Archive for May, 2006

Nudity, Law, and Social Norms

| Peter Klein |

From Bryan Caplan I learn that Berkeley's "Naked Guy," a campus fixture during my graduate-school years there in the early 1990s, committed suicide last week. Bryan, then a Berkeley undergraduate, adds this astute observation: "At the time, I often pointed out that the Naked Guy was proof that social norms, not the law, were the foundation of civility: Even if nudity were legalized, only one student out of tens of thousands would take it all off."

The importance of informal norms and social conventions is increasingly recognized in economics (and law). The literature in this area goes back at least to Menger's (1883) analysis of institutions, and includes contributions from Schelling (1960), Ullman-Margalit (1977), Schotter (1981), Sugden (1986), Benson (1990), and Ellickson (1991). Recent work by Baker, Gibbons, and Murphy (2002) on relational contracting, focusing on the narrower question of firm boundaries, belongs on this list as well. This literature interprets social norms as equilibrium solutions to the kinds of coordination games popularized by Schelling (1960). Credible threats of reciprocity are the key. In these models agents abide by informal rules not out of a sense of moral duty, or from a process of unconscious socialization, but because it is in their rational self-interest to do so.

My sense is that management theory, and organizational behavior in particular, has yet to grapple with the insights from this strand of literature. Am I wrong?

31 May 2006 at 12:44 pm 9 comments

Axel Leijonhufvud and a Bit of Autobiography

| Nicolai Foss |

As blogging is an inherently narcissistic undertaking, I hope I will be excused for the following piece of autobiographical indulgence.

I began studying economics at the University of Copenhagen in 1983. The three first years essentially followed a micro and macro division (with a strong dominance of macro stuff). The macro part, particularly in my second year, was positively awful. The intention clearly was that macro should lead directly to econometrics, so all teaching and reading material centered on analyzing the causal structure of one silly Keynesian model after another.

The indoctrination with Tinbergen-style Keynesianism was rather massive, but there was one paper in the syllabus that dealt with monetarist and new classical critiques of Keynesianism. Naturally, this paper (though dismissive of the critics of Keynesianism) triggered my interest in those writers who were somehow in opposition to the tedious Keynesianism that we were taught. Hunting expeditions to the library ensued.

In this way, I discovered a book by a Henry Hazlitt, called The Failure of the New Economics, which was virulently anti-Keynes, and somewhat primitive in its reasoning. Some further search uncovered a book in distinguished blue binding, and an intriguing title in golden letters, On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory by an author with a familiar Scandinavian name, Axel Leijonhufvud. I was completely captivated by this book, and it became my economics bible until I graduated from the University of Copenhagen. (more…)

31 May 2006 at 8:25 am 4 comments

Review Paper on the Economics of Clusters

| Peter Klein |

Pierre Desrochers calls my attention to this review essay for practitioners on the economics of clusters, published by Brookings in March. The paper cites Pierre's Review of Austrian Economics paper with Frederic Sautet, whch is a good sign.

30 May 2006 at 1:35 pm Leave a comment

New Institutional Economics: What My Students Ask

| Peter Klein |

At the September 2005 meeting of the International Society for New Institutional Economics (ISNIE) in Barcelona I participated in a roundtable organized by Claude Menard and Mary Shirley, “Challenges and New Directions in NIE,” celebrating the Handbook of New Institutional Economics (Springer, 2005). Because I teach a required first-year PhD course in the NIE, I thought it would be interesting to discuss how students react to the material as the seek to integrate it with what they are learning in the general economics curriculum. Many scholars research and teach aspects of the NIE, but only rarely step back and evaluate the entire field, as a whole. Preparing to teach this course for the first time last year gave me an opportunity to do so.

Here are the most common questions students ask about the NIE and my course, “Economics of Institutions and Organizations”:

1. Is this a tools course or a field course?

In other words, is the NIE foundational to all fields of economics (and, possibly management), or an applied field like industrial organization, labor economics, international trade, etc.? (more…)

30 May 2006 at 7:49 am 10 comments

Ken Lay, Local Boy

| Peter Klein |

Today’s edition of my local paper, the Columbia (Missouri) Daily Tribune, adds a little local color to the Enron story with this item on Ken Lay, a Missouri minister’s son who attended the University of Missouri in the 1960s and earned BA and MA degrees in economics. Lay was a protégé of economics professor Pinkney Walker, who brought Lay to Washington when Walker was appointed by Richard Nixon to head the Federal Power Commission (now FERC). That, for better or worse, is where Lay learned about the energy industry.

