Archive for October, 2007

Nye on Wine and Trade

| Peter Klein |

John Nye is a very interesting economic historian. I still remember his fiery (and controversial) talk at the inaugural ISNIE conference in 1997, in which he urged new institutional economists to separate themselves from their brothers and sisters in mainstream economics. (Other participants, such as Paul Joskow, thought this was a bad idea.)

John’s new book, War, Wine, and Taxes: The Political Economy of Anglo-French Trade, 1689-1900 (Princeton, 2007) argues that Britain was not, contrary to popular perception, devoted to free trade after the repeal of the Corn Laws in 1846. The British retained high tariffs on French wine, among other goods, leading to substantial welfare losses among Britons. (more…)

16 October 2007 at 10:56 pm Leave a comment

Mechanism Design and the Theory of the Firm

| Peter Klein |

I’ve been asked a few times today what I think of the Nobel Prize to Hurwicz, Maskin, and Myerson for mechanism design. (And, more than once, “What the heck is mechanism design?”) Briefly, mechanism design is the study of rules or contracts (“mechanisms”) that give agents incentives to do what a designer wants — for instance, revealing private information. A simple example is the ticket-pricing rules used by airlines. To maximize revenue, airlines want to charge high prices to business travelers (with presumably inelastic demands) and lower prices to leisure travelers (with more elastic demands). But airlines don’t know which travelers are which type. They can’t can’t simply ask, upon booking, “Are you going on a business trip?” because people would lie. Instead, the airlines give lower-priced tickets to travelers who buy their tickets in advance, will take a non-refundable ticket, are willing to stay over a Saturday night, and so on, assuming that people willing to abide by those restrictions are probably leisure travelers. These rules constitute a mechanism that provides incentives for agents to reveal their types to the principal (or “proposer”).

The WSJ offers this roundup of economics commentary on the Prize. You can find plenty more using your search engine of choice. What does any of this have to do with organizational economics, the theory of the firm, institutions, entrepreneurship, and other topics enjoyed here at O&M? Here are some random thoughts (I hope Nicolai and Dave will chime in soon with their own reactions). (more…)

15 October 2007 at 5:30 pm 5 comments

Another Use for PowerPoint

| Peter Klein |

From yesterday’s Lockhorns strip, for our fun with PowerPoint series.


15 October 2007 at 11:28 am Leave a comment

A Professor’s Influence

| Peter Klein |

As a professor, you never know how much influence you have. Sometimes you hear from former students, years later, thanking you for some remark you made in class, for challenging or inspiring them, for helping them see things in a different way. (You rarely hear from the ones you damaged for life, but forget the sample bias. . . .)

Most of us don’t get thanked on national TV, however. During the fourth quarter of last weekend’s Tennessee-Georgia game the ESPN crew showed an old picture of Tennessee head coach Philip Fulmer from his playing days in the 1970s, then mentioned former history professor Milton Klein, described by head announcer Ron Franklin as Fulmer’s mentor, a professor who “took a young Philip Fulmer under his wing and helped guide him” through his student days. Way to go, Dad! (Thanks to my brother Ed, whose company created ClipShack, host of the clip linked above.)

Update (26 October): Mom gives the football team a back-handed compliment in the local paper (scroll down to the second letter).

13 October 2007 at 3:08 pm 4 comments

Pomo Periscope XV: Orientalistic Pomo

| Nicolai Foss |

One of most influential modern disciples of pomo was the late Edward Saïd, a follower of Michel Foucault and Jacques Derrida. His famous, highly problematic, but surprisingly widely accepted thesis in Orientalism concerns the (alleged) European construction of the Islamic orient as a something radically different from Europe, a construction that developed from the 18th century on and became an instrument of European colonialism and imperialism vis-a-vis the Orient. However, the construction was just that, a mere construction; “Orientalism” was at best a mirror of Europe and not of the Islamic “Orient.” (Here is an intro to the critique of Saïd, and here is a forthcoming bashing). (more…)

13 October 2007 at 1:33 pm Leave a comment

Why Are Markets So Scary? Some Things (Liberal) Academics Get Wrong

| David Hoopes |

Many people make incorrect assumptions about capitalism. Some would have us believe that capitalism is based on greed, selfishness, and promotes behavior that is completely self-centered. This is a common interpretation of Smith’s advice to allow people to make decisions based on self-interest. Examples are easy to find in the many organization theory-based papers complaining about economics and economists.

