Archive for April, 2008

Live Long and Prosper

| Peter Klein |

As a student of Austrian economics, I hope to inherit not only the clarity of thought, insight, originality, and productive habits of the great Austrians, but also their longevity. Carl Menger, founder of the Austrian school, lived to be 81 (fathering a son, the mathematician Karl Menger, Jr., at age 62). Mises died at 92, having taught his graduate seminar at NYU well into his eighties. Hayek made it to 93. Böhm-Bawerk died relatively young, at 63, though Wieser lived to be 75. I also admire Ronald Coase, still going strong at 97, and Armen Alchian, who turned 94 this month (and is still serving on PhD dissertation committees). So hopefully I have many good years left (unlike some people).

This came to mind when reading Steve Levitt’s account of his attempt to get a referee report out of a former Chicago economist:

[W]hen I asked the octogenarian economist if he could referee a paper for me, here is the response I received:

Much as I would like to do a review of this paper, my schedule looking ahead for as much as a year is just too crowded. Maybe next time!!

I hope when I am in my eighties “too busy” is the reason I am turning things down! 

30 April 2008 at 9:38 am Leave a comment

NIE Workshop for Law Professors

| Peter Klein |

The University of Colorado invites law professors to a one-day workshop, 11 June 2008, on the new institutional economics. Speakers are Lee Alston, Lynne Kiesling, Gary Libecap, Henry Smith, and Tom Ulen. Contents include:

(1) an introduction to NIE and why it matters to legal scholarship, particularly for property and intellectual property law; (2) an introduction to behavioral economics and experimental economics, including a simulation exercise that will demonstrate how experimental economics can be used to examine institutions in practice; and (3) an interactive discussion where all participants examine some case studies to evaluate the payoffs of using NIE and experimental economics to evaluate the merits of different legal regimes.

Sounds like fun (but where’s the theory of the firm?). Thanks to Thom Lambert, one of the lucky attendees, for the heads-up.

29 April 2008 at 9:28 pm Leave a comment

Where There’s Smoke. . . .

| Peter Klein |

So I wake up about 2:30 this morning to the sounds and lights of emergency vehicles outside my house. I look out the front window and see my neighbor’s house, across the street and two houses down, engulfed in flames. Firefighters are already on the scene, hooking up their hoses. Flames are shooting 25 feet into the air. The occupants, a young couple without children, are outside already, and no one is hurt. The husband says they were asleep in the bedroom when smoke started pouring out of the ceiling vents. My next-door neighbor said he heard loud pops and cracks, like fireworks.

The wife is shaking and crying, asking if she can go in and look for her wedding photos. I begin to wonder, if this happened to me, once my wife and children were safely outside would I foolishly run back in to retrieve my laptop, or my signed first edition of Risk, Uncertainty, and Profit, or my CDs with old Compustat data? My Blackberry? (I wouldn’t want to miss an important email while standing outside watching my house burn down.) What would you do?

Mises, as many of you know, lost virtually his entire personal library, and most of his notes and research materials, when the Nazis entered Vienna in 1938. (The papers ended up in Moscow,  where they were discovered in the early 1990s.) Mises arrived in the US in 1940, a refugee without an academic position, without substantial personal funds, and having lost most of a lifetime’s worth of accumulated books and materials. Can you imagine starting over, at age 59, under such circumstances?

29 April 2008 at 8:58 am 2 comments

Occupational Psychosis

| Randy Westgren |

One of the profoundly valuable benefits of recently giving up an administrator’s position is that I have time to read. I sat down with a stack of journals, biographies, fiction, and cookbooks that has grown since last summer. In the first pass through the stack, I found a couple pieces that echo one of the themes of this blog: how our training affects our perceptions of theory, facts, and phenomena.

One piece is an article by two young, interesting colleagues, Brianna and Arran Caza, who write about “Positive Organizational Scholarship” (POS) in the March 2008 issue of the Journal of Management Inquiry . They argue that the bulk of research on organizations, as highlighted by the top-cited articles in three years of ASQ and AMJ, begin with negative framing of organizational issues — what Brianna and Arran call a deficit model approach. They propose the need for research based on positive framing — not exclusively — as necessary to advance theory and practice in the organizational sciences. The POS paradigm is unabashedly post-modern (up periscope!), but it serves us all when alternative lenses are trained on issues that we all observe from our particular perspectives. (more…)

