Archive for December, 2008
More on the Mythical Credit Crunch
| Peter Klein |
The mainstream media finally picks up the meme. From a Reuters story (via Jeff):
* Overall U.S. bank lending is at its highest level ever and has grown during the current financial crisies.
* U.S. commercial bank lending is at record highs and growing particularly fast since May 2007.
* Corporate bond issuance has declined but increased commercial lending has compensated for this.
As for the interbank market, [a new report] says:
* lending hit its highest level ever in September 2008 and remained high in October and that overall interbank lending is up 22 percent since the start of the financial crisis, taken to be mid-2007.
* The cost of interbank lending, as measured by the interest rates banks charge each other for lending overnight Fed funds, dropped to its lowest level ever in early November and remains at very low levels. . . .
[C]onsumer credit . . . was at a record high in September, the latest date for publicly available data. Local government bond issuance had continued at similar levels to those before the credit crisis, while bank lending for real estate reached a record level in October 2008. . . .
All of [this] drove the Celent report to conclude that the U.S. and other governments may be throwing good money after bad for want of a better idea of what is really happening. “Just like a doctor contemplating an obviously sick and suffering patient, a massive surgical intervention based on a misdiagnosis can only worsen the patient’s condition.”
As usual, you read it here first.
Peter Joins NHH
| Lasse Lien |
After a long and painstaking negotiation process, Peter has finally agreed to become an adjunct professor at the Norwegian School of Economics and Business Administration (NHH). The celebrations have kept me from blogging much lately.
With Nicolai in a 50% position, yours truly 100%, and now Peter 20%, I think NHH can now boast of being a (if not the) leading O&M business school. And to Dick: You can run, but you cannot hide. . . .
Supply and Demand
| Peter Klein |
You may have seen this ad that is currently making the rounds. It’s good for a chuckle, and also raises a serious point. Current discussion of the US automakers’ problems focuses almost entirely on the supply side: high labor costs, poor management, lack of innovation. The demand side is largely ignored — there’s talk about the distribution of demand for US products between large and small vehicles, but the overall demand for US cars and trucks, regardless of type, seems to be taken as fixed. But what if consumers change their preferences, not toward “small cars,” but toward non-US products? What, then, is the appropriate policy response?
Bailout proponents seem to believe that US cars “really are” as good as, say Japanese cars, but somehow consumers have been tricked into preferring cars from Japan. As usual, bailout proponents have no argument or evidence whatsoever for this belief, but no matter. A normal person might think consumers are fully entitled to buy, and refuse to buy, whatever brands they like. In today’s corporate-statist economy, however, consumer demand cannot be allowed to influence the allocation of resources.
Thirteen Ways of Looking at a Burrito
| Peter Klein |
I
On twenty pasty faces,
The only thing in common
Was burrito breath.II
I had three dollars,
Like a street person
Who panhandles three hours per burrito.V
I can’t decide between them.
The pleasure of obsession,
Or the pleasure of abandon.
The burrito in the mouth
Or the throat.VIII
I think clever phrases
And bipartisan, utopian ideas;
But I think, somehow,
That the burrito is more useful
than what I think.
Selected stanzas from Klipschutz’s “Thirteen Ways of Looking at a Burrito,” a parody of the famous Wallace Stevens poem “Thirteen Ways of Looking at a Blackbird.” Why am I blogging this? Because several years ago my wife and I picked up a print of the Klipschutz poem at the City Lights Bookstore in San Francisco. It spent years in a closet, rolled in a tube, but we finally got it mounted and framed, and I hung it in the dining room yesterday. Who says we aren’t haute culture here at O&M?
Directions for a Troubled Discipline: Strategy Research, Teaching, and Practice
| Peter Klein |
That’s the title of a symposium in the new issue of the Journal of Management Inquiry, edited by Michael Lounsbury and Paul Hirsch.
