Archive for July, 2006

Ignorance is Bliss, Among Economists

| Peter Klein |

Everyone knows that economists tend to be woefully uninformed about the history of their discipline. But one can still be surprised. At a recent luncheon I was seated next to an editor of one of the leading field journals in economics. This journal publishes mainstream, fairly technical articles in its specialty area and is quite highly ranked by the usual measures. The luncheon speaker was Kenneth Arrow.

The journal editor literally did not know who Arrow was. He recognized the name, and had a vague idea that Arrow was someone important, but could not name even one general area in which Arrow worked (general-equilibrium theory, information economics, social choice, etc.).

I resisted the temptation to ask if he’d heard of Adam Smith or Karl Marx.

31 July 2006 at 5:51 pm 1 comment

Law and Entrepreneurship

| Peter Klein |

Gordon Smith attempts to define this new field:

While legislatures, regulators, and courts sometimes tailor rules to small or emerging businesses, law typically is not organized according to whether the regulated actor is an entrepreneur. . . . “Law and entrepreneurship” is, at root, the study of the legal structure of organizations. This study includes the contracts, statutes/regulations, and common law doctrines that apply to the formation, governance, and termination of organizations.

Sounds encouraging, with the caveat that Gordon is focusing on what I call the “occupational” or “structural” concepts of entrepreneurship, rather than the broader “functional” concept emphasized in many of these papers.

31 July 2006 at 8:57 am Leave a comment

Rafe Champion on Talcott Parsons

| Peter Klein |

Rafe Champion has posted a working paper, “The Success and Failure of Talcott Parsons,” evaluating Parson’s methodology and comparing it to the approaches of Menger, Mises, and Popper. Here is the abstract:

At least three varieties of methodological individualism can be identified in the modern social sciences, all based on the achievement of Carl Menger. These are the praxeology of Ludwig Mises, the voluntarist theory of social action of Talcott Parsons and the situational analysis of Karl Popper. This paper describes how Talcott Parsons drew on Marshall, Pareto, Durkheim and Weber to foumulate an individualistic “action frame of reference” in his first book The Structure of Social Action (1937). The paper also signals some flaws in his approach which drove him to abandon individualism in his subsequent work and to devote himself to the elaboration of the general theory of social systems, a verbal counterpart to general equilibrium theory in economics.

Please send him feedback. And see Mises’s comments on Parsons.

30 July 2006 at 6:39 pm 1 comment

The Power of Ideas . . . ?

| Peter Klein |

Back to sociologists and economists. Brayden King says the leftward bias of academic sociology is largely due to selection. I think the same is true for economics. That is, crunchy, communitarian, big-government progressives are more likely to specialize in sociology or community development, while pro-market, steel-and-concrete individualist libertarians and conservatives are more likely to choose economics or finance.

What does this say, however, about the power of ideas to influence political beliefs? If scholars select into one scientific discipline or another based on prior commitment to a particular social and political worldview, then what generates those worldviews in the first place? Is it possible to change hearts and minds with reason and evidence?

Hayek reports that he started out a Fabian-style socialist but was converted to laissez-faire after reading Mises’s Socialism in 1922. Hayek says the same is true of Lionel Robbins, Bertil Ohlin, and Wilhelm Roepke. These cases seem highly exceptional, however. Can readers suggest other examples? In particular, are there any cases of free-marketeers converting to socialism or interventionism through the study of sociology?

29 July 2006 at 10:57 am 2 comments

The Enterprise of Law

| Peter Klein |

Bruce Benson’s terrific 1990 book The Enterprise of Law: Justice Without the State is back in print, courtesy of the Mises Institute.

See also his article archives at the Journal of Libertarian studies and the Independent Review.

Other useful books in this genre: Robert Ellickson’s Order Without Law, Benson’s To Serve and Protect, and David Beito’s From Mutual Aid to the Welfare State.

