Posts filed under ‘Recommended Reading’
New ebooks — Knowledge on the Cheap
| Peter Klein |
Google’s ebookstore now contains deeply discounted versions of several Edward Elgar books (which are usually priced for library use), including my Elgar Companion to Transaction Cost Economics ($48) and the Foss-Klein product Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization ($31.20). Nicolai’s greatest hits collection Knowledge, Economic Organization, and Property Rights is also published by Elgar but not yet available in ebook form. However, Google has cheap ebooks of Nicolai’s Strategy, Economic Organization, and the Knowledge Economy ($40) and Dick’s Firms, Markets, and Economic Change ($60), among other items of interest. And my Capitalist and the Entrepreneur remains available at the best price of all!
Finance and the Nature of the Firm
| Peter Klein |
Raghu Rajan’s AFA presidential address is now online as an NBER working paper:
The nature of the firm and its financing are closely interlinked. To produce significant net present value, an entrepreneur has to transform her enterprise into one that is differentiated from the ordinary. To achieve the control that will allow her to execute this strategy, she needs to have substantial ownership, and thus financing. But it is hard to raise finance against differentiated assets. So an entrepreneur has to commit to undertake a second transformation, standardization, that will make the human capital in the firm, including her own, replaceable, so that outside financiers obtain rights over going-concern surplus. I argue that the availability of a vibrant stock market helps the entrepreneur commit to these two transformations in a way that a debt market would not. This helps explain why the nature of firms and the extent of innovation differ so much in different financing environments.
Keynes-Hayek again!
| Peter Lewin |
I am not sure if this book has already been review on this blog space — I haven’t seen it. Similarly, I haven’t seen any other reviews, so these are my fresh impressions. The book is Keynes Hayek: The Clash that Defined Modern Economics by Nicholas Wapshott (W. W. Norton: 2011).
With the growing interest in Hayek as the antidote to the resuscitated Keynes, this book is timely providing for the reader lively insight into the life and times of these two key individuals. In terms of the details of the lives of Keynes and Hayek the book appears to be well researched. I learned a few things from it — interesting details about events and personalities. On Keynes particularly one gains a sense of the power of the man and how a whole generation of economists at the LSE and Cambridge were won over by his revolutionary vision. Though Wapshott provides a lot of material on Hayek, I could not fight the impression that it was Keynes who captured his interest (and admiration?) most. Hayek is presented in all of his aspects, including the not so wholesome ones. The picture of Keynes seems less forthcoming, or differently spun to cast a more favorable light. But maybe that is just me and my biases.
When it comes to the economics, however, the case is much clearer. Wapshott is very weak on this part of the story, especially when it comes to Austrian economics. He is able to do a fairly good job of Keynesianism, again positively spun — including the story of multiplier. It adds to the plausibility of Keynes’s appeal. But when it comes to explaining the essence of Hayek’s opposition, his treatment is very inadequate at best and complete wrong at worst. Like Keynes himself, Wapshott does not understand capital theory and the time structure of production. So he gets the story of the business cycle wrong. He simply parrots in a formulaic way the ingredients of Hayek’s case. His treatment of Mises is almost a caricature. He does not understand the nature of the Austrian turn from classical economics and has some misleading things to say about the concept of “value.” Likewise he does not understand the differences and similarities between the economics of the Austrians and the Monetarists and invents bogus differences. I found this part of the book frustrating.
So, the question in my mind is: do I recommend this book to my macro/money students? I think I probably will, with suitable warnings, just because it is such a vital and interesting story.
A Formal Model of Experimentation in Firms
| Peter Klein |
Following Knight, Mises, and Lachmann, we have often characterized entrepreneurship on this blog (and the McQuinn blog, which should be on your reading list) as experimentation with combinations of heterogeneous capital resources. Experimentation itself is relatively understudied in the entrepreneurship and strategy literature — we have general theories about the nature and effects of experimentation, indirect empirical evidence on competition as experimentation (e.g., my relatedness stuff with Lasse), case-study evidence about experimentation and innovation within firms, but don’t fully understand the exact mechanisms.
