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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

Chris Coyne’s Austrian Course

| Peter Klein |

Earlier I shared the reading list for my graduate course in the Austrian school of economics. Chris Coyne is teaching a similar class and has posted his syllabus here. Chris’s course is laid out differently than mine, with a different mix among types of readings, but I like what he’s done. As Pete Boettke and Joe Salerno have noted, the diversity and variety of course offerings and educational programs in Austrian economics is a sign of the health and vitality of the school.

3 comments 1 September 2010

How to Read an Academic Article

| Peter Klein |

This fall I’m teaching “Economics of Institutions and Organizations” to first-year graduate students. The reading list is rather heavy, compared to what most students are used to from their undergraduate courses and their first-year courses in microeconomics, econometrics, etc. I explain that they need to become not only avid readers, but also efficient readers, able to extract the maximum information from an academic article with the least effort. They need to learn, in other words, the art of the skim.

When I’ve explained this in the past, students have responded that they don’t know how to skim. So a couple years back I put together a little handout, “How to Read an Academic Article,” with a few tips and tricks. I emphasize that I don’t mean to be patronizing, and that they should ignore the handout if its contents seem painfully obvious. But students have told me they really appreciate having this information. So, I reproduce the handout below. Any comments and suggestions for improvement?

How to Read an Academic Article

Caveat: no single style works for everyone!
Klein’s basic steps for skimming, scanning, processing…
1. Read the abstract (if provided)
2. Read the introduction.
3. Read the conclusion.
4. Skim the middle, looking at section titles, tables, figures, etc.—try to get a feel for the style and flow of the article.
  1. Is it methodological, conceptual, theoretical (verbal or mathematical), empirical, or something else?
  2. Is it primarily a survey, a novel theoretical contribution, an empirical application of an existing theory or technique, a critique, or something else?
5. Go back and read the whole thing quickly, skipping equations, most figures and tables.
6. Go back and read the whole thing carefully, focusing on the sections or areas that seem most important.
Once you’ve grasped the basic argument the author is trying to make, critique it!
1. Ask if the argument makes sense. Is it internally consistent? Well supported by argument or evidence? (This skill takes some experience to develop!)
2. Compare the article to others you’ve read on the same or a closely related subject. (If this is the first paper you’ve read in a particular subject area, find some more and skim them. Introductions and conclusions are key.) Compare and contrast. Are the arguments consistent, contradictory, orthogonal?
3. Use Google Scholar, the Social Sciences Citation Index, publisher web pages, and other resources to find articles that cite the article you’re reading. See what they say about it. See if it’s mentioned on blogs, groups, etc.
4. Check out a reference work, e.g. a survey article from the Journal of Economic Literature, a Handbook or Encyclopedia article, or a similar source, to see how this article fits in the broader context of its subject area.

6 comments 31 August 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

Department of “Duh”

| Peter Klein |

It must be acknowledged, however, that a researcher’s political ideology or vested interest in a particular theory can still enter even ostensibly descriptive analysis by the data set chosen for the research; the mathematical transformations of raw data and the exclusion of so-called outlier data; the specific form of the mathematical equations posited for estimation; the estimation method used; the number of retrials in estimation to get what strikes the researcher as “plausible” results, and the manner in which final research findings are presented.

That’s Uwe Reinhardt, writing a NY Times op-ed that could have been titled “A Mainstream Economist Tries to Come to Grips with Kaldor-Hicks Efficiency.” It’s actually a pretty thoughtful and informative discussion that exposes some of the fatal — to my mind, anyway — flaws of the Kaldor-Hicks concept. But Reinhardt implies, unfortunately, that virtually every economist accepts the Kaldor-Hicks principle as a normative standard. There is actually a fair amount of dissent, not only from Austrians but also from people like Jon Elster and John Roemer. As Gary Lawson notes in an excellent survey of welfare economics concepts, the Kaldor-Hicks criterion, in practice, is

as useless as Pareto superiority. Kaldor-Hicks efficiency purchases its coherence by requiring that compensation be hypothetically possible in such a way as to guarantee that each person, by her own standards, does not come away a loser, just as strict Paretianism requires that each person judge herself to be as well off or better off than before. All it takes to make the universe of Kaldor-Hicks-efficient transactions an empty set is one person who sincerely cannot be bought-that is, a person who values autonomy, either his own or that of others, so highly that no amount of after-the-fact compensation could possibly leave him as well off as he would have been had the loss never been inflicted. (without consent) in the first place. In a large population, no legal rule [or other reallocation of resources] will ever satisfy the Kaldor-Hicks efficiency criterion.

