Archive for February, 2008
Still More on Legal Origins
| Peter Klein |
John Armour, Simon Deakin, Prabirjit Sarkar, Mathias Siems, and Ajit Singh add to the debate with a new dataset and a new interpretation: common-law countries offer better shareholder protection not because of the characteristics of common law per se, but because the emergence of a global common-law standard gave common-law countries a head start, a sort of network effect. Here is the paper. Abstract:
We test the ‘law matters’ and ‘legal origin’ claims using a newly created panel dataset measuring legal change over time in a sample of developed and developing countries. Our dataset improves on previous ones by avoiding country-specific variables in favour of functional and generic descriptors, by taking into account a wider range of legal data, and by considering the effects of weighting variables in different ways, thereby ensuring greater consistency of coding. Our analysis shows that legal origin explains part of the pattern of change in the adoption of shareholder protection measures over the period from the mid-1990s to the present day: in both developed and developing countries, common law systems were more protective of shareholder interests than civil law ones. We explain this result on the basis of the head start common law systems had in adjusting to an emerging ‘global’ standard based mainly on Anglo-American practice. Our analysis also shows, however, that civil law origin was not much of an obstacle to convergence around this model, since civilian systems were catching up with their counterparts in the common law. We then investigate whether there was a link in this period between increased shareholder protection and stock market development, using a number of measures such as stock market capitalisation, the value of stock-trading and the number of listed firms, after controlling for legal origin, the state of economic development of particular countries, and their position on the World Bank rule of law index. We find no evidence of a long-run impact of legal change on stock market development. This finding is incompatible with the claim that legal origin affects the efficiency of legal rules and ultimately economic development. Possible explanations for our result are that laws have been overly protective of shareholders; transplanted laws have not worked as expected; and, more generally, the exogenous legal origin effect is not as strong as widely supposed.
What Bad Academic Writing Does to the Brain
| Peter Klein |
From the brilliant Jorge Cham (via Per).
Click to enlarge.
The Role of Missionaries in Social and Institutional Change
| Peter Klein |
First Brayden, then Fabio. Today another talented young sociologist, Robert Woodberry of UT-Austin, gave a research workshop in my building. Bob is leading a massive project to construct a comprehensive dataset of all Protestant and Catholic missionary activity from 1813 to 1968. Some of the data are here. Bob presented a working paper (not yet online) on the affect of missionary activity on the spread of democracy in the global south. Once Protestant missionary activity (missionaries per capita, length of time in host country, percent of local population evangelized) is controlled for, the usual predictors of democracy (British colonial origin, location, economic variables) drop out of regression models as statistically significant. One implication is that studies on the effect of religion on economic performance (e.g., Stulz and Williamson 2003) should control more carefully for the precise charactersitics of religious activity (not simply “Protestant,” “Catholic,” etc.).
The Rhetoric of Science
| Peter Klein |
Tom Lessl, who’s work on the history of science we’ve mentioned before, offers some interesting reflections on scientific rhetoric in this 2005 interview.
There is a popular and widespread misconception in the world that scientific communication is distinctly different from other forms of public communication, but this is not really so. Its persistence is explained by an old adage in my field, which I think comes from Roderick Hart at the University of Texas, which says that rhetoric is most effective which disguises itself as something else. And I would have to say that science is the master of disguises. . . .
In saying this I am not trying to suggest that science is not a profoundly powerful form of inquiry, that its truth claims are without substance or that many scientific questions cannot be answered with a definitive yes or no. But scientific communication has all the same kind of properties that we typically find in other arenas of communication.