Here’s a new paper that will not be to everyone’s taste, but tries to get at these issues in a formal model of interaction between experimenting firms:
The Role of Information in Competitive Experimentation
Ufuk Akcigit, Qingmin Liu
NBER Working Paper No. 17602, November 2011Technological progress is typically a result of trial-and-error research by competing firms. While some research paths lead to the innovation sought, others result in dead ends. Because firms benefit from their competitors working in the wrong direction, they do not reveal their dead-end findings. Time and resources are wasted on projects that other firms have already found to be dead ends. Consequently, technological progress is slowed down, and the society benefits from innovations with delay, if ever. To study this prevalent problem, we build a tractable two-arm bandit model with two competing firms. The risky arm could potentially lead to a dead end and the safe arm introduces further competition to make firms keep their dead-end findings private. We characterize the equilibrium in this decentralized environment and show that the equilibrium necessarily entails significant efficiency losses due to wasteful dead-end replication and a flight to safety — an early abandonment of the risky project. Finally, we design a dynamic mechanism where firms are incentivized to disclose their actions and share their private information in a timely manner. This mechanism restores efficiency and suggests a direction for welfare improvement.
“Poor Economics” Wins FT Best Book Award
| Peter Klein |
The Financial Times has named Abhijit Banerjee and Esther Duflo’s Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty the best business book of 2011. Here’s the book’s webpage. Here are previous O&M posts on the Banerjee-Duflo approach, which is obviously gaining momentum.
Papers of Interest from the NSF’s Call for Long-Term Research Agendas
| Peter Klein |
The NSF recently commissioned a set of papers on long-term research agendas in economics:
This is a compendium of fifty-four papers written by distinguished economists in response to an invitation by the National Science Foundation’s Directorate for the Social, Behavioral and Economic Sciences (NSF/SBE) to economists and relevant research communities in August 2010 to write white papers that describe grand challenge questions in their sciences that transcend near-term funding cycles and are “likely to drive next generation research in the social, behavioral, and economic sciences.” These papers offer a number of exciting and at times provocative ideas about future research agendas in economics. The papers could also generate compelling ideas for infrastructure projects, new methodologies and important research topics.
Here are a few of particular interest for O&Mers:
Challenges for Social Sciences: Institutions and Economic Development
Daron AcemogluMaking the Case for Contract Theory
Oliver HartResearch Opportunities in Social and Economic Networks
Matthew O. JacksonThe Economics of Digitization: An Agenda for NSF
Shane M. Greenstein, Josh Lerner, and Scott SternThe Productivity Grand Challenge: Why Do Organizations Differ so Much?
John Van Reenen
You can find the whole set at SSRN.
What Do Boards Really Do?
| Peter Klein |
Coase is fond of telling this story about the economist and the horse:
Economics, over the years, has become more and more abstract and divorced from events in the real world. Economists, by and large, do not study the workings of the actual economic system. They theorize about it. As Ely Devons, an English economist, once said at a meeting, “If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, ‘What would I do if I were a horse?’” And they would soon discover that they would maximize their utilities.
Coase, as O&M readers know, prefers direct, hands-on observation to abstract theorizing. As a Misesian [serious, hubba hubba], of course, I can’t endorse this view as a general prescription, though I recognize its value for empirical work. Sometimes it’s best to look at real examples, or to ask real practitioners. Kaplan and Strömberg read through real-world venture-capital contracts to see how control rights were allocated. Genesove and Mullin used the minutes of trade-association meetings, not modeling, to figure out how members of the US sugar cartel maintained compliance.
Here’s another interesting example: “What Do Boards Really Do?” by Miriam Schwartz-Ziv and Michael Weisbach.
We analyze a unique database from a sample of real-world boardrooms – minutes of board meetings and board-committee meetings of eleven business companies for which the Israeli government holds a substantial equity interest. We use these data to evaluate the underlying assumptions and predictions of models of boards of directors. These models generally fall into two categories: “managerial models” assume boards play a direct role in managing the firm, and “supervisory models” assume that boards’ monitor top management but do not make business decisions themselves. Consistent with the supervisory models, our minutes-based data suggest that boards spend most of their time monitoring management: 67% of the issues they discussed were of a supervisory nature, they were presented with only a single option in 99% of the issues discussed, and they disagreed with the CEO only 3.3% of the time. In addition, managerial models describe boards at times as well: Boards requested to receive further information or an update for 8% of the issues discussed, and they took an initiative with respect to 8.1% of them. In 63% of the meetings, boards took at least one of these actions or did not vote in line with the CEO.
