Institutions « Organizations and Markets

Posts filed under 'Institutions'

Bruce Caldwell on The Road from Mont Pèlerin

| Peter Klein |

Don’t miss Bruce Caldwell’s review of Philip Mirowski and Dieter Plehwe, eds., The Road from Mont Pèlerin: The Making of the Neoliberal Thought Collective (Harvard, 2009). “Mont Pèlerin” refers, of course, to the Mont Pèlerin Society, the association of classical liberal academics and journalists founded by Hayek in 1947. Bruce finds the volume informative, despite its frequently disdainful tone toward its subjects. He also raises an important general point, one that I’ve wrestled with a lot since the financial crisis: does anybody listen to us?

The second question [raised by the book] has to do with the potency of intellectuals to shape world events or, more narrowly, even economic and social policy. It is evident that members of the Mont Pèlerin Society, for all of their diversity, still preferred some form of liberalism . . . to other ways of organizing economic and political affairs. But how important were they in the emerging global consensus that began in the 1980s in favor of trade liberalization and privatization? Were not, for example, the dismal performance of Keynesian demand management policies in the United States, Britain, and elsewhere in the 1970s; the heavy-handed actions of the trade unions in Britain during the “Winter of Discontent”; the sclerotic performance of countries like India who had embraced a modified version of the planning model for their own; and, of course, the patent economic and political failures of the East Bloc, far more important in turning the tide, however briefly, towards globalization? Was not George Stigler (himself a founding member of the Society) right in his comment about economists that “our influence appears to be powerful only when we support policies ripe for adoption” (Stigler 1987, p. 11)?

Add comment 2 September 2010

Two Economics Papers About Culture

| Peter Klein |

The New Institutional Economics focuses mainly on formal rules, both “macro” (constitutions, legal systems, written languages) and “micro” (firms, contracts, other formal agreements). But there are many studies of informal or semi-formal constraints — norms, conventions, religion, belief systems, and other aspects of culture, broadly conceived. Given their commitment to methodological individualism, New Institutional Economists tend to explain the emergence and stability of these phenomena as the consequences — typically unintended — of purposeful individual choices (which distinguishes us from our colleagues on the other side of the aisle). (Culture is important within organizations, as well as between them, though attempts to explain organizational culture in this manner have been less successful.)

Does Culture Matter?
Raquel Fernández

This paper reviews the literature on culture and economics, focusing primarily on the epidemiological approach. The epidemiological approach studies the variation in outcomes across different immigrant groups residing in the same country. Immigrants presumably differ in their cultures but share a common institutional and economic environment. This allows one to separate the effect of culture from the original economic and institutional environment. This approach has been used to study a variety of issues, including female labor force participaiton, fertility, labor market regulation, redistribution, growth, and financial development among others.

Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry
C. Kirabo Jackson, Henry S. Schneider

This study investigates the role of social networks in aligning the incentives of economic agents in settings with incomplete contracts. We study the New York City taxi industry where taxis are often leased and lessee-drivers have worse driving outcomes than owner-drivers as a result of a moral hazard associated with incomplete leasing contracts. Using instrumental variables and fixed-effects analyses, we find that: (1) drivers leasing from members of their country-of-birth community exhibit significantly reduced effects of moral hazard; (2) network effects appear to operate primarily via social sanctions; and (3) network benefits can help to explain the organization of the industry in terms of which drivers and owners form business relationships.

5 comments 30 August 2010

One-Size-Fits-All Higher Ed?

| Peter Klein |

Alternative title: “An Economist Tries Talking to an English Professor, and Gives Up.” Perhaps one of you wants to take up the mantle over at UD?

The point, which I’ve raised in previous posts (e.g., here and here), is that higher education isn’t one, well-defined thing, but a variety of things, and we should welcome experimentation, innovation, and — well — diversity. Blockquoting myself:

“Diversity” is the primary mantra of higher-education institutions. So why not have some diversity in organizational forms? “Education,” after all, is not a homogenous good. As with healthcare, one size doesn’t fit all. Shouldn’t we encourage entry, and applaud entrants who experiment with alternative curricula, teaching methods, incentive structures, sizes, and shapes? Let a thousand pedagogic flowers bloom, I say!

