Gordon Tullock is retiring this year from George Mason Law School. In the coming weeks you’ll probably be reading a lot of Tullock tributes and Tullock anecdotes (for example, about his famous put-downs). I don’t have much to add on the personal side, but I thought I’d share a remark or two about one of my favorite, and little-known, Tullock articles, “The New Theory of Corporations,” in Erich Streissler, ed., Roads to Freedom: Essays in Honor of Friedrich A. von Hayek (Routledge and Kegan Paul, 1969).

Tullock offers a number of insights into the corporate form and, in particular, the Berle-Means problem, that are well ahead of their time. As Tullock notes in the essay, he draws heavily here on Henry Manne’s work (and, he tells us, many conversations with Manne about these issues). In 1969 the consensus view was that corporations were almost exclusively controlled by salaried managers, running firms in their own interests and largely ignoring the wishes of shareholders. However, Tullock notes:

The theory of management control of corporations, of course, is subject to one very obvious difficulty. It offers no explanation of how managements are changed, and changes of management are an everyday occurrence as any reader of the Wall Street Journal can appreciate. It is true that presidents of large corporations frequently stay in office rather longer than the president of the United States, but they don’t stay in office as long as congressmen and senators, and we would hardly argue that the long tenure of congressmen and senators indicates that we do not have democracy in the United States. Thus, the current orthodoxy that the management actually runs the corporation cannot explain how the management got there or how the everyday occurrence of a change in management occurs. For some reason, this does not seem to disturb the partisans of the . . . Berle and Means theory.

As Tullock explains, and as Nicolai and I have also argued, shareholder-investors choose, in allocating capital to corporations, to delegate day-to-day control of the firm to managers. However, by appointing managers, and by reserving the right to intervene when desired, and to replace poorly performing managers, owners retain “ultimate” decision rights over corporate assets, no matter how many proximate rights are delegated. Tullock puts it this way:

I might well prefer to invest in a corporation even though I knew that the management was less efficient than my own direct management would be because of the advantages with the corporate form brings to me. Under these circumstances the cost of the use of the corporate form would include a certain amount of inefficiency. I would take these costs into account and would thus end up with the type of investment which seemed to me best. It might, or might not, lead to the choice of a corporation, just as the choice of a machine does not normally turn on whether the machine is perfect. We are interested in comparative efficiency, not in attempting to obtain a utopian perfection.

The real problem, then, raised by the critics of the corporation is simply that the stockholders are not obtaining theoretically perfect performance from their managers.

The point about comparative efficiency recalls what Harold Demsetz, writing in the same year, called the “nirvana fallacy” of welfare economics, namely the comparison of real-world market outcomes with hypothetical non-market alternatives. Jensen and Meckling (1976) would later argue that market participants can bid down the share price of manager-controlled firms so that the return on investment in a manager-controlled firm equals that of an owner-controlled firm.

I do have one Tullock story. Gordon spoke at Oliver Williamson’s Institutional Analysis Workshop at Berkeley around 1990, when I was a graduate student. I don’t remember the subject of his paper but, at one point, needing an example of a hypothetical scenario, he said “Now suppose Oliver Williamson is a rapist.” You should have seen the looks of horror on the Williamson students’ faces! Needless to say, that was not the example any of us would have chosen.

Addendum: This Monty Python sketch nicely illustrates the agency cost / organizational slack problem discussed by Tullock.

Frederic Sautet reports on a reception honoring Gordon Tullock at George Mason University Law School. When someone wondered aloud why Tullock didn’t share the 1986 Nobel Prize with James Buchanan, Tullock responded that he blames a remark he made around that time that “there were more good economists in the state of Virginia than in all of Scandinavia.” The sensitive Swedes must not have been familiar with Tullock’s style.

As 2006 draws to a close we reflect on our most popular posts of the year. (Actually, we’ve only been in operation since April, so these are our most popular posts of all time, but you get the idea.) Here’s the list, followed by some commentary:

1. Is Math More Precise Than Words?
2. Intellectual Property: The New Backlash
3. Dilemmas of Formal Economic Theory
4. We Need Some Economics of Pomo
5. The New Bashing of Economics: The Case of Management Theory
6. Has Corporate Corruption Increased?
7. HRM in Heaven and Hell
8. Yale’s New MBA Curriculum: “Perspectives,” Not Functions
9. Malthus and the “Dismal Science”
10. Formal Economic Theory: Beautiful but Useless?
11. Why Do Sociologists Lean Left — Really Left?
12. The SWOT Model May Be Wrong
13. Multi-Culturality and Economic Organization
14. What Do We Really Know About Organizations?
15. Academic Insults: CCSM Edition
16. A Nobel for Entrepreneurship?
17. Price as a Signal of Quality
18. Economics: Puzzles or Problems?
19. Another Irritating Practice 
20. Market-Based Management

Now, we’re talking small numbers here — the Drudge Report we ain’t — so the ranking is highly sensitive to random events, like an incoming link from Marginal Revolution. Nonetheless, some clear patterns emerge.

Our most popular subject appears to be methodology, particularly the language, task, and scope of economics (posts 1, 3, 10, and 18) and recent methodological trends in management theory (4 and 5). So much for Ed Leamer’s dictum that “methodology, like sex, is better demonstrated than discussed, though often better anticipated than experienced.”

Management and organization theory — this blog’s raison d’être — is also popular (posts 5, 12, 13, 14, and 20). Management education is represented by this week’s post on Yale’s new MBA curriculum (number 8 already). Jokes (post 7) and insults (post 15) are also popular.