4 comments 27 August 2010

An Industry Study for the Beautiful People

| Peter Klein |

It’s Beauty Imagined: A History of the Global Beauty Industry by Geoffrey Jones (Oxford University Press, 2010). From the blurb:

This book provides the first authoritative history of the global beauty industry from its emergence in the nineteenth century to the present day, exploring how today’s global giants grew. It shows how successive generations of entrepreneurs built brands which shaped perceptions of beauty, and the business organizations needed to market them. They democratized access to beauty products, once the privilege of elites, but they also defined the gender and ethnic borders of beauty, and its association with a handful of cities, notably Paris and later New York. The result was a homogenization of beauty ideals throughout the world.

Sounds like a great study of entrepreneurship, industry dynamics, clustering and network effects, and the relationship between business and culture. Reviewer Ingrid Giertz-Mårtenson says it’s “one of the more fascinating stories in modern business history,” the journey of an industry once seen as “fickle, superficial, and feminine” to a “brand-driven global power house.” The book should make a beautiful addition to your collection!

Add comment 26 August 2010

Texting Victorians

| Peter Klein |

I knew that the Victorians had their own Internet, that information goods and open innovation are old hat, and that S-curves go back a hundred years. But apparently the Victorians used texting language too! We instruct our students to avoid it, but apparently Victorian poets thought writing I “love U 2 X S” or “U R virtuous and Y’s” was exceedingly clever. LOL! (Discovery! via Gizmodo.)

1 comment 24 August 2010

Austrian Economics PhD Course

| Peter Klein |

This semester I am teaching a PhD course in the Austrian school of economics. Here’s a preview. Visitors to Columbia, Missouri are welcome to sit in!

Excerpt from the syllabus:

It is difficult to cover an entire school of thought in one semester. Austrian economics, after all, is not an applied field like development economics or international trade policy or biotechnology but an alternative approach to all fields of economics. The course objective is not to provide a comprehensive review and critique of the entire Austrian tradition, but to give students a sampler of high-quality Austrian writings, classic and modern, on a variety of issues and topics. One goal is to show that while Austrian economists share a common conceptual framework, theoretical core, and historical context, the Austrian literature contains tremendous variety, both stylistic and substantive. Like any living, breathing tradition the Austrian literature continues to expand and diversify, often at a dizzying pace.

9 comments 23 August 2010

The Corporate Hierarchy Dies, Again

| Peter Klein |

Ronald Coase described his 1937 paper on the firm as “much cited, but little used.” He was referring to the academic literature, but these days it seems to apply to the popular press as well. Almost every week brings a new article on the death of the corporate hierarchy: you know, firms only exist to deal with transaction costs, and the Internet has reduced them to almost zero, so who needs firms? This argument shows up again and again. But it’s wrong. Of course there are transaction costs between firms (search, bargaining, enforcement). But there are also transaction costs inside firms (agency and information costs, the Misesian calculation problem). The firm straddles these margins. Both sets of transaction costs matter, and both can be reduced through technological change. Coase was not as clear on this point as he could have been, but Williamson has been explaining it for decades, in terms of “comparative contracting costs.” You have to compare both sets of costs, not just look at one. Why is it so hard to see?

Saturday’s WSJ gives us the latest version of the bogus argument, this time from Alan Murray. Same old story: Internet, transaction costs, Tapscott and Williams, wikipedia, yada yada yada. “Mr. Coase received his Nobel Prize in 1991 — the very dawn of the Internet age. Since then, the ability of human beings on different continents and with vastly different skills and interests to work together and coordinate complex tasks has taken quantum leaps. Complicated enterprises, like maintaining Wikipedia or building a Linux operating system, now can be accomplished with little or no corporate management structure at all.” Yawn. “[T]he trends here are big and undeniable. Change is rapidly accelerating. Transaction costs are rapidly diminishing. And as a result, everything we learned in the last century about managing large corporations is in need of a serious rethink.” Zzzzzzzzzzzzzzz. Mr. Murray, please read The Victorian Internet three times fast and have a report on my desk first thing in the morning. “The new model will have to be more like the marketplace, and less like corporations of the past. It will need to be flexible, agile, able to quickly adjust to market developments, and ruthless in reallocating resources to new opportunities.” Right, no corporations of the past ever tried to do this.