28 April 2008 at 9:26 pm 3 comments

Introducing Guest Blogger Randy Westgren

| Peter Klein |

It’s a pleasure to welcome Randy Westgren as our newest guest blogger. Randy is Professor of Business Administration and Professor of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign. A specialist in the economic organization of food sector, Randy’s interests span strategic management, strategic marketing, governance, Austrian and evolutionary economics, supply-chain management, and much more. Randy describes himself as someone who “switches from econ to management and back and forth” and “studies such peculiar things as agent-based modeling, cooperative member commitment, the foodie culture, and biotechnology supply chains.” In explaining his diverse set of interests, Randy quotes this passage from Ralph Waldo Emerson (“Self-Reliance,” from Essays: First Series, 1841):

There will be an agreement in whatever variety of actions, so they be each honest and natural in their hour. For of one will, the actions will be harmonious, however unlike they seem. These varieties are lost sight of at a little distance, at a little height of thought. One tendency unites them all. The voyage of the best ship is a zigzag line of a hundred tacks. See the line from a sufficient distance, and it straightens itself to the average tendency. Your genuine action will explain itself, and will explain your other genuine actions.

Randy has been one of our regular readers, and frequent commentators, from the beginning, showing that he is also a discriminating consumer of blogiana. Welcome, Randy!

28 April 2008 at 9:10 pm 2 comments

Did Avner Greif Misread the Geniza Documents?

| Peter Klein |

That’s the claim of this startling paper by Jeremy Edwards and Sheilagh Ogilvie, “Contract Enforcement, Institutions and Social Capital: The Maghribi Traders Reappraised.” Avner Greif’s influential papers (1989, 1993) and book argue, based on documentary evidence from the Cairo Genizathat the medeival Maghribi traders developed an elaborate, informal network of trading relationships without central coordination or state enforcement. Close social ties, repeated interaction, and careful record-keeping allowed the Maghribi to overcome the prisoner’s dilemma — a perfect example of order without law

Edwards and Ogilvie, returning to the primary sources, dispute this account. They claim that (1) the Maghribi relied primarily on the Jewish and Muslim state legal systems, not private enforcement, for settling disputes; (2) the Maghribi traded heavily with non-Maghribi; and (3) communications channels were too slow and unreliable to support the social-sanction mechanism proposed by Greif. In short, while reputation effects could be important for individual traders, there is no evidence of the broad Maghribi coalition described by Greif.

I don’t know the primary sources well enough to have an opinion on the merits of this critique, but it strikes me as a very serious critique indeed. Of course, we Hayekians have known about “spontaneous order” long before Greif set pen to paper (or fingers to keyboard), so losing this example wouldn’t be a devastating loss for the theory of decentralized social institutions, any more than losing the Fisher-GM example would wipe out the asset-specificity theory of vertical integration. But it’s important to get the details right.

27 April 2008 at 11:57 pm 4 comments

Who Says Economists Don’t Tackle the Tough Issues?

| Peter Klein |

How can anyone doubt the value added of mainstream economics research:

We use tools from experimental economics to address the age-old debate regarding who was a better singer in the band AC/DC. Our results suggest that (using wealth maximization as a measure of “better”) listening to Brian Johnson (relative to listening to Bon Scott) resulted in “better” outcomes in an ultimatum game. These results may have important implications for settling drunken music debates and environmental design issues in organizations.

Note that I’m not completely innocent in this area either.

See also: “Economics: Puzzles or Problems?”

27 April 2008 at 8:23 am 1 comment

O&M Two-Year Anniversary

| Peter Klein |

O&M went live 25 April 2006, exactly two years ago. Introducing ourselves to the world, we wrote:

We started this blog for two reasons. First, while there are many excellent blogs on economics, law, and public policy, there are relatively few on organization, strategy, and management, our main areas of research. Organizations and Markets hopes to help fill this gap. Second, we think we have a unique and interesting perspective on many of these issues, and we thought it would be fun to share this perspective with the world.

We may or may not be interesting (or fresh), but we think we’re still unique. While the econo-blogosphere has become thickly populated, only a few blogs focus on managerial and organizational issues. (Our blogroll includes most of our personal favorites.)

In the last two years we’ve written 1,275 posts in 32 categories (the most popular being InstitutionsManagement Theory, Methodology/Theory of Science, Strategic Management, Entrepreneurship, and, of course, Ephemera). We’ve hosted 283,822 unique visitors from dozens of countries (including, during just the last week, Slovenia, Iraq, Cameroon, Malaysia, and Guam). Thanks to our readers (students in particular), regular commentators, and former guest bloggers for their continued enthusiasm and support.

We’re planning significant changes to the site in the coming weeks. Watch this space for details!

25 April 2008 at 8:54 am 2 comments

Best Anti-IRB Article You’ll Read Today

| Peter Klein |

It’s Zachary Schrag’s “How Talking Became Human Subjects Research: The Federal Regulation of the Social Sciences, 1965-1991,” forthcoming in the Journal of Policy History.

