Archive for May, 2007

Core Economics for Managers

| Peter Klein |

Previously I’ve noted the new managerial economics texts by Dwight Lee and Richard McKenzie and Luke Froeb and Brian McCann. Joshua Gans was kind enough to send me a copy of his Core Economics for Managers (Thomson, 2005) and it looks like a good option as well.

The first thing one notices about the book is its brevity and clean, minimalist design: just 206 pages, no fancy graphics, and few sidebars or mini-cases. The book focuses on the “core” areas of pricing, competitive strategy, incentives, and contracts, omitting corporate strategy, human resource management, and peripheral areas like ethics. As its main pricing model, the book features not the increasingly irrelevant perfectly competitive (general or partial) equilibrium model, but a negotiation framework like that in Brandenburger and Nalebuff’s 1996 book Co-opetition. That is, unlike the typical strategy text, cooperative game theory gets as much attention as its more familiar noncooperative counterpart.

Part IV of the book, on contracting, looks particularly good. It favors the property-rights approach to the firm (in my judgment, the correct approach) over the nexus-of-contracts approach, and features a section on relational contracting, a topic usually omitted from introductory managerial texts.

Joshua will be revising the text in the coming months for a new edition and would appreciate suggestions for improvement.

31 May 2007 at 4:22 pm 1 comment

More on the Austrian Firm Conference

| Peter Klein |

Anthony Evans offers further reflections on the “Austrian Market-Based Approaches to the Theory and Operation of the Business Firm” conference, including the epic Klein-Sautet showdown.

31 May 2007 at 9:31 am Leave a comment

Gintis Smashing Heterodox Economics

| Nicolai Foss |

Remember the “post-autistic” movement in economics that began in France in 2000? Have you, too, been irritated by the sometimes, ehmm, bizarre claims that are put forward by members of the “post-autistic economics network“? Do you think utterances such as the following one are, to put it nicely, not accurate representations of modern economic theory:

Game theory cannot be “applied”: it only tells little “stories” about the possible consequences of rational individuals’ choices made once and for all and simultaneously by all of them. . . . Akerlof, Spence and Stiglitz have no new “findings”, they just present, in a mathematical form, some very old ideas — long known by insurance companies and by those who organize auctions and second hand markets. . . . Amartya Sen, as an economist, is a standard microeconomist (that is what he was awarded the Nobel Prize for): only the vocabulary is different (“capabilities”, “functionings”, etc.).

(The quotation can be found here). (more…)

31 May 2007 at 3:27 am 3 comments

Scientific Progress in Strategic Management?

| Nicolai Foss |

OK, I persist in using O&M for the purpose of shameless self-promotion: I have written “Theory of Science Perspectives on Strategic Management Research: Debates and a Novel View” (I know — not an elegant title) for The Elgar Handbook of Research on Competitive Strategy, edited by Giovanni Battista Dagnino.  I will be happy to send you a copy if you drop me a mail at (more…)

30 May 2007 at 5:10 pm Leave a comment

Average versus Marginal: Blowback Edition

| Peter Klein |

Republican Presidential candidate Ron Paul caused a stir recently by suggesting, to the horror of the other Republican candidates, that US foreign policy might have something to do with Muslim anger toward the US. The Bush Administration, of course, maintains that “they hate us for our freedom.” No matter what the US government does, in other words, Islamic extremists will target Americans in retaliation for the Declaration of Independence, McDonalds, and Paris Hilton. (Rudy Giuliani, incredibly, claims he has never even heard of blowback.)

Of course, these explanations are not incompatible. US culture and institutions could, in theory, account for the average level of anti-Americanism in the Islamic world. To explain a specific terrorist act, however, we have to think in marginal terms. What we call “terrorism,” as Robert Pape has brilliantly explained, is a tactic, not an ideology. Whatever his general attitude toward the enemy, the terrorist must choose to attack this target or that, to attack now or later, to select one more target or one less. Even if exogenous US characteristics were responsible for overall terrorist attitudes and beliefs, blowback is probably still the best explanation for specific terrorist acts.