15 comments 22 August 2010

Note on Anonymous Comments

| Peter Klein |

We interrupt our regular programming for a note from the site administrators: When you comment here at O&M, the server asks you for a name, email address, and (optionally) a URL. The email address is hidden (to protect your privacy), while the name and URL (if provided) are published with the comment. Rest assured that we keep your private information private — we don’t sell your email address to spammers, laugh about your funny username, or otherwise violate your dignity. But the server knows the email address you entered and the IP address whence you came, and provides this information to the site administrators and/or post author. In other words, even if you don’t use your real name, we probably know who you are!

Of course, anonymous comments are welcome (though the spam filter may hold them if they contain bad words or other stuff it doesn’t like). We understand that you may wish to use a pseudonym and keep your identity hidden from the wider world, and that’s fine. But I recently discovered that some commenters thought they were anonymous from us too, and that isn’t the case.

10 comments 21 August 2010

Experimental Philosophy

| Peter Klein |

Experimental economics is mainstream, and is increasingly popular in management (as well as sociology, political science, criminology, etc.). Laboratory and natural experiments seem to fill more journal pages every year. Esther Duflo took home this year’s Clark Medal for her work on randomized controlled trials. Identification is all the rage in empirical social science, and who needs instrumental variables or fixed effects if you can force ceteris to be paribus through experimental design?

But wait a minute: philosophy? Apparently philosophers are getting into the game, via a new experimental philosophy movement (“X-Phi,” to the cool kids). The NYT Magazine surveyed the field a few years back, and this week’s this week’s “Room for Debate” asks important philosophers what they think. Note the wide range of opinions. My initial reaction was similar to Brian Leiter’s, namely that X-Phi is about being trendy, attracting funding, and keeping philosophy departments from being shredded by budget-conscious administrators. Academia, after all, is among the most faddish of the professions. But who knows. (Thanks to MLC for the link.)

4 comments 20 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

Students: Do It for the Panda

| Peter Klein |

Words — and pictures — of wisdom for the new academic year:

An epic win, courtesy of FAIL Blog.

Add comment 19 August 2010

New Books on Entrepreneurship

| Peter Klein |

Princeton University Press has just published Will Baumol’s latest work, The Microtheory of Innovative Entrepreneurship. One of the celebrity dust-jacket endorsers (OK, me) says: “Baumol is one of the giants in the entrepreneurship field. The Microtheory of Innovative Entrepreneurship will be widely read, discussed, and debated, and is likely to have a significant impact on the scholarly conversation.” Hmmm, that’s a bit pedantic. But it’s really a very interesting book, though Baumol defines entrepreneurship differently than I do (as a Schumpeterian, he identifies entrepreneurship primarily with innovation and economic growth). The book is oriented more towards mainstream economists than management scholars, but both groups will benefit from Baumol’s careful and scholarly treatment.

Next month Oxford is bringing out Amar Bhidé’s A Call for Judgment: Sensible Finance for a Dynamic Economy. HBR is running an excerpt titled “The Judgment Deficit” that is worth a read. There Bhidé writes:

As we rebuild from the economic crisis, we must renew the search for the appropriate balance — in finance and in other endeavors — not just between centralization and decentralization but also between case-by-case judgment and standardized rules. The right level of control is an elusive and moving target: Economic dynamism is best maintained by minimizing centralized control, but the very dynamism that individual initiative unleashes tends to increase the degree of control needed. And how to centralize — whether through case-by case judgment, a rule book, or a computer model — is as difficult a question as how much. But these are questions that we cannot afford to stop asking.

While Bhidé doesn’t offer a formal definition of judgment, his treatment in earlier books makes extensive use of Knight (and Hayek), and I think he has in mind the kind of middle ground between formal rule-following and randomness that was central to Knight’s understanding of entrepreneurship.