This misconception, Tom argues, is actively promoted by scientists themselves, primarily as a means of securing resources:
What I call science’s “priestly voice” is the outcome of several hundred years of experimentation with different ways of relating itself to its patrons. Patronage is a perennial problem for science, one of huge proportions. Science is at once an exceedingly costly undertaking and also one that does not necessarily offer any immediate return on investments. We all know that science has produced applications of immeasurable benefit, but in history when scientific patronage has been dependent upon the promise of such payoffs, science work has suffered. This is because most of what we call basic science is exploratory and can’t promise applications. It produces knowledge that winds up in science journals but not in pharmaceutical patents or medical applications. The characteristic expectation of Americans that science is valuable because it pays off has traditionally deterred scientific growth. This was why the U.S. remained a backwater province of theoretical science until after WWII — when the public began to realize that theory might pay off in things like atom bombs. But more generally, scientific culture has responded to the pressures of patronage by trying to construct a priestly ethos — by suggesting that it is the singular mediator of knowledge, or at least of whatever knowledge has real value, and should therefore enjoy a commensurate authority. If it could get the public to believe this, its power would vastly increase. (more…)
State-Enforced Cartels
| Peter Klein |
Theory and evidence suggest that firms cannot form effective cartels on the free market. So, when producers wish to cartelize, they naturally turn to the state for help. Pennsylvania’s recent decision to forbid dairies from advertising hormone-free milk provides a vivid example. “It’s kind of like a nuclear arms race,” said State Agriculture Secretary Dennis C. Wolff in November. “One dairy does it and the next tries to outdo them. It’s absolutely crazy.” Right, next thing you know firms will be lowering prices, increasing output, improving quality — who knows what else! If only they could agree not to compete. . . . (Andrew Samwick helpfully declared Wolff’s office a “Microeconomics Free Zone.”)
The classic example of state-enforced cartelization is, of course, the National Industrial Recovery Act of 1933. The Depression, argued President Roosevelt, was exacerbated by excessive competition among firms, so firms must be compelled to form cartels to keep nominal prices and wages high (exactly the opposite, unfortunately, of what was needed to reduce unemployment). Despite a massive propaganda campaign to enforce participation the NIRA cartels largely fell apart by early 1934. Jason Taylor and I have a new paper exploring the role of expectations and enforcement in the collapse of the NIRA. Abstract below the fold: (more…)
The SMG in EMR
| Nicolai Foss |
The latest issue of the European Management Review features an article (here, scroll down to “Project Report”), “Knowledge Governance in a Dynamic Global Context: the Center for Strategic Management and Globalization at the Copenhagen Business School,” which details the history of said Center (SMG). I happen to be the Director of the SMG. The article tells a rosy story of a talented cohort of CBS PhD students whose careers followed convergent paths, eventually leading to the establishment of the SMG, and raves about the ambitions and current accomplishments of the members of the Center. Oh, did I mention that I am the author of the article?
More on Opportunity Discovery and Entrepreneurial Judgment
| Nicolai Foss |
Peter and I (well, mostly Peter) have often contrasted the Knightian notion of entrepreneurial judgment with other notions of entrepreneurship, mainly Kirzner’s concept of alertness (here). In “Entrepreneurship: From Opportunity Discovery to Judgment” (download from this page), we provide what is no doubt the definitive statement on the issue. The paper is a draft of chapter 2 in our forthcoming book, Entrepreneurial Judgment and the Theory of the Firm, and constructive criticism is most appreciated. Here is the abstract:
Entrepreneurship has become a fast-growing subfield in management research, and is increasingly appearing in economics, finance, and even law. We survey a number of approaches to entrepreneurship in the economics and management literatures, and argue that modern research in this area need to be focused around ideas from Austrian economics and Frank Knight on entrepreneurial judgment. We critically discuss the recent opportunity discovery literature in management, and argue that it has partially misunderstood the Austrian origins of the theory, and fails to adequately distinguish between opportunity identification and opportunity exploitation.
UPDATE: You can also download the paper from SSRN.
Off to Sundance
| Nicolai Foss |
Teppo Felin has been raving about the BYU-University of Utah Winter Strategy Conference, and I decided to accept an invitation for this year’s conference which takes place at the Sundance Resort. I am off tomorrow, and should arrive after about 17 hours of travel (sigghhh!). The program (which doesn’t seem to be online) looks magnificent with talks by Michael Tushman, Dan Levinthal, and Brian Silverman, and panels with Jay Barney, Joel Baum, Jackson Nickerson and other illustrious people in the strategic management community. The conference seems to be relatively small (max. 50 people) and largely Euro-free (with the exception of Gino Cattani and yours truly), which means clear and focused. I will offer some thoughts here on O&M on what I hear at the Sundance conference.
More on Blind Freddy
| Steve Phelan |
Apologies to everyone for my lengthy absence. Since January 1, I have been working in a new administrative role in the College of Business at UNLV {shock, horror}. (Details can follow after a formal announcement is made).
