Archive for April, 2008

For My Next Blog. . . .

| Peter Klein |

What would be a fun and cool name for an econ-org-strategy-methodology-law-history-culture blog? I mean something clever, like Marginal Revolution, Asymmetrical Information [“Asymmetric”?], Division of Labour, Truck and Barter, Knowledge Problem, ArgMax, and the like. “Organizations and Markets” is descriptive, and easy to remember, but not terribly witty. Here are some better names. (These are mostly inside jokes, so they’re either funny or they’re not.)

  • Stochastic Dominance
  • Fundamental Transformation
  • Apodictic Certainty
  • Exogenous Shock
  • Rationality Unbound

I believe these URLs are still available (cybersquatters, take note). Readers, what would you suggest?

12 April 2008 at 11:55 pm 17 comments

Heard on NPR This Morning

| Peter Klein |

An item on the upcoming Italian elections featured a clip from comedian-activist Beppe Grillo denouncing both leading candidates, former PM Sylvio Berlusconi and former Rome mayor Walter Veltroni. Grillo, according to NPR’s Sylvia Poggioli, “has become the most powerful voice of protest in Italy. His blog is ranked among the 10 most-visited in the world, according to blog search engine Technorati.” I’m quite sure that’s the first time I’ve heard a national news program cite someone’s Technorati ranking as his main qualification!

Also curious: Later in the story Poggioli quotes Franco Ferrarotti, described as “one of Italy’s best-known sociologists.” How often have you heard an academic sociologist quoted in a general-interest news story?

11 April 2008 at 10:00 am 2 comments

The Industry Analysis/Positioning Dominance Myth

| Nicolai Foss |

Until the advent in the mid-1980s of the resource-based view in the writings of Barney, Wernerfelt, Rumelt, etc. industry analysis and positioning ruled the roost in the strategic management, right? Many expositions of the brief history of strategic management make this claim (and I have done so myself on many occasions). There is a certain dramatic quality to the story, á la from external to internal analysis, a swinging pendulum, etc., a story of controversy between opposed positions (“Porter vs. Barney”), etc.

However, the idea of the dominance of industry analysis/positioning/market power is a complete myth says Phil Bromiley (here and in a chapter with Lee Fleming in this book). Bromiley seeks to demonstrate this by simply checking the contents of strategic management’s leading journal, the Strategic Management Journal. As he concludes, “Even a casual perusal of the tables of content of the Strategic Management Journal demonstrates that industry analysis never formed more than a small fraction of strategic management scholarship” (p. 86, in The Behavioral Foundations of Strategic Management.

However, while Bromiley certainly has a point, industry analysis may well have been dominant in teaching. And the fact remains that Porter’s 1980 tome, Competitive Strategy, is among the most cited references in strategic management.

11 April 2008 at 4:27 am 2 comments

Defending the Undefendable, Online

| Peter Klein |

I forgot to mention that Defending the Undefendable is also available in a free online edition. Text and pictures!

Table of contents below the fold: (more…)

11 April 2008 at 12:16 am Leave a comment

Hart on Transaction Costs

| Peter Klein |

In a new paper, “Reference Points and the Theory of the Firm,” Oliver Hart reflects on the progress economists have made on the theory of the firm since 1937. He argues that despite many advances, economists still have difficulty operationalizing Coase’s notion of transaction costs, or “haggling costs,” as Hart calls them. Why, he asks, can’t managers strike efficient bargains — call them Coasian bargains, ironically, after Coase 1960 — with managers of other firms?

The transaction cost literature . . . has implicitly assumed the existence of haggling (or rent-seeking) costs: it has not confronted the issue of how to model them. The more formal property rights approach has sided with Coase (1960), thereby avoiding haggling costs. In a typical model the parties bargain costlessly ex post, and the focus is on ex ante investment inefficiencies. I have argued elsewhere (Hart and Moore (2007)) that, while such an approach can yield useful insights about optimal asset ownership, it is unlikely to be helpful for studying the internal organization of large firms. Specifically, in a world of Coasian bargaining, it is hard to see why important aspects of organizational form such as authority, hierarchy, and delegation matter. Why wouldn’t the parties simply bargain about everything all the time, using monetary sidepayments?

