but hard to replace.
I like Thom’s analysis but think he should go further in exploring the welfare implications. Paul David’s fable of the inefficient typewriter keyboard has been pretty well demolished by Liebowitz and Margolis, among others; perhaps with Britney we finally have an example of market failure due to network effects! Then again, it’s hard to predict, ex ante, which promising young artists will achieve long-term success; given imperfect knowledge, there is always room for ex post regret, which doesn’t necessarily imply inefficiency. Moreover, if Britneymania isn’t remediable, to use Oliver Williamson’s term, then it’s not inefficient. Finally, what’s the alternative? Do we want a trade association or, even worse, a Ministry of Culture choosing the next pop diva? We might get the next Oleg Gazmanov.
5 comments 6 February 2008
Adoption and Diffusion of Organizational Innovation
| Peter Klein |
Most theories of organizational form are framed in comparative-static, equilibrium terms. What organizational forms — degree of vertical integration, use of incentive pay, assignment of decision rights, and the like — are “optimal” in given circumstances (transactional attributes, industry conditions, legal or political environments)? There are lots of theoretical and empirical studies on these questions. And yet, we know relatively little about how new organizational forms emerge and how existing organizations change. Is change explained best in a comparative-statics framework — some underlying condition changed, leading firms to jump from the previously optimal, equilibrium form to a new, equilibrium form? Or is some kind of experimental, evolutionary, or institutional model required?
A new paper by Lisa Lynch, “The Adoption and Diffusion of Organizational Innovation: Evidence for the U.S. Economy,” addresses these questions empirically:
Using a unique longitudinal representative survey of both manufacturing and non-manufacturing businesses in the United States during the 1990’s, I examine the incidence and intensity of organizational innovation and the factors associated with investments in organizational innovation. Past profits tend to be positively associated with organizational innovation. Employers with a more external focus and broader networks to learn about best practices (as proxied by exports, benchmarking, and being part of a multi-establishment firm) are more likely to invest in organizational innovation. Investments in human capital, information technology, R&D, and physical capital appear to be complementary with investments in organizational innovation. In addition, non-unionized manufacturing plants are more likely to have invested more broadly and intensely in organizational innovation.
See also this paper on the evolution of contractual practices in US agriculture.
3 comments 1 February 2008
Legal Entrepreneurship
| 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…)
1 comment 15 January 2008
Reflections on LLSV
| Peter Klein |
I meant to blog on the newest LLSV paper (actually LLS, in this case) but never got around to it. LLSV, you’ll recall, inaugurated a stream of empirical research on the financial and economic effects of legal systems (focusing on the differences between common- and civil-law countries). The newest paper clarifies the argument and reflects on ten years of research, discussion, and debate on the role of legal origins.
Fortunately, Daniel Sokol has written some comments on the Conglomerate blog (one of my regular reads, by the way — keep up the good work, guys!). Daniel notes, wisely:
I believe that LLSV makes certain assumptions about history and political economy in legal origins that are not exactly supported by the underlying historical record. A number of scholars have attacked LLSV on these grounds. Nevertheless, I still find myself strangely attracted to LLSV. In many ways, the results are what you would intuitively expect if you were on your own to attempt to rank countries based on investor protection or other similar features. More importantly, a number of the variables that LLSV uses are a bit squishy but we have yet to come up with better cross country measurements. Indeed, as a result of the critiques, LLSV have gotten better as to how they measure shareholder protection. From a policy perspective, the key to change to various bottlenecks requires not merely a top down approach in the change of the legal system but a bottom up approach by the users of these legal systems to overcome various bottlenecks that are regulatory. This makes me believe that over time the common law/civil law distinction will be seen as a rather false one where instead you will find countries lumped into categories based on their ability to respond to local and changing conditions (even the United States, which in recent years may have created increased regulatory bottlenecks such as SOX). This evolutionary approach is what I believe holds the key to understanding how to think about law and institutions.
Add comment 15 January 2008
ASSA 2008 Papers on Organizations
| 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…)
1 comment 4 January 2008
Immigration and the Housing Bubble
| Steve Phelan |
Brad De Long’s analysis of the current financial crisis published in the Taipei Times on 01/01/08 received some attention in the blogosphere yesterday. For a crisis resulting in a sustained fall in asset values, he recommends either 1) nationalizing the debt or 2) inflating the price of nominal assets. As I was reading the article (and another on the fact that an 3 million excess housing units were created in the boom above long term trends) it occurred to me that a third path might be available — increased immigration. (more…)
2 comments 2 January 2008
Open Source and Spontaneous Order
| Peter Klein |
Open-source software is often cited as an example of what Hayek termed spontaneous order, the organic, bottom-up, decentralized form of organization that characterizes the market system. Giampaolo Garzarelli, in an explicitly Hayekian analyis, says open-source projects are defined by “no hierarchy, self-organization, self-regulation, and no ownership structure.” Is this an accurate characterization?
