Archive for May, 2008

Lien-Klein Paper on Relatedness

| Peter Klein |

Lasse and I have a new paper on the measurement of relatedness, the degree to which a diversified firm’s markets or industries are “close” to each other. Relatedness is a key concepts of corporate strategy, but it is difficult to define and measure consistently. We discuss a new, “survivor-based” approach and compare it to conventional measures. The survivor-based approach lets the competitive process and the knowledge of local decision makers replace the judgment of the researcher (or the SIC system) in determining what is related to what, giving it a Hayekian flavor. Specifically, we measure the relatedness between a pair of industries by comparing how often they are actually combined to what one would expect if diversification patterns were random. Industries are related when this difference is large and positive, and they are unrelated if it is negative. This concept was originally suggested by Teece, Rumelt, Dosi and Winter (1994) who used it to illustrate persistent patterns of “coherence” among US firms.

The paper, “Measuring Inter-Industry Relatedness: SIC Distances versus the Survivor Principle,” is available on SSRN. Here’s the abstract:

The conventional approach to measuring inter-industry relatedness uses the SIC system to capture the “distance” between industries. While relatedness measures based on SIC codes (or equivalent classifications) are readily available and easy to compute, they do not screen effectively for the conditions under which related diversification creates value. This paper constructs an alternative, survivor-based measure of inter-industry relatedness and compares it to similar measures based on distances between SIC codes. We find that survivor-based measures consistently outperform SIC-based measures in predicting firms’ decisions to enter new markets, even when herding tendencies and motives related to mutual forbearance are taken into account.

31 May 2008 at 11:10 pm 2 comments

A Radical New Idea

| Peter Klein |

Dynamic pricing is a relatively new idea that reflects consumer demand. If a show is popular, the system will increase the price of that show. Once it loses steam, the price will be lowered proportionally.

Prices that adjust according to supply and demand! Who’d a thunk it?

To be fair, the writer, CNET’s Don Reisinger, is talking about Apple’s plans to offer variable pricing on iTunes. But it’s still a startling statement, to an economist. I guess I shouldn’t really be surprised, though.

31 May 2008 at 5:15 pm 1 comment

Westgren at Missouri

| Peter Klein |

Those of you within driving distance of Columbia, Missouri should come over Monday (2 June) for a seminar by Randy Westgren, “The Entrepreneurial Niche,” at 2:00 2:30pm in 217 Mumford Hall. Abstract below the fold. The talk is sponsored by the McQuinn Center for Entrepreneurial Leadership. Email me for details. (more…)

30 May 2008 at 2:29 pm 2 comments

Mike and Me on Externalities

| Peter Klein |

Mike Moffatt responds to my post on externalities. I questioned the Pigouvian approach of using taxes as efficient remedies for negative externalities. I said if, say, carbon taxes are a good idea, then Pigouvian taxes on a range of activities that generate negative externalities should be even better. And what about Pigouvian subsidies? I rarely see members of the Pigou club explain what activities they would subsidize, at what rates, and with what resources.

Mike’s response, based on more detailed comments here, is interesting, but to my mind misses the main point. Pigouvian taxes aren’t perfect, Mike says, but neither are income taxes or excise taxes or any other taxes. Fine, I say, but the relevant comparison isn’t between Pigouvian taxes and other taxes, but between Pigouvian taxes and alternative institutions for dealing with externalities such as cap-and-trade, common-law tort remedies, etc. (more…)

30 May 2008 at 9:15 am 7 comments

Langlois and Lien Join the O&M Team — and Foss Is Back

| Nicolai Foss |

Since its inception in April 2006 Peter and I have been running this operation as a two-man show (with the help of some terrific guest bloggers). Peter has been the main man for the past several months, because of the time-consuming bureaucratic nightmares that I have been immersed in. The rumours that have been spreading about my virtual death are, however, exaggerated, and I will make a comeback attempt here at O&M.

Furthermore, while Peter and I enjoy writing about our own idiosyncratic interests, we think the time is right to broaden O&M’s scope by adding some permanent bloggers to the team. So, we’re pleased to announce that our longtime friends, collaborators, and former guest bloggers Dick Langlois and Lasse Lien have agreed to come on board.