The answer, Hart suggests, lies in the concept of “reference points,” discussed here (and later published here). Drawing on concepts from behavioral economics, Hart argues that parties enter transactions with some notion of fairness, and renege on commitments or shirk on performance to the extent that they feel aggrieved, or shortchanged relative to this reference point. (more…)

9 April 2008 at 12:02 am Leave a comment

Econ Grad Student Music Videos

| Peter Klein |

From the Berkeley econ skit party: No Dissertation and Stronger (via Mankiw).

As not only a former participant in, but also a two-time Master of Ceremonies for, said skit party, all I can say is thank goodness there was no YouTube in my day.

8 April 2008 at 1:59 pm Leave a comment

A Really Old Family Firm

| Peter Klein |

One advantage of the public corporation over the family-owned firm is longevity: few family firms last beyond two or three generations. Saturday’s WSJ profiled an interesting exception: Marchesi Antinori Srl, a wine business founded by Giovanni di Pietro Antinori in 1385 and run today by Piero Antinori, 26 generations later. Some of the Antinoris’ unusual business practices:

The Antinoris have flourished in part because of their willingness to flout conventional wisdom over how a family company should be run. Instead of creating clear lines that separate the family’s interests from the company’s, the Antinoris blur the two beyond recognition. The Marquis, his wife and their youngest daughter still live on the top two floors of the 15th-century Palazzo Antinori, a few steps from the Florence cathedral, where the family has resided for the past five centuries.

The business is still run on the palazzo’s bottom two floors, and the three daughters are top executives. . . .

Though the company has a six-person board of directors — including two non-family members — the Marquis says it only meets “for formalities.” The real board meeting, he says, “happens every Sunday, when we sit down to lunch.” That often takes place in one of the family’s nearby vineyards, either in the hills of Chianti, or along the Tuscan coast.

Instead of focusing on quarterly results, the Antinoris plan far into the future, laying the foundations for a company their grandchildren can run. They have been wary of following popular business trends. The family is suspicious of growing too much, which they say can compromise quality and run a company into debt.

One should be wary of drawing strong inferences from a sample of one. Of course, as Herbert Simon once noted, a sample of one is infinitely more informative than a sample of none.

Here is the Antinori wikipedia page. are some older posts on family firms.

7 April 2008 at 11:10 pm 5 comments

Overheard at Starbucks This Morning

| Peter Klein |

“She always referred to herself as ‘Dr. S____,’ so I assumed she was a medical doctor. Then I found out she was a former School Superintendent, with a Doctorate in Education.”

“Yeah, the only people who call themselves ‘Dr.’ are medical doctors and people with Doctorates in Education.”

7 April 2008 at 10:17 am 7 comments

Incentives Matter, Red-Light Camera Edition

| Peter Klein |

Auto-safety laws have an ambiguous effect on injuries because people drive less carefully when they feel protected from harm. (My former colleague Dwight Lee prefers a more colorful example: Distributing condoms on college campuses may increase the rate of sexually transmitted disease because students less reluctant to, um, engage in certain behaviors when they think their actions don’t carry consequences. Of course, as Dwight points out, the net effect depends on . . . wait for it . . . elasticity.)

Now we learn that red-light cameras, installed to boost city ticket revenues by recording violations and issuing fines automatically, are actually bringing revenues down, as drivers at those intersections learn not to run red lights. Naturally, city governments are upset and plan to remove the cameras. (HT: Anthony Gregory.)

5 April 2008 at 3:33 pm 5 comments

Accounting and Modern Management

| Peter Klein |

In assessing the role of accountants during the industrial revolution, historians generally have been guided by Sidney Pollard’s interpretation expressed in The Genesis of Modern Management (1965). Pollard contended that early industrial accounting exhibited a marked confusion between capital and revenues. This confusion suggested to him that early industrialists were more concerned with calculating and extracting interest on their investments rather than maximizing their rate of return. Thus, Pollard concluded, these early entrepreneurs apparently lacked the true profit motive possessed by modern capitalists.

