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.

You’ve all heard the story of the Manhattan socialite who expressed shock at Nixon’s landslide 1972 victory because “nobody I know voted for him.” (Attributed variously to Pauline Kael, Katharine Graham, Susan Sontag, and others, and probably apocryphal, but who cares; it’s a great quote.) I was reminded of this by a line in Larry Summers’s confidential 2008 economic policy memo now making the rounds, courtesy of the New Yorker: “Greg Mankiw is the only economist we have consulted with [about the optimal stimulus package] who refused to name a number and was generally skeptical about stimulus.” How can a huge stimulus package be wrong — everybody I know favors it!

(For the record, the economists consulted — supposedly representing the full spectrum of legitimate opinion — were Robert Reich (recommended stimulus: $1.2 trillion over 2 years), Joe Siglitz ($1 trillion over two years), Paul Krugman ($600 billion in one year), Jamie Galbraith ($900 billion in one year), Dean Baker and colleagues ($900 billion), Marty Feldstein ($400 billion in one year), Larry Lindsey ($800 billion to $1 trillion), Ken Rogoff ($1 trillion over two years), Mark Zandi ($600 billion in one year), an unnamed group of Fed officials (over $600 billion), Adam Posen ($500-700 billion in one year), and an unnamed group at Goldman Sachs(!) ($600 billion). So, we’ve got left-wing Keynesians, right-wing Keynesians, moderate Keynesians, Robert Reich who wouldn’t know a Keynesian from a Kenyan, and Goldman Sachs. How’s that for diversity of opinion?)

Update: Mankiw agrees: “Of course, the fact that I was ‘the only economist’ expressing skepticism reflects the range of economists that Team Obama chose to consult.”

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.

Did you know 2012 is the centenary of Charles Dickens’s birth? Dickens is often lumped with Carlyle, Shaw, Ruskin, etc. as a Romantic, Victorian, literary anti-capitalist. (Carlyle indeed disliked capitalism, but not for the usual reasons.) But Dickens, as I originally learned from Paul Cantor, was a wildly successful capitalist and entrepreneur, a driving force behind the great nineteenth-century innovation of the serialized, commercial novel. Consider the following from one Dickens scholar:

Stephen Marcus has called Dickens “the first capitalist of literature” in the sense that he worked within apparently adverse conditions to take advantage of new technologies and markets, creating, in effect, an entirely new role for fiction. In Charles Dickens and His Publishers, Robert Patten quotes Oscar Dystel (president and chief executive of Bantam Paperbacks) on the three “key factors” in his development of a successful paperback line: availability of new material, introduction of the rubber plate rotary press, and development of magazine wholesalers as a distribution arm. As Patten points out, parallel factors operated in the Victorian era: a plethora of writers, new technologies, and expanded distribution. And as methods of papermaking, printing, and platemaking increased in efficiency, so did means of transportation. By 1836, a crucial network of wholesale book outlets in the Strand, peddlers, provincial shops, and the royal mailmade possible by the development of paved roads, fast coaches, and eventually the national railway systemhad been consolidated. The final task facing early publishers was, then, to develop the newly accessible market for their commodity. By lowering prices, emphasizing illustrations and sensational elements, and increasing variety of both form and content, publishers created readers within the largest demographic groups: the rising middle and working classes, where readers had essentially not existed before. . . .

Concurrently with these marketing advances, Dickens transformed the narrative from a standard series of bumbling sportsmen’s sketches into a picaresque based in London but depicting urban infiltration of the country. The fifth number introduced a working-class character, Sam Weller, and his father. Audiences responded well to Dickens’s humorous but sympathetic textual representation of these urban characters. Sales soared after Sam appeared on the scene, and readers apparently wrote Dickens to ”counsel him to develop the character largelyto the utmost.” And Dickens, already showing the true responsiveness to his audience that contrasts so markedly with the simulated responsiveness of Chapman and Hall, answered by making Sam central to the Pickwick adventures.

The author’s and publishers’ narrative, advertising, and distribution techniques, innovative from an entrepreneurial standpoint, proved overwhelmingly successful. By number 5, Pickwick’s circulation had increased to forty thousand per number, where it stayed throughout the run. As Norman N. Feltes is careful to stress in his Modes of Production of Victorian Novels, this success is generally attributed to literary genius, lucky accident, and marketing ability, combining to explode upon the literary world. But, Feltes argues, the historical processes that shaped and determined the material production of Pickwick Papers are as important as “genius, luck, and the shrewdness of Chapman and Hall.” The series’ success certainly depended on a combination of perfect timing, insight into the potential of advertising, Dickens’s great comic skill and ability to reflect his audience, and fine-tuning of the narrative to respond to audience desire. But all these factors could not have arisen simultaneously without the particular nexus of economic, technological, and ideological conditions existent in the 1830s.

The source is Jennifer Hayward’s Consuming Pleasures: Active Audiences and Serial Fictions from Dickens to Soap Opera.

I recently read Planet of the Apes, the 1963 novel by Pierre Boulle that inspired the movie franchise. Not surprisingly, the book is far more interesting and intelligent than the films. In the novel (spoiler alert!), the ape planet isn’t a future Earth, but a distant world much like Earth in which apes gradually assimilated and displaced a former human civilization simply by imitating their masters. The discovery of this older civilization (confirmed by the remains a talking human doll, as in the 1968 movie) explains the mystery of why ape culture stagnated at the level of its former human model. The apes could imitate, but not innovate.

The human protagonist convinces himself that imitation could produce a reasonable quality of science and art, then turns to more mundane activities.

It seemed absolutely clear that industry did not require the presence of a rational being to maintain itself. Basically, industry consisted of manual laborers, always performing the selfsame tasks, who could easily be replaced by apes; and, at a higher level, of executives whose function was to draft certain reports and pronounce ceratin words under given circumstances. All this was a question of conditioned reflexes. At the still higher level of administration, it seemed even easier to concede the quality of aping. To continue our system, the gorillas would merely have to imitate certain attitudes and deliver a few harangues, all based on the same model.

Not a flattering portrait of management, but keep in mind that the protagonist (like the book’s author) is French.

Via Scott Masten, an important call for papers:

The Walter A. Haas School of Business at the University of California, with support from the Alfred P. Sloan Foundation, is issuing a call for original research papers to be presented at the Conference on the Law & Economics of Organization: New Challenges and Directions.  The conference will be held at the Haas School of Business in Berkeley, CA, on Friday, Nov. 30, and Saturday, Dec. 1, 2012. The purpose of the conference is to take stock of recent advances in the analysis of economic organization and institutions inspired by the work of 2009 Nobel Laureate Oliver Williamson and to examine its implications for contemporary problems of organization and regulation. Empirical research and research informed by detailed industry and institutional knowledge is especially welcome.  Conference papers will be published in a special issue of the Journal of Law, Economics, & Organization. Submissions are due March 31, 2012.  See the Call for Papers for details.

Mitt Romney’s time as head of Bain Capital has put private equity in the public spotlight. Jonathan Macey gave a vigorous defense of PE in Friday’s WSJ. I am certainly a fan, though of course PE as a governance mechanism has benefits and costs, like all organizational structures. For a great overview of the industry and its role in job creation and economic growth, listen to last Thursday’s Diane Rehm show, where Steve Kaplan gave a terrific presentation emphasizing the data and challenging popular myths about takeovers and layoffs.

This year’s DRUID conference, “Innovation and Competitiveness: Dynamics of Organizations, Industries, Systems and Regions,” is 19-21 June 2012 in Copenhagen. See the call for papers below the fold. Submission deadline is 29 February. 

 

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.