Langlois is professor of economics at the University of Connecticut and adjunct professor of strategy and business history at the Copenhagen Business School. He writes on the theory of the firm, organizational boundaries, technology, the economics of institutions, the history of economic thought, and economic methodology.

Lien is associate professor of strategy and management at the Norwegian School of Economics and Business Administration (NHH). He works in corporate strategy with an emphasis on diversification, mergers and acquisitions, and strategic positioning.

Welcome, guys!

30 May 2008 at 12:55 am 2 comments


| Peter Klein |

Facebook founder Mark Zuckerberg, reports the NY Times, skipped his college art history class:

When it came time for the end-of-term study period, he was too busy building the prototype of Facebook to bother to do the reading. So in an inspired last-minute save, he built a Web site with all of the important paintings and room for annotation. He then sent an e-mail to the students taking the class offering it up as a community resource.

In a half an hour, the perfect study guide had self-assembled on the Web. Mr. Zuckerberg noted that he passed the course, but he couldn’t remember the grade he received.

The pointer is from Joshua Gans, who calls this “an example of Wikicheatia or of Study Group 2.0.”

29 May 2008 at 12:08 pm 2 comments

Middle Managers in the Theory of the Firm

| Peter Klein |

The current issue of Knowledge@Wharton features a piece on the challenges facing middle managers. The middle-management role is typically high in responsibility and low in authority — middle managers are accountable for the performance of their subordinates but selective intervention from above makes it difficult for them to commit to particular incentive schemes. Moreover:

[T]op reasons for dissatisfaction among middle managers include micromanagement by senior managers and lack of respect, says [author David] Sirota. “And sometimes the senior leader is just really ineffective; middle managers don’t want to be in a company that is run by that type of person.” . . .

Navigating the various relationships upward, downward and horizontally can be an emotional management challenge, adds Wharton management professor Sigal Barsade. “This is particularly noticeable with organizational change. If you are a middle manager, there may be a change that you didn’t have much to do with, but you need to translate it to your people and make them feel protected and valued. However, you are also someone being impacted by the change. Because you didn’t design the change, you might be left feeling like you don’t know what to do yourself, but you still need to comfort, protect and inspire your people.”

A more colorful description is provided by Chef Shuna Fish Lydon who blogs on all things culinary at eggbeater. Here she is on the role of the sous chef: (more…)

29 May 2008 at 9:32 am Leave a comment


| Randy Westgren |

This weekend, I am planning to drive to Columbia, Missouri, the home of Peter Klein. I had to check the map this afternoon, as there is a wire service report that Max Motors in Butler, MO, is offering each car buyer $250 toward the purchase of a gun or gasoline. According to the report, “General manager Walter Moore said that, so far, most buyers have chosen the gun, adding that he suggests they opt for a semiautomatic model because it holds more rounds.”

I note that Butler is on the other side of Columbia from my route of ingress, though I will remain watchful. I suppose it is the curse of being an economist that causes me to believe that cars and guns sold together are complementary goods. . . .

28 May 2008 at 8:18 pm Leave a comment

New Center for the History of Political Economy

| Peter Klein |

Bruce Caldwell is joining Duke University’s HOPE group as founding Director of a new Center for the History of Political Economy. Bruce explains:

The purpose of the Center is to promote and support both research in and the teaching of the history of political economy, broadly defined. Though operating on a somewhat reduced scale next year (AY 2008-2009), we anticipate that once it is up and running it will include an active visitors program for post-docs and more senior fellows, both short and long term; a regular seminar series; and programming, possibly in the summer, aimed at promoting teaching in the field.

The Center’s web page is not yet up but you can contact Bruce for more information.

28 May 2008 at 9:25 am Leave a comment

There’s Still Hope for Foss and Klein

| Peter Klein |

Psychologists have not considered wisdom and creativity to be closely associated. This reflects their failure to recognize that creativity is not exclusively the result of bold discoveries by young conceptual innovators. Important advances can equally be made by older, experimental innovators.

That’s from the newest paper in David Galenson’s art history series, “Wisdom and Creativity in Old Age: Lessons from the Impressionists.” I notice the SSRN page has the title misspelled as “Wisom,” suggesting an old person typed it in.