7 comments 19 August 2010

WikiLeaks and Napster

| Peter Klein |

Apropos my WikiLeaks post, comparing the recent data dump to the data-sharing and data-mining practices increasingly common in academia, a Thursday New Yorker post by Raffi Khatchadourian takes the New Economy framing even further, comparing Wikileaks to Napster. “Shutting WikiLeaks down — assuming that this is even possible — would only lead to copycat sites devised by innovators who would make their services even more difficult to curtail.” The recording industry shut down Napster, spawning Bittorrent — a far more dangerous competitor. Khatchadourian says the Defense Department should “consider WikiLeaks a competitor rather than a threat, and to recognize that the spirit of transparency that motivates [Wikileaks founder Julian] Assange and his volunteers is shared by a far wider community of people who use the Internet.” Had the DoD had released the footage of the 2007 Apache helicopter attack itself, rather than waiting for WikiLeaks to publish it on YouTube, it could probably have contained the damage much more effectively. Naturally, I wouldn’t expect the DoD — or the RIAA — to be that smart. (HT to TechDirt via David Veksler.)

2 comments 7 August 2010

Incentives Matter, Soviet Edition

| Dick Langlois |

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

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

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

3 comments 14 July 2010

Too Much Research

| Peter Klein |

Bill McKelvey is one of the signatories to a controversial Chronicle piece that ran last month, “We Must Stop the Avalanche of Low-Quality Research.” The five authors, from a variety of academic disciplines, argue that “the amount of redundant, inconsequential, and outright poor research has swelled in recent decades, filling countless pages in journals and monographs.” As evidence they point to increases in the numbers of journals, journal pages, and authors and decreases in average citation rates.

[I]nstead of contributing to knowledge in various disciplines, the increasing number of low-cited publications only adds to the bulk of words and numbers to be reviewed. Even if read, many articles that are not cited by anyone would seem to contain little useful information. The avalanche of ignored research has a profoundly damaging effect on the enterprise as a whole. Not only does the uncited work itself require years of field and library or laboratory research. It also requires colleagues to read it and provide feedback, as well as reviewers to evaluate it formally for publication. Then, once it is published, it joins the multitudes of other, related publications that researchers must read and evaluate for relevance to their own work. Reviewer time and energy requirements multiply by the year. The impact strikes at the heart of academe.

I think this assessment is generally on target, in my own field at least. What percentage of the articles in your favorite scholarly journal do you read, let alone remember? How much of the research in your field really adds value? Of course, search tools make it easier to find relevant information, so I’m not sure the point about lit reviews is all that compelling. Still, it does seem increasingly difficult to sort wheat from chaff.

I’m less impressed with the authors’ proposed solutions — limiting the number of publications that can be considered for promotion and tenure, making greater use of impact factors, and enforce tighter page restrictions. These strike me as superficial fixes. The main problem is the vast increase in the scale and scope of the “scientific” enterprise itself, almost all of it due to public funding. There are simply too many universities and institutes, too many research faculty, too many granting agencies, too much research money. It’s a self-perpetuating process, almost exclusively driven by supply-side considerations (who on earth “demands” the output of most English departments?). Some of you will be shocked by the claim that there’s “too much” research money, particularly in today’s austere climate. But I mean too much relative to some social optimum, not too much relative to what university professors want.

Why would we expect this kind of system to produce high-quality research? Perhaps it’s a miracle that any good work gets done at all.

13 comments 8 July 2010

More on Managerial Coordination and the Vanishing Hand

| Dick Langlois |

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

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

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

5 comments 3 July 2010

Isomorphism in Higher Education

| Peter Klein |

Amitai Etzioni is upset that new firms are entering the higher-education market and offering — gasp! — a differentiated product. Worst of all, they operate on a for-profit basis! (“For-profit,” as all liberal intellectuals know, is synonymous for “evil.”) Consider:

The education students receive at for-profit colleges bears little resemblance to the kind they would get at a true liberal arts college. Neither does it resemble the collegial image the for-profit colleges love to project. Professors at these schools often work on short contracts. There is no tenure. The executives make staggering salaries. Most students are taught online, often by poorly qualified professors who have very limited contact with the students. . . .

