Archive for September, 2006
Is Selective Intervention Really “Impossible”?
| Nicolai Foss |
One of the most difficult notions in the theory of the firm is surely that of “selective intervention,” and particularly the associated notion of the “impossibility of selective intervention.” These terms were coined by Oliver Williamson to describe attenuation of incentives that accompanies integration (see this book, chapter 6). What Williamson calls “the fiction of selective intervention” refers to the thought experiment of one big firm replicating small firms for all activities “save those for which the expected net gains from intervention could be projected.” If this were possible, all economic activity, Williamson argues, would be organized in a single firm.
What then are the reasons why “selective intervention” thus defined is a “fiction”? (more…)
O&M Blocked
| Nicolai Foss |
I have just been informed by an avid O&M reader of Chinese nationality that upon his return to China a few days ago he found that O&M has been blocked by the Chinese authorities. Marginal Revolution, on the other hand, has not been blocked. Peter and I have long been wondering about the differences in the size of the readership of O&M and MR. We now have the explanation.
Reciprocal Harm
| Peter Klein |
Coase’s concept of reciprocal harm, illustrated by Jerry Scott and Jim Borgman:
You serious types may prefer Eric Claeys’s paper “Jefferson Meets Coase: Train Sparks, the Harm-Benefit Distinction, and Natural Property Rights.” On externalities more generally, Andy Barnett and Bruce Yandle’s “The End of the Externality Revolution” is worth a look.
17 September 2006 at 12:18 am Peter G. Klein Leave a comment
Are Economists Realists About Equilibrium?
| Nicolai Foss |
Economists are not always entirely forthcoming about how economic models connect to economic reality. My own perspective is that good economic models are simplified redescriptions of reality that capture those mechanisms that are essential for understanding a certain phenomenon. A crucial part of most economic models is that of equilibrium. Do economists think of equilibrium as a “simplified redescription of reality”? Or to put it somewhat differently, do they think that equilibrium is a possible (albeit perhaps highly unlikely) property of economic reality? Or is equilibrium a strictly analytical concept, and any association with economic reality a fallacy of conceptual realism? (more…)
More on Global Warming
| Peter Klein |
If you enjoyed our previous discussions of Greenland, and global warming more generally, check out these items from Der Spiegel. Here is one on Greenland agriculture (along with a great slide show). This one explains how global warming reduces the costs of oil production. (Via Arts & Letters Daily.)
The Make-and-Buy Decision
| Peter Klein |
Two new papers address bi-sourcing: Why do some firms simultaneously produce their own inputs and purchase the same inputs from external suppliers? Julan Du, Yi Lu, and Zhigang Tao’s “Why Do Firms Conduct Bi-Sourcing?” (Economics Letters, August 2006) uses bargaining theory to show how simultaneously making and buying can mitigate the holdup problem associated with exclusive reliance on an external supplier. Daifeng He and Jackson Nickerson’s “Why Do Firms Make and Buy? Efficiency, Appropriability, and Competition in the Trucking Industry” (Strategic Organization, February 2006) tells a more nuanced story in which “the interaction of efficiency, appropriability and competition concerns” explains simultaneous bi-sourcing. He and Nickerson provide empirical analysis inconsisent with market-power, capacity-constraint, agency-theoretic, and property-rights explanations for the results.
Both papers contribute to a growing understanding that vertical relationships are frequently more subtle and complex than what can be captured by simple “make-or-buy” models. (Even our canonical examples deserve further scrutiny.)
Outliving Your Enemies
| Peter Klein |
Most of us know the quip “science progresses one funeral at a time.” The reference is to Thomas Kuhn’s Structure of Scientific Revolutions, and this passage in particular: “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.” (A line Kuhn borrows from Max Planck.)
I recently heard an amusing illustration. J. Harlen Bretz was a geologist who studied a large area called the Channeled Scablands in eastern Washington, Idaho, and western Montana in the early 1920s. He concluded that this area had suffered a massive, ancient flood during the melting of the glaciers during the last ice age. For decades no one believed him, but finally his findings became generally accepted in the 1970s, when Bretz was in his 90s. Asked how it felt to be vindicated after so many years; he reportedly said “All my enemies are dead, so I have no one to gloat over.”