Two very good papers can aid in a deeper understanding of the invisible hand. First is James Q. Wilson’s “Adam Smith on Business Ethics.” A central point Wilson makes is that Adam Smith assumed people will behave with a moral sense. Wilson, “A moral man is one whose sense of duty is shaped by conscience; that is, by that impartial spectator within our breast who evaluates our own actions as others would evaluate it.” By suggesting people be allowed to make decisions based on their own self interest Smith was not advocating selfishness and greed. What then was he advocating?

This leads to the second paper, Harold Demstez’s “The Theory of the Firm Revisited.” In the third paragraph Demsetz notes that the debate between mercantilists and free traders was over the role of the government in the economic affairs of the state. “Is central economic planning necessary to avoid chaotic economic conditions?” The great achievement of the perfect competition model, what Demsetz argues should be called perfect decentralization, is its abstraction from centralized control of the economy.

Thus, the central element to capitalism is that decision making is pushed down as far as possible. (more…)

11 October 2007 at 4:19 pm 17 comments

Hagel on Institutional Innovation

| Peter Klein |

Here is John Hagel with a nice post on institutional innovation. Product, process, and management innovation are important, he notes, but institutional innovation — that which “redefines roles and relationships across independent entities to accelerate and amplify learning and reduce risks” — is the key to long-term value creation. Hagel names diversity, relationships, modularity, federated decision-making, reputation mechanisms, feedback loops, and incentive structures as the design principles underlying institutional innovation.

Hagel is clearly right to emphasize institutional innovation as a key driver of long-term firm, industry, and overall economic performance. He names the creation of the joint-stock company as a primary example. We could perhaps add the M-form structure, the franchise arrangement, relational contracting, the loosely organized network, and the venture-funded startup to this list.

And yet, there is a lot we don’t know about institutional innovation.  (more…)

11 October 2007 at 1:05 am 3 comments

NASA’s Ambitious Plans, Courtesy of the Onion

| Peter Klein |

It’s easy to poke fun at NASA. Has there every been a clearer example of Bastiat’s broken window fallacy? But I wish I could do it as cleverly as the Onion, which breathlessly reports NASA’s ambitious ambitious plan to install wi-fi by 2017. (Via Anthony Gregory)

11 October 2007 at 12:56 am Leave a comment

A Nobel for Organizational Economics?

| Peter Klein |

The econo-blogosphere is atwitter in anticipation of Monday’s Nobel Prize announcement. (Yes, I know it’s the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, not a “real” Nobel, but who cares? The money spends just the same.) Mankiw, Cowen, Boettke, and other bloggers have made their recommendations and issued their forecasts. Even the sociologists are getting into the act

How about a prize for organizational economics? Coase, of course, whose 1937 paper is foundational to the field, has already won, as have Akerlof, Spence, Stiglitz, Mirrlees, Vickrey, Hayek, and others whose work has greatly informed the study of organizations. But, for a prize recognizing organizational economics per se, whom would you pick? Williamson, Holmström, Milgrom, Roberts, Hart, Tirole, Aghion? Perhaps Alchian, Demsetz, or Jensen. Maybe a personnel economist (Lazear) or someone in corporate finance or accounting (Bill Schwert, Stewart Myers, René Stulz, Raghuram Rajan, Cliff Smith, Milton Harris, Artur Raviv)? Suggestions?