I think Ronald would approve.
strategyprofs.net
| Peter Klein |
At O&M we’ve long prided ourselves on being one of the top academic group strategy blogs. We believed this with great confidence, mainly because we were the only academic group strategy blog. Other blogs deal with strategic issues — Dick Rumelt’s blog, Knowledge Problem, Managerial Econ, Digitopoly, and of course the Good Twin, among others — but the Herfindahl index for academic group strategy blogs has been pretty close to 1.0.
We’re happy now to introduce a new entrant, strategyprofs.net, brainchild of Freek Vermeulen, Karim Lakhani, Mike Ryall, Russ Coff, Steve Postrel, and Teppo Felin. The first posts are already up, and the discussion is extremely interesting. Welcome to the blogosphere, Strategy Profs!
Now Ready for Pre-Order!
| Peter Klein |
This is a placeholder page without much detail, but you can pre-order today! The best news is the price: just £55.00 for the hardback and a mere £19.99 for the paperback — less than a family outing to the cinema, and far more rewarding!
Digitopoly
| Peter Klein |
A new group blog by Erik Brynjolfsson, Joshua Gans, and Shane Greenstein. Should be interesting and informative. The authors
noticed that there were many blogs devoted to digital developments and consumer products but the selection focussing on economic and business aspects of the digital world was very limited. Digitopoly’s mission is to provide an economic and strategic management perspective on digital opportunities, trends, limits, trade-offs and platforms; expanding commentary in this important space.
The blog’s name — Digitopoly — reflects our broad interests in the impact of digital technology on competition. While, in some cases, our concern is the preservation of competition in the face of pressures toward monopoly, in others we see opportunities for greater competition and welfare benefits.
Our logo is deliberately iconic. The heavy set line in the graph could represent Moore’s Law (for processing power as time progresses) or Metcalfe’s Law (for the value of networks as more join). It overtakes the simple linear trend represented by thin, broken line. This reflects the idea that linear ways of thinking rarely serve us well in the digital economy.
Of Categories and Killers
| Peter Lewin |
A recent issue of the Review of Austrian Economics (edited by Virgil Storr) honors the contributions of Don Lavoie who died at a very young age in 2001. It contains contributions by Storr, Boettke and Prychitko, Klamer, Chamlee-Wright, Horwitz, Lewis, and High. In addition, published for the first time is a seminal article by Lavoie on the interpretive turn in economics.
Lavoie was an audacious pioneer. Like many such pioneers he was ahead of his time. The newly re-emergent Austrian school was not ready for him — did not understand what he was about. Most of them either ignored Lavoie’s products (and those of his collaborators at the Program on Social and Organizational Learning — a center he co-founded with Jack High), or else marginalized him. To the latter his preoccupation with late Continental Philosophy and hermeneutics was seen as a real threat to doing social science. His young, loyal and creative collaborators were caught in the crossfire. After his death the furor simply died down.
With the publication of this issue it is possible to gain a fresh perspective (something Lavoie’s hermeneutics might have predicted). For me it is a case of “distance lends enchantment to the view.” I confess I was in the group who neglected his work for lack of sufficient understanding of its significance.
