Posts filed under ‘History of Economic and Management Thought’

PhD Strategy Syllabi

| Peter Klein |

Russ Coff has assembled an impressive list of syllabi and reading lists for PhD courses in strategy, innovation, research methods, and related subjects. Feel free to send him additional suggestions. Many useful references here for faculty and students teaching or taking these courses, and for anybody wishing to learn more about classic and contemporary literature in strategic management research.

25 November 2014 at 9:21 pm Leave a comment

It’s the Economics that Got Small

| Peter Klein |

Joe Gillis: You’re Norma Desmond. You used to be in silent pictures. You used to be big.

Norma Desmond: I *am* big. It’s the *pictures* that got small.

Sunset Boulevard (1950)

John List gave the keynote address at this weekend’s Southern Economic Association annual meeting. List is a pioneer in the use by economists of field experiments or randomized controlled trials, and his talk summarized some of his recent work and offered some general reflections on the field. It was a good talk, lively and engaging, and the crowd gave him a very enthusiastic response.

List opened and closed his talk with a well-known quote from Paul Samuelson’s textbook (e.g., this version from the 1985 edition, coauthored with William Nordhaus): “Economists . . . cannot perform the controlled experiments of chemists and biologists because they cannot easily control other important factors.” While professing appropriate respect for the achievements of Samuelson and Nordhaus, List shared the quote mainly to ridicule it. The rise of behavioral and experimental economics over the last few decades — in particular, the recent literature on field experiments or RCTs — shows that economists can and do perform experiments. Moreover, List argues, field experiments are even better than using laboratories, or conventional econometric methods with instrumental variables, propensity score matching, differences-in-differences, etc., because random assignment can do the identification. With a large enough sample, and careful experimental design, the researcher can identify causal relationships by comparing the effects of various interventions on treatment and control groups in the field, in a natural setting, not an artificial or simulated one.

While I enjoyed List’s talk, I became increasingly frustrated as it progressed. I found myself — I can’t believe I’m about to write these words — defending Samuelson and Nordhaus. Of course, not only neoclassical economists, but nearly all economists, especially the Austrians, have denied explicitly that economics is an experimental science. “History can neither prove nor disprove any general statement in the manner in which the natural sciences accept or reject a hypothesis on the ground of laboratory experiments,” writes Mises (Human Action, p. 31). “Neither experimental verification nor experimental falsification of a general proposition are possible in this field.” The reason, Mises argues, is that history consists of non-repeatable events. “There are in [the social sciences] no such things as experimentally established facts. All experience in this field is, as must be repeated again and again, historical experience, that is, experience of complex phenomena” (Epistemological Problems of Economics, p. 69). To trace out relationships among such complex phenomena requires deductive theory.

Does experimental economics disprove this contention? Not really. List summarized two strands of his own work. The first deals with school achievement. List and his colleagues have partnered with a suburban Chicago school district to perform a series of randomized controlled trials on teacher and student performance. In one set of experiments, teachers were given various monetary incentives if their students improved their scores on standardized tests. The experiments revealed strong evidence for loss aversion: offering teachers year-end cash bonuses if their student improved had little effect on test scores, but giving teacher cash up front, and making them return it at the end of the year if their students did not improve, had a huge effect. Likewise, giving students $20 before a test, with the understanding that they have to give the money back if they don’t do well, leads to large improvements in test scores. Another set of randomized trials showed that responses to charitable fundraising letters are strongly impacted by the structure of the “ask.”

To be sure, this is interesting stuff, and school achievement and fundraising effectiveness are important social problems. But I found myself asking, again and again, where’s the economics? The proposed mechanisms involve a little psychology, and some basic economic intuition along the lines of “people respond to incentives.” But that’s about it. I couldn’t see anything in these design and execution of these experiments that would require a PhD in economics, or sociology, or psychology, or even a basic college economics course. From the perspective of economic theory, the problems seem pretty trivial. I suspect that Samuelson and Nordhaus had in mind the “big questions” of economics and social science: Is capitalism more efficient than socialism? What causes business cycles? Is there a tradeoff between inflation and unemployment? What is the case for free trade? Should we go back to the gold standard? Why do nations to go war? It’s not clear to me how field experiments can shed light on these kinds of problems. Sure, we can use randomized controlled trials to find out why some people prefer red to blue, or what affects their self-reported happiness, or why we eat junk food instead of vegetables. But do you really need to invest 5-7 years getting a PhD in economics to do this sort of work? Is this the most valuable use of the best and brightest in the field?

My guess is that Samuelson and Nordhaus would reply to List: “We’re are big. It’s the economics that got small.”

