Archive for August, 2008

Public Choice and Austrian Economics

| Peter Klein |

The Austrian school and the Public Choice or Virginia school of economics are often tightly linked, both among the lay public and within academic circles. The connection isn’t obvious, however. While members of both schools tend to have classical-liberal views on political economy, the Virginia school emerged from the Chicago public finance tradition (Buchanan, after all, was a student and disciple of Knight) and is thoroughly “neoclassical” in orientation. Public choice economists tend to look to Chicago, not Vienna, for inspiration.

Anamaria Berea, Art Carden, and Jeremy Horpedahl take a different tack, drawing out common threads in Buchanan’s and Hayek’s subjectivist approach to cost.

Cost and Choice and The Sensory Order represent tangents from the basic research programs of their respective authors, James M. Buchanan and F.A. Hayek. These seeming diversions into methodology by two political-economic philosophers help to shed light on their underlying assumptions about cost and rationality. We argue that Buchanan and Hayek, and consequently Public Choice and Austrian Economics, have very similar underlying assumptions about the nature of cost. This can help to explain other similarities between the two schools, especially regarding the role of the state. These contributions are synthesized and applied to debates over the “new paternalism” and military conscription.

Tom DiLorenzo’s 1990 paper “The Subjectivist Roots of James Buchanan’s Economics” is also worth consulting on this connection. The question, though, is whether Cost and Choice (and the later Buchanan and Thirlby-edited volume, LSE Essays on Cost) is a consistent with the rest of the public choice tradition (including Buchanan’s own work).

NB: In graduate school I was exposed to the “positive political theory” (PPT) literature associated with Riker, Shepsle, Weingast, etc. and was surprised that the Virginia school was never mentiond in the discussion. A prominent PPT scholar told me once that PPT is “scientific,” while public choice is merely “ideological” and “low-tech.” Fair or not, I think this view is widespread among younger scholars. Has anyone written a good comparison of PPT and the public-choice approach?

18 August 2008 at 4:41 pm 10 comments


| Nicolai Foss |

As you may have noticed — and as Peter points out in daily emails — my blogging activity has been rather light of late.  Part of this is caused by being a department head, a task that has a notorious (and entirely correct) reputation for letting your brain rot. And part of it has been caused by the completion of some major projects.  

I have , however, done the Facebook thing. FB seems to be overcoming its teenage bias, attracting more mature and normal people, such as academics. (Check the group Unlike 99.99% of the Facebook population, I was born in the 1960s). Indeed, I have noticed a very strong FB herd behavior among academics this last month, no doubt prompted by the summer vacation. Quite a number of people of interest to readers of O&M are now on FB (e.g., professors Jackson Nickerson, Nicholas Argyres, Russ Coff, and many others, including O&M’s own Peter Klein), and there are fan groups devoted to Herbert Simon, Michael Porter, Friedrich Hayek, Murray Rothbard, Ludwig Mises, etc. started by students and academics on FB.

I have also noted that fewer of academic friends and acquaintances are using Skype. I conjecture that overall blogging activity — not to mention research and writing activity — has also diminished. Possible conclusion? Blogging is becoming passé and the immediate future belongs to Facebook. Who wants article-like treatments of esoteric subjects, when they can have one-liners about going to the gym, reading, etc.?

More seriously, there are in fact blogging features on FB for those who have more to say to the world than “NN has gone kite surfing.” Indeed, FB combines the features of the homepage with the blog — and introduces even greater possibilities of ego massage than these two (e.g., it is terribly easy to upload pics).

18 August 2008 at 4:50 am 7 comments

Econ Academics Blog

| Peter Klein |

Christian Zimmerman of RePEc (and Dick’s colleague at UConn) has set up a blog aggregator focused on academic economics research, Econ Academics Blog. As Christian points out, there are lots of economics blogs, but only a few that deal primarily with academic economics (theories, research papers, debates). We’re happy to be included as a source.

16 August 2008 at 10:35 pm 1 comment

Technology and Organization and Firm Size (Re-Redux)

| Dick Langlois |

I blogged a while back about the recent Dosi et al. paper in Capitalism and Society, which basically claims that, since firm size distributions (as they model them) have not changed much over time, it must be the case that recent technological change has not led to greater vertical specialization in industry. My response to this claim, which should be published soon, points out that firm size in the sense of price theory (as measured by output, employees, etc.) tells us nothing at all about firm size in the sense of Coase (number of transactions or stages of production within the firm’s boundaries). Vertical specialization does not imply small size — it may even mean larger firms. A recent NBER paper by four University of Chicago economists sheds light on this point. There is evidence, notably in a well-known paper by Erik Brynjolfsson and coauthors, that, at least before 1994, investment in ICT technology tended to make firms smaller. But there is another way in which ICT, in the form of the Internet, can make firms bigger. As this NBER paper shows, in reducing search costs in areas like new-car sales and bookstores, the Internet tended to increase the average size of the firm by driving the smaller less-efficient firms out of business and increasing the (price theory) size of the more efficient. Note that such an increase in size is not a resurgence of the Chandlerian multi-unit enterprise. Despite its diversification into many different products, even Amazon is still highly specialized vertically.