For management and industrial organization types Lavoie’s work is highly relevant. There is a growing appreciation of the connection between language, communication, meaning, action, purpose and organization — about which Lavoie’s approach has much to say, not to mention his prescient contributions on culture, modularity, and computer science. For those wishing to benefit from his work, unless you have an interest in the epistemology of Continental philosophers, I would suggest concentrating on the contributions that have to do with information, knowledge, computing, and organization. (more…)
New Book on American Institutionalism
| Peter Klein |
It’s by Malcolm Rutherford, titled The Institutionalist Movement in American Economics, 1918-1947: Science and Social Control (Cambridge University Press, 2011). Rutherford reinterpretes the American (or “Old”) Institutional Economics as a much broader and deeper movement than simply the ideas of Veblen, Commons, and Mitchell. Reviewers Robert Van Horn and Richard McIntyre say that “institutional economics should be understood as a ‘movement’ that shared core ideas and beliefs and as a network of people with a self-conscious unity, and Rutherford marvelously shows how the self-conscious unity of this network shaped institutionalist economics and American economics more generally in the first half of the twentieth century.” The reviewers also praise Rutherford for debunking three important “myths” about the Old Institutionalists:
First, he challenges the notion that institutional economics was only a critique of neoclassical economics and that institutional economics disappeared because it did not make any substantial contributions to economics. Second, Rutherford successfully assails the idea that institutional economics was just a set of facts and bereft of theory. Third, Rutherford dispels the notion that institutional economics was Veblenian; he shows that Veblen was an intellectual inspiration to the movement but not central to the networking process.
My previous forays into the writings of the Old Institutionalists have not yielded much fruit, but I will look at Rutherford’s book and try to keep an open mind.
The Institutional Revolution
| Peter Klein |
I’m very excited about Doug Allen’s forthcoming book The Institutional Revolution (University of Chicago Press). Trained by Yoram Barzel (and hence part of the Tree of Zvi), Doug is a leading contemporary scholar on property rights, transaction costs, contracting, and economic history. His work on agricultural contracting with Dean Lueck, including their 2002 book The Nature of the Farm, is a classic contribution to the economics literature on economic organization. He also has a very good introductory textbook. More information is at Doug’s informative (and amusing) website.
Here’s the cover blurb for the new book:
Few events in the history of humanity rival the Industrial Revolution. Following its onset in eighteenth-century Britain, sweeping changes in agriculture, manufacturing, transportation, and technology began to gain unstoppable momentum throughout Europe, North America, and eventually much of the world—with profound effects on socioeconomic and cultural conditions.
In The Institutional Revolution, Douglas W. Allen offers a thought-provoking account of another, quieter revolution that took place at the end of the eighteenth century and allowed for the full exploitation of the many new technological innovations. Fundamental to this shift were dramatic changes in institutions, or the rules that govern society, which reflected significant improvements in the ability to measure performance—whether of government officials, laborers, or naval officers—thereby reducing the role of nature and the hazards of variance in daily affairs. Along the way, Allen provides readers with a fascinating explanation of the critical roles played by seemingly bizarre institutions, from dueling to the purchase of one’s rank in the British Army.
Engagingly written, The Institutional Revolution traces the dramatic shift from premodern institutions based on patronage, purchase, and personal ties toward modern institutions based on standardization, merit, and wage labor—a shift which was crucial to the explosive economic growth of the Industrial Revolution.
Bonus: Here’s the syllabus from Doug’s course on the economics of property rights.
More on Selective Intervention
| Nicolai Foss |
“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.
C. K. Prahalad Interview
| Nicolai Foss |
The late über-influential management thinker C K Prahalad would have been 70 this August. booz&co’s strategy+business magazine features an interesting interview with CK, “The Life’s Work of a Thought Leader.” It may surprise some that Prahalad was trained as a physicist, and in the beginning of his career worked as an industrial engineer. And for someone, like myself, who has criticized the absence of microfoundations for notions such as “core competence” (e.g., here), it certainly came as a surprise to find Prahalad stating that
If I had to characterize my deepest belief, I would say it’s the centrality of the individual…. Institutions are not central. Institutions are different ways of combining skills and capabilities of the moment. That, of course, is the opposite of the traditional way of thinking, starting from Max Weber and Frederick Taylor in the early 20th century. They posited that institutions were central to society, not individuals. I believe the contrary is true.
Another notable feature in the interview is Prahalad’s view of scientific progress in strategic management which does not come from the kind of cross-sectional studies that take up 93 % of the pages of the Strategic Management Journal, but, he says, from in-depth small-N research:
If you look historically at the strategy literature, starting with Alfred D. Chandler Jr.’s Strategy and Structure: Chapters in the History of the Industrial Enterprise [MIT Press, 1962], the most powerful ideas did not come out of multiple examples. They came out of single-industry studies and single case studies. Big impactful ideas are conceptual breakthroughs, not descriptions of common patterns. You can’t define the “next practice” with lots of examples. Because, by definition, it is not yet happening.