Note that this is an application of a more general point about intrinsic and extrinsic motivation, an important issue for management theory. (more…)

30 May 2007 at 11:42 am 5 comments

O&M at the AoM

| Peter Klein |

O&M will be well represented at the Academy of Management annual meeting in Philadelphia, 3-8 August 2007. Former guest blogger (and Philly native) Joe Mahoney is president-elect and program chair for the Business Policy and Strategy Division, so you know the program will be good.

I am chairing a Professional Development Workshop (PDW) titled “The Austrian School of Economics: Applications to Organization, Strategy, and Entrepreneurship” featuring former guest bloggers Mahoney and Dick Langlois along with Elaine Mosakowski, Yasemin Kor, Nicolai, and myself. Teppo of has put together a session on “Entrepreneurship and Strategic Organization: Taking Stock, Problems, and Future Directions” which includes Jay Barney, Todd Zenger, Kirsten Foss, Mosakowski, Nicolai, and me. Other sessions of note include a PDW on the fifth anniversary of the excellent Strategic Organization (Nicolai is in that one too, along with O&M favorite and guest blogger Chihmao Hsieh’s mentor Jackson Nickerson); a session on the philosophical and epistemological foundations of strategy and organization theory, organized by Teppo and featuring regular O&M commentator J. C. Spender; a session on cognitition in organizational economics; and many other interesting workshops, lectures, and sessions on organization, strategy, entrepreneurship, and the market process.

PS: Before you go, be sure to study this article on Philadelphia dining from the current issue of Food and Wine Magazine.

29 May 2007 at 2:15 pm Leave a comment

War, American Idol, the New “Kidney” Reality Show, and Markets for Attention

| Chihmao Hsieh |

I read two news articles today. One of them describes Cindy Sheehan’s decision to give up her anti-war protest, where she exclaims that Americans live in “a country which cares more about who will be the next American Idol than how many people will be killed in the next few months.” (For those of you who don’t watch any TV, American Idol is the American version of that popular season-long show where 15-20 contestants sing and compete for a record contract, voted upon via SMS text messaging by TV viewers like you and me.) The other news article describes the newest reality TV program in the Netherlands, where a patient with an inoperable brain tumor is donating her kidney and choosing the beneficiary based on televised interviews of three contestants, in a manner apparently reminiscent of a game show format.

How I described the latter article may not make you furl your eyebrows, but listen to this: TV viewers will vote via SMS text messaging who gets to receive the kidney.

Likely many types of societal issues are raised by the juxtaposition of these two news articles. One of the likely-provocative questions I have for the readership: Would you prefer to associate with a world that promotes “American Idol” or a world that promotes this new kidney donation game show?

UPDATE: The kidney reality show was all apparently an elaborate hoax.

29 May 2007 at 10:11 am 5 comments

What Does “Zero Transaction Costs” Mean, Epistemically?

| Nicolai Foss |

What does the Coase Theorem require epistemically? To put it less mysteriously, what are the assumptions concerning agents’ knowledge that must be made for the Coase theorem to hold? Or, to rephrase it somewhat, what does zero transaction costs mean in terms of agents’ knowledge (an inquiry started by Carl Dahlman in this paper)?

In his retrospective (1988) discussion and assessment of the debate on the theorem, “Notes on the Problem of Social Cost,” Coase seems to imply that the Theorem requires omniscience. I think that Barzel makes the same inference in his Economic Analysis of Property Rights. In other words, the Coase Theorem holds iff all resource uses, current as well as future ones, are known by everyone.

Not all writers seem to agree with this interpretation, however. (more…)

29 May 2007 at 12:54 am 6 comments

Jewish Economic Theory

| Peter Klein |

Five principles of Jewish economic theory, as described in Judaism, Markets, and Capitalism: Separating Myths from Reality by Corinne Sauer and Robert M. Sauer (forthcoming from the Acton Institute):

  • Work, creative activity, and innovation are the avenues through which the divine image is expressed.
  • Private property rights are essential and must be protected.
  • The accumulation of wealth is a virtue not a vice.
  • Man has an obligation to care for the needy through charitable giving.
  • Government is inefficient and concentrated power is dangerous.