10 October 2007 at 1:37 pm 5 comments

Academics and Ideology Redux

| Peter Klein |

More on academics and left-liberal ideology. Becker and Posner weigh in with explanations based on demographic change, selection bias, and other structural characteristics of higher education. See also these comments by Ilya Somin (1, 2) and David Bernstein on the new study by Gross and Simmons. David wins the quote-of-the-day prize with this gem:

It turns out, according to the study, that 17.6 of professors in the social scientists consider themselves Marxists. Only academics doing a survey of other academics could possibly think that this is low.

9 October 2007 at 5:07 pm 3 comments

Call for Papers: Entrepreneurship — Strategy and Structure

| Peter Klein |

The Journal of Economics and Management Strategy, founded and edited by Dan Spulber, seeks papers for a special issue on “Entrepreneurship: Strategy and Structure.” Thomas Hellmann and Scott Stern are editing the special issue.

While submissions from a wide range of perspectives and topics are welcome, we specifically invite theoretical and empirical papers on the following:

  • The sources of value creation by entrepreneurial ventures
  • Game-theoretic approaches to the organization of new firms, and the impact of entrepreneurs on market outcomes
  • The determinants of entrepreneurial activity across industries and locations
  • The determinants and consequences of the structure of entrepreneurial finance
  • The impact of formal and informal networks (including strategic alliances) on the structure and conduct of entrepreneurial firms
  • The impact of innovation policy, including intellectual property rights policy, the tax system, and the legal system, on the formation and strategic impact of new ventures

Here are the submission guidelines. Deadline is 15 November 2007. 

9 October 2007 at 4:36 pm Leave a comment

Foss & Klein Chapter on “Organizational Governance”

| Nicolai Foss |

Peter and I often get requests that we blog something of a more introductory nature on organizational economics, the theory of the firm, etc. Until now, we haven’t really had the opportunity.

However, we just completed a draft of a chapter on “Organizational Governance” for the Handbook of Rational Choice Social Research, a major project initiated by sociology professors Rafael Wittek, Tom Snijders and Victor Nee for the Russell Sage Foundations (thus dispelling strange claims by Brayden and others that this is the anti-sociology blog). As the title suggests, the contributors, representing economics (/game theory), anthropology, and sociology are united by their commitment to the rational choice approach. The project involves such luminaries as Avner Greif, Jean Ensminger, Sigwart Lindenberg, and others. You can find the chapter under “Papers.” (more…)

9 October 2007 at 12:48 pm Leave a comment

What Are Hybrid Forms and How Can They Be Modeled?

| Nicolai Foss |

Many scholars have argued that hierarchies are increasingly infused by market mechanisms (e.g., here and here), and that elements of authority can increasingly be witnessed in market transactions. This has been referred to as the “swollen middle hypothesis.” A major step forward in the understanding of such hybrid governance is Williamson’s seminal 1991 paper in the ASQ, “Comparative Economic Organization: The Analysis of Discrete Structural Alternatives,” and Holmström and Milgrom’s equally important 1994 paper in the AER, “The Firm as an Incentive System.” (more…)

8 October 2007 at 2:39 am 24 comments

Terence Hutchison (1912-2007)

| Peter Klein |

Terence W. Hutchison, the iconoclastic British methodologist and historian of economic thought, died today. Hutchison’s Significance and Basic Postulates of Economic Theory (1938) was an early and influential attempt to incorporate logical positivism into economic method. Frank Knight’s excellent 1940 article, “What is ‘Truth’ in Economics?” is framed as a reply to Hutchison. Hutchison later sparred with Fritz Machlup on Mises’s methodology; Murray Rothbard sided with Hutchison. I enjoyed parts of Hutchison’s The Politics and Philosophy of Economics: Marxians, Keynesians and Austrians (1981). And who can forget his distinction between “Hayek I” and “Hayek II”?

NB: In an otherwise favorable review of my edited volume, The Fortunes of Liberalism, vol. 4 of The Collected Works of F. A. Hayek, Mark Blaug took me to task for consistently misspelling Hutchison as “Hutchinson.” Good thing I left in that error to distract reviewers from the other errors!