Nothing New Under the Sun
| Peter Klein |
Back when the “New Economy” was in vogue I enjoyed challenging the claim that the “new” phenomena were really new. Before the internet, there was the telegraph. Before the Yahoo! directory there was the telephone book. Before the personal computer there was electric service, the refrigerator, the washing machine, the telephone, and the VCR. In short, such breathlessly touted phenomena as network effects, the rapid diffusion of technological innovation, and highly valued intangible assets are nothing new.
Now comes an interesting paper in the current issue of Economic History Review by Jochen Streb, Jörg Baten, and Shuxi Yin, “Technological and Geographical Knowledge Spillover in the German Empire 1877-1918.” The authors use patent and geographic data to identify four distinct technological waves during this period, drive by innovation in railways, dyes, chemicals, and electrical engineering, respectively. The general claim is that “inter-industry knowledge spillovers between technologically, economically, and geographically related industries were a major source for innovative activities during German industrialization,” and that “technological change affected the geographical distribution of innovative regions.” A nice application of the modern literature on clusters, innovation, and knowledge spillovers to the recent past. Perhaps Ecclesiastes was right after all.
14 September 2006 at 10:44 am Peter G. Klein Leave a comment
A Mistaken Argument for Relativism
| David Gordon |
A very popular argument among postmodernists and other inhabitants of the Kingdom of Epistemological Darkness goes like this: We see things only from our own perspective, and we can never grasp the truth as it is in itself. All observation is “theory-laden”.
Of course we see things from a point of view, but it doesn’t follow from this that we are not making an objectively true judgment about what we see. I’m now, for example, looking at a computer screen in normal light. Is there any reason to think that the computer screen isn’t really there, or that my view of the screen is distorted? In the absence of reason to think otherwise, it is entirely rational for me to accept my common sense belief that I am viewing a real screen. The argument from perspective mistakenly assumes that the “real” object exists at no point of view at all. As Jim Sadowsky puts it, the claim is that because we have eyes, we can’t see.
In like fashion, the argument that observation is theory-laden assumes that our theories block access to the world as it really exists. But some of our theories, at least, are true, and known to be true. The argument for relativism relies on an equivocation in the meaning of “theory”. In one sense, a theory is a speculative belief that is not known to be true. We can, in this sense, speak of the theory that intelligent life exists on other planets than Earth in our galaxy. Maybe it does, and maybe it doesn’t; we don’t know. In another sense of the word, a theory is a statement that goes beyond a “pure observation statement”, if such a thing exists. In this sense, perfectly obvious claims, e.g., elephants weigh more than sociologists, count as theoretical statements. To say that a statement is theory-laden, in this second sense, gives us no reason whatever to doubt its truth.
Economics and Sociology: Gains from Trade?
| Peter Klein |
Indiana University’s Fabio Rojas, who blogs at orgtheory.net, has an interesting paper, “Economics and Sociology: What are the Gains of Trade?,” forthcoming in Geoff Hodgson’s Journal of Institutional Economics. A review and critique of contemporary economic sociology, the paper points out that “research findings and theoretical developments [in economic sociology] are rarely reconciled or integrated with economic research.” Moreover, the critics tend to deal with a stylized, and rather stale, caricature of neoclassical economics, rather than the best work in modern organizational economics, Austrian or evolutionary economics, or the newer strand of behavioral research (a point made repeatedly on these pages). A good read.
14 September 2006 at 12:30 am Peter G. Klein Leave a comment
Empirical Work on Modularity
| Nicolai Foss |
Modularity has now been on the agenda of strategic management, organizational theory, and technology studies scholars for more than a decade. One of the first (perhaps the first) discussions of modularity in strategic management is the 1996 Strategic Management Journal paper by Ron Sanchez and former O&M guest blogger Joe Mahoney (“Modularity, Flexibility, and Knowledge Management in Product Organization Design”). This paper was largely theoretical.