15 August 2008 at 2:39 pm Leave a comment

Unpopular Economics

| Lasse Lien |

The Norwegian Directorate for Roads recently published a report concluding that politicians should scrap a plan to make roads safer for kids walking or riding bikes to school. The argument is that the investment required per life saved is too high compared with other measures that will primarily save the lives of grown-ups. The directorate bravely chose to publish this recommendation just four days before school starts.

While their cost/benefit analysis shows beyond reasonable doubt that this conclusion is consistent with maximizing national economic welfare, I don’t think I’ll brag about being an economist at the PTA meeting this evening.

15 August 2008 at 9:37 am 4 comments

Random Thoughts from the AoM

| Peter Klein |

Back now from the AoM conference in Anaheim. Random thoughts:

1. The Critical Management Studies Division (yes, it really exists) featured, as a keynote speaker, none other than Ward Churchill, former professor of ethnic studies at the University of Colorado (fired in 2007 for professional misconduct). His talk: “On the Banality of Managerial Efficiency: The ‘Eichman Question’ Revisited.” Apparently the Late Unpleasantness (1, 2) did not disqualify him from this eminent academic honor. I did not attend the talk but was told he was “impressive.”

BTW, if you’re wondering about this division of the Academy, look no farther than the CMS website:

The Critical Management Studies Division is a forum within the Academy for the expression of views critical of unethical management practices and exploitative social order. Our premise is that structural features of contemporary society, such as the profit imperative, patriarchy, racial inequality, and ecological irresponsibility often turn organizations into instruments of domination and exploitation. Driven by a shared desire to change this situation, we aim in our research, teaching, and practice to develop critical interpretations of management and society and to generate radical alternatives. Our critique seeks to connect the practical shortcomings in management and individual managers to the demands of a socially divisive and ecologically destructive system within which managers work.

2. You know how all stereotypes are based on elements of truth? I noticed that the receptions hosted by groups and organizations dominated by economists (such as the BPS Division) tended to have cash bars, while those dominated by psychologists and sociologists (e.g., anything to do with organizational behavior) tended to have open bars. (more…)

14 August 2008 at 2:08 pm 1 comment

A Note to My Undergraduate Students

| Peter Klein |

From a former student:

I was in your Managerial Economics back in Spring 2005. I guess I actually learned something and remembered it. I am going back to school for my MBA and I was able to test out of my basic economics class using the knowledge I gained in your class. Since I actually paid attention to you talking about game theory, I was able to save myself from taking an extra graduate class.

Pay attention now, save $$$ later!

14 August 2008 at 1:18 pm 1 comment

Robust Competitive Advantage

| Peter Klein |

Rich Makadok, during an AoM session on “Real Options and Competitive Advantage,” made an interesting point about the concept of sustained competitive advantage (SCA). The modifier sustained is typically taken to mean “persisting over a long period of time.” As Rich noted, however, the initial formulation of SCA in Barney (1991) doesn’t include a temporal dimension at all. It refers, instead, to imitability: “a firm is said to have a sustained competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy” (Barney, 1991, p. 102). Sustained competitive advantage, in other words, refers to value-creating activities that cannot be imitated. The key is entry barriers, not time.

Rich suggested replacing SCA with some other term, like “hard-to-duplicate competitive advantage,” for greater clarity. Here’s my suggestion: robust competitive advantage. What do you think?

13 August 2008 at 11:54 pm 14 comments

CSI: Reform

| Dick Langlois |

My old friend Roger Koppl has an interesting article in Slate on reforming the system of forensic analysis and testimony. He and his coauthor argue for such measures a forensic counsel for the indigent; greater independence of experts from the prosecutorial team; more competition among labs; more statistical analysis to uncover anomalous findings; and the masking of evidence from analysts to reduce cognitive bias.

Roger has started something called the Institute for Forensic Science Administration. Check out his website for links to papers and others materials. (The website also declares that Roger’s Erdös number is 6. As Roger and I have written a couple of papers together, my Erdös number must be no greater than 7.)