Debates about relevance versus rigor in management research have only grown in intensity over the past decade (e.g., Pfeffer, 2008). The following dialog highlights how these concerns have become manifest in the field of strategy, in which there has been disquiet in some circles about the dominance of abstract theorization and a movement toward a re-engagement with practice and practitioners (e.g., Jarzabkowski, 2005; Kaplan, 2003; Whittington, 2006; Whittington et. al., 2003). After a brief introduction by Jarzabkowski and Whittington that situates the dialog, Bower’s article “The Teaching of Strategy: From General Manager to Analyst and Back Again?” defends the importance of a practitioner focus by highlighting the historical role of process research in the early development of the business policy field and the case-oriented teaching tradition at the Harvard Business School. In contradistinction, Grant’s article on “Why Strategy Teaching Should be Theory Based” emphasizes the importance of economic theory in both strategy teaching in research. Finally, in “A Strategy-as-Practice Approach to Strategy Research and Education,” Jarzabkowski and Whittington conclude with an argument hat aims to forge a truce between these often rhetorically opposed positions. They argue that a strategy-as-practice perspective can usefully bridge the divide between research and practice without sacrificing either rigor or relevance.
This issue of JMI also includes a 25-year retrospective on DiMaggio and Powell’s famous “Iron Cage Revisited” paper, for you institutional isomorphism types out there (we know who you are).
Interesting Blogs
| Peter Klein |
- Urban and Regional Studies, by Pedro Marquez
- Beerkens’ Blog, by Eric Beerkens
- Estzer’s Blog, by Eszter Hargittai
- Terminal Degree, by a funny music professor
Off to Boot Camp
| Peter Klein |
I’ll be in Utah this week for the Society for Entrepreneurship Scholars conference, also known as “Manuscript Boot Camp.” It’s a sort of cross between a regular academic conference and a professional development workshop, with an interesting and unusual format. The conference is organized around a set of competitively selected working papers written by PhD students and junior faculty, who will be paired with a rotating series of senior scholars for one-on-one mentoring sessions designed to improve the quality of the papers for publication. These sessions, combined with plenary roundtables and lots of informal interaction, should make for a fun and professionally valuable event, for all concerned. I wish more workshops were organized this way.
The set of senior scholar-mentors includes many of the biggest names in entrepreneurship and strategy research, people like Rajshree Agarwal, David Deeds, Greg Dess, Jeff Dyer, Bill Hesterly, Bob Hoskisson, Jeff Reuer, Harry Sapienza, Bill Schulze, Dave Whetten, and your humble correspondent. More important, the participant list includes several bloggers — me and orgtheory’s Teppo Felin among the mentors, Brian McCann of Management R&D and former O&M guest blogger Chihmao Hsieh among the mentees — so expect good during- and post-conference reporting in the blogosphere.
My only concern, expressed to co-organizer Bill Shulze yesterday, is fitting that many egos into a single room. His solution: “free beer.”
My Favorite Student Questions
| Peter Klein |
Everybody loves the classics. This one, which I received today, is one of my favorites:
I can’t be in class tomorrow. Will I miss anything important?
What are your favorites? (If you’re not an educational professional, you can still play by listing favorite questions received from colleagues, subordinates, etc.)
Nixon Quote of the Week
| Peter Klein |
In case you missed it, a few days ago the Nixon Library released a new batch of tapes from December 1972. My favorite Nixon exhortation, issued to Kissinger on 14 December:
“Never forget,” Nixon tells national security adviser Henry Kissinger in a taped Oval Office conversation revealed Tuesday. “The press is the enemy. The establishment is the enemy. The professors are the enemy.
“Professors are the enemy,” he repeated. “Write that on a blackboard 100 times and never forget it.”
You can listen to the recordings here. Remember, it ain’t paranoia if they really are out to get you.
Have Economists Sold Out?
| Peter Klein |
I’ve complained that, in the current crisis, economists are being ignored. Oliver Hart and Luigi Zingales, two economists I very much admire, argued in Wednesday’s WSJ that the problem is, rather, that economists have sold out:
This year will be remembered not just for one of the worst financial crises in American history, but also as the moment when economists abandoned their principles. There used to be a consensus that selective intervention in the economy was bad. In the last 12 months this belief has been shattered.