However, four years earlier another former O&M guest blogger, Dick Langlois, published a paper in Research Policy (“Networks and Innovation in a Modular System,” with Paul Robertson) that remains among the most downloaded RP papers ever. The empirical basis for this paper was case studies of the micro computer and stereo component industries.
Since these two pioneer contributions, much work has been done on modularity, and much of it with an empirical orientation. However, the kind of empirical approach that is dominant in management — quantitative, cross-sectional work — has been very slow in being applied to issues of modularity. (more…)
Swedish Economists
| Peter Klein |
When Sweden was hit by a deep economic crisis in the fall of 1992 and was forced to abandon the pegged exchange rate, the government appointed a commission of primarily university economists under the chairmanship of Assar Lindbeck, the most well-known economist in the country at the time. The commission was assigned to present an analysis of the problems facing Sweden. Appearing in March 1993, the report had a major impact in the media and in public debate. Several of its 113 proposals eventually served as a source of inspiration for political action.
This event illustrates the strong position of the economics profession in Swedish society -— no historians, philosophers, management consultants or former political leaders were considered for this task, as may have been the case in other countries. Economists play a prominent role in public debate in Sweden, many appear on radio and television, write for the daily press, magazines and books, and serve as experts on government inquiries and commissions. In Sweden, economists probably have more influence than any other category of social scientists.
This is from “Knut Wicksell, Gustav Cassel, Eli Heckscher, Bertil Ohlin and Gunnar Myrdal on the Role of the Economist in Public Debate” by Benny Carlson and Lars Jonung in the September 2006 issue of EconJournalWatch. Can any of our Nordic readers explain why Swedish economists have so much influence? (And if so, why the Swedish economy isn’t in better shape?)
N.B.: Also recommended, from the same issue of EconJournalWatch, is the exchange between Robert Lawson and critics on the use of the Gwartney et al. Economic Freedom Index.
Majoring in IBM
| Peter Klein |
Allowing students to write their own textbooks is controversial enough. What if IBM wrote them?
When graduate students at North Carolina State University took their seats on the first day of a class called Services Management, the kickoff lecture wasn’t delivered by a professor. Instead, it was given by a manager from International Business Machines Corp.
The company, in fact, helped develop the curriculum and awarded grants to the school with the expectation that the course would be taught — all with the aim of producing graduates better prepared to work for IBM.
This is from a report in today’s W$J on a growing trend toward business-school courses, and even entire curricula, designed for particular firms. (Disclaimer: I am affiliated with this.)
12 September 2006 at 12:20 pm Peter G. Klein Leave a comment
Mises’s Bureaucracy
| David Gordon |
Mises’s Bureaucracy (1944) is seldom cited, at least by comparison with Human Action and Socialism; but it presents some of his key insights better than anywhere else. Mises contrasts profit-and-loss management with bureaucratic management.
A businessman can always tell how well a section of his enterprise is doing by looking at the profit-and-loss accounts. If a section shows a loss, this fact doesn’t by itself enable him to locate the problem; but at least he is aware that something needs to be done.
Government bureaucracies, by contrast, do not produce goods or services for profit. Lacking the tool of profit-and-loss accounts, they instead must operate according to fixed rules. The well-known failings of bureaucracies, according to Mises, do not primarily stem from deficiencies of character in the government personnel. Rather, resort to fixed rules makes bureaucracies much less flexible than profit-seeking businesses. (Mises’s views on bureaucracy were influenced by his friend Max Weber.)
Mises does not think that attempts to introduce business methods into government can succeed, and he deplores the bad effects of government regulations on private enterprise. These regulations interfere with profit-and-loss accounting.
Bureaucracy is available at the Mises Institute website.
Coase and the Myth of Fisher Body
| Peter Klein |
I vividly recall, at the inaugural meeting of the International Society for New Institutional Economics in 1997, a discussion about the best empirical strategy for that emerging discipline. Harold Demsetz stood up and said “Please, no more papers about Fisher Body and GM!” The Fisher-GM case had become the canonical example of holdup in transaction cost economics and was considered stale and even trite. Ronald Coase, who was at the podium, replied (I’m paraphrasing from memory) “Sorry, Harold, that is exactly the subject of my next paper!”
