The second review article in the latest issue of AMR by Venkataraman, Sarasvathy, Dew, and Forster (VSDF) is more ambitious than the first by Shane, discussed in Part 1. In fact one might describe the ambition motivating the article as grandiose. VSDF “seek to recast entrepreneurship as a science of the artificial” an entirely new way of looking at entrepreneurship in the interest of uncovering (what I take to be universal) principles that can serve as the basis of a new empirical and policy-useful science of entrepreneurship. [I see this article as a companion piece to the article by Sarasvathy and Venkataraman (SV) in ET&P January, 2011, in which this grandiose vision is even more apparent.]

The science of the artificial(supposedly a distinct category of science from natural or social science) is derived from the work of Herbert Simon (1996).

As a theory develops it splits into two streams: (1) “basic” research that continues to refine the causal explanations and (2) “applied” research that seeks to alter the variables of explanation. At that point the phenomenon of interest has become an artifact. …

A science of the artificial is interested in phenomena that can be designed [and controlled]. … Design lies is the choice of the boundary values; control lies in the means to change them. (24).

So a useful theory is itself an artifact something that can be used to understand and (importantly) control aspects of the (social) world. And, I suppose, the new science of entrepreneurship will eventually develop such artifacts. [At the end of the article they talk about “recasting opportunities as artifacts” – so I am not sure how this is all connected.]

My lack of expertise regarding the work of Herbert Simon (something which I am now more encouraged to remedy) prevents me from pronouncing with confidence on this part of the article. Suffice it to say that the meaning and contribution of this new “science of the artificial” is far from clear to me. I am left with a feeling that if it is indeed such an important and path-breaking meta-scientific turn, the authors should be able to explain it better. It should be more accessible and transparent. I am left highly skeptical, but I urge readers of this post to read the article and perhaps enlighten me and others.

VSDF claim new ground in three areas 1) understanding opportunities as made as well as found, 2) moving beyond new combinations to transformations 3) developing a new nexus around actions and interactions. In each of these I find their arguments in part unclear or unpersuasive or both, and where I see something of value I don’t see it as new.

They are strongest on the first category – seeing opportunities as made as well as found. They have a nice analysis of the proverbial $100 bill on the sidewalk waiting to be found. Is this an opportunity found (discovered) or made (created) or both? As they point out, in order for this to be an opportunity at all the bill has to exist, someone has to find it (objective conditions), the finder has to know it is $100 bill (subjective interpretation) and other people have to acknowledge its value and be willing to accept it (intersubjective considerations). For an opportunity to exist, certain actions and preconditions must be fulfilled – “actions and interactions that constitute the atomic units of ‘making’ a market opportunity” (26). They proceed to point out that this applies to all opportunities regardless of their degree of objectivity or “creativeness.” Indeed, I believe this is true, and I like the phrase “made or found” – but I don’t think their resolution is new. Isn’t this is line with the sort of thing that Peter Klein and others (among whom I would like to count myself) have been saying for some time? In a fundamental sense “made or found” is irrelevant. What matters is that entrepreneurs take actions that add value above and beyond what was expected or seen before.

This relates to the second category – moving beyond new combinations to transformations. Here they seem to be arguing (I say ‘seem’ because there is a fog of verbiage obscuring the bottom line argument) that successful entrepreneurship involves something transcendental. It is more than simply the reorganization of existing resources. Well, yeah! What about all the recent discussion of ‘emergence’ and similar ideas. Moreover, I think they go wrong in their treatment of the concept of “new combinations.” They see this idea as coming from the natural sciences, like chemistry. But I take it to come from Schumpeter, and later, and more clearly, from Lachmann, where it means something entirely different from the notion of physical transformation. VSDF may be falsely attributing a materialist fallacy to the notion of “new combination”.

At the heart of all this is the importance of an understanding of all resources as types of economic capital. [In the final  section of the article VSDF talk about artifacts “embodying knowledge” and come close to a capital-theoretic approach without quite getting there or mentioning capital]. What makes something capital is not its physical nature per se, but, rather, the value of the function it can perform. The conservation laws of physics ensure that matter-energy cannot be created or destroyed. The whole point of capital theory, as pointed out clearly by Böhm-Bawerk, is that while the entrepreneur can never create anything in the physical sense, he can add value to what exists. In fact he talks about the transformation of resources into more useful forms and combinations. Physical transformations may or may not be involved. An interesting issue is whether capital accumulation necessarily involves technological change, something about which Böhm-Bawerk was ambiguous and about which Hayek and Lachmann wrote a lot. This theme is evident in the huge recent literature on the relationship between production and design and related themes like modularity. VSDF talk about design as an element of entrepreneurial action without addressing the large volume of work on this – for example Baldwin and Clark’s Design Rules.