Leijonhufvud on the Current Crisis
| Nicolai Foss |
We have often blogged on the work of Axel Leijonhufvud on O&M (here). Here is a 2008 talk which was given in Denmark (and which, unfortunately, somehow missed my attention at that time) on “Keynes and the Crisis.” The talk contains many characteristic Leijonhufvudian themes (smashing of Ricardian equivalence, representative agent modeling, and the foundations of financial theory), little on Keynes (luckily!), and much critique of monetarism, in particular the choice of the CPI as the unique target of central bank policies and the notion of the independence of central banks from the political system. Here is Leijonhufvud’s overall diagnosis of the root causes of the current crisis:
The process leading up to today’s American financial crisis had the dollar exchange rate supported by foreign central banks exporting capital to the United States. This capital inflow was not even to be discouraged by a Federal Reserve policy of extremely low interest rates. The price elasticity of exports from the countries that prevented the appreciation of their own currencies in this way kept US consumer goods prices from rising. Operating an interest-targeting regime keying on the CPI, the Fed was lured into keeping rates far too low far too long. The result was inflation of asset prices combined with a general deterioration of credit quality (Leijonhufvud 2007a). This, of course, does not make a Keynesian story. It is rather a variation on the Austrian overinvestment theme.
Two New Papers …
| Nicolai Foss |
… by Yours Truly. The Academy of Management Review just published my paper with Siegwart Lindenberg, “Managing Joint Production Motivation: The Role of Goal Framing and Governance Mechanisms,” and Organization Science just published “Linking Customer Interaction and Innovation: The Mediating Role of New Organizational Practices,” by me, Keld Laursen and Torben Pedersen. Here are the abstracts: (more…)
2011 Oliver E. Williamson Prize
| Peter Klein |
The Journal of Law, Economics, and Organization, co-founded by Oliver Williamson in 1985, has created a new best article prize in his name. The first winner is “Juvenile Delinquency and Conformism” by Eleonora Patacchini and Yves Zenou. Details about the award and this year’s winner and runners-up are available at Oxford’s JLEO site. Congrats!
Gans on Google+
| Nicolai Foss |
I have been using Google + for about a week now. I am unimpressed, and I think I will remain unimpressed. Quite simply, it doesn’t do a lot for me. On his HBR blog, the always thoughtful Joshua Gans points out that because Google+ is a network technology it must build sufficient installed base. However, G+ may face difficulties doing just that, because it offers users rather little extra problem-solving value compared to the existing alternatives:
Facebook provides “hyper-local news,” allowing people to broadcast news, opinions, and interests to their social circle in a way that feels authentic. Twitter, because it is essentially public and open, delivers news fast and also permits users to follow famous or interesting individuals.
Google+ does both of these things in one. But because the problems are already solved separately, then Google+ only solves the increment: you can view private and public content on the one “page.” To be sure, some harmonization across content platforms can be valuable to consumers. But Google+ is only adding the increment and not the whole lot. So while it might be argued that if Google+ happened five years ago, its technical implementation might have made it a clear winner, that is not the world we find ourselves in now.
Productivity: The Mother of (Nearly) All Good Things
| Lasse Lien |
The mother of all good (material) things is productivity growth. Competitive advantage, firm level growth and survival, profits, economy-wide economic growth, job creation, and destruction, etc. are all outcomes that depend critically on relative productivity and productivity changes. So if you understood productivity really well, you would understand a lot about (material) outcomes across firms, industries and countries, too.
Also, if one wants to advance “the human condition” it is presumably better to advance the understanding of productivity than profits, since profits are contaminated by market power. Profit maximization is good because – or to the degree – it tends to raise productivity. So while profit maximization and competition are means, productivity growth is the goal.
Though few would argue against the fundamental importance of productivity, productivity is nevertheless quite rarely used as a dependent (or independent) variable in strategy, organizational economics, organization theory, leadership, innovation, etc. The reason is probably that the considerable problems associated with measuring productivity has scared us into focusing on more easily observable variables, such as accounting profits, Tobin’s Q, EVA, sales growth, survival, etc.