The GM-Fisher case was introduced into the transaction cost literature by Klein, Crawford, and Alchian in their 1978 paper “Vertical Integration, Appropriable Rents and the Competitive Contracting Process.” They cited the case as a classic example of vertical integration designed to mitigate holdup in the presence of asset specificity. As the story is told, Fisher refused to locate its plants near G.M. assembly plants and to change its production technology in the face of an unanticipated increase in the demand for car bodies. This led G.M. to terminate its existing ten-year supply contract with Fisher and to acquire full ownership of Fisher.
The basic facts of the account, and the interpretation of these facts, were challenged in five independently written papers, all appearing in 2000. Three of the papers, by Coase, Casadesus-Masanell and Spulber, and Freeland, are in the April 2000 Journal of Law and Economics. A fourth paper by Helper, MacDuffie, and Sabel appears in Industiral and Corporate Change and one by Miwa and Ramseyer is in the Michigan Law Review. These papers showed that nearly every detail of the canonical account is wrong. (more…)
Introducing Guest Blogger David Gordon
| Peter Klein |
It is a delight to welcome David Gordon, Senior Fellow of the Ludwig von Mises Institute and author of The Mises Review, as our newest guest blogger. David is a philospoher and intellectual historian whose expertise encompasses — well, pretty much everything. He has written extensively on methodology, epistemology, political philosophy, the history of economic thought, and other subjects. His bibliographic knowledge is immense. And he knows (and appreciates) more bad jokes than I do. (Did I mention that he’s also an authority on professional wrestling?)
We look forward to David sharing his wit and wisdom over the next few weeks. Welcome, David!
Tacky Editors
| Nicolai Foss |
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?
Structure and Agency: A Response to Felin and Foss
| Nicolai Foss |
In 2005 Strategic Organization published a paper by Teppo Felin and me, “Strategic Organization: A Field in Search of Micro-foundations.” The paper has caused quite a stir, and the editor of SO! told me at the recent Academy Meetings that he had been contacted by several authors and author teams who wanted to write responses. Our argument? The — apparently provocative — one that notions of capabilities, routines, etc. are collective-level constructs that do not have any clear (and clean) micro-foundations (as well as definitions, measures, etc.). (more…)
Quote of the Day
| Peter Klein |
As a regular feature at O&M we will begin sharing our favorite quotations, particularly on days when we have nothing original to say. Today, as a professional educator and amateur cynic, I offer this classic passage from H.L Mencken, describing the condition of American universities, circa 1928:
[T]he great majority of American colleges are so incompetent and vicious that, in any really civilized country, they would be closed by the police. . . . In the typical American state they are staffed by quacks and hag-ridden by fanatics. Everywhere they tend to become, not centers of enlightenment, but simply reservoirs of idiocy. Not one professional pedagogue out of twenty is a man of any genuine intelligence. The profession mainly attracts, not young men of quick minds and force of character, but flabby, feeble fellows who yearn for easy jobs. The childish mumbo-jumbo that passes for technique among them scarcely goes beyond the capacities of a moron. To take a Ph.D. in education, at most American seminaries, is an enterprise that requires no more real acumen or information than taking a degree in window dressing. . . . Their programs of study sound like the fantastic inventions of comedians gone insane. — H.L. Mencken, “The War Upon Intelligence,” Baltimore Evening Sun, December 31, 1928.
I leave it to the reader to assess how much things have changed.
Against Freakonomics
| Peter Klein |
We’ve discussed the Freakonomics phenomenon on these pages, but said little about the substance of Levitt and Dubner’s famous book. (Nicolai offered some brief remarks here — scroll down to the 15 August entry — in the dark days before Organizations and Markets.)
Several new critiques are floating around. Gene Epstein’s book Econospinning: How to Read Between the Lines When the Media Manipulate the Numbers challenges the chapters on real-estate agent services and the abortion-crime link. And from Division of Labour I learn that Ariel Rubinstein reviewed the book, quite harshly, for Haaretz. Rubenstein thinks the book is clever and entertaining, but not really economics. He also takes Levitt and Dubner to task for playing fast and loose with the facts. (more…)
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