12 August 2008 at 1:25 pm Leave a comment

Megawatt Ghemawat

| Peter Klein |

Five things you didn’t know about Pankaj Ghemawat:

1. He entered Harvard College at age 16 and graduated in three years.

2. He entered Harvard Business School’s PhD program at age 19 and graduated in three years.

3. After a year at McKinsey he was hired by Michael Porter into the HBS strategy group and later became, at age 31, the youngest full professor in HBS history.

4. He has authored or co-authored more than 50 HBS cases.

5. He looked about the same at age 19 as he looks today. (I have seen the photographic evidence).

This was discussed yesterday at an AoM session honoring Pankaj with the BPS Division 2008 Irwin Outstanding Educator Award. Jan Rifkin and Anita McGahan hosted a semi-roast in his honor, at which they revealed that Pankaj’s college nickname was “Megawatt Ghemawat” (the authenticity of this story could not be verified, however). Pankaj explained that he started writing his own cases out of fear, lacking the confidence to teach other people’s cases to demanding Harvard MBAs. Eventually he decided that cases were interesting in themselves and led to new research questions and new answers to old questions.

His website is He now lives in Spain where he holds the Anselmo Rubiralta Chair of Strategy and Globalization at the IESE Business School, University of Navarra. He blogs at the HBS Discussion Leader site. His Foreign Policy article “Why the World Isn’t Flat” gained a lot of attention when it appeared last year.

12 August 2008 at 1:32 am Leave a comment

Rival Teams and Non-Rival Knowledge

| Dick Langlois |

A recent issue of the Journal of Quantitative Analysis in Sports, an all-electronic Bepress journal, carried a piece provocatively titled “Quantifying NFL Coaching: A Proof of New Growth Theory” by Kevin P. Braig. The paper is a rambling mix of sports anecdotes and goofy math. My favorite of the latter is:

lim f(x) = 1 first down


But the piece is amusing reading and does make some interesting points.

The title is more than a bit fatuous, of course. What the author has in mind is that one can increase output not only by increasing the inputs but by learning to reorganize the way those inputs are combined. This was the growth theory of Smith and Marshall, of Rosenberg and Mokyr. The only contribution of the New Growth Theory has been to cram a diminished and mechanized version of these ideas into the formalism of the production function — and, of course, to receive credit in the popular mind for the very notion that growth is about the search for new “recipes.” Braig is on firmer ground when he associates himself with Carliss Baldwin‘s notion of designs.

What has this got to do with sports? Consider baseball, which is probably the most modular of major (American) sports. In baseball, the only real way to be more successful is to improve the quality of the players, what Braig likes to call their human capital. This is because the way players interact is relatively hard-wired and invariant among teams. Small adjustments are possible — shifts, bunting strategy — but no one ever redefines how to turn a double play. The so-called moneyball approach has been to find better statistical measures of the effectiveness of player human capital — not to reorganize how the players interact. (In testimony to the almost mystical numerology of this article, Braig finds wonder in the fact that average on-base percentage has remained nearly constant over the live-ball era at about 0.331, exactly the ratio one gets by recognizing that “the hitters’ needs (4 bases) exceed their resources (2 outs) by a 2-to-1 margin.” But this presumes that human capital in batting should somehow exactly keep pace with human capital in pitching — even though there is arguably more room for innovation in pitching. I think a closer examination would find that baseball rulemakers have tweaked subtle rules like the size of the strike zone or the height of the mound to keep the ratio constant.) (more…)

11 August 2008 at 3:31 pm 3 comments

Organizational Structure and the Diversification Discount

| Peter Klein |

Do diversified conglomerates trade at a discount relative to more specialized firms? A huge literature in strategy and corporate finance emerged over the last couple of decades devoted to this question. Early studies claimed to find a substantial diversification discount, though more recent papers claim that the observed discount is due to measurement error, self-selection, and other characteristics, not a harmful effect of diversification per se. (For a good overview of this literature, now slightly dated, see this roundtable report edited by Belén Villalonga. Some of my own contributions are here and here.)

Seemingly lost in the search for a diversification discount, however, is a related question: What is being discounted? Potential benefits of diversification, according to the literature, include access to internal capital markets and more efficient redeployment of distressed assets; potential costs include inefficient rent-seeking, bargaining problems, and bureaucratic rigidity. But these benefits and costs have little to do with industry or geographic diversification per se — they apply to the management of any multi-unit organization, even if its activities do not span different industries or regions.