However, there is a large literature in economics that attacks productivity head on, and tries to elucidate its determinants. Though there is an unfortunate bias towards manufacturing in this literature (due to measurement issues), the findings from this research stream still makes extremely interesting reading (IMHO). Here is a recent review of the key findings from the past decade:
Economists have shown that large and persistent differences in productivity levels across businesses are ubiquitous. This finding has shaped research agendas in a number of fields, including (but not limited to) macroeconomics, industrial organization, labor, and trade. This paper surveys and evaluates recent empirical work addressing the question of why businesses differ in their measured productivity levels. The causes are manifold, and differ depending on the particular setting. They include elements sourced in production practices — and therefore over which producers have some direct control, at least in theory — as well as from producers’ external operating environments. After evaluating the current state of knowledge, I lay out what I see are the major questions that research in the area should address going forward. (JEL D24, G31, L11, M10, O30, O47)
Syverson, Chad. 2011. “What Determines Productivity?” Journal of Economic Literature 49(2): 326–65.
New Issue of Business History Review
| Peter Klein |
The March 2011 issue of Business History Review, just now online, contains several excellent papers, including “The Origin and Development of Markets: A Business History Perspective” by Mark Casson and John Lee, “Economics, History, and Causation” by Randall Morck and Bernard Yeung, “Globalization, Development, and History in the Work of Edith Penrose” by Christos Pitelis, and “Economic Theory and the Rise of Big Business in America, 1870–1910″ by Jack High.
Morck and Yeung take the (perhaps surprising, almost Misesian) position that “[i]nstrumental variables can lose value with repeated use because of an econometric tragedy of the commons: each successful use of an instrument creates an additional latent variable problem for all other uses of that instrument,” and that “[e]conomists should therefore”consider historians’ approach to inferring causality from detailed context, the plausibility of alternative narratives, external consistency, and recognition that free will makes human decisions intrinsically exogenous.”
High notes that “by 1910, the entrepreneur was an important figure in American economics. He appeared regularly in textbooks written by American economists and his influence in the economy, especially in large firms, was generally recognized.” Entrepreneurship at that time was not about startups, but coordination more generally: J. R. Commons called the entrepreneur “the speculating, progressive, organizing, inventive, economizing agent of industry.”
2011 Spengler Prize
| Peter Klein |
Congratulations to Robert Leonard for winning the 2011 Joseph J. Spengler Prize for the best book in the history of economics for Von Neumann, Morgenstern and the Creation of Game Theory: From Chess to Social Science 1900-1960 (Cambridge University Press, 2010). I’ve only skimmed the book but it looks exceptionally well done. Required reading for O&Mers interested in intellectual history, methodology, Austrian economics, strategy, and/or game theory. . . . (That’s pretty much all of you.)
What Do Resource- and Capability-Based Theories Propose?
| Peter Klein |
Check out Michael Leiblein’s Guest Editorial in the new Journal of Management:
What Do Resource- and Capability-Based Theories Propose?
Michael J. Leiblein
The Ohio State UniversityThe purpose of this editorial is to review the basic definitions, assumptions, and propositions offered by the resource-based, strategic factor market, and dynamic capability literature streams. Considering the underlying definitions and assumptions associated with these approaches leads directly to a set of refutable propositions that highlight the distinct insights offered by each of these literatures. It is hoped that accentuating these distinctions may stimulate dialogue regarding the underlying causal mechanisms associated with these approaches and foster future empirical work testing these related perspectives.
A very useful reference, both for specialists and those new to the RBV and capabilities approaches. Highly recommended! (And not just because the author’s name ends in “-lein.”)