A 1991 profile of Lay in the Houston Chronicle goes further in crediting — certain people would say “blaming” — Lay’s economics training for his later accomplishments. “His sophomore year at the University of Missouri, in professor Pinkney Walker’s introductory economics class, the small-town boy who had never been outside the Missouri state line became hooked on the world of money, from Wall Street horse-trading to monetary policy and international trade. ‘It all became so clear, so logical,’ Lay says. ‘I could see how markets worked, how firms worked. All of it just sort of fit together.’ ”

Of course, Lay understood markets well, but was no friend of free ones. (more…)

28 May 2006 at 4:05 pm Leave a comment

Paradoxes in the RBV?

| Nicolai Foss |

One of the hallmarks of pomo (postmodernist) "discourse" (or "conversation") is the indiscriminate use of the word "paradox." In management, organizational scholars are particularly prone to use the p word. I have sat in countless seminars and witnessed several conference presentations where the presenters declared some paradox to exist, in theory, in practice or in both. I have never been successful in my attempts to argue that upon closer inspection (better analysis) the postulated paradoxes usually vanish.

In terms of management journals, one of the pomo strongholds is unfortunately one of our leading journals, the Academy of Management Review.  I am pretty much behind in my reading of AMR. But  this morning I opened the January 2006 issue, and performed my usual vain search for articles that cited my works. I quickly found Lado, Boyd, Wright and Kroll's "Paradox and Theorizing Within the Resource-based View."

The authors claim to use "paradox in the logical sense to address epistemological issues surrounding RBV logic, such as unfalsifiability, tautology, and infinite regress" (p.117).  They argue that they embed their understanding in a non-traditional view of science (in contrast to those — such as Foss (1996; "Knowledge-based Approaches to the Theory of the Firm," Org Science) — who allegedly holds "… that the presence of paradox within a theory undermines its scientific utility" (Foss 1996 says no such thing)). (more…)

28 May 2006 at 8:24 am 7 comments

Non-Monetary Compensation

| Peter Klein |

Managers: Looking for effective forms of non-monetary compensation? Scott Adams has suggestions here, here, and here.

27 May 2006 at 9:07 am Leave a comment

Interview With Mark Blaug

| Peter Klein |

You readers with a passion for economic methodology (yes, both of you) will enjoy this interview with Mark Blaug. (HT to Rafe Champion, who calls Blaug "the man who did more than anyone to generate the cottage industry of 'new philosophy of science applied to economics.' ")

One excerpt: Blaug's problem with contemporary economics is

not just that economics has become technical; it is that economics prizes technicalities above everything else, and that is why I call it formalism. Formalism is the tendency to worship the form rather than the content of the argument. That is the kind of subject it has become. We care only about the form in which an economic theory or hypothesis is presented, and we care almost nothing about the actual content of the hypothesis.

I have my own problems with formalism, but I think Blaug overstates his case. His characterization may apply to general-equilibrium models in macroeconomics, growth theory, and some other fields, but in applied microeconomics (contract theory, agency theory, labor economics, parts of industrial organization) the situation is not nearly so dire. (more…)

27 May 2006 at 12:47 am Leave a comment

Should the Term “Neoclassical” Die?

| Nicolai Foss |

In a characteristically well written paper, "The Death of Neoclassical Economics," David Colander claims that the "neoclassical classification should die." Others, notably Mark Blaug, have also argued that the term is rather meaningless.

Colander's argument begins with a list of necessary criteria of what it means for a theory to be "neoclassical." He then argues that most modern economics do not conform to these criteria. The relevant criteria are: 1) focus on atemporal resource allocation, 2) acceptance of some kind of utilitarianism, 3) focus on marginal tradeoffs, 4) assumption of farsighted rationality, 5) methodological individualism, 6) general equilibrium.

For each one of these points, Colander exemplifies how various modern economics contributions make a break with them. For example, with respect to point 2), he says that "few modern economists today accept utilitarianism" (p.135) and with respect to 5) he invokes new institutitonal economists as engaged in work that is explicitly at variance with methodological individualism. This exercise results in the Solowian conclusion that the only thing that really unites modern economists is the modeling approach to social explanation.

While it is indeed hard to precisely define "neoclassical" economics, I think Colander (and Solow) goes much too far. (more…)

26 May 2006 at 11:12 am Leave a comment

Measuring Entrepreneurship

| Peter Klein |

Earlier this week the Kauffman Foundation released an Index of Entrepreneurial Activity for the US and for individual US states. A local TV station asked me to comment on the report (my state, Missouri, ranked sixth from the bottom, provoking much consternation), so I prepared a few sound bites. Here they are:

1. Entrepreneurship is difficult to define, let alone measure. The Kauffman index estimates the percentage of adults, not already owners of a business, who start a new business each month. But the common notion of "entrepreneurship" encompasses imagination, creativity, risk-taking, judgmental decision-making, and so on, activities or attributes not necessarily reflected in new firm formation.