Turning to entrepreneurship, there’s a common myth that entrepreneurial creativity declines sharply after age 30 but little systematic evidence for this. Given a suitably broad concept of entrepreneurship (i.e., not simply the establishment of new companies), we might expect entrepreneurial ability to increase with age and experience. Indeed, looking even at the conventional definitions, we find that the likelihood of self-employment and the probability of new-venture success are positively correlated with age and business experience (see Parker 2004 for details).

27 May 2008 at 10:53 am 2 comments

Remixed Movie Trailers

| Peter Klein |

As I noted in my review of Yochai Benkler’s The Wealth of Networks, I think that Web 2.0 enthusiasts tend to overstate the novelty of “user-generated content.” It’s true that the costs of creating and disseminating movies, music, and even the written word have, in many settings, fallen dramatically (look at blogging, for goodness’ sake). On the other hand, as Paul Cantor, Tyler Cowen, and others have pointed out, commercial culture has always been, in an important sense, consumer culture. Benkler tends to portray twentieth-century consumers as passive recipients of culture, easily manipulated by Hollywood and Madison Avenue. Yet individuals have always played an active role in shaping the plays, books, songs, and shows made available to them, in their decisions to buy or not to buy, to patronize or not to patronize, to support or reject particular artistic producers and particular products.

Having said this, I do enjoy clever bits of user-generated content. For instance, check out this trailer for Sleepless in Seattle — number 5 on this list of The 20 Worst Chick Flicks of All Time — remixed as a horror movie. It reminds me of the brilliant Brokeback to the Future trailer from a couple of years back.

Of course, the greatest of all such parody shorts is Kevin Rubio’s Troops, now more than a decade old. And don’t miss George Lucas in Love.

26 May 2008 at 11:11 pm 2 comments

Do What Consultants Say, Not What Other Firms Do

| Peter Klein |

McKinsey suggests this strategy: when other firms ignore strategy consultants, earn rents by listening to strategy consultants.

  • Companies don’t react to competitive threats in the way management theory says they should, according to a McKinsey Global Survey.
  • Instead of undertaking extensive, sophisticated analyses when faced with a competitive threat, most companies assess just a few responses, and they often choose the most obvious one.
  • These practices give companies an opportunity to seize a competitive advantage by understanding how their competitors are likely to react to their moves.

The pointer is from the ever-valuable Luke Froeb. Most economists are puzzled management consulting, believing that consultants add little real economic value. I am sympathetic to a signaling explanation with a separating equilibrium in which high-quality firms can afford to signal quality by hiring expensive consultants and low-quality firms cannot. But I haven’t studied this closely. Can anyone recommend literature on the economics of consulting?

26 May 2008 at 8:55 am 8 comments

InBev and Bud . . . In Bed?

| Randy Westgren |

Recent news about the impending bid by InBev for Anheuser-Busch was interesting subtext for my current study tour on EU agri-food supply chains. We normally schedule a stop at InBev when we spend our first week based in Leuven, Belgium, which is InBev’s HQ. This year, they told us a visit was impossible. I had assumed that it was due to shake-ups in the management following a weak first quarter, but I guess there was more in the air!

You will note that A-B shares rose on the news. The strategic fit is stunning. InBev is strong in its traditional markets (Belgium and Germany from the Interbrew parent; Brazil from the Ambev parent) as is A-B, who also has an equity strategic alliance with Tsingtao in China. Not much overlap geographically and lots of opportunities for building on existing distribution alliances. A merged firm gets serious presence in mature markets as well as the growing ones.

The other thing that the market will react to is the InBev style. They drive growth with a limited number of global brands; they pare local brands over time. And they are relentless cost-cutters. Look at the top management team for a “Belgian” brewer. It has only taken a few years for the “tradition-oriented” Belgians to be succeeded by aggressive Brazilians. (I know this smacks of ethnic profiling, but ask around. . . .) The corporate culture of InBev is palpable.

24 May 2008 at 5:36 pm 3 comments

From Rumination to Rumelt via Dobzhansky

| Randy Westgren |

I was perusing the website of the Oxford Symposium on Food and Cookery to find the references to last year’s theme: food and morality. Some interesting reads there. I noticed that the Symposium awards the Sophie D(obzhansky) Coe Prize in Food History annually. Dr. Coe was an anthropologist who wrote on pre-Columbian diets and was the daughter of Theodosius Dobzhansky, one of “the Four Horsemen” of the modern synthesis of genetics and evolution (American Philosophical Society). Dobzhansky emigrated from the University of Kiev in 1927 to Columbia University, thence to Caltech, where he and his colleagues bred squillions of generations of fruit flies and provided the empirical basis for the mathematical models of evolution of the other horsemen: Haldane, Fisher, and Wright.