28 July 2006 at 10:07 am 5 comments

Unusual Business Ideas That Work

| Peter Klein |

See Uncommon Business for interesting examples of entrepreneurial creativity. (Via Craig Depken)

28 July 2006 at 9:33 am Leave a comment

Assets versus Activities

| Richard Langlois |

At the risk of injecting some substance into my posts, let me raise an issue in the economics of organization that I have been thinking about recently.

There has been much discussion in the literature about the differences between the transaction-cost and capabilities views of organization, something that Nicolai and I, among many others, have written about. But another division might be between asset theories and activity theories. Asset theories are of course the province of the mainstream economics of organization. In this literature, one typically defines vertical integration as joint ownership of productive assets, and integration typically arises because of hazards from cooperating without joint ownership. Activity theories come from the literatures on product design and modularity. Here the issue is how tasks (or activities) ought to be designed given the structure of the production process. In this literature, the logic of integrality versus modularity provides clues to which activities out to be “outsourced.” Perhaps the best example of this kind of thinking is by Baldwin and Clark. I have also tried to think about the issues in a paper that will be coming out in Organization Studies. In many ways, this approach harkens back to Adam Smith. (more…)

27 July 2006 at 1:46 pm 3 comments

An Even Brighter Side of Global Warming?

| Richard Langlois |

I remain agnostic about whether global warming is taking place and, if so, whether it is being caused by human behavior.  In part, my skepticism comes from some familiarity with large mathematical models in my graduate student days — and my recollection of how sensitive they are to the assumptions fed in.  I certainly agree with Peter about what the issues are.

But I recently saw a review by Bob Whaples on (the economic history website and list-serve) of a book called Plows, Plagues and Petroleum: How Humans Took Control of Climate by William F. Ruddiman.  According to the review, the earth for the last 900,000 years or so has experienced cycles in which massive glaciation lasting on the order of 100,000 years has alternated with comparatively brief (10,000 year) “interglacials.”  (more…)

27 July 2006 at 1:45 pm 8 comments

The Bright Side of Global Warming

| Peter Klein |

I recall a comment from Gordon Tullock a few years ago at a panel on global warming: If we think that climate is affected by human activity, why aren’t we doing more research on the optimal temperature of the earth? In other words, why is it universally assumed that hotter is worse? Rising temperatures and water levels would be tough for those near the equator and on the coasts, but a few degrees warmer would be a blessing for those near the poles. (Not sure about the net effect on people near the poles and on the coast; sorry Lasse!)

Last Tuesday’s WSJ ran this front-page feature: “For Icy Greenland, Global Warming Has a Bright Side.” Excerpt:

[T]o many of the people who live here in Greenland, the warming trend is a boon, not a threat. . . . Even small increases in temperature can make a big difference in the quality of life for many Greenlanders who scrabble out a living at the whims of the weather. Freezing temperatures are the biggest factor limiting plant growth in Greenland. If the average temperature warms just a degree or two, the number of freezing nights is reduced. Higher temperatures produce stronger, healthier plants and provide farmers larger crop yields.

Of course, identifying beneficiaries does not tell us about net gains. (more…)

27 July 2006 at 8:41 am Leave a comment

A “Commie Austrian”

| Nicolai Foss |

Regular readers may have noticed the comments of a commentator who signs on as “Cliff.” Cliff is in fact a visiting scholar at the Center of Strategic Management and Globalization at Copenhagen Business School. His real name is Zhu Hai Jiu. I mention him here because he embodies what Israel Kirzner has often said that he wished existed: The Socialist Austrian. Cliff is, I believe, a card-carrying member of the Chinese Party -– and an Austrian economist.

27 July 2006 at 8:31 am 2 comments

Frontiers of Shirking, via Scott Adams

| Peter Klein |

Nicolai and I have written on the tradeoff between productive and destructive “entrepreneurial” behavior by employees. Decentralization and incentive compensation can increase effort, foster creativity, and facilitate more effective use of dispersed, specific knowledge. On the other hand, employee empowerment allows for shirking, rent-seeking, and other behaviors that reduce firm value. (See, for example, this paper.)