The schools’ stripped-down curricula and poor instruction often make for nearly worthless degrees. When students graduate from these colleges, many cannot find jobs — or at least not the kinds they were promised — and eventually, many of them default on their loans.

Of course, this in no way resembles the situation at traditional colleges and universities, at which all instructors are highly qualified, administrators make minimum wage, instructors spend lots of time with their students, and all students get exactly the jobs they were promised and pay their loans back immediately. (more…)

17 comments 1 July 2010

Bailouts in Historical Perspective

| Peter Klein |

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

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

Add comment 23 June 2010

Management Journal Impact Factors 2009

| Nicolai Foss |

Eugene Garfield may not exactly be defunct, but it is entirely true that practical men, such as university presidents, deans, and department heads, are slaves of the Science Citation Index he created. In fact, so are the rest of us who have eagerly been waiting for the publication of the impact factors for 2009. They have just arrived and it is fascinating stuff. Here are a few immediate observations on the management IFs:

Abstracting from MIS Quarterly, the Strategic Management Journal is #3.
Journal of Management is, at #5 (and #4 if MIS Q is left out) cementing its position as a top journal.
Strategic Organization is up on #8! Way to go, Joel and colleagues! But can you sustain that position?
Journal of International Business Studies has dropped a few positions but is still in the top-10.
Journal of Management Studies (#14) has emerged as a close competitior in terms of ranking to Organization Science (#12). It is the undisputed #1 Euro management journal (it has also just entered the Financial Times ranking).
Resarch Policy, which was among the top 10 only two years back, is now #22.
Management Science is now down to #24. There are management departmetns where this journal is considered A+.

Of course, we all know the many reasons why all this should be taken with more than the proverbial grain of salt. For example, as Ram Mudambi points out (personal conversation), more and more journals play the impact factor game and force authors to cite recent papers in the journals, and reference lists grow longer and longer. Perhaps Article Influence Scores represent the superior alternative.

1 comment 20 June 2010

The “Knowledge Filter” and the New Economy

| Dick Langlois |

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

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

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

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

3 comments 28 May 2010

Study this Summer with Klein

| Peter Klein |

I’m participating in a distance-learning experiment this summer — no, not Bootsy Collins’s Funk University, but the Mises Academy, a new Mises Institute service offering short, non-degree courses to university students, management professionals, and the general public. Everything’s online — lectures, readings, discussions, assignments. I’m teaching “Entrepreneurship in the Capitalist Economy,” a course based on my favorite book (as Mankiw would put it). The course runs for 9 weeks from 7 June to 7 August and costs a mere $255 — that’s less than one or two of Nicolai’s books!

The course is pitched at the undergraduate/MBA level, with no formal prerequisites except intellectual curiosity, a good work ethic, and a sense of humor. Perhaps I’ll offer special extra-credit assignments for O&M readers. . . .

Drop me a line if you have any questions. I’d love to have you join me on this journey!

3 comments 26 May 2010

Intellectual Steam

| Dick Langlois |

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

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

4 comments 19 May 2010

The Invention of Enterprise: Reviews

| Peter Klein |

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

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

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

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

2 comments 6 May 2010

Religion and Economic Development

| Peter Klein |

Thanks to Tyler for calling my attention to Davide Cantoni’s job-market paper, “The Economic Effects of the Protestant Reformation: Testing the Weber Hypothesis in the German Lands”:

Many theories, most famously Max Weber’s essay on the ‘Protestant ethic,’ have hypothesized that Protestantism should have favored economic development. With their considerable religious heterogeneity and stability of denominational affiliations until the 19th century, the German Lands of the Holy Roman Empire present an ideal testing ground for this hypothesis. Using population figures in a dataset comprising 276 cities in the years 1300-1900, I find no effects of Protestantism on economic growth. The finding is robust to the inclusion of a variety of controls, and does not appear to depend on data selection or small sample size. In addition, Protestantism has no effect when interacted with other likely determinants of economic development. I also analyze the endogeneity of religious choice; instrumental variables estimates of the effects of Protestantism are similar to the OLS results.