David Oldroyd’s book seeks to test these contentions by subjecting the financial accounts of three northern [coal] estates to detailed analysis in four specific areas: the performance of contracts, investment planning, labor management, and managerial behavior. . . .

The result is a discussion of early industrial entrepreneurship that is both revealing and nuanced. For example, Oldroyd shows that an extensive network of contracts regulated the exploitation of the Durham and Northumberland coalfield. These contracts covered a myriad of circumstances involved in both the underground mining and aboveground transportation of minerals. A typical enterprise might need to contract the leasing or subcontracting of a mine, aboveground “wayleaves” to transport coal across neighboring properties, the shipment of coal to London or other ports, and the off-loading of coal at the point of sale. In all of these areas, accounting records carefully quantified not only total production and transport, but very often unit costs as well. Oldroyd therefore concludes that, contrary to Pollard, accounting was an essential and extremely adaptable tool promoting economic efficiency during this era.

This is from James Jaffe’s EH.Net review of David Oldroyd’s Estates, Enterprise and Investment at the Dawn of the Industrial Revolution (Ashgate, 2007). Interesting fodder for business historians and specialists in contracting and organization. And here are some previous posts on accounting (1, 2, 3, 4, 5, 6).

5 April 2008 at 10:27 am Leave a comment

Defending the Undefendable

| Peter Klein |

One of the greatest influences on my intellectual development (such as it is) was Walter Block’s Defending the Undefendable: The Pimp, Prostitute, Scab, Slumlord, Libeler, Moneylender and Other Scapegoats in the Rogue’s Gallery of American Society. Yes, you read that right. It’s a brilliant polemic on the benefits of peaceful, voluntary exchange, using the most outrageous and provocative examples to illustrate the gains from trade. And oh, the cartoons! My favorite, appearing in the chapter on saving, shows a half-crazed, miserly sort running his fingers through a large pile of gold coins, shouting to his wife, “Lip up, will ya’, Edith? You knew I wasn’t a Keynesian when you married me!”

First published in 1976, the book has just been reissued by the Mises Institute. Get one today and give yourself the same experience as Hayek:

Looking through Defending the Undefendable made me feel that I was once more exposed to the shock therapy by which, more than fifty years ago, the late Ludwig von Mises converted me to a consistent free market position. . . . Some may find it too strong a medicine, but it will still do them good even if they hate it. A real understanding of economics demands that one disabuses oneself of many dear prejudices and illusions. Popular fallacies in economic frequently express themselves in unfounded prejudices against other occupations, and showing the falsity of these stereotypes you are doing a real services, although you will not make yourself more popular with the majority.

See also Block’s 1994 article, “Libertarianism and Libertinism,” which clarifies some misconceptions about the argument. It appeared in the Journal of Libertarian Studies back when yours truly was assistant editor.

4 April 2008 at 2:23 pm Leave a comment

Choice Architecture

| Steve Phelan |

Interesting article by Thaler and Sunstein in the LA Times on “choice architecture” and the concept of “libertarian paternalism”:

the organization of the context in which people make decisions. Choice architects are everywhere. If you design the ballot that voters use to choose candidates, you are a choice architect. If you are a doctor and must describe the alternative treatments available to a patient, you are a choice architect. If you design the form that new employees fill out to enroll in the company healthcare plan, you are a choice architect. If you are a parent, describing possible educational options to your son or daughter, you are a choice architect. If you are a salesperson, you are a choice architect (but you already knew that).


The libertarian aspect of the approach lies in the straightforward insistence that, in general, people should be free to do what they like. They should be permitted to opt out of arrangements they dislike, and even make a mess of their lives if they want to. The paternalistic aspect acknowledges that it is legitimate for choice architects to try to influence people’s behavior in order to make their lives longer, healthier and better.