Add comment 17 August 2010

O&M in Lund

| Peter Klein |

Nicolai and I, along with Jay Barney and John Matthews, are headlining the 2010 Holger Crafoord Memorial Symposium on “Strategy and Entrepreneurship,” 7 September 2010 at the Lund School of Economics and Management. The symposium is free but registration is required; details at the link above. Lund is a lovely university town, a short train ride (via the Øresund Bridge) from Copenhagen and hence easy to reach. A good time will be had by all.

1 comment 16 August 2010

Lachmann on Capital Heterogeneity

| Peter Klein |

We have written often on the role of capital heterogeneity in an entrepreneurial theory of the firm. “We are living in a world of unexpected change,” wrote Ludwig Lachmann in 1956; “hence capital combinations . . . will be ever changing, will be dissolved and reformed. In this activity, we find the real function of the entrepreneur.” Of course, the concept of heterogeneous resources is fundamental to transaction cost and resource-based views of the firm. It is mostly ignored by mainstream economists, however — macroeconomists in particular, as evidenced by the Old School Keynesianism that drives bailout and stimulus policy.

Here is Richard Ebeling with a fine overview of Lachmann’s capital theory, in contrast to Keynes’s superficial treatment:

A crucial element in Lachmann’s view of capital . . . is that the relationships between and among capital goods are those of substitutes and complements.

The Keynesian fallacy, Lachmann implies, is that Keynes tended to view and consider the capital stock has a more or less homogeneous aggregate under which all capital goods might be considered as interchangeable substitutes. Thus, any increase in capital investment lowers the “marginal efficiency of capital” (Keynes’ term) of every other unit of capital, since every unit of capital is a substitute with all other capital. . . .

Thus, if monetary manipulation brings about an increase in money and credit, and a resulting distortion of the rates of interest, and if this generates a tendency for misguided capital and related investments, and as a consequences capital goods and various types of labor are drawn into particular sectors of the economy and “stages” of the time structure of production, then . . .

You know the rest. And the coda too:

Government interventions and “stimulus” gimmicks merely serve to delay the adjustments and further distort an already distorted market. It is an attempt to maintain capital and labor complementary production and investment structures that are unsustainable in many of the patterns generated during the boom phase of the business cycle.

Add comment 15 August 2010

Business Communication Tool of the Day

| Peter Klein |

It’s UnsuckIt, an online tool that translates business jargon into regular English. The graphic is a little crude for my taste, by the spirit is admirable. You can browse a list of popular terms, and there’s a handy button to share a term’s translation with a colleague or, as the site puts it, “e-mail the douchebag who used it.” (Via BoingBoing.)

3 comments 13 August 2010

The Unbearable Hotness of Being

| Peter Klein |

Does blogging reduce research productivity? Are we O&Mers worried about posting something we’ll later regret? Nah, we think blogging is good for us, professionally. But we have another problem, more difficult to remedy: we are hot. I mean smokin’ hot. Harrison Ford in the first Indiana Jones movie? Forget it. He looks like some dork philosopher compared to us. Colleagues and students — females, especially — don’t take us seriously. “We know why you got this job!” We get one-line student evaluations: “Yum.”

Apparently, this is a real problem for some faculty members, according to a recent Chronicle story. “[I]n academe, being hot has a downside: Professors who are considered too good-looking can be cast by their peers as lightweights, known less for their productivity than for their pulchritude.” As the article points out, students have been falling in love with their professors for years, but only now do they have a chance to express themselves, often anonymously, at sites like RateMyProfessor.com. One professor — an economist, no less! — got so annoyed with the leering after making a hot professor list that he moved out of town. “He found notes under his door asking ‘what it would take to lasso me.’ And female students coyly ask his advice on whether it’s OK to date professors once a class is over.” I feel for the guy, really I do.

One anonymous professor quoted in the article puts things in their proper perspective, however: “on a scale of hotness academics aren’t all that hot, relatively speaking, and to make a list of hot ones is thus, relatively laughable.”