In a new paper, “Organizational Structure and the Diversification Discount: Evidence from Commercial Banking,” Marc Saidenberg and I try to distinguish the effects of diversification and organiztaional complexity by studying multi-unit firms within a single industry, commercial banking. (more…)

11 August 2008 at 2:04 am Leave a comment

O&M at the AoM

| Peter Klein |

Ah, Los Angeles . . . land of “tattoos, breast implants, bleached hair, and vacuous egos,” as Nicolai recently wrote on Facebook. And then there are the people not in town for the Academy of Managment meeting!

As readers may know, the AoM is meeting this week in Anaheim. The O&M crowd is well represented, as usual. You can search the online program for your favorite person, subject, or interest area. Below are some of the sessions involving O&Mers, past and present: (more…)

9 August 2008 at 9:27 am 1 comment

Laptop Bleg

| Peter Klein |

I’m in the market for a new laptop. My current model is a Sony Vaio TR3 and I want to stay in the ultraportable category (under 4 lbs., 12″ or smaller display). For now, I’m sticking with the WinTel platform (sorry, Teppo!).

Sony’s current offering in this category, the TZ, has the right combination of size, weight, and style, but it’s not quite as powerful (in RAM or clock speed) as some alternatives, like the Asus U2 and a few models by HP and Toshiba. I’m not particularly looking for a tablet, though I wouldn’t rule it out. The Lenovo X series is nice, but lacks the Sony’s built-in optical drive. Any suggestions?

8 August 2008 at 9:48 am 10 comments

Cars for Comrades

| Peter Klein |

A while back we posted a video from an East German Trabant factory that got a lot of hits. A video is worth more than a thousand words on the political economy of socialism, right?

Indeed, the automobile played an important role in the eventual collapse of the communist system, according to Lewis Siegelbaum’s Cars for Comrades: The Life of the Soviet Automobile (Cornell University Press, 2008). As Perry Patterson notes in his review for EH.Net:

As incomes and economic complexity grew over time, the Soviet state found it necessary to produce more and more vehicles of all sorts, and private cars in particular. But policymakers also discovered that the existence of cars generated additional demands for consumer services, and discontent when the economy could not provide them. As Siegelbaum puts the matter, “cars, cars, and more cars seem to have played a particularly large and invidious role in popular disillusionment with Soviet socialism.” Worse perhaps for the Soviet state, private automobiles and the culture that grew up around them also opened up numerous ways for individuals to evade and undermine the official command economy. For example, cars facilitated private conversions, private dealmaking, the generation of “unearned” income from taxi rides, and the unplanned movement of (sometimes stolen) goods.

The quality of Soviet cars was, well, about what you’d expect. The book “provides extensive examples of the mental knots in which the Communist leaders tied themselves, wanting on the one hand to boast about their superiority over the West on all fronts, and being unable and unwilling to match it when it came to cars,” notes the Economist.

My first “serious” research paper, written in Glen Elder’s undergraduate sociology class, dealt with the social and cultural impact of “automobility” in the US, so this subject is near and dear to my heart. (Fortunately, the paper is buried deep in a secret vault and will never see the light of day.)

8 August 2008 at 9:08 am 5 comments


| Peter Klein |

As the next phase of my Plan for World Domination I’ve taken office as Chair-Elect of the Institutional and Behavioral Economics Section (IBES) of the Agricultural and Applied Economics Association. One of my duties is to organize the section’s sessions for next year’s AAEA annual meeting, 26-28 July 2009 in Milwaukee, Wisconsin. I welcome participation from the O&M crowd so please email me your suggestions for session topics, papers, special formats, themes, or other ideas. Milwaukee is a lovely and interesting town (just ask Alice), so make plans to join us!

7 August 2008 at 12:26 pm 1 comment

The Price of Exclusivity

| Peter Klein |

Whenever I fly first or business class — not nearly often enough — it’s usually an upgrade, and I feel sorry for the rich guys around me who shelled out serious coin partly to avoid sitting next to schmucks like me. Perhaps you’ve been to an expensive restaurant where the food isn’t that good, but the clientele is made up of people who can afford that kind of place and you enjoy the exclusivity. And you’ve heard stories about first-class train compartments that are identical to their second-class counterparts, only more expensive, catering to people who like to be surrounded by other rich people.

Here’s a cool modern example of this phenomenon: a $999 iPhone application that does nothing but announce to the world that you can afford a $999 iPhone application (via Josh). Talk about a separating equilibrium!