VSDF see the distinction between combination and transformation as adding empirical traction to the study of entrepreneurial events, and they give some examples of each. They characterize transformative actions as ones that entail the freedom to choose one’s ends and well as one’s course of action. I don’t know – is this new? Is this helpful? It leaves me a bit exasperated because I just don’t see it.

The third category – developing a new nexus around actions and interactions.  They talk about some interesting case studies and make some astute observations. What this adds up to, again, I am not sure. But I will leave that for now.

In revisiting the ontology and epistemology of “opportunity,” VSDF draw on the interesting work of the philosopher Donald Davidson. Every action involves the objective, the subjective and inter-subjective. A new tripod? By inter-subjective (no reference to Shutz) they mean not merely the total of all shared meanings and understandings that permit us to act, but, apparently, something more particular about the action itself, more idiosyncratic I guess. But, again, this is not new nor particularly well handled. So much has been written about the role of institutions in human action. How is this different and how does the difference matter. Ten years after Promise more promise?

As I said initially I think what this is all about is the question of entrepreneurship as an empirical science in the sense of the discovery of universal elements that can be useful for policy or entrepreneurial action itself – a very old theme. Austrian economists, in discussing the business cycle,  for example,  have had to face the perennial question of “what makes an entrepreneur?” – how are some individuals better able to perceive opportunities for value-creation? I don’t see how this question can be answered. It goes to the heart of the working of the market process – a complex-adaptive system that defies description in mechanical terms. Yet, in the end, it is that which VSDF (and probably many others) are seeking. See for example, Table 1 of SV in which they compare their  new entrepreneurial science with natural science, suggesting that the former has still to develop an understanding of the key elements of entrepreneurship so that they can be taught and learnt by anyone! I guess on this we will just have to agree to disagree, at least until time proves one of us wrong.

The January 2012 issue of the AMR (available here for subscribers or those with academic access) features two review articles assessing the progress of the “Promise” examined in the well-known article by Scott Shane and Sankaran Venkataraman (AMR 2000: The Promise of Entrepreneurship as a Field of Research) — one from each of the original co-authors. The first is an interesting, if somewhat pedestrian, article by Scott Shane. The second is a much more profound and ambitious contribution by Venkataraman together with Saras Sarasvathy, Nicholas Dew, and William Forster.

In the decade since that article there has, indeed, been a significant shift in the focus of research in entrepreneurship. Most notable, perhaps, is the focus on entrepreneurial “opportunities” — familiar to Austrian economists from the work of Israel Kirzner, but by now a standard element in the story. Each of the articles spends considerable time revisiting questions about the nature of entrepreneurial opportunities and provides its own resolutions. Here I will provide just a quick overview of this part of Shane’s article. (I intend to provide one for the second article soon).

In considering the “nexus of opportunities and individuals” offered originally in “Promise” as a reason to shift attention from the person to the function, Shane addresses the question of whether entrepreneurial opportunities should be considered “objective” or “subjective” — a question that has proliferated in this research stream, albeit with varying focus and terminology. The problem is, it seems to me, that the notion of “opportunity” is one that depends on the formation of a mental image by some individual or individuals. Opportunity implies plan — a plan of action to use, transform, combine, existing resources in a profitable way. Without the plan there is just the world. So how can “opportunity” be objective? This is related to the question: are opportunities “discovered” (Alvarez and Barney: Organizaҫões em Contexto, 2007) or are they created; or in the words of Venkataraman, et. al. are they made or found?

Shane thinks now that the whole debate was probably unnecessary and that opportunities must be objective. If not, then there is no way to talk about unsuccessful entrepreneurial action. If, as asserted by our esteemed host Professor Peter Klein (Strategic Entrepreneurship Journal, 2008), opportunities are “imagined” and “are inherently subjective — they do not exist until profits are realized” (180) — “then unsuccessful entrepreneurship is a logical impossibility. No entrepreneur can fail to generate an entrepreneurial profit” (Shane, 16). No profit, no opportunity really existed.