2. The Kauffman index measures the rate at which new firms are established, not the number of firms that exist. The Census Bureau's Survey of Business Owners provides one measure of the latter. I haven't examined it in detail, state by state, but spot-checking suggests that its ranking doesn't correspond closely to the Kauffman ranking. (Missouri, for example, is 30 of 50 in the number of independent establishments.) (more…)

26 May 2006 at 12:57 am 3 comments

Austrian Economics and the Theory of the Firm

| Nicolai Foss |

My co-blogger has developed a very nice online bibliography on the extremely important research that takes place in the intersection between Austrian economics and the theory of the firm.  It numbers almost 50 papers. A booming research area! The list may be incomplete, so be sure to mail Peter if your AE/ToF paper is not listed.

26 May 2006 at 12:44 am Leave a comment

Austrian Economists and the Wealth of Nations

| Peter Klein |

David Warsh's Knowledge and the Wealth of Nations is eliciting praise from many quarters (Tyler Cowen; Paul Krugman; The Economist; Brayden King). Peter Gordon likes it too, but notes that "the book and its story are poignant for Austrian economists, whose contributions are hardly acknowledged. The question that goes unasked is: What has the neo-classicists' journey of discovery, as sketched by Warsh, contributed that is worthy beyond the Austrians' long-held focus on entrepreneurial discovery?"

25 May 2006 at 1:54 pm Leave a comment

Non-Market Motivators

| Peter Klein |

Some scholars and consultants say that incentive plans are harmful, that managers should instead try to create within organizations a sense of duty, collective identity, and overall communitarian spirit. If so, why not dump that dreadful motivational art and decorate the office with these Soviet propaganda posters? (HT: Jeff Tucker)

24 May 2006 at 12:01 pm 3 comments

A Fruity Response

| Peter Klein |

Much of the resistance to markets and “market-like” mechanisms within firms seems to flow from a belief that market exchange is somehow crass, profane, and uninspiring, at least compared to communal or family relationships. An example is the horrified reaction of many bioethicists to economists’ proposals to allow markets for cadaveric organs, particularly kidneys.

I’ve avoided commenting on the organ-market controversy, though I’ve been using it as an example in my introductory courses for years. I have little to add to the excellent discussions by Kaserman and Barnett, Epstein, Mankiw, Becker, etc. (not to mention this observation from Robin Hanson). But I can’t resist pointing to a letter in today’s Wall Street Journal by one Charles Fruit, chairman of the National Kidney Foundation. Responding to Richard Epstein’s earlier op-ed in favor of markets, Mr. Fruit declares himself “among the millions of other ‘high-minded moralists’ who oppose treating life-saving organs as commodities.” Closing his letter with a presumed coup-de-grâce, Fruit adds: “We moralists can only pray that [Epstein’s] proposed market mechanism for the transaction of hearts, lungs, kidneys and other life-saving human organs would work a little better than it does for the nation’s consumers of gasoline.”

Cute. But how exactly should gasoline be allocated to consumers? (more…)

23 May 2006 at 2:03 pm 1 comment

“The Train Wreck That Is Strategy” and Game Theory

| Nicolai Foss |

In a comment on my co-blogger’s post of yesterday, a commentator argues that there is no real alternative to formalism, and then provokingly continues:

If you need any demonstration of the need for formalism in theory-building within the social sciences, take a look at the train wreck that is Strategy. As we are discovering using formal methods, most of what passes for foundational theory in strategy is wrong.

Unfortunately, he doesn’t explain what exactly he means by “foundational theory in strategy” and why it is “wrong.”

I think that formalization is definitely an important goal of social science research and is worth striving for (See Patrick Suppes’ very convincing argument on the “desirability of formalization in science”). Formalization certainly also makes life easier in a number of ways. For example, in my teaching I have found it literally impossible to convey what agency theory is fundamentally about without using game theory.

However, what may be at issue is exactly how important it is and, in connection to this, whether the practice of building formal theory per se should occupy the highest position in the reputational hieararchy of economics. (more…)

23 May 2006 at 1:34 pm 10 comments

Formal Economic Theory: Beautiful but Useless?

| Peter Klein |

Greg Mankiw, reflecting on the "poetry" of Paul Romer's growth theory, offers this assessment of modern, mathematical, neoclassical economic theory: "Too much of it is beautiful but useless."

