Video from Coase Conference

| Peter Klein |

Last weekend the Ronald Coase Institute held a conference, “The Next Generation of Discovery: Research and Policy Change Inspired by Ronald Coase.” The impressive lineup featured Kenneth Arrow, Oliver Williamson, Gary Libecap, Sam Peltzman, John Nye, Claude Menard, Ning Wang, Lee and Alexandra Benham, Mary Shirley, and many others. The Institute has now made both days of the program available on video. Great stuff.

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Photo courtesy of John Nye.

31 March 2015 at 11:20 am Leave a comment

O&M in South America

| Peter Klein |

I hope to see O&M readers and friends at next week’s SMS Special Conference in Santiago, “From Local Voids to Local Goods: Can Institutions Promote Competitive Advantage?” The conference focuses on the relationships among institutions, firm strategy, entrepreneurship, and economic growth. Besides the usual paper and paper-development sessions, Tarun Khanna’s keynote and several plenary sessions should be of special interest to O&Mers.

Before heading to Santiago I will be giving talks in Rio de Janeiro and São Paulo sponsored by Mises Brasil, to celebrate a new Portuguese translation of my 2010 book The Capitalist and the Entrepreneur, as well as visiting my friends and colleagues at Insper, which among other activities is starting a doctoral program in business administration.

O&M is popular in Latin America. Nicolai and I are both on the advisory board of CORS and have given the CORS lecture; Nicolai was at USP last month to give a PhD course in strategy and organization.

9 March 2015 at 12:12 pm Leave a comment

A Good Reason to Study Corporate Culture

| Peter Klein |

Corporate culture is hard to define and measure (Kreps’s game-theoretic version is probably the one most familiar to economists), but may play a role in explaining variation in firm performance. Of course, one should not invoke “culture” as an explanation for outcomes without specifying some microfoundations. And culture may be as much the result of firm performance as the cause.

But organizations can also serve as a sort of laboratory for understanding the links between informal institutions like culture and more formal institutions such as written rules, policies, and procedures in society at large, a very important issue for economic history, growth, public policy, etc. So say Luigi Guiso, Paola Sapienza, and Luigi Zingales in this short note:

Unlike large societies, however, corporations give hopes to identify the link between culture and formal institutions. . . . First, the creation of a firm is a moment where the founder has the power to set values on a blank slate. Identification of this moment is easier (it is recorded, it is recent) than identifying when and who sets the values of a large community (e.g. a country). Second, culture is easier to change in a corporation. Through hiring and firing corporations can select values by selecting people, avoiding the more difficult strategy of changing their minds. And can punish them if they do not adapt (e.g. by deferring promotion). In large societies only the difficult strategy is available, and slow adaptation is hard to punish, unless slow-adapters are outlawed, which makes culture and law undistinguishable. Third, it is easier to establish the link with performance. Performance is continuously recorded, for the corporation as a whole and often for its segments and divisions in order to implement compensation schemes. Hence, one can study the role of shared norms and beliefs while controlling for the power of economic incentives. Finally, because firms break up and merge much more often than countries, an observer can collect exposure of a firm to a new culture much more often than one can for larger societies.

Here is the link (NBER gated, CEPR, may be ungated for some users).

2 March 2015 at 11:58 am 1 comment

Review of Organizing Entrepreneurial Judgment

| Peter Klein |

OrganizingEntrepreneurialJudgmentBook2David Howden’s generous review of Organizing Entrepreneurial Judgment appears in the March 2015 issue of the International Entrepreneurship and Management Journal. Excerpt:

This ambitious book has a three-fold purpose. First, it seeks to clarify “entrepreneurship” in a manner amenable to both modern management and economics literature. Second, it redefines the theory of the firm in order to integrate the role of the entrepreneur more fully and give a comprehensive view on why firms exist. Finally, and most successfully, it sheds light on the internal organization of the firm, and how entrepreneurship theory can augment our understanding of why firms adopt the hierarchies they do. . . .

Organizing Entrepreneurial Judgment is a massive undertaking, and one that ambitiously spans the unnecessary divide between management studies and economics literature. For the scholar seriously contemplating exploiting this gap further, the book is highly recommended. Having thoroughly enjoyed reading this rendition of their entrepreneurial theory of the firm, it is this reviewer’s hope that Foss and Klein continue to carve out this growing niche straddling the two disciplines. Following up with a more direct and focused primer on their firm would be a welcome contribution to further the growing field.

Also, at last November’s SDAE conference, the book received the 2014 FEE Prize for best book in Austrian economics.