In my AE 8050 class last semester we discussed several papers on religion, and other aspects of culture, as they affect economic development (e.g., Stulz and Williamson, 2003). Cantoni’s paper will go on my reading list next year.

Add comment 5 May 2010

IRB Flames

| Peter Klein |

Zachary Schrag’s excellent Institutional Review Blog highlights the discussion on a recent Chronicle post about IRBs. As you can imagine, most of the comments are from frustrated researchers who see the campus IRB as their enemy, not their ally. Sample: “At my current institution, humanities scholars are subject to an IRB that only makes sense for scientists collecting blood and doing life-threatening experiments on small children.” Zach points out that a few comments defend the local IRB, but these comments “are vaguer and less eloquent,” and “none tells a story of an IRB review that proved necessary.”

I suspect that some of this researcher frustration can be alleviated by recognizing that IRBs exist not to protect research subjects, but to protect the university. The IRB’s goal is to prevent the university from being sued or otherwise losing Federal funding. Protecting research subjects, improving research methods, and contributing to the growth of knowledge are incidental.

7 comments 15 April 2010

Miscellaneous Conference and Paper Links

| Peter Klein |

SSRN has a new Philosophy and Methodology of Economics working-paper series, sponsored by the International Network for Economic Method.

Here’s a CFP for a Special Issue of the E-conomics e-Journal on the Social Returns to Higher Education, R&D and Innovation.

You can watch a live stream of this weekend’s SEJ Special Issue Conference on Knowledge Spillovers & Strategic Entrepreneurship.

The registration and accommodations section of the ISNIE 2010 website is now open.

Add comment 14 April 2010

A Hayekian Story About Taxis

| Peter Klein |

No, not taxis, but taxis. You know the old story about colleges placing paved footpaths along the paths already worn down by students, relying on “spontaneous order” to select the best routes across campus? Here’s a similar story involving New York City taxicabs. This New York Times infographic tracks taxi traffic and pick-up/drop-off locations across Manhattan throughout a typical week. You can see where traffic clusters during the weekly commute, on Saturday night, and so on. If the city were going to improve certain roads, build taxi stands, re-time traffic signals, and the like, these data could allow for a sort of Hayekian solution. (Via Cliff Kuang, who provides interesting commentary as usual, including this link to a similar San Francisco project.)

Add comment 9 April 2010

Why Are the Dutch So Clean?

| Nicolai Foss |

Folk wisdom holds that people stopped bathing after the fall of the Roman Empire. Thus, it is commonly held that all of Europe was, until recently, quite smelly indeed. Some hold the view that this is still the case.

There were serious exceptions, of course. I cannot resist mentioning a particularly well taken example, reported by the prior of St. Fridswides, John of Wallingford, “who complained bitterly that the Danes bathed once a week, combed their hair regularly, and changed their clothes regularly. The result was that English women were easily seduced by the nice-smelling Danes” (here).

A perhaps better-known example of European cleanliness is that of the Dutch. It is also the most seriously researched example. In the 17th and 18th century, visitors to Holland wondered about Dutch cleanliness, indeed, obsession with hygiene. Some have argued that this, somehow, reflected Dutch Calvinism. No, argue Bas van Bavel and Oscar Gelderblom in “The Economic Origins of Cleanliness in the Dutch Golden Age,” the reason is . . . butter! And here is the explanation (Abstract):

This paper explores why early modern Holland, and particularly its women, had an international reputation for cleanliness. We argue that economic factors were crucially important in shaping this habit. Between 1500 and 1800 numerous travellers reported on the habit housewives and maids had of meticulously cleaning the interior and exterior of their houses. We argue that it was the commercialization of dairy farming that led to improvements in household hygiene. In the fourteenth century peasants as well as urban dwellers began to produce large quantities of butter and cheese for the market. In their small production units women, and their daughters, worked to secure a clean environment for proper curdling and churning. We estimate that, at the turn of the sixteenth century, half of all rural households and up to one third of urban households in Holland produced butter and cheese. These numbers declined in the sixteenth century as peasants sold their land and larger farms were set up. Initially the migration of entire peasant families to towns, the hiring of farmers’ daughters as housemaids, and the exceptionally high consumption of dairy products continued to encourage the habit of regular cleaning in urban households. However, by the mid-seventeenth century the direct link between dairy farming and cleanliness was, for the most part, lost.