Commercial law, manifest in the medieval law merchant or lex mercatoria, is another important example of spontaneous order in the literature (see Harold Berman and Bruce Benson). Fabrizio Marrella and Christopher Yoo use the law merchant as a benchmark, asking “Is Open Source Software the New Lex Mercatoria?”They think not, arguing that focal firms, individuals, and groups play a more important role in guiding the evolution of open-source projects than is usually recognized. As a result, “[o]pen source has not achieved the type of universality or uniformity of principles envisioned by proponents of the lex mercatoria.” (more…)
3 comments 28 December 2007
Adam Smith: Proto-Austrian?
| Peter Klein |
Austrian economists have mixed views on Adam Smith and classical economics. Mises and Hayek admired Smith as a social theorist and system builder while rejecting much of his technical apparatus, especially the labor theory of value. Menger taught Smithian political economy to his most famous pupil, Crown Prince Rudolf. Rothbard considered Smith grossly overrated. More generally, Austrian economists have tended to distance themselves as much from the classical system as from its neoclassical descendant. (Kirzner’s review of George Reisman’s Capitalism, which tries to synthesize Austrian and Ricardian economics, is worth reading in this regard.)
A new paper by Michael Bradley argues that the distinction between classical and Austrian analysis is overdrawn, at least with regard to competition theory. (more…)
1 comment 19 December 2007
Summer Workshop on Social Norms
| Peter Klein |
It’s hosted by Spain’s Urrutia Elejalde Foundation and takes place in San Sebastián, 14-17 July 2008. (Basque Country, not Spain, if you prefer.) The impressive speaker list includes Jon Elster, Diego Gambetta, Herb Gintis, Russell Hardin, and Edna Ullmann-Margalit, among others. Details here.
Add comment 12 December 2007
Ratings Agencies
| Steve Phelan |
One of my hobbies is to perform counterfactual exercises in organization design (yes, sad, I know). Here is my current challenge. Ratings agencies like Moody’s are paid by the issuers of securities rather than the purchasers of the securities. This creates an agency problem because the rater has an incentive to give high ratings to stay in the good graces of the issuer — who will presumably “shop around” to get the best ratings.
Assuming this arrangement is efficient then what are the counterbalancing factors that offset the agency costs? How much would agency costs have to increase to trigger an adjustment in design? Was the the subprime fiasco such a trigger? What would the new design look like?
I know that economists are reluctant to second-guess how the market will work out its problems — but strategists are in the business of being proactive about these things :-)
6 comments 3 December 2007
Capabilities and Comparative Advantage
| Steve Phelan |
Brad DeLong recently posted an interesting set of questions on his blog about corporate nationality: (more…)
1 comment 26 November 2007
Langlois on McCraw on Schumpeter
| 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.
Add comment 16 November 2007
More on the Noble Prize (or the Economics Prize in Memory of Nobel)
| David Hoopes |
Since the O&Mers have been so quiet about the N prize I guess I’ll ramble a bit. In a comment on one of Peter’s posts I mentioned Demsetz and Alchian. For some reason I had it in my head that A.A. had already won. That’s what I get for staying at UCLA for so long (Alchian had just quit teaching when I got there).
I don’t know why I thought Alchian had won it. “Production, Information costs and Economic Organization” (with Harold Demsetz), American Economic Review 62 (1972): 777-95 is a pretty amazing paper. And “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process” (with Robert Crawford and Bejamin Klein), Journal of Law and Economics (1978) has been very influential. Though I think people think of Ben Klein for that paper. As noted above, Alchian is very well known for (and thought of because of ) “Uncertainty, Evolution and Economic Theory,” Journal of Political Economy 58 (1950): 211-21.
Having said all that, I think srp is correct in that Alchian’s best chance is going in with Nelson and Winter for evolutionary economics or Demsetz and Williamson or Oliver Hart for theory of the firm. It’s hard to imagine that evolutionary economics is that appreciated. I think Sid Winter is grossly underrated. His body of work in economics and strategy is pretty amazing.
As readers of my posts might guess, I am a pretty big fan of Demsetz. I don’t know that Harold is as productive or quantitative as most award givers might like. Stilger and Coase were pretty big fans. But, Hart and Williamson seem more likely award winners.
Over at orgtheory.net they’ve been discussing sociologists and management people who (in some alternate universe) might win. There are not too many Herb Simons out there.
2 comments 18 October 2007
Hagel on Institutional Innovation
| Peter Klein |
Here is John Hagel with a nice post on institutional innovation. Product, process, and management innovation are important, he notes, but institutional innovation — that which “redefines roles and relationships across independent entities to accelerate and amplify learning and reduce risks” — is the key to long-term value creation. Hagel names diversity, relationships, modularity, federated decision-making, reputation mechanisms, feedback loops, and incentive structures as the design principles underlying institutional innovation.
Hagel is clearly right to emphasize institutional innovation as a key driver of long-term firm, industry, and overall economic performance. He names the creation of the joint-stock company as a primary example. We could perhaps add the M-form structure, the franchise arrangement, relational contracting, the loosely organized network, and the venture-funded startup to this list.