Practically every day the government launches a massively expensive new initiative to solve the problems that the last day’s initiative did not. It is hard to discern any principles behind these actions. The lack of a coherent strategy has increased uncertainty and undermined the public’s perception of the government’s competence and trustworthiness.
Now, Hart and Zingales imply, but don’t demonstrate, that these selective interventions are supported by the majority of economists. I think most economists oppose them, but I don’t have systematic evidence either. Still, their point is well taken. To the extent that the lay public associates the moves by Bernanke, Paulson, etc. as representing some kind of professional consensus, the reputation of economics as a scientific discipline will be forever destroyed.
Incidentally, I don’t mind Hart and Zingales’s key counter-proposal that government “should intervene only when there is a clearly identified market failure,” because I think that condition is basically impossible to meet.
Macroeconomics Quote of the Day
| Peter Klein |
From Gary North (thanks to Dennis Lubahn):
Ben Bernanke . . . spent his career studying Milton Friedman’s now-dominant 1963 interpretation of the failure of Federal Reserve Policy, 1930-33, in not reversing the Great Depression. The FED did not inflate, Friedman said. This was in contrast to Murray Rothbard’s 1963 interpretation of the same era. He argued that the FED did inflate, 1924-29, which created the boom that busted in 1929. Had Bernanke studied Murray Rothbard’s 1963 book on Federal Reserve policy as the cause of the Great Depression, he might have had a very different career, perhaps teaching in a community college in North Dakota.
Of course, Rothbard’s approach to addressing the current crisis would be exactly the opposite of what has been done so far: stop inflating, allow interest rates to rise, encourage saving and capital accumulation, allow bankrupt financial and industrial firms to fail, etc. But we are all Keynesians now, right?
The Almost-Convergence of Mises, Parsons, and Popper
| Peter Klein |
O&M dabbles in economics, sociology, and the history and methodology of science so Rafe Champion’s new paper, “Mises, Parsons, and Popper: Comparison and Contrast of Praxeology, the Action Frame of Reference, and Situational Analysis,” may be of interest. Here’s the abstract:
During the 1930s three lines of thought converged on a common model of explanation in economics and the human sciences. Working in Europe, Ludwig von Mises of the Austrian school developed what he called “praxeology” to explore the sciences of human action. In the United States, Talcott Parsons, under the influence of Marshall, Pareto, Durkheim and Weber, offered the “action frame of reference” and in Australasia (in exile from Austria) Karl Popper elaborated “situational analysis”. Common features of the three models are methodological individualism, rejection of instrumentalism in favour of the search for real explanatory theories, and the use of a rationality principle to link the ends and means of action. General acceptance of the common features of these models would have significantly altered the criteria for theory development and appraisal in economics and the other social sciences. In the event, the three lines of thought did not merge to create a critical mass that might have made a difference in the scientific community at large. Their potential synergy has yet to be explored and there is scope for a synthesis of their most robust features with some modifications to each, especially to correct the views of Mises and Parsons on the methods that are effective in the natural sciences. A strange feature of the situation is that the three principals and their followers have, up to date, almost completely refrained from public comment or discussion of the work of the other two parties.
Comments are welcome here or at Rafe’s site.
Some Basic Finance Theory
| Peter Klein |
Sorry to sound like a broken record,* but journalists keep babbling about the “reduction in credit” as if it’s necessarily a bad thing. They don’t know any basic finance theory, which says that in well-functioning capital markets, positive NPV projects are funded and negative NPV projects aren’t. The talking heads think that the total number of projects funded, or the total amount of funding, independent of quality, measures the health of the financial system (and more is always better). They point out that consumers are finding it more difficult to get mortgages, that credit-card issuers are lowering borrowing limits, that firms are facing a higher cost of capital. (Of course, as we’ve pointed out before [1, 2], wild claims about credit markets being “frozen” are preposterous.) But changes in the allocation of credit are inefficient only if previous credit arrangements were somehow optimal. What if mortgages were too easy to get, credit-card limits too high, capital costs too low? A reduction in aggregate borrowing may be an improvement. Aggregate data aren’t helpful here.