In universities across the United States, institutional review boards, or IRBs, claim that they have the moral and legal authority to control the work of researchers in the humanities and social sciences. While IRBs may claim powers independent of federal regulations, they invariably point to these regulations as a key source of their authority. This article draws on previously untapped manuscript materials in the National Archives to trace the history of the federal regulation of social science research. Officials raised sincere concerns about dangers to participants in social science research, especially the unwarranted invasion of privacy as a result of poorly planned survey and observational research. On the other hand, the application of the regulations to the social sciences was far less careful than was the development of guidelines for biomedical research. Regulators failed to define the problem they were trying to solve, then insisted on a protective measure borrowed from biomedical research without investigating alternatives.

See also Schrag’s valuable Instituitional Reveiw Blog.

IRB oversight is particularly strong at the University of Missouri, across all departments, partly the result of a federal investigation in 1999 that came down hard on the medical school. One might wonder what this has to do with social-science research, but there you go.

24 April 2008 at 12:30 pm Leave a comment

The Nature of the (Law) Firm

| Peter Klein |

Gordon Smith shared an interesting report on a recent Georgetown conference, “The Future of the Global Law Firm.” Apparently there is a healthy literature in legal scholarship examining the boundaries and internal organization of law firms. Writes Gordon:

The participants seem to have reached a few points of consensus. First, the legal profession has changed dramatically in the past two decades and it remains under significant stress, meaning that more change is on the way. Second, the rules that constrain change (e.g., prohibition of non-lawyer ownership, rules relating to conflicts, non-competition rules) should be changed sooner rather than later. Third, the traditional legal form (partnership) is largely irrelevant to the current practice of law, even if law firms want to create an organizational structure that encourages the collegiality of a traditional partnership. Fourth, the law firms that will succeed in the future are those that get the organizational structure right.

In a follow-up email, Gordon explains that the organizational features being challenged include the partnership model, the up-or-out  “Cravath system,” and the outsourcing of routine services (e.g., electronic discovery) to places like India. Gordon recommends Laura Empson’s Managing the Modern Law Firm for an overview of the issues. I said I thought there was some work by economists and management scholars on the economic organization of the law firm (and professional services firms more generally), but couldn’t come up with much, aside from a series of interesting papers by Luis Garicano and Thomas Hubbard (here, here, and here). Any suggestions from our readers? Is the persistence of the partnership form, for example, mainly the result of arcane professional-ethics rules or is there an underlying efficiency rationale? If consulting firms can have IPOs, why not law firms?

23 April 2008 at 11:47 pm 7 comments

Ken Lay Chair Filled

| Peter Klein |

The University of Missouri’s Kenneth L. Lay Chair of Economics, which we’ve written about before, has been filled, by an internal candidate, Joe Haslag. Joe is a monetary economist who, unlike many macroeconomists, does policy work (some with the controversial Show-Me Institute) and, unlike many economists, is a warm and friendly person. (Did I just write that?)

For those who think that economists, like other social-science and business academics, tend to be overly narrow and specialized, note what Joe says about his patron:

Haslag acknowledged being relatively uninformed about the Enron affair. “Actually, it’s not an episode that’s part of the economics I teach,” he said. “There isn’t anything about the story that entices me to spend a lot of time on it. I couldn’t talk about it with any amount of detail or any analysis.”

23 April 2008 at 1:27 pm Leave a comment

MDE Special Issue: Frontiers of Strategic Management Research

| Nicolai Foss |

Managerial and Decision Economics has become a favorite journal of mine. It has a strong econ orientation, to be sure, but the journal stresses econ that is relevant, readable, and right. In other words, there is lots of applied microeconomics, transaction cost economics, etc. Moreover, over the last few years MDE — presumably as a result of Margie Peteraf’s tenure as co-editor — has become very much of an econ-based strategic management journal, not like the Journal of Economics and Management Strategy, to be sure, but more economics-oriented than the Strategic Management Journal.

The most recent issue(s — issue 2 and 3 are bundled into one special issue) features a string of excellent papers under the heading “Frontiers of Strategic Management Research,” edited by Peteraf and Catherine Maritan. Several of the papers should be of interest to the O&M readership. For example, Kyle Mayer (with Janet Bercovitz) continues to work with his information technology service contracts dataset, this time looking at the influence of inertia on what contract clauses that are included in these kind of contracts. Maritan and Robert Florence engage in a nice modelling exercise, modelling strategic factor markets in a way that seems quite different from earlier attempts (e.g., by Rich Makadok). Michael Jacobides builds an interesting argument, linking foreign direct investment to the investing firm’s embeddedness in value chains in the home country and value chain conditions in the host country. And, of course, there is the usual handful of alliance articles. A great special issue. Highly recommended.