In 1937, Dobzhansky had two publications. One was his landmark book, Genetics and the Origin of Species, which was the siren song that drew Ernst Mayr and other biologists to the field of evolutionary biology. Mayr has often been credited with developing the concept of the isolating mechanism as the basis for speciation. Methinks that Mayr’s long shadow at Harvard fell on Richard Rumelt, who ported the concept to strategic management without much attribution in his 1984 and 1987 pieces. Mahoney and Pandian must be credited with the most complete exposition of the concept. (more…)

24 May 2008 at 3:24 pm 1 comment

Elgar Catalog Covers Getting Weird

| Peter Klein |

I said before how much I liked the cover of Edward Elgar’s law catalog, which shows two stick figures holding megaphones and shouting at each other. The image on the business and management catalog (below, left) is pretty good too. But I don’t understand the economics catalog (below, middle), which pictures a family standing under an umbrella. Is it about saving for a rainy day? (What would Lord Keynes say?)

Today I get a pamphlet advertising Elgar’s “Economic Approaches to Law Series,” which has excellent edited contributions by Levitt, Posner, Epstein, Ben Klein, and others but an even weirder cover. This one shows the two guys with megaphones shouting at the family under the umbrella! What could they be saying to these poor people? “Consider the liability rule before opening that pointy umbrella in a crowd!” “Do you know your marginal damage cost of wetness?”

24 May 2008 at 11:57 am Leave a comment

Economists as Public Intellectuals

| Peter Klein |

I haven’t read Judge Posner’s 2002 book Public Intellectuals: A Study in Decline but I hear it’s one of his more interesting efforts. (Actually I haven’t read most of Posner’s books, but you can’t blame me — he writes ’em faster than I can read ’em.) Posner’s thesis, as is obvious from the title, is that today’s public intellectuals are a far cry from those of yore, and he blames this (in part) on the increasing professionalism of the Academy and its inward-looking, highly technical but ultimately ephemeral research. (I remember an economist colleague a few years back being chided, by his senior peers, for having published an op-ed in the Wall Street Journal, thus indicating his lack of commitment to “serious” scholarship.)

The current issue of Foreign Policy contains a list of today’s top 100 public intellectuals. Shockingly, none of your esteemed O&M bloggers made the list. Economics, however, is its most represented academic discipline. The list includes ten academic economists, if I counted correctly: Paul Collier (Oxford), Esther Duflo (MIT), William Easterly (NYU), Paul Krugman (Princeton), Steve Levitt (Chicago), Nouriel Roubini (NYU), Jeff Sachs (Columbia), Amartya Sen (Harvard), Michael Spence (Harvard), and Larry Summers (unemployed). Daniel Kahneman, a psychologist whose work has been extremely influential in economics, is also there, along with several think-tank economists or journalist-economists. A few observations:

  • No one from management or busisness administration makes the list, though some of these gurus are plausible candidates. Perhaps “influential business thinker” and “public intellectual” are disjoint sets in the minds of people who edit magazines like Foreign Policy.
  • Six of the ten are development economists. Only one, Larry Summers, is a macroeconomist. Remember when Keynes, Hayek, Friedman, and Samuelson were household names? Today development is the hot field.
  • The list includes one academic sociologist, Slavoj Zizek. Oh, and one pop sociologist, Malcolm Gladwell (don’t blame me, that’s what FP calls him). Robert Putnam, a political scientist often mistaken for a sociologist, gets his props too. More fodder for the orgtheory crew.

See also: The Role of Economic Analysis in Public Policy and Econo-Bloggers and the Public Good.

Update: Michael Spence isn’t a development economist but has been working in that area, serving most recently as Chair of the World Bank’s Commission on Growth and Development. Bill Easterly characterizes the Commissions newly released report thusly: “After two years of work by the commission of 21 world leaders and experts, an 11-member working group, 300 academic experts, 12 workshops, 13 consultations, and a budget of $4m, the experts’ answer to the question of how to attain high growth was roughly: we do not know, but trust experts to figure it out.”