6 October 2007 at 3:31 pm 1 comment

Kleins Behaving Badly

| Peter Klein |

Cousin Naomi is in the news again. Her new book, The Shock Doctrine: The Rise of Disaster Capitalism, is attracting a lot of attention in the econo-blogosphere, virtually all negative. The Economist offers this guide to the commentary. The only sensible person who likes the book appears to be Joe Stiglitz, taken to task here by Pete Boettke. Klein’s shocking treatment of Milton Friedman has raised hackles everywhere (see this and this). Ultimately, her thesis is unsupported by any historical evidence. When one is a “cultural critic,” however, facts and reason are not too important.

6 October 2007 at 10:23 am 12 comments

World Freedom Atlas

| Peter Klein |

Here is a terrific resource: the World Freedom Atlas, a “geovisualization tool” — i.e., cool interactive map — for world statistics. It includes the most important variables used by economists including income and purchasing power from the Penn World Table, legal origin from LLSV, economic freedom from the Fraser Institute and the Heritage Foundation, policy constraints from Witold Henisz, the World Bank’s governance indicators, and a host of other variables from Acemoglu, Johnson and Robinson; Barro and Lee; Easterly and Levine; Persson and Tabellini; and several others. All that’s missing is links to the original datasets. Still, an impressive tool. (HT: Mike Kellermann)

5 October 2007 at 12:42 am 2 comments

Me and Yu

| Peter Klein |

My review of Tony Yu’s Firms, Strategies, and Economic Change (Elgar, 2005) for the QJAE (volume 10, number 1, Spring 2007) is now online.

4 October 2007 at 3:18 pm Leave a comment

The Future That Never Was

| Peter Klein |

I’ve been thinking about Oskar Morgenstern, specifically his collaboration with John von Neumann (mentioned briefly here). The relationships between Morgenstern and von Neumann, and between Morgenstern and his Habilitation supervisor Ludwig von Mises, raise interesting questions about the possible “Austrian” roots of game theory. (See the discussion by this brilliant economist-blogger.)

Some of Morgenstern’s most important works — Economic Prediction (1928), “Perfect Foresight and Economic Equilibrium” (1935), and On the Accuracy of Economic Observations (1950) — deal with problems of prediction in economics. (Morgenstern holds to a middle ground between the perfect-foresight, rational expectations view of Lucas and Sargeant and the “radical uncertainty” position associated with Shackle and Lachmann.)

Prediction was on my mind when I stumbled across a reference (in yesterday’s WSJ) to the Paleo-Future Blog, a fun site dealing with past predictions about technological progress. Even just a few decades ago everyone assumed that by 2007 we’d have personal robots, flying cars, and push-button meals. (We do have personal communicators, microwave ovens, and an internet nobody foresaw.)

See also this review of Daniel Wilson’s Where’s My Jetpack?

4 October 2007 at 8:57 am Leave a comment

Getting a PhD Takes Too Long

| Peter Klein |

So says the (US and Canadian) Council of Graduate Schools, studying ways to shorten the process, as reported in today’s NY Times. Some startling figures:

The average student takes 8.2 years to get a Ph.D.; in education, that figure surpasses 13 years. Fifty percent of students drop out along the way, with dissertations the major stumbling block. At commencement, the typical doctoral holder is 33, an age when peers are well along in their professions, and 12 percent of graduates are saddled with more than $50,000 in debt.

In economics, this problem has been alleviated, to some degree, by the rise of the three-essays dissertation, now the dominant model at the major research universities. In many economics departments, at least one essay is mostly finished by the end of the second year (written as a required second-year econometrics paper). Sociology, despite having become — like economics and strategy — a discipline that communicates mostly through articles, not books, seems to have stuck with the “grand treatise” model for the dissertation.

3 October 2007 at 1:33 pm 4 comments


| Peter Klein |

We use crowds to predict things and even to make stuff. Why not use them to generate electricity? (Harmlessly, not like this.)

3 October 2007 at 10:57 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).