Hmmm….is this freedom (of choice)? How would we build a practice of choice architecture?

3 April 2008 at 1:21 pm 2 comments

The Sixth Force

| Peter Klein |

the_sixth_sense_sm.jpg Luke has a nice post today about competition and cooperation among providers of complementary products — the “sixth force” that Michael Porter left out of his famous framework. Luke points us to “How Companies Become Platform Leaders”by Annabelle Gawer and Michael Cusumano in the Winter 2008 Sloan Management Review. As Luke notes (continuing this week’s Apple meme):

One of the biggest mistakes a company can make is to pursue a product strategy and fail to recognize the platform value of their product. The best example of this is perhaps Macintosh computer which, due to its early technological lead, could have become the dominant platform for personal computing. Instead they priced high, failed to encourage complementary innovation, and let Microsoft become the dominant platform.

Porter does discuss complements in his newer work (e.g., here) but does not elevate them to the status of the original Fab Five.

3 April 2008 at 1:04 pm Leave a comment

New Essays on Insider Trading

| Peter Klein |

Steve Bainbridge reviews the history of insider-trading litigation and characterizes Henry Manne’s classic contribution.

Here are Manne’s own reflections (in 2005) on the influence of his work from the 1960s. The new paper, “Insider Trading: Hayek, Virtual Markets, and the Dog that Did Not Bark,” suggests that the activities of insider traders, in so far as they help move stock prices toward their “true” (full-information) values, provides valuable information to corporate decision-makers facing the Hayekian knowledge problem.

3 April 2008 at 11:19 am 2 comments

I Love Recycling

| Peter Klein |

This kind. (Yes, they’re calling it the iWipe.)

3 April 2008 at 1:47 am 1 comment

Apple, Microsoft, and Product Design

| Peter Klein |

I’m not an Apple guy. I have no doubt the Mac is a fine product but, come on, I’m not some froofy artist type! (Teppo, take note.) And I know how to use a right mouse button. I do like the iPhone, and would definitely consider buying one if it weren’t tethered to AT&T. At present, however, the only Jobs et al. product I’ve owned is an Apple II back in high school. (With 48K and dual floppies, it sizzled!)

This week I’m teaching the Apple 2006 HBS case in my undergraduate strategy course. As the case materials emphasize, Apple’s product design and packaging capabilities are an important source of its competitive advantage. The Zen thing is certainly a refreshing change from the industry norm. In preparing the case I was reminded of a funny item that circulated a couple of years ago, What if Microsoft Designed the iPod Package? You don’t have to be one of the bad Kleins to enjoy it.

1 April 2008 at 10:36 pm 8 comments

Hubbard on Firm Boundaries

| Peter Klein |

Thomas Hubbard has a nice review article in the May 2008 issue of the Canadian Journal of Economics, “Empirical Research on Firms’ Boundaries.” (Thanks to Fabio Chaddad for the pointer.) It’s a well-worn subject but there is certainly room for new interpretations. And Hubbard himself has been an important contributor to this literature (e.g., here and here). Here’s the abstract:

La recherche empirique sur les déterminants des frontières de l’entreprise a fleuri au cours des derniers 25 ans. Cet article discute des progrès accomplis en mettant l’accent sur les avancées intellectuelles faites par les chercheurs dans la littérature spécialisée durant cette période. On souligne le rôle important des chercheurs empiriques dans l’opérationnalisation des concepts théoriques, et on explique comment les succès dans ce registre ont contribué à faire que ces concepts ont eu un impact sur les décisions de faire-ou-faire-faire dans la vie réelle. On discute aussi des déficiences de cette littérature — en particulier la pauvreté des travaux de recherche sur l’impact de la variation dans les frontières des entreprises sur les rendements économiques — et on suggère comment de telles déficiences pourraient être corrigées.

Ha ha, April Fool’s! OK, here it is in English: (more…)

1 April 2008 at 9:58 am 5 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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