22 April 2008 at 4:06 am 1 comment


| Peter Klein |

From Marshall Jevons I just learned about the Authors@Google lecture series. Lots of good stuff there. The O&M crowd may especially enjoy the talks by Ian Ayres, Larry Lessig, Bob Litan, Richard Florida, John Searle, Daniel Solove, Steven Pinker, Robert Frank, Don Tapscott, Bill Easterly, and Tom Perkins.

Update: If you like this sort of thing check out TED as well (thanks to Art Carden for the pointer). The first person I saw when I visted the site yesterday was Yochai Benkler, whose book The Wealth of Networks I happen to be reviewing for The Independent Review.

21 April 2008 at 4:36 pm Leave a comment

Bacon Weave

| Peter Klein |

Michael Ruhlman, one of my favorite food writers, maintains that cooking is a craft, not an art. For example, writing in The Soul of A Chef about the Certified Master Chef exam, he writes:

Poetry is an art form. Cooking is a craft. (Oh, I know how the foodie blowhards — and even a lot of chefs — love to talk about food as art! But I’m sorry, noodles spun into towers and designs on plates with different-colored sauces do not equal art, so don’t talk to me about food as art or chefs as artistes.) As with any craft, there were artful levels and shared standards of excellence. The test’s very existence implied that great cooking, cooking at so-called master chef level, was not art, was only craft, the result of physical skills that were consistently measurable and comparable from one chef to the next. The Certified Master Chef exam aimed to set an objective standard of great cooking that existed regardless of this or that person’s own taste and preferences, something you could not do with an art such as poetry.

I used to agree with Ruhlman, until I saw the bacon weave. Now that’s art! (Thanks to Gary.)

On a more serious note, there are of course different schools of thought on the possibility of objective standards in art (not just visual arts but also music, literature, drama, and film). I don’t think Ruhlman’s distinction between art and craft implies some kind of postmodernism. Certainly one neen’t embrace pomo to understand that essay exams are a lot harder to grade than multiple-choice tests! (But see this.)

20 April 2008 at 5:37 pm 1 comment

Langlois Paper on the Theory of the Firm and Austrian Economics

| Nicolai Foss |

Former O&M guest blogger Dick Langlois is IMHO one of the most original thinkers in the field of economic organization. He is also one of the best writers in management and in economics. So I try to keep track of his writings and usually succeed. However, this paper, “The Austrian Theory of the Firm: Retrospect and Prospect,” written for a conference at the George Mason Law School last May, had escaped my attention until today.

Dick develops a number of related arguments. One is that Hayek (of the 1945 essay, “The Use of Knowledge in Society”) developed richer insights in economic organization than Coase.  Moreover, by pointing out the importance of dispersed knowledge, the coordination problem this raises, and the importance of “change” for “economic problems,” Hayek anticipated the capabilities theory of the firm. In a parallel argument, Dick links his own work on the capabilities theory of the firm to Austrian capital theory (see also here and here). He ends by speculating on the future of Austrian arguments in the theory of the firm, noting various manifestations, particularly in strategic management, of these arguments (he notes that “Some work in this literature is close in spirit to my own, in some cases extremely close (Jacobides and Winter 2005)” — one agrees).  Definitely worth a read!

19 April 2008 at 1:42 pm 3 comments

Ethical Standards for Business Professors

| Peter KIein |

You may have heard about the campaign to have John Yoo, author of the infamous Bush Administration torture memo, fired from his (tenured) position as professor of law at UC Berkeley. Brad DeLong has blogged a lot about this. (Here is Yoo’s response, last week, in Esquire, and here is a statement from Yoo’s dean.) Brad quoted something interesting on Tuesday from James Wimberly:

[T]he relevant fact [is] that . . . Professor Yoo is employed to teach a vocational subject, law. This isn’t a prestige issue. Particle physics, cultural studies and remedial English fall on one side of the vocational/non-vocational distinction; law, medicine, nursing, flying training and plumbing school on the other.

All teaching carries with it a minimum set of professional standards on plagiarism, harassment, favoritism and so on. Nobody has suggested John Yoo has violated these. But vocational education should also inculcate the specific ethical standards of the trade in question. It seems at least arguable that Yoo’s probable professional misconduct as legal enabler of war crimes taints his ability to train future advocates and judges. Should a flying school for airline pilots keep an instructor guilty of reckless flying in his own weekend plane? But the same conduct would be irrelevant to the employment of a professor of surgery.