4 comments 5 April 2010

Posner on Institutions and Organizations, Round Two

| Peter Klein |

Remember the infamous Posner-Coase-Williamson exchange from JITE, 1993? Posner dismissed the New Institutional Economics as a derivative form of Posnerian law and economics, prompting unhappy replies from Coase and Williamson. Here’s Coase:

Posner [1993, 79] says that the first part of his paper describes “the conception of the field [the new institutional economics] held by Ronald Coase.” Reading this part of his paper recalled to my mind Horace Walpole’s opening remarks in his book on King Richard the Third: “So incompetent has the generality of historians been for the province that they have undertaken, that it is almost a question, whether, if the dead of past ages could revive, they would be able to reconnoitre the events of their own times, as transmitted to us by ignorance and misrepresentation” (Walpole [1768, 1]). I have only one foot through the door but should the final yank come before this piece is published, Horace Walpole’s words would apply exactly to Posner’s highly inaccurate account of my views.

Adds Williamson, wryly: “Richard Posner is a prolific writer and distinguished jurist. He is frequently asked to speak with wisdom and authority on many issues. Whether he hits the mark or misses varies with his depth of knowledge and understanding of those issues. . . . I content that Posner’s [1993] commentary mainly misses.”

Now Geoff Hodgson has produced a reboot: a long essay by Posner in the Journal of Institutional Economics titled “From the New Institutional Economics to Organization Economics: with Applications to Corporate Governance, Government Agencies, and Legal Institutions,” with replies from Jürgen Backhaus, Bruno Frey, Lin Ostrom, John Roberts, Tom Ulen, and several others (but not Coase or Williamson!). Posner focuses almost exclusively on the principal-agent problem, perhaps unaware that information, delegation, coordination, and adaptation are also important issues in organizational economics. His main conclusion seems to be that both private firms and public agencies are equally inefficient. Interesting reading, to be sure (and much better than Posner’s solipsistic essay on his conversion to Keynesianism, inexplicably published by the New Republic).

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Add comment 25 March 2010

A New Organizational Chart

| Peter Klein |

Fodder for dozens of future PhD dissertations, no doubt! (Click to enlarge.)

7 comments 23 March 2010

Unquenchable

| Dick Langlois |

I attended an interesting lecture on Thursday, part of the University’s Edwin Way Teale lecture series on the environment. Normally these lectures do not tend, shall we say, to take perspectives that O&M readers would find congenial. But this lecture, by Robert Glennon of the University of Arizona Law School, was interesting along a number of dimensions. The talk was based on his book Unquenchable: America’s Water Crisis and What To Do About It. Here is the abstract:

From manufactured snow for tourists in Atlanta to trillions of gallons of water flushed down the toilet each year, Dr. Robert Glennon reveals the heady extravagances and everyday inefficiencies that are sucking the nation dry. The looming catastrophe remains hidden as the government diverts supplies from one area to another to keep water flowing from the tap. But sooner rather than later, the shell game has to end. And when it does, shortages will threaten not only the environment, but every aspect of American life. America must make hard choices — and Glennon’s answers are fittingly provocative. He proposes market-based solutions that value water as both a commodity and a fundamental human right.

The talk was interesting not only in that I learned a few things about the screwed-up water system in the U. S. (the broad contours of which I was vaguely familiar with) but also in that it presented an interesting case study in rhetoric. Glennon spent most of the talk revving up the environmentalist crowd, with lots of show and tell about the effects of bad water policy and a tour through various command-and-control policies that environmentalists might think of to fix the situation. (He even paused to make fun of Ann Coulter’s claim that the flush toilet is man’s greatest invention.) But Glennon’s bottom line, revealed at the very end, is that the only thing that will fix the problem is properly assigning property rights and trading those rights on markets. This was the conclusion I was expecting, not only because of the abstract but also because Glennon has an NBER Working Paper with Gary Libecap. Maybe this is the way to go in selling market-based solutions.