23 May 2008 at 8:46 am 1 comment

Disengaged Students

| Peter Klein |

To my colleagues who teach: how do you handle disengaged students? Paul Trout describes them thusly:

They do not read the assigned books, they avoid participating in class discussions, they expect high grades for mediocre work, they ask for fewer assignments, they resent attendance requirements, they complain about course workloads, they do not like “tough” or demanding professors, they do not adequately prepare for class and tests, they are impatient with deliberative analysis, they regard intellectual pursuits as boring, they resent the intrusion of course requirements on their time, they are apathetic or defeatist in the face of challenge, and they are largely indifferent to anything resembling an intellectual life.

I have known a few in my time. The pointer is from George Leef, who also provides this excerpt from Generation X Goes to College:

[B]y and large, students view themselves primarily as consumers who intend to study just a handful of hours a week for all their classes, and who expect, at a minimum, solid Bs for their efforts. . . . In short, they view themselves as consumers who pay their teachers to provide “knowledge,” regardless of how superficial that knowledge might be. After all, how hard should a consumer have to work to buy something?

See also: “In the Basement of the Ivory Tower” from the new Atlantic Monthly.

23 May 2008 at 7:52 am 16 comments

Pensées de l’Alsace

| Randy Westgren |

Sorry to carry no intellectual weight tonight. One day remains of a 14-day whirlwind tour of the EU with 24 students of business, international studies, and agriculture. No student has had as much as 4 hours of sleep any night this week and I am in awe of their willingness to throw themselves into long days of travel and company visits. I am beat. Much of my day was spent translating between English and French, between US weights and measures and EU metrics (including such oddballs as quintals and hectolitres), and between currencies. Luckily, there was beer.

In honor of Peter Klein’s francophilia, I note the following from our second day outside Strasbourg.

(1) Cousin Naomi’s book has been translated as La Stratégie de Choc and sells as a trade paperback for 25 euros. It is not flying off the shelves. Evidently, there aren’t enough intellectuals in Europe’s second capital to make a sale.

(2) Not that polemics aren’t big press here. I bought Le Monde Selon Monsanto by Marie-Monique Robin. Evidently (on first read) Monsanto is behind the dioxin poisoning in Belgium, agent orange use, hormones in beef, and lost biodiversity in Mexico. Complete crap, but worthy of two hours on national TV earlier this year. Something for Naomi Klein to aspire to.

(3) We dined at a restaurant in the beautiful village of Obernai tonight. The specialty of the house is choucroutte (sauerkraut) served in a 2 kilo pile topped with 4 kilos of sausages, meatballs, pork chops and belly slices. What sweet revenge on the sour, self-absorbed vegetarian in the group (add emoticon here)! Magnificent food!

Bonne nuit.

22 May 2008 at 4:43 pm 2 comments

New Kauffman Entrepreneurship Blog

| Peter Klein |

The Kauffman Foundation’s Tim Kane and Bob Litan have a new blog, Growthology, focusing on the links between entrepreneurship and economic growth. Early posts focus on Schumpeter and Jane Jacobs, a good sign.

Reflecting on blogs’ advantages over traditional media, Kane notes the critical role of disaggregation. “A better way to think of this is personalized aggregation, something that can be done digitally with ease. . . . What is under siege is the business of mass-market aggregated news. I do not know if it can survive, but I do know that -– as a blogger -– I have its ink on my hands.” Amen to that.

22 May 2008 at 9:22 am Leave a comment

Best Seminar Title You’ll Read Today

| Peter Klein |

It’s “Manure Entrepreneurs: Turning Brown to Green,” the theme for today’s Breimyer Seminar here at the University of Missouri. I promise, it won’t be just the same old . . . you know.

Incidentally, the seminar series is named for Harold F. Breimyer, a prominent agricultural economist of the last century. A friend described him to me this way:

He was an original New Deal agricultural economist who was absolutely and positively convinced of the inability of farmers and ranchers to compete without government because of their “obvious” lack of market power. His main issue was who will “control” agriculture. This conviction was so deep-seated that he could not appreciate or comprehend other perspectives. We corresponded in the late 1970s and it was as if we were from different planets. Promoting free-market agriculture, I was to him either a fool or a tool, or both.

22 May 2008 at 9:07 am 1 comment

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Recent Posts



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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