6 comments 13 August 2010

The (Very) Early History of Financial Economics

| Peter Klein |

The latest issue of the History of Economics Review contains Geoffrey Poitras and Jovanovic’s interesting paper, “Pioneers of Financial Economics: Das Adam Smith Irrelevanzproblem?” (published version not available online; working-paper version here, presentation slides here). Despite the subtitle the paper isn’t about Adam Smith, but the (very) early history of financial economics. Here’s an excerpt:

In the case of financial economics, the roots of this field stretch back to antiquity, involving the valuation of financial transactions, such as determining payment on a loan or distributing profits from a partnership. Poitras (2000) uses the late fifteenth century as a starting point for the early or pre-classical history of financial economics, more than three centuries prior to the publication of the [Wealth of Nations]. As early as Fibonacci (1170?-1250?), elements of financial economics were being disseminated among the merchant classes in the commercial arithmetics that, by the fifteenth century, formed the core of the reckoning school curriculum, e.g., Swetz (1987). A fundamental historical demarcation point appears with Christian Huygens’s (1629-1695) seminal introduction of the modern theory of expectations.

From this point, until the appearance of the WN, the founding work of classical political economy, financial economics underwent a dramatic transformation. By the time the Theory of Moral Sentiments appeared, sophisticated methods for pricing contingent claims, such as the life annuities sold by various individuals, municipalities and national governments in western Europe, had been developed and were being applied to the establishment of actuarially sound life insurance plans and pension funds. Hald (1990), Poitras (2006), Lewin (2003) and Rubinstein (2003) among others identify the earliest pioneers of modern financial economics, the beginning of classical financial economics, from the contributors that developed these pricing methods. As such, there is a close connection between the classical histories of financial economics, statistics, and actuarial science.

In other words, this is a field in which theory and practice appear to have co-evolved quite closely, which raises interesting questions for the performativity crowd. Modern financial economics is in many ways similar: theories of market efficiency were both shaped by, and helped to shape (e.g., through options-pricing formulas) actual market behavior.

1 comment 12 August 2010

Academy of Management Conference Open Thread

| Peter Klein |

Much of the O&M extended family is heading home from Montréal, site of the Academy of Management Annual Meeting. I presented one paper, discussed several more, facilitated a research roundtable, and spoke at a doctoral student consortium. Then there are business meetings, editorial board pow-wows, and planning sessions. Plus the really important stuff: socializing, networking, exchanging gossip, and enjoying good food and drink. It was great to see so many O&M bloggers, former guest bloggers, regular and occasional commentators, lurkers, and secret admirers.

Several sessions dealt with pedagogy, data sharing, research collaboration, and other issues being transformed by the web/wiki/blog/tweet/Facebook revolution. There was even a session on academic blogging featuring some of our friends from That Other Site. Clearly the O&M community is on the cutting edge of organizational research, teaching, and policy.

What did you think of the conference? What were your favorite sessions, papers, discussions, and activities? What could be done to improve future conferences? (Believe it or not, many high-ranking AoM muckety-mucks are regular O&M readers, so now’s your chance to be heard!)

3 comments 11 August 2010

Does Knowledge Management Improve Performance?

| Peter Klein |

Yes, says Peter Cappelli:

The extensive literature on knowledge management spans several fields, but there are remarkably few studies that address the basic question as to whether knowledge management practices improve organizational performance. I examine that question using a national probability sample of establishments, clear measures of IT-driven knowledge management practices, and an experimental design that offers a unique approach for addressing concerns about endogeneity and omitted variables. The results indicate that the use of company intranets, data warehousing practices, performance support systems, and employee competency databases have significant and meaningful effects on a range of relevant business outcomes.

Cappelli relies on a national (US), establishment-level survey of knowledge-management practices to construct a panel in which (according to the practioner literature) none of the knowledge-management practices under consideration existed at the start of the sample period. Check it out.

1 comment 9 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

Before They Were Famous

| Peter Klein |

Joe Morgenstern’s recent rant about the horrible year in movies included a sidebar (scroll down) about cinema classics that appeared ordinary when they came out. Casablanca, for example, was considered just another patriotic war movie, which the studios were putting out by the dozen, and a syrupy one at that.