Who better to chronicle the newest and most creative forms of shirking than Dilbert creator Scott Adams? Here are his ten tips for looking busy, from the August issue of Wired: (more…)

26 July 2006 at 9:41 am Leave a comment

Re: Robustness

| Peter Klein |

Econometric methodology junkies may wish to dig up the December 1988 isssue of the Economic Record, which contains a symposium on same. Contributors include heavyweights Dennis Aigner, Clive Granger, Edward Leamer, Hashem Pesaran, Esfandiar Maasoumi, and P.C.B. Phillips. (If you’re lucky you can get it from EBSCO Host.) I just happened to stumble across a hardcopy of the Leamer article, “Things That Bother Me,” which begins thusly:

I thought I might share with you some things that bother me.
(1) There are too few issues.
(2) There are too many sharp hypotheses.
(3) There are too few graphs.
(4) There is too much asymptotic theory.
(5) There are too many diagnostics.
(6) There is too little testing “the usefulness” of theories/models.
(7) There is too little “confusion.”

26 July 2006 at 9:40 am Leave a comment

Classical Liberal Sociology

| Peter Klein |

At the risk of turning O&M into a sociology blog, let me call your attention to yet another item on the ideological leanings of sociologists. The Summer 2006 issue of The Independent Review, one of my favorite journals, is hot off the press, and it contains an essay by Daniel Klein and Charlotta Stern, “Sociology and Classical Liberalism.” Here is the abstract:

Sociology inspired by classical liberalism isn’t as far fetched as the profession’s current collectivist tilt might suggest. In addition to developing the social insights of Adam Smith, Alexis de Tocqueville, Herbert Spencer, William Graham Sumner, and F. A. Hayek, a classical liberal sociology might take up such topics as the differences between cooperation and coercion; the interrelations between commerce and community; the role of privilege, prestige, status, and power in “rent seeking”; and the social mechanisms that foster and reinforce statism.

O&M readers may also enjoy, from the same issue, “Four Years After Enron: Assessing the Financial-Market Regulatory Cleanup” by Roy C. Smith and Ingo Walter and “Holding ‘Governance’ Accountable: Third-Party Government in a Limited State” (on government outsourcing) by Sheila Suess Kennedy.

26 July 2006 at 12:00 am Leave a comment

More on Sociologists

| Peter Klein |

Regarding the political inclinations of economists and sociologists, my colleague David O’Brien remarks:

As I’m sure you know, the ideological roots of economics come out of “liberal” thought, whereas, as you may not know, the ideological roots of sociological thought emerge from the “romantic conservative reaction” to the French Revolution and Enlightenment thought; hence the inclination of sociologists to define the problem of order in terms of “consensus-building” either in the traditional sociology of Durkheim that focuses on values and norms or the Marxian obsession with “control of the means of production”. . . .

To me, the most intriguing aspect of the paradigmatic biases of economics versus sociology is that the economists’ assumptions are much closer to the long-term “informal” as well as “formal” liberal institutional structure of our society; not only in economics, but in political life as well. Thus, it’s not surprising that ordinary folks, as well as policy makers are more likely to listen to economists than sociologists. Of course, as the previous World-Bank President came to realize, it is difficult to solve development problems solely in terms of the neo-classical economic paradigm. It’s interesting, along these lines, that the concept of “social capital” that has been “embedded” in sociological thought since the 19th century, although in different terms, finally was the idea that made the “breakthrough” in bringing sociological thought into the bankers’ discussions of development; i.e., when a sociological idea could be understood within the language of liberal thought as a factor in capital formation.

Of course, there is a lot of silliness in sociology that reinforces the notion that the discipline is far removed from “practical problem solving.” I think that many sociologists often tend to be their own worst enemies by eschewing incremental — i.e., “liberal” policy alternatives — and to focus on utopian dreams.