4 comments 8 March 2010

Quote of the Day: Bartley on the Marketplace of Ideas

| Peter Klein |

I happened to be looking today through Unfathomed Knowledge, Unmeasured Wealth by W. W. Bartley, III, who passed away shortly after this book was published. Bartley, a student and colleague of Karl Popper and the Founding Editor of The Collected Works of F. A. Hayek, was a brilliant and penetrating thinker whose work is not very well known outside of a few professional circles. Unfathomed Knowledge, a book about higher education (with the subtitle “On Universities and the Wealth of Nations”), was written for a general audience and is full of insights about the crazy business of academia. Here’s one passage:

Analogies have often been drawn between a free market in ideas and free markets in goods and services. Yet intellectuals tend to dislike such comparisons. They see the free market in ideas as something on a higher plane, qualitatively different from free markets in commodities and the like. Many of them indeed even hate the marketplace as traditionally conceived, and would want nothing to do, even analogically, with a free market in coal, housing, fish, or petroleum.

Take a few examples. Several scholars, including Edward Shils, of the University of Chicago, strongly protested the analogy when it was drawn by Michael Polanyi at the Congress for Cultural Freedom. One called Polanyi’s comparison between free markets in goods and in ideas “clever but questionable” in that a man who offers commodities in the free market “is not bound by anything” whereas in science one is bound to an objective method. Shils added that members of the scientific community, by contrast to businessmen and traders, act in accordance with overriding standards, a “common law” above and beyond individuals.

Such a position does not withstand examination. Someone offering commodities in a market — far from being “not bound by anything” — is governed by enforceable law relating to fraud, credit, contract and such like. The analogy does have limits, but of a different sort: in the marketplace of ideas, fraud, plagiarism, theft, false advertising (including false claims to expertise and the whole mystique of expertise), “conspiracies of silence,” casual slander and libel, breach of contract, deceit of all sorts are more common than in business — simply because there are few readily enforceable penalties against offenders, whereas “whistle-blowers” are severely punished. This is so especially in those areas (the humanities, social sciences, the arts — as opposed to the profitable fields) where the transaction costs of enforcing such things as property rights, priority claims, or even accurate report5ing usually outweigh the advantage in doing so, and where the transaction costs of trying to defend oneself against such things as slander are prohibitive.

5 comments 25 February 2010

New Issue of QJAE

| Peter Klein |

The new issue of the Quarterly Journal of Austrian Economics (volume 12, no. 3) has several papers of likely interest to O&Mers. For instance:

Jack High, “Entrepreneurship and Economic Growth: The Theory of Emergent Institutions”

This paper enlarges Menger’s theory of the origins of money by making explicit the role of entrepreneurship in the theory and by extending the theory to market institutions other than money. Drawing on the research of anthropologists, archaeologists, and historians, the paper considers the origins of three institutions that underlie economic growth — the division of labor, monetary accounting, and private property. Menger’s generalized theory of the origins of institutions is used to interpret each of these institutions.

Laurent A.H. Carnis, “The Economic Theory of Bureaucracy: Insights from the Niskanian Model and the Misesian Approach”

Governmental interventions in the economy take numerous forms, and they require the existence of a public authority, a bureaucracy, to implement them. This article proposes an analysis of the origins and the dynamics of bureaucracy, and discusses means of escaping bureaucracy’s disadvantages. I will proceed by means of a comparison between the theories of Niskanen and Mises, two impressive and very representative works from the Public Choice School and the Austrian School of economics. Although Mises and Niskanen share a common analysis of the defect of bureaucratic management, there are strong disagreements between the two authors about the reasons for the existence of bureaus and about their functioning and their deficiencies. Inevitably, the means proposed by Niskanen and Mises for escaping the disadvantages of bureaucracy are different and cannot be reconciled.

Check out the rest!