See also: Identification versus Importance

23 November 2014 at 2:58 pm 2 comments

Rich Makadok on Formal Modeling and Firm Strategy

[A guest post from Rich Makadok, lifted from the comments section of the Tirole post below.]

Peter invited me to reply to [Warren Miller’s] comment, so I’ll try to offer a defense of formal economic modeling.

In answering Peter’s invitation, I’m at a bit of a disadvantage because I am definitely NOT an IO economist (perhaps because I actually CAN relax). Rather, I’m a strategy guy — far more interested in studying the private welfare of firms than the public welfare of economies (plus, it pays better and is more fun). So, I am in a much better position to comment on the benefits that the game-theoretic toolbox is currently starting to bring to the strategy field than on the benefits that it has brought to the economics discipline over the last four decades (i.e., since Akerlof’s 1970 Lemons paper really jump-started the trend).

Peter writes, “game theory was supposed to add transparency and ‘rigor’ to the analysis.” I have heard this argument many times (e.g., Adner et al, 2009 AMR), and I think it is a red herring, or at least a side show. Yes, formal modeling does add transparency and rigor, but that’s not its main benefit. If the only benefit of formal modeling were simply about improving transparency and rigor then I suspect that it would never have achieved much influence at all. Formal modeling, like any research tool or method, is best judged according to the degree of insight — not the degree of precision — that it brings to the field.

I can’t think of any empirical researcher who has gained fame merely by finding techniques to reduce the amount of noise in the estimate of a regression parameter that has already been the subject of other previous studies. Only if that improved estimation technique generates results that are dramatically different from previous results (or from expected results) would the improved precision of the estimate matter much — i.e., only if the improved precision led to a valuable new insight. In that case, it would really be the insight that mattered, not the precision. The impact of empirical work is proportionate to its degree of new insight, not to its degree of precision. The excruciatingly unsophisticated empirical methods in Ned Bowman’s highly influential “Risk-Return Paradox” and “Risk-Seeking by Troubled Firms” papers provide a great example of this point.

The same general principle is true of theoretical work as well. I can’t think of any formal modeler who has gained fame merely by sharpening the precision of an existing verbal theory. Such minor contributions, if they get published at all, are barely noticed and quickly forgotten. A formal model only has real impact when it generates some valuable new insight. As with empirics, the insight is what really matters, not the precision. (more…)

14 October 2014 at 11:25 am 18 comments

Tirole

| Peter Klein |

As a second-year economics PhD student I took the field sequence in industrial organization. The primary text in the fall course was Jean Tirole’s Theory of Industrial Organization, then just a year old. I found it a difficult book — a detailed overview of the “new,” game-theoretic IO, featuring straightforward explanations and numerous insights and useful observations but shot through with brash, unsubstantiated assumptions and written in an extremely terse, almost smug style that rubbed me the wrong way. After all, game theory was supposed to add transparency and “rigor” to the analysis, bringing to light the hidden assumptions of the old-fashioned, verbal models, but Tirole combined math and ad hoc verbal asides in equal measure. (Sample statement: “The Coase theorem (1960) asserts that an optimal allocation of resources can always be achieved through market forces, irrespective of the legal liability assignment, if information is perfect and transactions are costless.” And then: “We conclude that the Coase theorem is unlikely to apply here and that selective government intervention may be desirable.”) Well, that’s the way formal theorists write and, if you know the code and read wisely, you can gain insight into how these economists think about things. Is it the best way to learn about real markets and real competition? Tirole takes it as self-evident that MIT-style theory is a huge advance over the earlier IO literature, which he characterizes as “the old oral tradition of behavioral stories.” He does not, to my knowledge, deal with the “new learning” of the 1960s and 1970s, associated mainly with Chicago economists (but also Austrian and public choice economists) that emphasized informational and incentive problems of regulators as well as firms.

Tirole is one of the most important economists in modern theoretical IO, public economics, regulation, and corporate finance, and it’s no surprise that the Nobel committee honored him with today’s prize. The Nobel PR team struggled to summarize his contributions for the nonspecialist reader (settling on the silly phrase that his work shows how to “tame” big firms) but you can find decent summaries in the usual places (e.g., WSJ, NYTEconomist) and sympathetic, even hagiographic treatments in the blogosphere (Cowen, Gans). By all accounts Tirole is a nice guy and an excellent teacher, as well as the first French economics laureate since Maurice Allais, so bully for him.