Sauer and Sauer compare this passage in 1 Samuel to Hayek’s warnings in The Road to Serfdom: (more…)

29 May 2007 at 12:07 am 3 comments

Conference on Austrian Economics and the Firm

| Peter Klein |

Last week I attended an interesting discussion conference sponsored by the Atlas Foundation, “Austrian Market-Based Approaches to the Theory and Operation of the Business Firm.” Former O&M guest blogger Dick Langlois was there, as were Pete Boettke and Fred Sautet of The Austrian Economists, Tony Woodlief of the Market-Based Management Institute, Saras Sarasvathy, Peter Lewin, Ivan Pongracic, Anthony Evans, and several others. (A selection of papers, written for the conference, will appear in the Review of Austrian Economics.)

The participants clearly believe the Austrian tradition has something of value for researchers and teachers in business administration. There may also be Austrian lessons for practitioners, though there was less consensus on exactly what these lessons are and how they should be communicated. One theme that emerged clearly from the discussions was the depth and variety of the Austrian approach. Despite a shared commitment to the general framework of the Austrian school there were many disagreements about core theoretical issues and much uncertainty about what these ideas imply for firm boundaries, strategy, entrepreneurship, and public policy. (more…)

28 May 2007 at 10:15 am 6 comments

Great Economists’ Autographs

| Nicolai Foss |

If you are into collecting autographs and admire Nobel Prize winning economists, ebay is (of course) the place for you. Here is Ronald Coase’s autograph — with a buy-it-now price of 10 USD; here is Nash’s — a bit more fancy (First Day Cover), and (therefore?) with a buy-it-now price of 85 USD; here is Uncle Milton at 34 USD, and one more Nash at 24 USD.  The latter Nash autograph, the Friedman and the Coase ones are all on 3×5 unlined index cards. Still, there is a heavy disparity in terms of the asked price. The market values Friedman more than Nash who is valued more than Coase.

28 May 2007 at 3:53 am 14 comments

Quote of the Day: Poetry About Prices

| Peter Klein |

One of my favorite quotes about the beauty of the price mechanism:

[The market price] synthesizes a number of factors, so that there is difficulty in identifying them and even more in forecasting them: quantities, qualities, possibilities, calculations of interest, memories, fears, hopes. A price is not only the result of statistical figures. It includes all the vibrations of man’s thoughts and soul, since ever they have exercised an influence on the market. (Louis Baudin, La Monnaie et la Formation des Prix, 1836, quoted in Hoff, Economic Calculation in the Socialist Society, p. 299.)

27 May 2007 at 3:46 pm 1 comment

Foss & Foss Paper on Opportunity Discovery and the RBV

| Nicolai Foss |

With my frequent co-author, Kirsten Foss, I have written “New Value Creation in the Resource-based View: How Knowledge and Transaction Costs Shape Opportunity Discovery.” (more…)

27 May 2007 at 10:45 am 5 comments

Pioneers of Industrial Organization

| Nicolai Foss |

Pioneers of Industrial Organization: How the Economics of Competition and Monopoly Took Shape is the title of a new volume edited by Henk de Jong to be published next month by Edward Elgar. My CBS colleague Peter Møllgaard and I have contributed a chapter on early (meaning pre-1980) IO research in the Scandinavian countries. (more…)

26 May 2007 at 5:52 am 2 comments

Barzel on Property Rights

| Nicolai Foss |

This is how Yoram Barzel — arguably the most creative current exponent of property rights economics — defines (economic) property rights (in this paper, p. 394):

… an individual’s net valuation, in expected terms, of the ability to directly consume the services of the asset, or to consume it indirectly through exchange. A key word is ability: The definition is concerned not with what people are legally entitled to do but with what they believe they can do.

Notice how different this is from other (older) economic conceptions (e.g., Furubotn & Pejovich, Alchian, Demsetz et al.) which have typically categorized property rights into usus, usus fructus and abusus rights (and the right to sell these rights), often keeping a legalistic connotation. (more…)

25 May 2007 at 12:58 pm 5 comments

The Religion of Economists

| Peter Klein |

The relationship between economics and religion has attracted increasing attention in recent years. There is the positivist approach, represented by Larry Iannaccone and ERel, which applies standard economic analysis to religious activity and institutions; there are groups like the Acton Institute that try to improve economic literacy among the clergy; and some have even attempted to analyze economics itself as a kind of secular religion.