25 July 2006 at 11:58 pm 3 comments

Theories of Religion

| Richard Langlois |

My previous post was in part a comment on Nicolai’s Bastille Day post. While I’m at it, I thought I might comment on another aspect of that post, namely Armstrong’s theory of religions of the “Axial Age.” I haven’t read the book (of course), but I’m skeptical, since most of human history until recently (and still now in much of the world) was a time of “violence, political disruption and extreme intolerance.” Another theory of religion that readers of this blog might find interesting is that suggested by Burton Mack in “Who Wrote the New Testament?” (which I actually have read). He argues — perhaps reflecting a generally accepted view among secular biblical scholars — that Christianity was the product of ancient “globalization.” Judaism was (or at least grew out of) an ethnic temple-state religion, and its innovation of monotheism was useful in helping to bind together an ethnic community. (We have been chosen by the one true God.) By contrast, as Morris Silver has argued, Greek religion was a congeries of local gods assembled from the various peoples the Greeks and later Romans had conquered — and thus a useful kind of religion for empire-builders, since you could just add the local god to the pantheon to make the locals happy. (The Jews never bought into that, of course, and suffered for it.) (more…)

25 July 2006 at 3:42 pm Leave a comment

Capitalism, Socialism, and the Cote d’Azur

| Richard Langlois |

Thanks to Nicolai and Peter for inviting me to join in on the fun.

I trust that Nicolai and family are enjoying their vacation in Antibes, soaking up the sun and tpicture004_24jun06.jpghe local communist ideology. As it happens, I was in that part of the world about a month ago. On a free day while exploring Nice, I headed up to Nice Castle in search of some medieval ambience. Instead I found the annual local fete of the French Communist Party. The experience was surreal in that the event reminded me of nothing so much as the small-town agricultural fairs here in New England. The main difference seemed to be that the booths offering grilled sausages were staffed not by the Columbia Lions Club but by the Pablo Picasso Cell. (I must admit, however, that, even though the towns near me have names like Hebron and Lebanon, none of them would have had a pro-Palestinian anti-Israeli booth.) Adding to the surreal experience, the sound system kept pumping out Steely Dan’s “Cousin Dupree” over and over, apparently as a way of checking the settings.

I was in Nice — actually Sophia Antipolis, which is closer to Antibes — for the biennial meeting of the International Joseph A. Schumpeter Society. This was a rather more capitalistic experience, at least from my point of view. For one thing, the conference dinner, which featured the award of the Schumpeter Prize, took place at a former Rothschild Villa overlooking the sea. As a certain modicum of self promotion is apparently de rigeur in blogs, I suppose I should admit that one of the winners of the Schumpeter Prize was, well, me. The manuscript in question, called The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy, started out as the Graz Schumpeter Lectures in 2004. (In this respect I followed in the footsteps of Brian Loasby, whose 1996 Graz Lectures won the 2000 Schumpeter Prize.) The book (which Routledge is to publish) mixes intellectual history and economic history, tracing the (remarkably similar) Weberian accounts of Schumpeter and Chandler, who see the large managerial corporation as the apotheosis of “rational” economic organization, and confronting those accounts with the rather contrary evidence of the last quarter century — what I call the Vanishing Hand thesis. At least until I sign the rights over to Routledge, the manuscript is available here.

More substance next time.

25 July 2006 at 2:33 pm 4 comments

Do Economists Make Good Leaders?

| Peter Klein |

Hugo Sonnenschein is a rare breed, an accomplished mathematical economist who went on to become a Dean (Penn), Provost (Princeton), and University President (Chicago). I bet he’s the only university president emeritus with a forthcoming Econometrica. And what a cool title: Adam Smith Distinguished Service Professor!

However, like Harvard’s Larry Summers, Sonnenschein ran into problems as Chicago’s president. His attempt to reform the university’s rigid, and increasingly idiosyncratic, undergraduate core curriculum met with strong resistance. The conflict led to Sonnenschein’s resignation in 2000, though without the fireworks accompanying Summers’s departure.

Do economists make good leaders? Many commentators on the Summers brouhaha suggested that Summers’s training as an economist contributed to his poor communication and people-management skills. (One critic complained that “Summers’s thinking is grounded in a discipline that has little sense of fairness and moral obligation, where discriminatory situations are often accepted as the result of Darwinian mechanisms that should be left untouched.” Hmmmmm . . . wanna bet this critic prefers polar bears to Pakistanis?)