I do think Tirole-style IO is an improvement over the old structure-conduct-performance paradigm, which focused on simple correlations, rather than causal explanations and eschewed comparative institutional analysis, modeling regulators as omniscient, benevolent dictators. The newer approach starts with agency theory and information theory — e.g., modeling regulators as imperfectly informed principals and regulated firms as agents whose actions might differ from those preferred by their principals — and thus draws attention to underlying mechanisms, differences in incentives and information, dynamic interaction, and so on. However, the newer approach ultimately rests on the old market structure / market power analysis in which monopoly is defined as the short-term ability to set price above marginal cost, consumer welfare is measured as the area under the static demand curve, and so on. It’s neoclassical monopoly and competition theory on steroids, and hence side-steps the interesting objections raised by the Austrians and UCLA price theorists. In other words, the new IO focuses on more complex interactions while still eschewing comparative institutional analysis and modeling regulators as benevolent, albeit imperfectly informed, “social planners.”

As a student I found Tirole’s analysis extremely abstract, with little attention to how these theories might work in practice. Even Tirole’s later book with Jean-Jacques Laffont, A Theory of Incentives in Procurement and Regulation, is not very applied. But evidently Tirole has played a large personal and professional role in training and advising European regulatory bodies, so his work seems to have had a substantial impact on policy. (See, however, Sam Peltzman’s unflattering review of the 1989 Handbook of Industrial Organization, which complains that game-theoretic IO seems more about solving clever puzzles than understanding real markets.)

13 October 2014 at 2:31 pm 15 comments

“Why Managers Still Matter”

| Nicolai Foss |

BxrnIo-CQAA8lk7Here is a recent MIT Sloan Management Review piece by Peter and me, “Why Managers Still Matter.” We pick up on a number of themes of our 2012 book Organizing Entrepreneurial Judgment. A brief excerpt:

“Wikifying” the modern business has become a call to arms for some management scholars and pundits. As Tim Kastelle, a leading scholar on innovation management at the University of Queensland Business School in Australia, wrote: “It’s time to start reimagining management. Making everyone a chief is a good place to start.”

Companies, some of which operate in very traditional market sectors, have been crowing for years about their systems for “managing without managers” and how market forces and well-designed incentives can help decentralize management and motivate employees to take the initiative. . . .

From our perspective, the view that executive authority is increasingly passé is wrong. Indeed, we have found that it is essential in situations where (1) decisions are time-sensitive; (2) key knowledge is concentrated within the management team; and (3) there is need for internal coordination. . . . Such conditions are hallmarks of our networked, knowledge-intensive and hypercompetitive economy.

29 September 2014 at 10:02 am 7 comments

The Use of History in Management Research and Education

| Peter Klein |

Another book recommendation, also courtesy of EH.Net. The book is Organizations in Time: History, Theory, Methods (Oxford University Press, 2014), edited by Marcelo Bucheli and R. Daniel Wadhwani. (Bucheli is author of an excellent book on the United Fruit Company.) Organizations in Time is about of the use of history in management research and education. Perhaps surprisingly, the field of business history is not usually part of the business school curriculum. In the US at least, business historians are typically affiliated with history or economics departments, not management departments or other parts of the business school. EH.Net reviewer Andrew Smith notes the following:

Until the 1960s, economic history and business history had an important place in business school teaching and research.  Many management scholars then decided to emulate research models developed in the hard sciences, which led to history becoming marginal in most business schools. History lost respect among positivistic management academics because historians made few broad theoretical claims, rarely discussed their research methodologies, and did not explicitly identify their independent and dependent variables. Historians in management schools became, effectively, disciplinary guests in their institutions.

The period from 2008 to the present has witnessed a revival of interest in history on the part of consumers of economic knowledge in a variety of academic disciplines, not to mention society as a whole. . . . It is now widely recognized that there needs to be more history in business school research and teaching. However, as Marcelo Bucheli and Dan Wadhwani note in the introductory essay, this apparent consensus obscures a lack of clarity about what a “historic turn” would, in practice, involve (p. 5).

This volume argues that the historic turn cannot simply be about going to the historical record to gather data points for the testing of various social-scientific theories, which is what scholars such as Reinhart and Rogoff do. Rather than being yet another device for allowing the quantitative social sciences to colonize the past, the historic turn should involve the adoption of historical methods by other management school academics. At the very least, people in the field of organization studies should borrow more tools from the historian’s toolkit.

Read the book (or at least the review) to learn more about these tools and approaches, which involve psychology, embeddedness, path dependence, and other concepts familiar to O&M readers.

23 July 2014 at 7:59 am Leave a comment

More Pioneers of Entrepreneurship Research

| Peter Klein |

Besides the essay on Mark Casson discussed below, the Strategic Entrepreneurship Journal has released forthcoming profiles of Ian MacMillan (by Rita McGrath), Arnold Cooper (by Tim Folta), and Steve Klepper (by Rajshree Agarwal and Serguey Braguinsky), as part of its series on “Research Pioneers.”

2 July 2014 at 10:42 am Leave a comment

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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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