Against (Karl) Polanyi
| Peter Klein |
I mentioned Karl Polanyi (not to be confused with Michael) in yesterday’s post on anonymity. Gavin Kennedy points us today to Mark Pennington, who writes that Polanyi’s claims “are either historically inaccurate or based on a crude misrepresentation of classical liberalism.” Specifically,
classical liberalism has never claimed that narrowly selfish behaviour is all that is required to sustain the social fabric. Of course markets are always “embedded” in a broader nexus of institutions, but the question we need to ask is precisely what sort of institutional and social norms are required to facilitate social cooperation on the widest possible scale. Polanyi and his followers prefer to rely on hackneyed accounts of the Wealth of Nations rather than recognise that Smith’s support for markets and “self interest” constituted part of a broader ethical system set out in the Theory of Moral Sentiments. Specifically, Smith was concerned to elucidate the balance between the social norms appropriate to contexts of commercial exchange and those appropriate in more intimate environments. From Smith’s point of view feelings of sympathy which include love, friendship and reciprocity are reserved for people of whom we have detailed personal knowledge. The morals expected in commercial relations which are often between relative strangers, however, tend to be more impersonal, focussed on principles such as the observance of contracts and are oriented more towards the “self interest” of the parties involved rather than the direct benefit of “others.” The great mistake is to suppose that the type of ethos that pervades family life or that in tight knit communities can operate on a much wider scale. The development of inclusive markets requires a more impersonal ethos which enables people to engage with diverse actors who may not share the same moral outlook. If people deal only with those who share the same moral outlook or trade only with “locals” rather than engage in transactions with “foreigners” then the sphere of potentially cooperative relationships will be reduced. The alternative to self-interest is not solidarity, but suspicion if not outright conflict.
Do Senior Managers Make Better Decisions Than Students?
| Nicolai Foss |
Even management students may occasionally suffer from confidence and self-esteem problems. I have had many students confide that they were more than a little scared at the prospect of landing a real job where their decision-making skills would be compared to older, wiser, smarter, etc. colleagues. Rather than directing them to this site, in the future I am going to give such students a copy of Gary E. Bolton, Axel Ockenfels and Ulrich Thonemann’s “Who Is the Best at Making Decisions? Managers or Students?” They set up a simple experiment based on a simple profit maximizing problem, and find that practitioner performance isn’t as good as graduate business students’. Moreover, the learning curve of the latter is steeper than that of practicioners. (more…)
Incomplete Contracts and the Theory of the Firm
| Peter Klein |
A very useful survey article from the Spring 2011 Journal of Economic Perspectives: “Incomplete Contracts and the Theory of the Firm: What Have We Learned over the Past 25 Years?” by Philippe Aghion and Richard Holden. From the introduction:
In the first section of this paper, we spell out Grossman and Hart’s argument using a simple numerical example, then then we show how the incomplete contracts approach can be extended beyond the firms’ boundaries issue to analyze firms’ internal organization; firms’ financial decisions; the costs and benefits from privatization; and the organization of international trade between inter- and intrafirm trade. In the second section, we discuss several criticisms of the incomplete contracts/property rights methodology, especially what we call the “implementation criticism,” and then we briefly review some recent developments of the incomplete contracts approach.
I plan to use it in “Economics of Institutions and Organizations” this fall.
Update: Thanks to Stéphane Saussier for the pointer to the upcoming conference, Grossman and Hart at 25, June 24-26 in Brussels.
New Survey Paper on Firm Boundaries
| Peter Klein |
It’s “Theories of the Firm-Market Boundary” from our friends Todd Zenger, Teppo Felin, and Lyda Bigelow, and forthcoming in the Academy of Management Annals. Here’s the abstract:
A central role of the entrepreneur-manager is assembling a strategic bundle of complementary assets and activities, either existing or foreseen, which when combined create value for the firm. This process of creating value however requires managers to assess which activities should be handled by the market and which should be handled within hierarchy. Indeed, for more than forty years, economists, sociologists and organizational scholars have extensively examined the theory of the firm’s central question: what determines the boundaries of the firm? Many alternative theories have emerged and are frequently positioned as competing explanations, often with no shortage of critique for one another. In this paper, we review these theories and suggest that the core theories that have emerged to explain the boundary of the firm commonly address distinctly different directional forces on the firm boundary – forces that are tightly interrelated. We specifically address these divergent, directional forces – as they relate to organizational boundaries – by focusing on four central questions. First, what are the virtues of markets in organizing assets and activities? Second, what factors drive markets to fail? Third, what are the virtues of integration in organizing assets and activities? Fourth, what factors drive organizations to fail? We argue that a complete theory of the firm must address these four questions and we review the relevant literature regarding each of these questions and discuss extant debates and the associated implications for future research.