And yet, there is a lot we don’t know about institutional innovation. (more…)
3 comments 11 October 2007
What Is a Capability and What Does It Matter?
| David Hoopes |
I am often surprised when I present or submit papers because audience members and reviewers find my construct definitions problematic. Often, people find my definitions are too narrow. Also, sometimes others don’t find the scholars whose work I would like to develop merit the attention I give them. This attention sometimes comes in the form of using their definition. Case in point: Sid Winter and capabilities. In a couple of papers I’m working on my co-authors and I have based our definition of capabilities on one Sid Winter has used in an SMJ paper and a book he edited. Tammy Madsen and I have stuck with Sid’s definition. Steve Postrel and I have taken Sid’s definition and made it more specific to our work. Some readers and listeners have had a hard time with this (and given me a hard time). Now, there’s one “school,” that generally does not like definitions or theoretical constructs to be very narrow. Thus, “can’t X, Y, or Z also be a capability?” “Well, it could be. Just not in this paper.” ”Aren’t capabilities just resources?” “Sure. So and So big shot thinks so. We just think of resource and capabilities as being two different things.” Another “school” doesn’t understand why we should care about Sid’s opinion. “Shouldn’t you use Other Big Shot’s definition?” “Well, I don’t really understand her definition. Sid has been doing this capability thing for a while.” ”Isn’t it the same as Selznick?” “I don’t think so. Sid doesn’t think so” (see Intro to edited volume with Dosi).
I don’t mind that people prefer other definitions. Yet, I am surprised by how agitated people get. I get agitated by definitions when 1) There aren’t any; 2) I don’t understand what the author/presenter is saying; 3) The definition includes everything and the kitchen sink (presumably because that’s the way life is, “complex”).
So, I stumble along with my narrow definitions and hope not to get yelled at too much.
9 comments 2 October 2007
Economic Darwinism During Recessions
| Peter Klein |
Some version of the survivor principle, or “economic Darwinism,” underlies much economics and strategy research. While the term “survivor principle” was coined by Stigler (1968), the idea is usually attributed to Alchian (1950) and Friedman (1953). Alchian argued that even though theories about rational decision makers making “optimal” choices are clearly unrealistic, the predictions of such theories need not be. The quest for profit, combined with competitive selection forces, ensures that the average firm will tend to behave like those described by theories of rational behavior (Alchian, 1950). Friedman (1953: 22), defending the profit-maximization hypothesis, puts it this way:
[U]nless the behavior of businessmen in some way or other approximated behavior consistent with the maximization of returns, it seems unlikely that they would remain in business for long. Let the apparent immediate determinant of business behavior be anything at all — habitual reaction, random choice, or whatnot. Whenever this determinant happens to lead to behavior consistent with rational and informed maximization of returns, the business will prosper and acquire resources with which to expand; whenever it does not, the business will tend to lose resources and can be kept in existence only by the addition of resources from outside. The process of “natural selection” thus helps to validate the [maximization] hypothesis or, rather, given natural selection, acceptance of the hypothesis can be based largely on the judgment that it summarizes appropriately the conditions for survival.
The problem with Friedman’s strong version of the survivor principle is that we know little about how such competitive selection processes actually work. (more…)
7 comments 2 September 2007
Brilliant But Neglected II
| Peter Klein |
Some suggestions for Nicolai’s list:
John G .Matsusaka, “Corporate Diversification, Value Maximization, and Organizational Capabilities,” Journal of Business 74 (July 2001): 409-31. Offers a novel and provocative “match-seeking” theory of diversification in which firms do not know their own capabilities but must discover them by experimenting with various combinations of business units. A diversified firm may be valued at a discount relative to more specialized firms because its current lines of business include some not consistent with its capabilities, but such conglomeration is necessary, and value-creating in the long run, if the firm is to discover where it should eventually refocus. 85 hits on Google Scholar. Possibly neglected because it appeared in the Journal of Business near the end of its run.
Robert C. Ellickson, “A Hypothesis of Wealth-Maximizing Norms: Evidence from the Whaling Industry,” Journal of Law, Economics, and Organization 5, no. 1 (Spring 1989): 83-97. A nice example of the emergence of private law, focusing on the rules governing property rights in whales prior to the twentieth century. Without a central authority the whaling community — a small, close-knit group with shared characteristics and frequent interaction — developed a complex set of norms enforced by community sanction and the threat of ostracism. Just 25 Google Scholar hits. (more…)
Add comment 25 July 2007
Is Social Capital Path Dependent?
| Peter Klein |
Recent work by Robert Putnam, Douglass North, Ed Glaeser, and others has highlighted the role of social capital — membership in organizations, participation in civic activities, social trust — plays in economic development. Empirically, social capital has typically been measured with survey data, making historical comparisons difficult. It is important to know, however, how social capital changes over time. If social capital is largely path dependent, then there is little that can be done to improve the stock or productivity of social capital at a particular time.
A new paper by Marta Felis Rota, “Is Social Capital Persistent? Comparative Measurement in the Nineteenth and Twentieth Centuries,” exploits Adelman and Morris’s (1965) database of socio-economic indicators for 23 countries from 1850 to 1914 to construct social capital indicators for the late nineteenth century, which can be compared to similar indicators for the twentieth century. Evidence for path dependence is weak; all countries enjoy long-run increases in social capital but rates of change vary widely. Check it out.
1 comment 17 July 2007