Further to my argument several months ago that “blind freddy” could have seen the mortgage problems, here is a nice insider view from Calculated Risk:
But a whole lot of these loans that are failing right now were originated as 100% CLTV stated-income loans, because the guidelines agreed to by the issuer allowed that. I am scratching my head over the logic here: I spent most of the early years of this decade, just as a for instance, blowing my blood pressure to danger levels every time I looked at the underwriting guidelines published by ALS, the correspondent lending division of Lehman. ALS was a leader in the 100% stated income Alt-A junk. And I kept having to look at them because my own Account Executives keep shoving them under my nose and demanding to know how come we can’t do that if ALS does it. I’d try something like “because we’re not that stupid,” and what I’d get is this: “But if ALS can sell those loans, so can we. All we gotta do is rep and warrant that they meet guidelines that Wall Street is dumb enough to publish.” Every lender in the boom who sold to the street wrote loans it knew were absurd, but in fact they had been given absurd guidelines to write to. What on earth good did it do to have those originators represent and warrant that they followed underwriting guidelines to the letter, when those guidelines allowed stated income 100% financing on a toxic ARM with a prepayment penalty?
The argument is that mortgage originators were not so much committing massive fraud but rather that banks were following lax guidelines that those on ‘the Street’ did not view as problematic (or perhaps that the ultimate investor did not view as problematic).
Fun With Words
| Peter Klein |
You know the game where you take a common word, add or change one letter, and create a new definition? Our good friend Randy W. sends these examples, including some economics and management terms:
1. Cashtration: The act of buying a house, which renders the subject financially impotent for an indefinite period of time.
2. Ignoranus: A person who’s both stupid and an asshole.
3. Intaxication: Euphoria at getting a tax refund, which lasts until you realize it was your money to start with.
4. Reintarnation: Coming back to life as a hillbilly.
5. Bozone: The substance surrounding stupid people that stops bright ideas from penetrating.
I tried but all I could come up with is
6. Jive-forces analysis: a model analyzing the effect of intra- and
inter-industry rivalry on the truthfulness of corporate disclosures.
Dear readers, give it your best shot!
UPDATE: I thought of a few more:
7. Basset specificity: relationship specific investments dog-lovers make in their hounds.
8. Strategic compliments: what you give your significant other on Valentine’s Day.
9. Perennial gale of creative distraction: the blogosphere. (OK I changed two letters on that one.)
Impact of B-School Research
| Peter Klein |
The AACSB has released its Impact of Research Task Force Report. Key excerpt:
The Task Force believes that it is critical for business schools to find ways to continuously enhance the value and visibility of scholarship and research of all types — basic, applied, and pedagogical. Through its analysis, the Task Force has uncovered five issues that, if addressed by AACSB International, its member schools, and other organizations, could assist business schools to achieve their fullest potential from scholarship and research. First, current measures of intellectual contributions focus on inputs rather than outcomes. That is, the focus is on how faculty spend time (engagement in scholarship) and not on the value of outcomes produced (impact of scholarship on intended audiences). Second, business school and individual faculty incentives tend to create an overwhelming emphasis on discipline-based scholarship at the expense of contributions to practice and to pedagogical development. Third, the relationship between management research and teaching and the
mechanisms to support their interaction, especially when these functions are not always performed by the same people, are not well-understood. Fourth, there are inadequate channels for translating academic research to impact practice. Fifth, opportunities to support deeper, more continuous interaction between faculty and practicing managers on questions of relevance have not been fully developed.
The recommendations are fairly generic — require accredited schools to demonstrate the impact of faculty research, find ways to reward faculty for producing high-impact work, study more closely the links between scholarship, education, and practice, and so on. There’s less detail on exactly how impact should be measured, however. A few examples are given:
- number of practitioners or firms adopting new approach or developed practice
- awards by industry or professional associations
- adoptions and integration in curricula of schools
- sales of book
- number of regional/national/international presentations
- reviews in magazines (e.g., BusinessWeek, Forbes)
These are all fine, but it’s difficult to imagine criteria that can be applied consistently across disciplines, across types of research (basic versus applied), and so on.
Here is some commentary from Inside Higher Ed.