A nice synthesis that makes a number of important points. I can even forgive a few key omissions. :)
Inventors During the Industrial Revolution
| Peter Klein |
Following up an earlier post on apprenticeship: Ralf Meisenzahl and Joel Mokyr discuss the role of apprenticeship in the diffusion of innovation among skilled craftsmen during the British Industrial Revolution. “Using a sample of 759 of these mechanics and engineers, we study the incentives and institutions that facilitated the high rate of inventive activity during the Industrial Revolution. First, apprenticeship was the dominant form of skill formation. Formal education played only a minor role. Second, many skilled workmen relied on secrecy and first-mover advantages to reap the benefits of their innovations. Over 40 percent of the sample here never took out a patent. Third, skilled workmen in Britain often published their work and engaged in debates over contemporary technological and social questions. In short, they were affected by the Enlightenment culture.”
Who Benefits from Coups?
| Peter Klein |
Not surprisingly — private interests:
Coups, Corporations, and Classified Information
Arindrajit Dube, Ethan Kaplan, Suresh Naidu
NBER Working Paper No. 16952, April 2011We estimate the impact of coups and top-secret coup authorizations on asset prices of partially nationalized multinational companies that stood to benefit from US-backed coups. Stock returns of highly exposed firms reacted to coup authorizations classified as top-secret. The average cumulative abnormal return to a coup authorization was 9% over 4 days for a fully nationalized company, rising to more than 13% over sixteen days. Pre-coup authorizations accounted for a larger share of stock price increases than the actual coup events themselves.There is no effect in the case of the widely publicized, poorly executed Cuban operations, consistent with abnormal returns to coup authorizations reflecting credible private information. We also introduce two new intuitive and easy to implement nonparametric tests that do not rely on asymptotic justifications.
In what can only be a pure coincidence, the following item appeared just below the NBER paper in my RSS reader: “Halliburton Profit More Than Doubles.”
Confusing Definitions of Entrepreneurship
| Peter Klein |
Some of you have heard me complain before about the confusing ways “entrepreneur” and its cognates are used in the literature. Sometimes entrepreneurship refers to an outcome or phenomenon (startups, self-employment, high-growth firms), other times to a behavior or attribute (creativity, alertness, innovation, judgment, adaptation). I find the occupational, structural, and functional taxonomy useful, but other organizing schemes may be useful too. In any case, reading the entrepreneurship literature can be a frustrating experience.
I’m glad I’m not the only one who thinks so:
[T]he book’s diversity of approaches and styles is both a strength and also an inherent weakness. Some chapters offer comprehensive descriptions over long periods of time (e.g., Hudson, Hau, Wengenroth, Chan), while others focus on narrow aspects of entrepreneurship (e.g., Yonekura and Shimizu, Mokyr, Wolcott). The first kind appears to be written for a broad audience of noneconomic historians, whereas the second type tends to be drier and more technical. Some authors follow Baumol and distinguish between productive and redistributive entrepreneurship (e.g., Hudson, Mokyr, Cain, Lamoreaux), while others use very broad definitions of entrepreneurship (e.g., Kuran, Casson and Godley, Gelderblom), and yet another group of authors associates entrepreneurship with innovation (e.g., Yonekura and Shimizu, Graham). This extreme diversity of definitions and approaches can overwhelm the reader. As a result, the volume’s ambition of tracing “the history of entrepreneurship throughout the world since antiquity” (p. vii) ends up being an interesting patchwork of insights drawn from different times and places rather than a unifying and synthetic history.
That’s from Michaël Bikard and Scott Stern’s Journal of Economic Literature review of The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times (ed. David S. Landes, Joel Mokyr, and William J. Baumol, Princeton, 2010), which we blogged about earlier. Obviously in a work of this scope, a common definition of entrepreneurship is likely to be elusive. But the wide variety of meanings in this lone volume give you a sense of the challenge in making sense of the wider literature.
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