On many blogs policy-oriented posts get the most attention. We haven’t had many of those, but three make the top 20 (posts 2, 6, and 11). Perhaps we need to “drop the gloves” and get nasty more often.

Anyway, thanks to all our readers for a great 2006. We look forward to an even better 2007!

Time to begin a new thread on academic insults (1, 2, 3). Overhead at the CCSM:

Session chair to audience: “Thank you, [Presenter], for your excellent time management.” [But not your paper.]

Discussant to presenter: “Your paper is beautifully written. When I got to the end I realized that I totally disagree with it, but I couldn’t remember where in the paper you started to go wrong.”

Audience member to presenter: “Your paper reminds me of my lecture on fallacies of strategic management research. You committed every one of them.”

On the triumph of formalism in economics (addressed here and here) — not to mention academic insults — I give you this passage in Fred Kaplan’s The Wizards of Armageddon, a history of the RAND Corporation. The subject is RAND mathematician Albert Wohlstetter, the chief theoretician behind the development of US nuclear strategy in the 1950s and 1960s. Writes Kaplan:

[T]he social science division was removed from the rest of RAND — literally, 2500 miles away, in Washington, D.C. Most [of the social scientists] were figuratively removed, too: quantitative analysis had triumphed at RAND, through the spread of systems analysis and game theory and — until the Wohlstetter studies, which put the economids division on top of the strategic business — through the domination over the rest of RAND by the mathematics division. [Wohlstetter, though a mathematician, was associated with the economics division.] These sorts of studies were scientific, so it was thought; there were numbers, calculations, rigorously checked, sometimes on a computer. maybe the numbers were questionable, but they were tangible, unlike the theorizing, the Kremlinology, the academic historical research and interpretation produced by social science. Wohlstetter snootily denigrated all such works as being in “the essay tradition.”

Here is one more entry in another O&M feuilleton, namely our “Jerehmiads” on publication in management and related fields (e.g., here and here.) (The term was introduced by Omar at orgtheory.net, who despite being a brand-new assistant professor is also a specialist in the publication game; see his comments here.)  

I recently had a paper rejected for one of the top-4 management journals. It is the third time I have been rejected from this particular journal. However, every time something a little weird has happened: 3-4 days after the rejection, the editor has approached me, asking whether I would like to review a paper.  I can understand the rationale: Now that I have enjoyed the service of this journal, I need to pay back.  But, isn’t it just a little bit tacky? Or am I too wimpy? (or too much like Jeremiah?).  Anybody who has had similar experiences?

Nicolai recently started a thread on academic insults. Alex Tabarrok has created one exclusively for insults delivered by Gordon Tullock, a legendary put-down artist. To wit:

“Gordon,” I asked, “do you think we should ban child labor?”  “No, keep working.”

The other day Gordon asked me to read one of his papers and I pointed out a few typos.  “Excellent,” he said, “this will surely be your greatest contribution to economics.”

Gordon is prone to pressing people with difficult questions.  One of my colleagues responded, “Gordon, I’m not that good at thinking on my feet.”  Without missing a beat Gordon pulled up a chair and said “well sit down and we’ll see how you do then.”

Bob Lawson adds this one:

After going through the model and somewhat apologetically presenting my results which didn’t show what the model predicted. Gordon says to me, “That’s ok, Bob, a lot of other people haven’t found that result either.”

My earlier post on Academic Insults attracted quite a lot of views, and some comments, including some comments detailing insults that I allegedly distributed (of which I, of course, have no recollection whatsoever). I also received mails from people who didn’t want to share the insults they had suffered with the blogosphere. Anyway, here is what almost amounts to a sequel, namely one on formalized academic insults, better known as nasty reviews. 

In 1989 I submitted my first paper to a journal, specifically to the Journal of Management. I have forgotten why I submitted to this particular journal, but I suppose I liked the name (!), and I had at any rate no idea that this journal was already at that time an established and rather highly reputed journal (I probably had no notion that there was such a thing as a journal hierarchy).  Anyway, 2 months later, I received a report that began: “This extremely rambling paper asserts…”.  It took a couple of days to fully recover.

One of the best known economists in Europe (and I believe the most productive one), told me that he had once received a report from the Journal of Political Economy which was admirably sparse and to the point: “Utterly without value.”  He somehow later found out that the reviewer was George Stigler.  

A colleague here at Copenhagen Business School submitted a paper a few years back to the Strategic Management Journal.  The paper was written with one of the pioneers of the TCE approach to the multinational corporation (aka “internationalization theory”), and was as far as I could gauge a very solid piece of research. Still, the only report that was returned from the editorial offices began: “This is the worst paper I have ever read.”  One need not speculate about the outcome of the editorial decision-making.

I was once told by a prominent German economist over (an otherwise pleasant) dinner: “Nicolai, you have the potential to become a rigorous scientist” (a colleague dryly commented that “at least he said you had the potential”). Well, I ended up doing muzzy management stuff, and, hence, never realized any such potential.

Does anyone out there have any good stories of academic insults that you want to share with the readership of O&M? Perhaps with a little effort we may end with something akin to George Stigler’s Conference Handbook.

Update 1: Here is nice poisonous comment that I received only yesterday but forgot to mention: “Nicolai, you are the master of academic economies of scope” (i.e., excessive recycling).

Update 2: Joe Mahoney reminded me of this classic: “No one can think higher of Professor Z’s paper than I do — and I think the paper is a complete mess.”

Update 3: I just recalled that the German economist mentioned above at a later occasion, a conference dinner, told me: “You know, Nicolai, it is actually really funny, but it turns out — giggle, giggle — that you have more citations than I have, heh-heh-heh.” Oh, the absurdities of this world.