Shane resolves this by making a distinction between entrepreneurial opportunities and business ideas. The latter are subjective. Juxtaposing the two rescues the notion of failed entrepreneurship.

This strikes me as unacceptably ad hoc, to say the least. I think Shane does not really understand what “subjectivism” is all about and, as a result, his treatment is rather superficial. Nevertheless, he may be incidentally right in suggesting that aspects of the debate are unnecessary. I refer to the ontological status of “opportunity.”  Subjectivism in economics and related fields is an epistemological issue, not an ontological one. Accordingly, I would say as follows: Opportunities originate as perceptions — perceptions of what can be done to earn a profit. (Klein says “imagined” which I think is essentially the same as perceived.) Perceptions are both real and subjective. These perceptions may turn out to be right or wrong. The “discovery” of an opportunity is, strictly speaking, the formation of a perception, a plan involving real (objective) resources. So, action in pursuit of a perceived (discovered, created) opportunity is entrepreneurial action and may be successful or unsuccessful.

Alvarez and Barney — Academy of Management Annals, 2010 — blurring epistemology and ontology, want to make a distinction between exogenously and endogenously generated opportunities. I am not sure this is a viable or profitable distinction. To repeat, all opportunities are about perceptions that can be right or wrong.

TBC: Part 2.

Rich Bettis makes an important point in a forthcoming issue of SMJ. Bettis points out how two unfortunate practices interact with each other to create a very serious and fundamental problem for knowledge accumulation in (strategic) management.

One is the widespread practice of running numerous regressions on a given dataset and subsequently adapting (or in milder cases “tuning”) hypotheses or theory to fit the data. By itself this practice is quite unfortunate, since data patterns can and will occur by chance, and the more regression models one tries the more likely that one will “find” something. We obviously do not want such random patterns to influence either theory building or our catalog of empirical findings. However, this problem would be a great deal less serious if replication studies were common and we gladly published non-findings. Random correlations in the data would not survive replication tests, and would be eliminated fairly quickly.

As we all know, in management, replication studies cannot get published and are basically just not done. To make matters worse, we don’t publish non-findings either. This is the second unfortunate practice. Taken together these two practices may in the worst case indicate that much of what we think we know in management are just random data patterns, discovered through data mining, and protected by our lack of replication studies and refusal to publish non-findings. This is a sobering thought. As Bettis points out, we should all be very thankful that replication studies are more common in medical research than in management.

What is the solution? Well, a first step might be to launch the Journal of Managerial Replication Studies and give it the prestige it deserves. Either SMS or AOM should see the launch of such a journal as a crucial responsibility. I mean, we really don’t want to be quacks, do we?

HT: Helge Thorbjørnsen

Back from the SEA meetings in Washington DC, the venue for our annual SDAE conference and membership meeting. At the annual banquet we honored Leonard Liggio for his contribution to the teaching of Austrian economics. Dick Wagner gave the presidential address. Both received a standing ovation.

The panels were well attended and, from what I could tell, the quality very high. I presented my paper on Entrepreneurial Paradoxes (which has been around for a while). Young Bak Choi commented on it and presented an interesting paper on the role of entrepreneurship in economic development and development policy. David Harper and Anthony Endres presented a paper on another variation on the theme of heterogeneous capital and its structure. Perhaps most interesting was a paper by a strategic management Ph.D candidate at York University, Mohammad Keyhani (co-authored with Moren Lévesque), on “The Role of Entrepreneurship in the Market Process: A Simulation Study of The Equilibrating and Disequilibrating Effects of Opportunity Creation and Discovery.” Randy Holcombe commented. Interesting that the issue of equilibration is considered important enough to investigate with simulations. But it raises some important questions. My own current view, having spent a lifetime contemplating the issue, is that we are no nearer an answer than we ever were, and that perhaps the more important distinction is between entrepreneurial actions that add value and those that do not.

Next year’s meetings will be in New Orleans. The president-elect of the SDAE is Larry White. He will be putting together the panels. So if you have an interest in presenting a paper, discussing one, or chairing a panel, let him know (lwhite11@gmu.edu).