NB: I’ve spent much of my own academic career serving under economists, first Charles B. Knapp at the University of Georgia and now Brady J. Deaton at the University of Missouri. What does that say about me . . . ?

25 July 2006 at 8:26 am 4 comments

Introducing Guest Blogger Richard Langlois

It is a pleasure to welcome Richard Langlois as our newest guest blogger. Dick is Professor of Economics at the University of Connecticut and Adjunct Professor of Strategy and Business History at the Copenhagen Business School. A prolific scholar and accomplished teacher, Dick is author or editor of nine books and dozens of articles in the theory of the firm, organizational boundaries, technology, the economics of institutions, the history of economic thought, and economic methodology. (His impressive CV is here.)

During the next couple of weeks Dick will share his thoughts on these subjects and whatever else strikes his fancy. Please join us in welcoming him to the team.

24 July 2006 at 11:24 am 3 comments

Why Do Sociologists Lean Left — Really Left?

| Peter Klein |

It’s no secret that academic intellectuals tend to favor socialism and interventionism over the free market, agnosticism and warm-and-fuzzy universalism over orthodox Christianity, cultural relativism over tradition and authority, and so on. Indeed, studies of US professors’ political affiliations consistently find a strong leftward bias. Hayek ascribed the hostility of the intellectual classes toward capitalism to selection bias. Schumpeter noted the intellectual’s “absence of direct responsibility for practical affairs,” emphasizing “the intellectual’s situation as an onlooker — in most cases, also an outsider — [and] the fact that his main chance of asserting himself lies in his actual or potential nuisance value” (Capitalism, Socialism, and Democracy, 3rd ed., p. 147).

Now comes a new study of academics’ political affiliations using voter-registration records for tenure-track faculty at 11 California universities. The study, by Christopher F. Cardiff and Daniel B. Klein, finds an average Democrat:Republican ratio of 5:1, ranging from 9:1 at Berkeley to 1:1 at Pepperdine. The humanities average 10:1, while business schools are at only 1.3:1. (Needless to say, even at the heartless, dog-eat-dog, sycophant-of-the-bourgeoisie business schools the ratio doesn’t dip below 1:1.)

Here’s the most interesting finding. What department has the highest average D:R ratio? You guessed it: sociology, at 44:1. Perhaps some of our readers of the sociological persuasion could tell us why, and what this means. (more…)

23 July 2006 at 1:28 pm 40 comments

Nickels, Dimes, and Wal-Mart

| Peter Klein |

Like many US universities, my school has a summer reading program, in which incoming freshman are assigned a book to read over the summer, for small-group discussions during the fall. A couple of years ago I volunteered to lead one of these discussions. You can imagine my disappointment when I learned that the assigned reading was Barbara Ehrenreich’s extremely silly Nickel and Dimed, a polemic against the low-wage retailing and hospitality sector. (My main complaint against the book was not that I disagreed with nearly all its substantive points, but that it consists of little more than left-wing bromides and platitudes, supported by anecdotal evidence and written in an annoyingly cutesy style. I don’t care if the book is liberal, conservative, libertarian, Green, brown, or purple, but please make it well-reasoned, balanced, and thorough. Why expose these poor freshmen to mush?)

Hence I was glad to see Ehrenreich taken to the cleaners by Jason Furman in this Slate dialog, “Is Wal-Mart Good for the American Working Class?” Furman actually has arguments and evidence for his position, a refreshing addition to the typical Wal-Mart debate. (HT: Fred Tung)

Incidentally, some of the best empirical work on Wal-Mart has been done by my colleague Emek Basker.

Update: Bob V. summarizes the Slate debate this way: “Dr. Furman is an economist. . . . He sees the world as systems and asks the question: how should our systems be designed to make the world a better place? Ms. Ehrenreich, on the other hand, asks: how can I get more stuff?”

22 July 2006 at 8:12 am 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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