Add comment 24 February 2010

Stuck on the Methodological Hamster Wheel

| Craig Pirrong |

I’ve read John Cassidy’s New Yorker article (not available online) in which he described his journey to the freshwater provinces in his attempt to see whether the financial crisis had caused Chicago economists to reject their reactionary views. (With one exception, the answer is blessedly “no.”) I’ve also read his paean to Pigou in the WSJ. So I pretty much knew what to expect when I picked up his How Markets Fail. Let’s say I wasn’t disappointed, in the sense that my very low expectations were met.

The book is a very conventional, Stiglitz-esque critique of market economics and those who defend markets. The latter are always described with Homer-esque modifiers, just so you’ll know that they [we!] are retrograde knuckle draggers. (more…)

4 comments 3 February 2010

ISNIE 2010 Call for Papers

| Peter Klein |

The Call for Papers is out for the International Society for New Institutional Economics’s 2010 meeting, 17-19 June in Stirling, Scotland. Proposals are due 1 March. President-Elect Frank Stephen is putting together an impressive program with keynotes from Bruno Frey and two longtime ISNIE members you may have heard of: Elinor Ostrom and Oliver Williamson. Don’t miss it!

Add comment 27 January 2010

Corporations Are People Too

| Craig Pirrong |

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

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

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

2 comments 25 January 2010

Josh Lerner on Public Policy Toward Entrepreneurship

| Peter Klein |

Speaking of public entrepreneurship, here’s an interview with Josh Lerner about his new book Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do About It (Princeton, 2009). Excerpt:

There are two well-documented problems that can derail government programs to boost new venture activity. First, they can simply get it wrong: allocating funds and support in an inept or, even worse, a counterproductive manner. Decisions that seem plausible within the halls of a legislative body or a government bureaucracy can be wildly at odds with what entrepreneurs and their backers really need. . . .

Economists have also focused on a second problem, delineated in the theory of regulatory capture. These writings suggest that private and public sector entities will organize to capture direct and indirect subsidies that the public sector hands out. For instance, programs geared toward boosting nascent entrepreneurs may instead end up boosting cronies of the nation’s rulers or legislators. The annals of government venturing programs abound with examples of efforts that have been hijacked in such a manner.

Thanks to Ross Emmett for the tip.

2 comments 15 January 2010

Do Top Scholars Make the Best University Leaders?

| Peter Klein |

Yes, says Amanda Goodall here and here. Here’s a summary and here’s some commentary. Her argument is based on inside knowledge, the ability to set appropriate standards, signaling, and legitimacy. Signaling strikes me as the most plausible (non-academic administrators may not have knowledge or legitimacy but they can hire subordinates who do). I haven’t studied the work carefully, however. Kudos to Goodall for tackling an important subject.

Her Vox article singles out economist-administrators for special mention. They seem to be doing quite well, Larry Summers notwithstanding.

2 comments 8 January 2010

Public Entrepreneurship

| Peter Klein |

Joe Mahoney, Anita McGahan, Christos Pitelis, and I have written a paper, “Toward a Theory of Public Entrepreneurship,” exploring the application of concepts, theories, and approaches from the entrepreneurship literature to non-market behavior. We argue that governments, government agencies, social enterprises, charitable organizations, and other “public” actors can be described as being alert to opportunities for value creation and capture, exercising judgment over the deployment of resources under uncertainty, introducing technological and organizational innovations, and so on. These actors are, in a sense, “public entrepreneurs.” This characterization also helps highlight critical differences between private and public actors and organizations, differences relating to the definition and measurement of objectives, the ability to evaluate performance, the nature of external governance, and, of course, the role of coercion. The paper is very much an exploratory effort in this area, and we certainly welcome comments and suggestions.

Here’s the abstract:

This paper explores innovation, experimentation, and creativity in the public domain and in the public interest. Researchers in various disciplines have studied public entrepreneurship, but there is little work in management and economics on the nature, incentives, constraints and boundaries of entrepreneurship directed to public ends. We identify a framework for analyzing public entrepreneurship and its relationship to private entrepreneurial behavior. We submit that public and private entrepreneurship share essential features but differ critically regarding the definition and measurement of objectives, the nature of the selection environment, and the opportunities for rent-seeking. We describe four levels of analysis for studying public entrepreneurship, provide examples, and suggest new research directions.

11 comments 23 December 2009

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