A new paper by Dan Hammond takes a more straightforward approach, analyzing the religious views of John Nef, Frank Knight, and Milton Friedman, placing this in context of the twentieth century’s general move toward embracing the secular over the sacred. (more…)

24 May 2007 at 1:24 pm 4 comments

HBS Case on Wikipedia

| Peter Klein |

Karim Lakhani and Andrew Mcafee have written a Harvard Business School Case on Wikipedia. Unlike normal Harvard case, it’s available free online. (But you can’t edit it!)

23 May 2007 at 4:03 pm 2 comments

Keynes on the Entrepreneur

| Peter Klein |

Robert Solow, in his review of Thomas McCraw’s Shumpeter biography, emphasizes the contrast between Schumpeter and Keynes. Schumpter’s Business Cycles (1939) was long, detailed, convoluted, and mostly ignored. Keynes’s General Theory (1936) was — at least as interpreted by Meade, Hicks, Hansen, etc. — short, straightforward, operational, and hugely popular. (The book itself is a tough read.) Not surprisingly, Solow’s sympathies lie with Keynes. Schumpeter, he writes,

seemed not to understand what Keyensian economics was about, or why it won over the younger [i.e., Solow’s] generation. For example, he described Keynes as the apostle of consumer spending (in contrast to his own emphasis on innovational investment). But in fact consumer spending is passive in Keynes’s General Theory. The driving force of the aggregate economy is actually investment spending; and Keynes put great causal weight on “animal spirits” and “the state of long-run expectations,” both of which are much more akin to entrepreneurial drive.

It’s been a while since I’ve read Keynes carefully (and hopefully will be a while before I do so again), but this can’t be right. To be sure, “entrepreneurial behavior,” meaning aggregate investment, is critially important in the Keyensian system. However, it is precisely because entrepreneurs are guided not by reasonable conjectures, but by animal spirits — i.e., because investment is so unstable — that all the action lies with consumption. Central planners have no choice but to manipulate aggregate demand; there is little they can do about (highly volatile) aggregate investment.

More generally, Keyes’s investment theory has little to do with any systematic account of the entrepreneur and his function. Am I wrong?

22 May 2007 at 10:01 pm 3 comments

What Would Genghis Do?

| Peter Klein |

After reading Jack Weatherford’s book on Genghis Kahn last year I imagined writing a business bestseller, “Genghis Kahn on Leadership,” or maybe “Genghis Kahn: Five Lessons for Managers.” Unfortunately I’ve been beaten to the punch (1, 2). (Thanks to Tommy Sallee for the links.)

22 May 2007 at 10:15 am 5 comments

Varieties of Institutionalism

| Peter Klein |

The new institutional economists have not been kind to their “old institutional” predecessors. Coase’s dismissal of J. R. Commons, Wesley Clair Mitchell, Thorstein Veblen, Clarence Ayres, and their associates is typical: “Without a theory they had nothing to pass on except a mass of descriptive material waiting for a theory, or a fire.” Like its older counterpart, the new institutional economics is interested in the social, economic and political institutions that govern everyday life. However, the new institutional economics eschews the holism of the older school, adopting strict methodological individualism and some kind of rational choice framework. (See former guest blogger Dick Langlois’s 1989 paper, “What Was Wrong with the ‘Old’ Institutional Economics? (And What Is Still Wrong with the ‘New’?),” for a more sophisticated treatment of these differences.)

Among political scientists there is a similar distinction: “historical institutionalism” versus “rational choice institutionalism.” The differences, as discussed in Preferences and Situations, edited by Ira Katznelson and Barry Weingast (Sage, 2005), revolve mainly around the concept of preference. Rational choice institutionalists — like mainstream economists — take preferences as given, while historical institutionalists take preferences as endogenously determined by historical circumstance, rendering attempts to understand historical phenomena in methodologically individualistic terms impossible.

The historical approach has many problems, however. Mike Munger objects to its relativism: It tends “to presume that theory — any general theory — is wrongheaded: everything is different in various ways from one case to another. The central thesis of much of the work reported in Preferences and Situations seems to be that it is difficult to say anything interesting about persuasion, and the authors go on to demonstrate this claim persuasively.” (Jean Baudrillard, call your office!) More generally, is historical institutionalism, in its modern variant, much of an advance over the crude historicism smacked down in prior generations by the likes of Mises and Popper?

21 May 2007 at 12:14 pm 3 comments

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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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