Three newly published papers of likely interest to O&Mers:

• Jeffrey L. Furman and Scott Stern, “Climbing atop the Shoulders of Giants: The Impact of Institutions on Cumulative Research,” American Economic Review 101, no. 5 (August 2011).

While cumulative knowledge production is central to growth, little empirical research investigates how institutions shape whether existing knowledge can be exploited to create new knowledge. This paper assesses the impact of a specific institution, a biological resource center, whose objective is to certify and disseminate knowledge. We disentangle the marginal impact of this institution on cumulative research from the impact of selection, in which the most important discoveries are endogenously linked to research-enhancing institutions. Exploiting exogenous shifts of biomaterials across institutional settings and employing a difference-in-differences approach, we find that effective institutions amplify the cumulative impact of individual scientific discoveries.

• Antti Kauhanen, “The Perils of Altering Incentive Plans: A Case Study,” Managerial and Decision Economics 32, no. 6 (September 2011).

This paper studies a retail chain that introduced a sales incentive plan that rewarded for exceeding a sales target and subsequently cut the incentive intensity in addition to increasing the target. Utilizing monthly panel data for 54 months for all 53 units of the chain the paper shows that the introduction of the sales incentive plan increased sales and profitability, whereas the changes in the plan lead to a marked drop in sales and profitability. Thus, modifying the incentive plan proved costly for the firm. The results are consistent with the gift-exchange model of labor contracts.

• Oriana Bandiera, Iwan Barankay, and Imran Rasul, “Field Experiments with Firms,” Journal of Economic Perspectives 25, no. 3 (Summer 2011).

We discuss how the use of field experiments sheds light on long-standing research questions relating to firm behavior. We present insights from two classes of experiments—within and across firms—and draw common lessons from both sets. Field experiments within firms generally aim to shed light on the nature of agency problems. Along these lines, we discuss how field experiments have provided new insights on shirking behavior and the provision of monetary and nonmonetary incentives. Field experiments across firms generally aim to uncover firms’ binding constraints by exogenously varying the availability of key inputs such as labor, physical capital, and managerial capital. We conclude by discussing some of the practical issues researchers face when designing experiments and by highlighting areas for further research.

A reviewer of a recent book proposal by Teppo Felin and me (which was accepted, BTW; details later) had the effrontery to note that “Felin and Foss get considerable pushback when they take a strong stand on methodology.” Of course, this reviewer got it all wrong. To wit:

• Teppo and I recently published “The endogenous origins of experience, routines and organizational capabilities: The poverty of stimulus” in the Journal of Institutional Economics, accompanied by critical comments by Sidney Winter, Brian Pentland, Geoff Hodgson and Thorbjørn Knudsen. Here is our response to the comments of our critics. The response has been accepted for publication in the Journal of Institutional Economics.
• In a recent paper in Sociological Theory, influential sociologists  Ronald Jepperson and John W Meyer took issue with the rampant “micro-chauvinism” that, in their opionion, increasingly dominates social science, and called for multi-level explanation that admits a role for causation that (in some unexplained fashion) takes place at levels above that of individuals. In this brief note, Teppo and I (and Peter Abell of LSE) take issue with their arguments, and argue that they fundamentally misunderstand methodological individualism and its crucial role in understanding those phenomena that are “multi-level”, “complex” and “emergent.”

Thus, the macro chauvinists are the ones who are getting the pushback ;-)

If you don’t think this title is cool there is something very wrong with you. Here is the associated abstract:

Abstract: In the spirit of the many recent simple models of evolution inspired by statistical physics, we put forward a simple model of the evolution of such models. Like its objects of study, it is (one supposes) in principle testable and capable of making predictions, and gives qualitative insights into a hitherto mysterious process.