For example, on the Diane Rehm show yeseterday two “experts” were talking about the proposed auto-industry bailout, when a wise caller raised this question: if the Big Three can return to profitability after receiving these government loans, then why wouldn’t private lenders be eager to make the loans? The pundits agreed that this was a good question but responded, matter-of-factly, that of course that can’t happen because credit markets have “completely shut down.” Rubbish!
* Readers under 30: ask your parents or grandparents what this expression means. It’s sort of like a corrupted mp3 file.
Outsourcing of Legal Services
| Peter Klein |
Interesting footnote to this recent discussion between me and Gordon Smith on the organizational structure of law firms. Last week the WSJ ran an item, “With Times Tight, Even Lawyers Get Outsourced,” profiling a subsidiary of India’s Pangea3 LLC that performs routine legal services for foreign (mainly US) clients. According to Forrester, quoted in the story, 35,000 US legal jobs will be moved offshore by 2010 and 79,000 by 2015.
The New World Order
| Peter Klein |
Jim Surowiecki at the New Yorker:
When news broke that Timothy Geithner was Barack Obama’s pick for Secretary of the Treasury, the stock market jumped more than six per cent in the space of an hour. Obviously, this was a good thing, but there was also something weird about the spectacle of the Street’s once fearless free marketeers exulting over a government appointment, as if they were nomenklatura members cheering a new Politburo chief. It showed just how central a few government officials have become to the well-being not just of the markets but of the economy as a whole. For better or worse, we now live in a world in which the Treasury Secretary controls hundreds of billions of dollars in spending and shapes the fate of some of the nation’s biggest companies. That’s quite a job to ask someone to do.
I think Surowiecki overstates the newness of all this — government has been heavily involved in running Wall Street since at least the 1930s, and I don’t know how many of the Street’s big players were ever “fearless free marketeers” — but the point is well taken.
Organizational Economics versus Strategy
| Peter Klein |
Brayden has a nice post at our good-twin blog on the differences between organization theory and strategy research. Writing from the perspective of an organizational sociologist, Brayden argues that organization theory is a higher-status, “purer” discipline, but that strategy research asks better questions and is providing more insight into organizations than organization theory.
I think much of Brayden’s analysis carries over to economics as well. Organizational economics (referring to people like Tirole, Hart, Gibbons, Holmström, Baker, Zingales, Aghion, Garicano, Bolton, etc.) has a much higher status than the kind of work published in the Strategic Management Journal or the strategy papers in Organization Science, the Academy of Management Review, or Management Science. (If by “strategy” we mean simply game theory, then strategy research would have the same status as organizational economics.) The explanation is simple: economic theory is a high-status discipline while sociology and applied economics, sociology, and psychology are not. A prominent economist who does some work that could be considered strategy once told me, when asked about SMJ, that its authors “ask good questions, but don’t know how to answer them.” He said it with a knowing smile and a slight shake of the head, the way a Southerner might say “bless their hearts.” Still, one would have to admit that some terrific work has come out of the strategy journals in recent years, particularly (ahem) as economics has become a more foundational discipline in that field.
Neuroscientist Sam Wang on Crackberry Addiction
| Peter Klein |
Email in small does is productivity enhancing but in large doses it is not productivity enhancing and can even slow down productivity. You don’t even notice because you’re just busy getting those little drops of dopamine. There’s a disconnect between the perceived reward and actual reward.
From an interview in Fast Company. I too suffer from the disease. I never thought of incoming messages as little drops of dopamine, but it makes sense.
Government and the Corporation
| Peter Klein |
What is the net effect of government intervention on firm size, scope, complexity, and ownership? Roderick Long thinks government intervention makes firms larger and more hierarchical than they would otherwise be, and that a pure market economy would be dominated by small firms like worker-owned cooperatives. I think the net effect of government intervention on firm characteristics is ambiguous, because there are so many interventions affecting different types of firms. Here’s some back-and-forth between Roderick and me: his original essay on Cato Unbound, my comment on Mises.org, his reply, and my rejoinder.
Update: See also Caplan.
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