We have several new papers coming out that develop, extend, and defend the judgment-based perspective. Details to follow.

12 February 2015 at 10:05 am 3 comments

Microeconomics of War

| Peter Klein |

The old Keynesian idea that war is good for the economy is not taken seriously by anyone outside the New York Times op-ed page. But much of the discussion still focuses on macroeconomic effects (on aggregate demand, labor-force mobilization, etc.). The more important effects, as we’ve often discussed on these pages, are microeconomic — namely, resources are reallocated from higher-valued, civilian and commercial uses, to lower-valued, military and governmental uses. There are huge distortions to capital, labor, and product markets, and even technological innovation — often seen as a benefit of wars, hot and cold — is hampered.

A new NBER paper by Zorina Khan looks carefully at the microeconomic effects of the US Civil War and finds substantial resource misallocation. Perhaps the most significant finding relates to entrepreneurial opportunity — individuals who would otherwise create significant economic value through establishing and running firms, developing new products and services, and otherwise improving the quality of life are instead motivated to pursue government military contracts (a point emphasized in the materials linked above). Here is the abstract (I don’t see an ungated version, but please share in the comments if you find one):

The Impact of War on Resource Allocation: ‘Creative Destruction’ and the American Civil War
B. Zorina Khan
NBER Working Paper No. 20944, February 2015

What is the effect of wars on industrialization, technology and commercial activity? In economic terms, such events as wars comprise a large exogenous shock to labor and capital markets, aggregate demand, the distribution of expenditures, and the rate and direction of technological innovation. In addition, if private individuals are extremely responsive to changes in incentives, wars can effect substantial changes in the allocation of resources, even within a decentralized structure with little federal control and a low rate of labor participation in the military. This paper examines war-time resource reallocation in terms of occupation, geographical mobility, and the commercialization of inventions during the American Civil War. The empirical evidence shows the war resulted in a significant temporary misallocation of resources, by reducing geographical mobility, and by creating incentives for individuals with high opportunity cost to switch into the market for military technologies, while decreasing financial returns to inventors. However, the end of armed conflict led to a rapid period of catching up, suggesting that the war did not lead to a permanent misallocation of inputs, and did not long inhibit the capacity for future technological progress.

10 February 2015 at 11:16 am 1 comment

“Robert Bork’s Forgotten Role in the Transaction Cost Revolution”

| Peter Klein |

E1725-27Thanks to Danny Sokol for passing on this paper by Alan Meese.

Robert Bork’s Forgotten Role in the Transaction Cost Revolution

Alan J. Meese
Antitrust Law Journal 79, no. 3 (2014)

This essay, prepared for a conference examining Robert Bork’s antitrust contributions, examines Bork’s hitherto unknown role in the transaction cost economics (“TCE”) revolution. The essay recounts how, in 1966, Bork helped rediscover Coase’s 1937 article, The Nature of the Firm and employed Coase’s reasoning to explain how various forms of partial integration could reduce transaction costs. As the essay shows, Bork described how exclusive territories, customer restrictions and horizontal minimum price fixing that accompanied otherwise valid integration were voluntary efforts to overcome the costs of relying upon unfettered markets to conduct economic activity. To be sure, Bork did not develop a complete account of TCE capable of informing a full-fledged research program. Nonetheless, Bork did articulate and apply various tools of TCE, tools that reflected departures from the applied price theory tradition of industrial organization.

The essay also offers some brief speculation regarding why scholars have not recognized Bork’s early contributions to TCE. For one thing, Bork did not purport to offer a new economic paradigm. Instead, Bork repeatedly characterized his work as an application of basic price theory, the very economic paradigm that TCE overthrew with respect to the interpretation of non-standard contracts. Moreover, Bork did not persist in his critique of price theory’s once-dominant account of non-standard contracts. After reiterating his views in 1968, for instance, he did not revisit the economics of non-standard agreements for nearly a decade. Finally, when Bork did return to the topic, he deemphasized TCE-based arguments and focused more on the claim that such agreements could not add to the market power already possessed by manufacturers and thus could not produce economic harm. In short, Bork’s failure to reiterate his TCE-based interpretation of non-standard agreements seems partly responsible for the lack of recognition his early contributions have received.

On Bork see also Jack High’s useful 1984 paper, “Bork’s Paradox: Static vs. Dynamic Efficiency in Antitrust Analysis.”

6 February 2015 at 9:20 am Leave a comment

Upcoming Workshops, Seminars, and Events

| Peter Klein |

Some upcoming events of interest to O&M readers:

5 February 2015 at 12:41 pm Leave a comment

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Our Recent Books

Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

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