The sidebar reminded me of Josh Gans and George Shepherd’s essay on classic social-science papers that struggled to find a publisher. Akerlof’s “Market for Lemons” was rejected by the AER, JPE, and REStat before QJE finally picked it up in 1970. Williamson’s manuscript for Markets and Hierarchies was rejected by Brookings. Robert Lucas’s 1972 paper, “Expectations and the Neutrality of Money” was rejected by the AER on the grounds that it was too mathematical. William Sharpe’s 1964 paper that introduced the capital asset pricing model was initially rejected by the Journal of Finance because, wrote the editor, the assumption that all investors make the same predictions was “preposterous.”

Jim March, as often, gets the best line: “I recall on one occasion a referee filing a two paragraph commentary on a paper I co-authored suggesting (in the first paragraph) that the key theorem involved was trivially obvious and (in the second) that it was wrong. I thought on the whole that he ought to
choose.”

3 comments 6 August 2010

Uncertainty and Human Action in Fiction

| Peter Klein |

From Ursula Le Guin’s 1969 novel The Left Hand of Darkness:

“The unknown,” said Faxe’s soft voice in the forest, “the unforetold, the unproven, that is what life is based on. Ignorance is the ground of thought. Unproof is the ground of action. If it were proven that there is no God there would be no religion. No Handdara, no Yomesh, no hearthgods, nothing. But also if it were proven that there is a God, there would be no religion. . . . Tell me, Genry, what is known? What is sure, predictable, inevitable — the one certain thing you know concerning your future, and mine?”

“That we shall die.”

“Yes. There’s really only one question that can be answered, Genry, and we already know the answer. . . . The only thing that makes life possible is permanent, intolerable uncertainty: not knowing what comes next.”

The phrase “permanent, intolerable uncertainty” brings to mind Knight’s famous remark in Risk, Uncertainty, and Profit about the “the sheer brute fact that the results of human activity cannot be anticipated.”

6 comments 4 August 2010

Historical Foundations of Entrepreneurship Research

| Peter Klein |

Look for this new collection later this Fall. Hans Landström and Franz Lohrke have put together an excellent set of essays on the intellectual origins and historical development of entrepreneurship research. Nicolai and I have a chapter on “Entrepreneurial Alertness.” Other topics include entrepreneurial orientation, the liability of newness, entrepreneurial groups, governance, social networks, social enterprise, culture, and psychology. Check it out!

Add comment 1 August 2010

University Websites

| Peter Klein |

xkcd, via Roderick:

9 comments 31 July 2010

Rothbard Quote of the Day: Theory and History

| Peter Klein |

I stumbled recently upon this passage from Murray Rothbard’s review of Unemployment in History by the distinguished historian John A. Garraty. Rothbard’s review, published in 1978, raised an issue that has come up in previous discussions of the Freakonomics phenomenon (1, 2, 3, 4): Can a little theory, without accompanying real-world knowledge, be a dangerous thing?

After chiding Garraty for writing about unemployment without knowing the basics of business-cycle theory, Rothbard adds:

My strictures against history which lacks any sound theoretical base are not meant to be an act of intellectual imperialism on behalf of economics and against history or other disciplines. Quite the contrary; the economist who ventures into the historical arena armed only with a few equations and mathematical razzle-dazzle has wreaked far more damage than the uninspired and slightly bumbling historian. For the economist, particularly the latter-day “cliometrician,” aims to flaunt his arrogant “scientific” pretensions of encompassing and explaining all of world history by means of a few mathematical symbols. The economist who knows no history understands far less than his opposite number in the historical profession; but his claims are far greater. Therefore, he is much wider off the mark.

3 comments 30 July 2010

Foss and Klein Critique of Kirzner

| Peter Klein |

The Spring 2010 issue of the Journal of Private Enterprise contains a Kirzner symposium, including a paper by Nicolai and me, “Alertness, Action, and the Antecedents of Entrepreneurship.” We critique Kirzner’s concept of the “pure entrepreneur,” arguing that alertness is a historically contingent attribute of real-world business people — what Mises calls “promoters” — but not essential to the entrepreneurial function itself. We also suggest that Kirzner is inconsistent on the issue of antecedents, simultaneously holding that the entrepreneur-as-discoverer exists outside any particular institutional environment, and that certain public policies inhibit entrepreneurial discovery by blocking profit opportunities. Some of the material in the paper is familiar to readers of our other works, but our critique of the Kirznerian pure entrepreneur, in the context of ideal types, goes beyond previous arguments.