7 August 2008 at 12:17 am 2 comments

Homogeneity and Cooperation

| Peter Klein |

Why are Scandinavians so cooperative? Nicolai and Lasse might suggest it’s their superior moral character. La Porta et al. (1997), Putnam et al. (1992), and others point to Protestantism: hierarchical religions like Catholicism and Islam, it is argued, tend to discourage trust and retard the development of social capital. The Protestants, who already have Max Weber in their corner, seem to be piling it on.

Not so fast, says Kevin O’Rourke in a recent paper, “Culture, Conflict, and Cooperation: Irish Dairying Before the Great War” (Economic Journal, October 2007). O’Rourke compares the Danish and Irish dairy industries before 1914 and argues that cultural and ethnic homogeneity, not religion, explains the success of Danish cooperatives. Unlike recent large-sample econometric work on trust, the paper uses deeper, more robust indicators of cooperation. Key findings:

At first sight, the contrast between Protestant Ulster and the Catholic South (as well as between Denmark and Ireland as a whole) seems a striking confirmation of the LLSV hypothesis that culture matters for the ability to cooperate, and that hierarchical religions such as Catholicism undermine both trust and cooperation. However, on closer examination it appears that politics, not culture, was responsible for the lower Irish propensity to cooperate. Suspicion between Catholics and Protestants, and tenants and landlords, spilled over into Nationalist suspicion of the cooperative movement and hindered its spread, despite the efforts of the [Irish Agricultural Organisation Society] to remain apolitical. To this extent, the results are more consistent with the stress on [ethnolinguistic fractionalisation] in Alesina and La Ferrara (2000) than with the cultural perspective of LLSV, Knack and Keefer (1997) and Zak and Knack (2001).

Denmark benefited from several relevant advantages that Ireland did not enjoy during this period. In particular, it was an extremely homogeneous country, ethnically, religiously and linguistically. There was no conflict over who should own the land, since land reform in Denmark had been underway since the late eighteenth century. . . . Nor was there any ethnic conflict, or disputes over where national boundaries should lie (all such controversies became redundant following the loss of Schleswig-Holstein in 1864). The results suggest that this homogeneity of Danish society is what explains the success of cooperation there.

6 August 2008 at 9:10 am 11 comments

Rothbard on Big Business

| Peter Klein |

We at O&M are sometimes described as “pro-business.” But this is not correct. We strongly support the economic function of commerce, and we think private ownership of capital, the profit-seeking activities of entrepreneurs and managers, and unfettered markets for consumer goods, factors of production, and financial assets are essential to a strong economy. But that doesn’t mean we admire the behavior and character of every capitalist, entrepreneur, and manager. Indeed, plenty are scoundrels. Empirically, the businesspeople who rise to the top in today’s mixed economy, with its peculiar blend of free markets and state controls, are likely to be those who excel in political entrepreneurship, in “working the system” to their advantage.

Murray Rothbard summarizes this view in a private letter written in 1966:

For some time I have come to the conclusion that the grave deficiency in the current output and thinking of our libertarians and “classical liberals” is an enormous blind spot when it comes to big business. There is a tendency to worship Big Business per se. . . and a corollary tendency to fail to realize that while big business would indeed merit praise if they won that bigness on the purely free market, that in the contemporary world of total neo-mercantilism and what is essentially a neo-fascist “corporate state,” bigness is a priori highly suspect, because Big Business most likely got that way through an intricate and decisive network of subsidies, privileges, and direct and indirect grants of monopoly protection.

Rothbard refers his correspondent to Gabriel Kolko, William Appleman Williams, James Weinstein, C. Wright Mills, and other New Left critics of the corporate state for details. For more on Rothbard’s own views see “Left and Right: The Prospects for Liberty” (1965) and “Confessions of a Right-Wing Liberal” (1968), as well as related essays by Joseph Stromberg and Roy Childs.

6 August 2008 at 9:09 am 10 comments

Thanks to Randy, and Get Well Soon!

| Peter Klein |

Our thanks to Randy Westgren for some terrific guest blogging this past spring and summer. Randy had a little time left on his guest-blogger clock, and was planning to share some additional thoughts in the coming weeks, but he was involved in a freak carpentry accident this weekend, losing a thumb and forefinger to a circular saw. Fortunately his digits have been reattached but — the academic’s worst nightmare — he can’t write or type, for the short term at least. He’s therefore requested, and been granted, a graceful early retirement.

We’ve greatly enjoyed Randy’s insights and look forward to his continued participation in the comment threads when fully healed. Thanks, Randy, and best wishes for a speedy recovery!

5 August 2008 at 4:59 pm Leave a comment

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Our Recent Books

Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

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