And this is the essence of the simple model⁽²⁾:

1. A physicist runs across or concocts from whole cloth a mathematical model which is simple, neat, and contains a great many variables of the same sort.
2. The physicists has heard of Darwin (1859), and may even have read Dawkins (1985) or some essays by Gould, but wouldn’t know Fisher (1958), Haldane (1932), and Wright (1986) from the Three Magi, and doesn’t dream that such a subject as mathematical evolutionary biology exists.
3. The physicist is aware that lots of other physicists are interested in annexing biology as a province of statistical physics.
4. The physicist interprets his multitude of variables as species or (if slightly more sophisticated) as genotypes, and proclaims that he has found “Darwin’s Equations” (cf. Bak et al. (1994)), or, more modestly, has made an important step towards eventually finding those equations.
5. His paper is submitted for review to other physicists, who are just as ignorant of biology as he, but see that it’s about equivalent to the other papers on evolution by physicists. They publish it.
6. The paper is read by other physicists, because at least it’s not another derivation of specific heats on some convoluted lattice under a Hamiltonian named for some Central European worthy now otherwise totally forgotten. Said physicists think this is cutting-edge evolutionary theory.
7. Some of those physicists will know or discover simple, neat models with lots of variables of the same type.

(Shalizi and Tozier, 1999, p. 2)

What could substitute for physics and evolution here if we wanted to make a social science analogy? I think game theory could play the role of physics in many cases. What else?

Good papers often seem like they are long overdue. One can’t help but wonder why they weren’t written a long time ago since the questions they raise are of such obvious interest and importance. In that sense I think this paper qualifies as overdue:

Abstract: How economic crises impact the boundaries of firms has been offered virtually no attention in the literature on the theory of the firm. I review the best-known theories of the firm and identify the variables that matter for the explanation of firm boundaries. I then examine how an economic crisis may impact these variables and change efficient firm boundaries. The various theories of the firm have difficulties explaining how firms efficiently adapt their boundaries to such prominent characteristics of economic crisis as declining demand and increased costs of external finance. However, all these theories stress uncertainty as an antecedent of firm organization, and as uncertainty is also an important characteristic of an economic crisis I examine how uncertainty is allowed to play out in the various theories in order to identify what predictions we can derive from the theory regarding changes in efficient firm boundaries as consequence of changes in uncertainty. The analysis suggests that we need to be more precise in describing the nature of the uncertainty that is assumed in the various theories. Moreover, allowing for changes in levels of uncertainty requires that we take the processes of boundary changes into account in the theory of firm boundaries.

Foss, Kirsten. 2010. How do economic crises impact firm boundaries? European Management Review7: 217–27.

“Selective intervention” and the more narrow notion of the “impossibility of selective intervention” are among the more elusive notions in the theory of the firm. We have blogged on them a number of times (the most explicit treatment is here). Coined by Oliver Williamson, selective intervention simply means intervention to produce net gains. Thus defined, selective intervention is, of course, not “impossible.” The” impossibility” refers to the conjecture that firms cannot just be grown continuously by selective intervention; at some point various commitment and enforcement problems associated with managerial intervention kicks in, resulting in zero net gains. However, demonstrating this is a “puzzle.”

A new paper, “Solving the Selective Intervention ‘Puzzle’,”  by noted French economist, Jacques Cremer, usefully places the problem in context, provides a nice overview of the extant literature, and argues that the problem has essentially been solved:

I have shown that the common thread to all the solutions is the fact that the principal stays in the game” after the contract is signed, and cannot commit himself to a policy which would make the world similar to the world in which there would be no vertical integration. On this basis, solutions that stress incompleteness of contracts, the change in the allocation of authority, the change in the amount of information available to the principal, all provide solutions that are theoretically consistent, and, furthermore, often not incompatible with each other. Determining which solution provides a better guide to applied analysis requires an examination of other features of the model.

In case you wonder the author of this paper — Stefano Allesina — works in Chicago:

Abstract: Nepotistic practices are detrimental for academia. Here I show how disciplines with a high likelihood of nepotism can be detected using standard statistical techniques based on shared last names among professors. As an example, I analyze the set of all 61,340 Italian academics. I find that nepotism is prominent in Italy, with particular disciplinary sectors being detected as especially problematic. Out of 28 disciplines, 9 – accounting for more than half of Italian professors – display a significant paucity of last names. Moreover, in most disciplines a clear north-south trend emerges, with likelihood of nepotism increasing with latitude. Even accounting for the geographic clustering of last names, I find that for many disciplines the probability of name-sharing is boosted when professors work in the same institution or sub-discipline. Using these techniques policy makers can target cuts and funding in order to promote fair practices.

Allesina, S. (2011). “Measuring Nepotism through Shared Last Names: The Case of Italian Academia.” PLoS ONE 6(8): e21160. doi:10.1371/journal.pone.0021160