Business administration, like law, is a vocational subject (despite the top-notch scholarship conducted by some business professors). What are the ethical responsibilities of a business professor? Clearly someone who engages in unethical business practices, or encourages students to do the same, is in danger. But what about borderline issues — say, an accounting professor who favors the liberal use of special purpose entities? A critic might even claim that Henry Manne’s endorsement of insider trading is akin to Yoo’s endorsement of “harsh interrogation techniques.” (I think the comparison is ludicrous, but wouldn’t be surprised to hear it from the bashers.) What about business conduct? Certainly a failed entrepreneur can be an entrepreneurship professor; indeed, the experience may even be an advantage. Is a business professor’s consulting activity a purely private matter, or should it have some bearing on his or her professorial standing?

17 April 2008 at 11:48 pm 2 comments

Aoki on North

 | Peter Klein |

Masahiko Aoki’s contribution to a forthcoming North symposium, “Understanding Douglss North in Game-Theoretic Language,” is available on SSRN. North’s 1990 book Institutions, Institutional Change and Economic Performance, writes Aoki,

laid the foundation for New Institutional Economics by conceptualizing institutions as the rules of the game, pointing out the vital importance of effective enforcement and arguing for the crucial roles they play in determining economic performance. Thus it became a seminal book. But if the rules of the game are so crucial, then why doesn’t a lagging economy emulates the rules that prevail in more advanced economies? Why cannot the rules of the game be changed and enforced by emulation? It seemed that in his [1990] book North regarded it as the essential role of polity to change and enforce the (formal) rules of the (economic) game. But in his view, political markets are imperfect and inefficient so that better rules cannot be emulated/devised or enforced as desired. Thus a further question is raised regarding how rules of political games are determined. This problem of potential infinite regression needs to be answered by going back in historical time to the past. Thus history matters to our understanding of institutions and thus the performance of an economy. . . .

In [Understanding the Process of Economic Change, 2005], particularly in Part I, he has made critical progress toward understanding to the nature of this process. He is now more explicit and vocal about the evolutionary nature of institutional change. . . . He innovatively focuses on the evolution of belief systems that human agents hold, arguing that we perceive the “human landscape,” interpret it, discover problems within it and intend to solve them. In this way, we collectively and incrementally change the societal rules of the game. In other words, we may say that there is a coevolution of belief systems and institutions.

See also reviews of the newer book by Alex FieldStefan Voigt and Stanley Engerman.

16 April 2008 at 10:37 pm 1 comment

Best Billboard I Saw Today

| Peter Klein |

OK, I didn’t see the actual billboard, just a photo of it. My colleague Peter Sukovsky, a professor of animal science at MU and a specialist in reproductive physiology, gave a presentation on his startup company AndroLogika at the University of Missouri’s Life Sciences Week. Peter concluded by showing us this picture, helping to illustrate that Missouri is a particularly good state for doing reproductive research. Where else would you find a summer festival like this? (In case you’re wondering, it’s a food festival; you can see examples of the cuisine here. It ain’t Guo-li-zhuang, but in the same genre.)

15 April 2008 at 11:20 pm 3 comments

Erasmus Journal for Philosophy and Economics

| Peter Klein |

The Erasmus Journal for Philosophy and Economics is a new journal focusing on economic methodology, the history of economic thought, relationships between economics and other disciplines, and similar “meta” issues. Here’s the call for papers for the inaugural issue. The journal advertises that it is “particularly friendly to Young Scholars (graduate students and recent PhD graduates).”

15 April 2008 at 2:18 pm Leave a comment

Do Economists Believe in “Atomistic Individualism”?

| Peter Klein |

To many critics economics goes astray in characterizing people as isolated, autistic, self-interested, individualistic utility maximizers, unconnected from the broader social fabric in which they are embedded. The celebrated Ferraro, Pfeffer, and Sutton paper (AMR, 2005), and the broader “performativity” critique of economics, is a typical example of this attitude. Some heterodox economists even long for a “post autistic” version of the discipline.

As emphasized repeatedly on this blog, however, the criticism is fundamentally mistaken. At heart, it confuses methodological individualism with ontological individualism. The assumption of individual utility maximization, the simplified model of an isolated individual, and the like are principles of explanation, not descriptions (or, a fortiori, prescriptions). Now, I do think that economists have gone astray by emphasizing “rationality,” modeled with consistent preferences, a utility function that is monotonic and non-decreasing, etc., rather than the broader concept of “purposeful action,” as Mises described it, which is what most economists before the formalist revolution seemed to have had in mind. (more…)

14 April 2008 at 10:22 am 16 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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