Economists with Verve
| Peter Klein |
Jim Heckman is one. Steve Sailer, whom I enjoy reading despite many disagreements, recently shared this Heckman nugget. Referring to Heckman’s angry 1995 review of Herrnstein and Murray’s The Bell Curve, Sailer notes:
What people didn’t realize . . . is that Heckman is almost always upset. That’s his personality. In a Medieval Big Four Humours model, he’d be The Man of Choler.
Years ago, I was participating in an email discussion with Heckman, who made all of his contributions to the conversation IN ALL CAPS.
As I recall, I privately emailed him to suggest — diplomatically, I hoped — that if he didn’t find the shift key convenient, he could just eschew upper case altogether and type using only lower case, like e.e. cummings. You see, I explained, using all caps gives other readers the impression that you are shouting.
“I AM SHOUTING!” he emailed back.
Heckman’s distinctive personality is one of the things that helps make him a great scientist.
Incidentally, this story helps place the thin-skinned scholar episode in perspective.
Henry Manne, Academic Entrepreneur
| Peter Klein |
Henry Manne did as much as anyone to create the modern discipline of law and economics. I refer here not only to his scholarly contributions, particularly his work on the market for corporate control and on insider trading, but also his creation of institutions (such as the original Law and Economics Center at the University of Miami) to support the emerging field. So it’s nice to see this essay by Larry Ribstein, “Henry Manne: Intellectual Entrepreneur,” coming out in Pioneers of Law and Economics edited by LLoyd Cohen and Josh Wright. (Via Josh.)
Writing when there was a theory vacuum in legal academia, Manne breathed life into corporate law by using economic principles to formulate a sweeping new theory of the corporation. Then he took his show on the road with seminars, programs and ultimately a law school to create a market for his ideas. The Chapter shows that Manne was an entrepreneur not only in bringing people and ideas together, but also in the Schumpeterian sense Manne discussed in his work on insider trading — an active participant in the creative destruction of the existing paradigm rather than merely a manager of existing ideas. Manne’s career demonstrates that, under the right conditions, a single scholar can leave noticeable ripples in the stream of intellectual history. By demonstrating that corporations, and by inference other important institutions, are best analyzed in market terms, and by creating an intellectual market for these and other economic ideas, Manne changed the way scholars, judges, regulators and others think about the role of law in society.
See also this Manne essay on the emergence of the field. And these papers by my former student Alex Padilla on insider trading. (And these cool gowns worn by the examiners at Alex’s dissertation defense at l’Université d’Aix en Provence.)
The Nicest Thing Anyone’s Ever Said About Us
| Peter Klein |
Alf Rehn directs his readers to
my favorite gang of theorists I do not agree with at all over at Organizations and Markets (fun blog, and I have a great deal of respect for them, even though we are as far apart in thinking as people in the kinda-the-same-field-although-you-could-be-forgiven-for-thinking-otherwise can be — I even like reading Nicolai Foss’s rants, bless his little hardliner heart).
But why does he think Nicolai has a heart?
Medieval Business Schools
| Peter Klein |
Contrary to popular belief, formal education in medieval times was not restricted to the clergy and the very wealthy. Nor was theology the most popular subject. Independent schools, unaffiliated with any particular religious body or royal institution and staffed by lay people, were common, and even taught business administration (writing letters, drafting contracts, keeping the books).
So says Nicholas Orme in Medieval Schools: From Roman Britain to Renaissance England (Yale, 2006). (Thanks to Tom Woods for the pointer.) In Britain, grammar schools were often supported by wealthy patrons and were open to students of modest means. Notes Orme:
Most [English] schoolmasters were probably broad rather than specialized teachers, catering for a wide range of needs, so it is not surprising that a brand of practical teacher emerged by the fourteenth century (at latest), offering more focused instruction for careers in trade and administration. Such instruction might include “dictamen” (the art of writing letters), the methods of drafting deeds and charters, the composition of court rolls and other legal record, and the keeping of financial accounts. Since documents of these kinds were often written in French between 1200 and 1400, the practical teachers came to teach French too.
This illustration, from p. 69 of the book, depicts such a class. How did they do it without PowerPoint?
Essay Contest on Property Rights
| Peter Klein |
My co-blogger, an enthusiast for the Coase-Alchian-Demsetz-Cheung-Barzel property-rights approach, will appreciate the topic for this year’s Sir John M. Templeton Fellowships Essay Contest, sponsored by the Independent Institute:
For decades social critics in the United States and throughout the Western world have complained that “property” rights too often take precedence over “human” rights, with the result that people are treated unequally and have unequal opportunities. Inequality exists in any society. But the purported conflict between property rights and human rights is a mirage — property rights are human rights.