Oh, some of you may be more interested in the rest of the special issue, which leads with Dan Klein and Jason Briggeman’s broadside, “Israel Kirzner on Coordination and Discovery,” followed by a lengthy response from Kirzner himself. (Our paper is really an addendum.) Pete Boettke and Dan D’Amico, Steve Horwitz, Gene Callahan, Bob Murphy, and Martin Ricketts round out the Kirzner symposium.

2 comments 28 July 2010

The Wikileaks Data Dump

| Peter Klein |

I’ve been fascinated by the reaction to the Wikileaks release of 90,000+ classified documents related Afghanistan war. US and British (and Pakistani) authorities are predictably outraged, while critics of the war are encouraged that the disclosures could help turn the tide, as did the Pentagon Papers three decades prior. What interests me the most, however, is the massive size of the Wikileaks archive. As the Guardian’s Roy Greenslade remarked, this is “data journalism.” Wikileaks doesn’t analyze, synthesize, attempt to corroborate, seek alternative points of view, write up the inverted-pyramid lead, or do the other things respectable journalists are supposed to do; it just dumps the data and lets others sort it out.

Some find this approach distasteful. A Pakistani official said “these reports betray a lack of understanding of the complexities of the nations involved.” Well, sure. They’re raw data, nothing more. But isn’t sharing data, and not just analysis, a quintessential New Economy phenomenon? Don’t we have search and analysis tools, data-mining algorithms, page rankings, and other means to sift through the huge piles of stuff that constitute the long tail? Shouldn’t expert commentary and analysis be replicable? Many journals now mandate data-sharing. E.g.: “It is the policy of the American Economic Review to publish papers only if the data used in the analysis are clearly and precisely documented and are readily available to any researcher for purposes of replication. Authors of accepted papers that contain empirical work, simulations, or experimental work must provide to the Review, prior to publication, the data, programs, and other details of the computations sufficient to permit replication. These will be posted on the AER Web site.” Why should foreign-affairs reporting be different?

8 comments 27 July 2010

Overconfidence

| Peter Klein |

Busenitz and Barney (1997) famously argued that entrepreneurs (founders) are particularly susceptible to overconfidence and representativeness biases. Compared to professional managers, entrepreneurs systematically overestimate the probability that a new venture will succeed and tend to draw unwarranted generalizations about the future from small samples. Overconfidence is now one of the major themes in the contemporary entrepreneurship literature (Bernardo and Welch, 2001; Forbes, 2005; Koellinger, Minniti, and Schade, 2007).

A new NBER paper by Itzhak Ben-David, John Graham, and Campbell Harvey finds evidence for a particular kind of overconfidence, “miscalibration,” among corporate executives. Miscalibration occurs when the agent’s forecast probability distribution is too narrow, meaning that the likelihood of extremely positive or negative events is unrealistically discounted. The idea is that agents with miscalibrated expectations are overconfident, not in the success of their activities (what the authors label “optimism”), but in their ability to predict the success of their activities. Survey evidence from a sample of CFOs reveals a number of interesting regularities about the relationship between miscalibration and past financial performance, corporate investment, and other observables. Here’s the abstract:

Miscalibration is a form of overconfidence examined in both psychology and economics. Although it is often analyzed in lab experiments, there is scant evidence about the effects of miscalibration in practice. We test whether top corporate executives are miscalibrated, and study the determinants of their miscalibration. We study a unique panel of over 11,600 probability distributions provided by top financial executives and spanning nearly a decade of stock market expectations. Our results show that financial executives are severely miscalibrated: realized market returns are within the executives’ 80% confidence intervals only 33% of the time. We show that miscalibration improves following poor market performance periods because forecasters extrapolate past returns when forming their lower forecast bound (“worst case scenario”), while they do not update the upper bound (“best case scenario”) as much. Finally, we link stock market miscalibration to miscalibration about own-firm project forecasts and increased corporate investment.

I’m not aware of any entrepreneurship studies that distinguish miscalibration from optimism, in the sense those terms are used here. Am I missing something?

4 comments 26 July 2010

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