Let's leave beauty in the eye of the beholder, for now, and focus on the second part of Mankiw's description. How much has formal, mathematical economic theory contributed to our understanding of the world? What economic phenomena do we understand better today than we did, say, before World War II, when the principal language of English-speaking economists was, well, English? (more…)

22 May 2006 at 1:22 pm 8 comments

Passion, Blogging, and Manuel Castells

| Nicolai Foss |

It seems that one of the functions of blogging is to allow people to exercise the passion that they cannot exercise anymore in the writing they do for journals (I have to mention, however, that my co-blogger and I were recently taken to task by a journal reviewer for not exhibiting sufficient “passion and excitement” in the conclusion part of a joint paper).

Look at the econ journals prior to World War II. Plenty of flames and shouting. Admittedly, much of it unproductive, but highly entertaining (e.g., check out John Maynard Keynes’ wildly hysterical, over-the-top review of Hayek’s Prices and Production in Economica 1932; discussed in this book. Of Hayek’s gloomy book, Keynes said: “The abyss yawns — and so do I”).

Whatever the scientific merits of the average paper in the Econometrica or the Journal of Economic Theory, one is not exactly struck by the level of “passion and excitement” that they project. (more…)

21 May 2006 at 8:53 am Leave a comment

Natural and Artificial States, and Firms

| Peter Klein |

Among the last published papers of the libertarian polymath Murray N. Rothbard — one of my intellectual heroes — is his 1994 article “Nations by Consent: Decomposing the Nation-State.” Here Rothbard distinguishes sharply between the state, as a political entity, and the nation, a “complex and varying constellation of different forms of communities, languages, ethnic groups, or religions.” He goes on to develop a theory of appropriate national boundaries, based on the principle of volunary association and the empirical claim that people tend to associate with particular familial, linguistic, cultural, and religious groups. “One goal for libertarians should be to transform existing nation-states into national entities whose boundaries could be called just, in the same sense that private property boundaries are just; that is, to decompose existing coercive nation-states into genuine nations, or nations by consent.”

A March 2006 working paper by Alberto Alesina, William Easterly, and Janina Matuszeski, “Artificial States,” proposes several measures of the degree to which state boundaries are “natural” — corresponding roughly to Rothbard’s nations — or “artificial.” One measure identifies state borders that split ethnic groups into separate states, while another uses fractal geometry to characterize borders as straight or squiggly, assuming that straight borders are more likely to be articifially drawn and not corresponding to natural geographic or ethnic boundaries. The authors show that their measures are closely correlated with the usual measures of national economic performance (the more natural, the better).

What does all this have to do with organizations? The capabilities literature distinguishes between firm boundaries that are “natural,” or organic, and those that are artificially constructed. (more…)

19 May 2006 at 4:28 pm 4 comments

Multi-Culturality and Economic Organization

| Nicolai Foss |

Transaction cost scholars have increasingly become interested in the way economic organization is shaped by the “institutional environment,” for example, how the legal regime impacts internal organization or the boundaries of the firm (e.g., this paper). A paper that seems to have stimulated much of this is Oliver Williamson’s 1991 paper on “Comparative Economic Organization.”

To my knowledge relatively little interest has been devoted to the how the softer rules of the game, notably those that may be placed under a “culture” heading may impact economic organization, although quite some research in international business has dealt with this (e.g., this paper).

As far as I know no research has dealt with the implications of “multi-culturality” within a given territory for economic organization. (more…)

19 May 2006 at 4:10 pm 10 comments

Capabilities as Compensation

| Peter Klein |

Lots of blogospheric buzz today about this paper on local production externalities and researcher compensation (Mankiw, Caplan). The paper examines output and pay for economics and finance professors and concludes that the productivity effect of being at an “elite” university — i.e., having daily personal contact with top-notch colleagues and students — has fallen sharply over the last three decades. (Advances in information technology are seen as the likely cause.) Moreover, as compensation theory would predict, these spillover effects and faculty salaries appear to be substitutes; as the intangible benefits of co-location decrease, universities must increase wages to retain top staff.

The empirical approach used in the paper has obvious applications to the knowledge-management and capabilities literatures more generally. To the extent that the firm’s capabilities are consumed by employees — XYZ Company is an exciting, dynamic, enjoyable place to work — the firm should be able to pay lower wages, other things equal. Using panel data and fixed effects it should be possible, econometrically, to estimate firm-specific capabilities that are reflected in below-market wages. I’m not aware of any capabilities or knowledge-management papers that utilize this approach, however. Am I wrong?

18 May 2006 at 12:49 pm 1 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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