— Armen Alchian, “Property Rights,” in The Concise Encyclopedia of Economics
Are property rights human rights? How are they related? What are their similarities and differences? If property rights are human rights, why have they enjoyed fewer legal protections and intellectual champions than other human rights?
The contest is for college students and “young” college professors (sorry Nicolai).
Nietzsche and Contemporary Philosophy
| Peter Klein |
“Nietzsche is peachy,” according to a bumper-sticker I once saw. Nietzsche is sometimes cited in management research as an authority on power, complexity, time, or relativism (e.g., Singer, 1994; Kilduff and Mehra, 1997; Mainemelis, 2001). But what did Nietzsche really say about these things? What are his main contributions to philosophy? Professional philosophers can’t seem to agree, as witnessed in this roundtable conversation with Peter Bergmann, Teodor Münz, Frantisek Novosád, Paul Patton, Richard Rorty, Jan Sokol, and Leslie Paul Thiele. Bergmann calls Nietzsche “the culture hero of modernism, a cultural revolution comparable to the Reformation or the Enlightenment. His critique of herd values is reflected in the posture of the avant-garde: elitist to the present, democratic to the future.” But Nietzsche was no nihilist, says Sokol; he was rather “an excessively sensitive person horrified by a world where nothing has rules and stands for nothing.”
All agree that Nietzsche bears no personal responsibility by the appropriation of his ideas by German nationalists, but Schrift notes that Nietzsche “chose to write in a style that invites misunderstanding — his use of metaphor, dissimulation, and hyperbole in particular, all make it easier for his words to be taken to mean something other than what he might have intended.” A warning to those of us who like jargon and are guilty of bad academic writing. (HT: 3quarks)
A Sociology Class I Might Actually Take
| Peter Klein |
SOC 121-015: “Introduction to Sociology: The Sociology of George Lucas and Steven Spielberg’s Films”
This class introduces students to the science of sociology utilizing examples from the real world of society, and the reel worlds of George Lucas and Steven Spielberg’s films. Sociological theories and research, and their application to culture, socialization, religion, technology, inequality, and media are the themes of the class. Films such as THX-1138, American Graffiti, Star Wars, Indiana Jones, Schindler’s List, Amistad, and E.T. will be used as examples oft he these themes, and the fans of Star Wars and Indiana Jones will be discussed. Students will present a paper about the sociological themes of the films and the movies illuminate about the 1970s to 2000s zeitgeist.
For more information about the class, contact Professor Tenuto at jtenuto@clcillinois.edu or at the college website www.clcillinois.edu.
Link via a Star Wars fan site.
If Einstein Wrote a Management Book
| Peter Klein |
It might look like this (via Newmark). Einsteinisms like “imagination is more important than knowledge,” “not everything that can be counted counts, and not everything that counts can be counted,” and “whoever is careless with the truth in small matters cannot be trusted with important matter” are pithy, to be sure, but not very operational. And Einstein did not seem to understand economics very well.
CEOs as University Presidents
| Peter Klein |
I could have titled this post “University Presidents as CEOs,” focusing on the characteristics and responsibilities of university administrators. But I’m interested here in universities hiring former corporate CEOs, rather than career educators, as presidents. Gary Forsee, Sprint-Nextel CEO from 2005 to 2007, became my boss yesterday when he began his term as President of the University of Missouri System. Forsee’s selection last year raised hackles among some faculty because he holds only a bachelor’s degree and has no faculty or university administrator experience. (A greater concern, among some faculty, was the eagerness with which Sprint, under Forsee’s leadership, participated in the Bush Administration’s warrantless wiretapping program.) The University of Colorado is apparently in a similar situation, though with far greater controversy.
Does a university president need a PhD? Under the university-as-guild model, hiring a leader from outside the guild is unthinkable, akin to bringing in Richard Dawkins to head the Catholic Church, or hiring a guy who never played in the NBA to coach an NBA team (actually, that happened). On the other hand, if the university is just another service organization, then hiring leaders from outside makes perfect sense. (more…)
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