Archive for March, 2009

Management Theory and the Current Crisis

| Peter Klein |

unequalshovelsHere is a short piece by Nicolai and me written for a general audience, “Management Theory Is Not to Blame.” We discuss the role of resource heterogeneity in management theory and critique the vulgar Keynesianism that dominates mainstream commentary on the crisis. The graphic with the shovel alone is worth the click. Comments welcome here or at the Mises blog.

19 March 2009 at 10:08 am 4 comments

Austrian Economics and Strategic Management

| Nicolai Foss |

In terms of direct influence, the impact of Austrian economics (AE) on strategic management is fairly limited (e.g., Jacobson, 1992; Young et al., 1996; Foss et al., 2008). Different kinds of industrial economics, namely the SCP approach, the Chicago-UCLA school, and game theoretical industrial economics,  have clearly been stronger influences. However, the points of contact and even overlap between the mainstream of strategic management and AE are many, and AE has the potential to contribute to the further development of the field. (more…)

18 March 2009 at 2:44 pm 2 comments

L’effet de Klein

| Peter Klein |

FRANCE JOB PROTESTS  TOPIXIn 2006 I spent two weeks in Paris to visit colleagues and give a series of seminars. My first seminar was scheduled for a Tuesday in March. That day students decided to go on strike to protest a proposed labor law, the host university was closed, and my seminar was canceled. The next seminar was scheduled for the following Tuesday. Sure enough, that was the next day of protests, and that talk was canceled as well.

Now I am in France again to give some lectures at the University of Angers and ESC Rouen. Tomorrow I was planning to go by train from Angers to Rouen for an afternoon seminar. So, guess what’s planned for tomorrow? You guessed it: general strike. Trains are shut down, so no Rouen seminar for me.

Sooner or later someone in France is going to run some Granger causality tests and I will be banned from the country forever.

Update (Thursday): Here are some photos I took of this morning’s activity in Angers. For those who can’t read French, the signs say “Klein Go Home” and “French Lectures for French Professors.”

18 March 2009 at 2:19 pm 13 comments

John Nash’s Dissertation

| Peter Klein |

Thanks to Dave Prychitko for linking to the original, which I hadn’t seen before. Things I didn’t know about the dissertation:

  1. The symbols and equations are hand-written (standard practice for 1950, I assume).
  2. There is no discussion of social-science applications — in fact, no discussion of any applications other than poker.
  3. The bibliography contains two items, von Neumann and Morgenstern (1944) and an earlier paper by Nash.
  4. The whole thing is only 27 pages long.

17 March 2009 at 1:42 pm 8 comments

Conference on Law and New Institutional Economics

| Peter Klein |

Vic Fleischer and Phil Weiser have organized a conference on Law and New Institutional Economics at the University of Colorado, 4-5 June 2009.  Along with Lee Fennel, Mark Ramseyer, Henry Smith, and Eric Talley, Vic and Phil will facilitate discussion of classic (Demsetz 1967, Klein, Crawford, and Alchian, 1978) and contemporary papers dealing with property rights, contract design, behavioral finance, the teaching of NIE, and more. See the link for details.

16 March 2009 at 4:56 pm 1 comment

“I’m 30 Years Old, and I Made $600 Last Year”

| Peter Klein |

Bart Simpson explains graduate school (via Per):

My favorite Matt Groening take on grad school remains this one.

16 March 2009 at 11:41 am Leave a comment

Passing the Hat for Jon Stewart’s Mother

| David Gerard |

No doubt you have all seen or at least heard of the bloodletting of CNBC’s Jim Cramer at the hands of Jon Stewart. Stewart took Cramer to task for the financial “journalists'” role as cheerleaders rather than as investigative reporters leading up to the financial meltdown.

What seems to be lost in the discussion is the fate of Mr. Stewart’s poor mother.

Mr. Stewart: My mother is 75. And she bought into the idea that long-term investing is the way to go. And guess what?

Mr. Cramer: It didn’t work.

Although I think it is a bit premature to malign the viability of equities and long term investing, I found it even more distressing was that Mr. Stewart’s mother doesn’t seem to have access to any competent financial advice. I would hope that the host of a popular television show would have sufficient financial resources to hook his mother up with a financial planner. Or, she might have stayed in-house and asked her son who is the “head of U.S. Markets and Global Technology at NYSE Euronext.”

Well, I am willing to help out by imparting a bit of my investment knowledge (actually, all my investment knowledge) that I picked up in graduate school to the cause.

(1) It’s tough to beat the market. Most funds don’t beat a simple index fund, so buy a simple index fund.

(2) Stocks tend to be more volatile than bonds. There is a bigger upside, yes, but there is also a bigger potential downside. As you hit your golden years, consider rebalancing to reduce your portfolio risk.

If you have any further questions, please consult the comments.

14 March 2009 at 2:53 pm 4 comments

Rizzo on Ideology

| Peter Klein |

Arguments about ideology are often the last refuge of the (intellectual) scoundrel. If you can’t refute someone’s scientific and technical arguments, accuse him of being an “ideologue,” thus rendering all his opinions tainted. Those of us sympathetic to markets are familiar with this rhetorical trick. “Only a free-market ideologue could oppose this government program. . . .” In other words, practical, open-minded, technocratic types all favor X, so only an irrational ideologue could favor Y. Of course, this argument cuts both ways. The point of my post on the ideology of Keynesian economists was to point out that one can just as easily say that interventionists are led by statist ideology to reject scientific and technical arguments in favor of laissez-faire.

Mario Rizzo has an excellent post on the proper use of “reasonable ideology” in framing political discussions. As Mario points out, ideology represents a set of default beliefs, beliefs that need not be irrational, but can be based on the accumulation of prior evidence. Like a Kuhnian paradigm, an ideology helps prioritize different types of evidence, helps establish ground rules for thinking about problems, and facilitates the operation of “normal science.” Like Bayesian priors, ideologies change slowly, as new information is revealed; indeed, they shouldn’t be abandoned based on one or two pieces of supposedly contrary evidence.

Reasonable ideologues of the world, you have nothing to apologize for.

14 March 2009 at 12:06 pm 5 comments

The Political Economy of Vertical Integration

| Peter Klein |

An understudied area in the organizations literature is the effect of organizational form on lobbying, rent-seeking, tax-rate arbitrage, and similar kinds of political behavior. The accounting literature on transfer pricing looks at the ability of  vertically integrated multinationals to shift income between tax jurisdictions to reduce the overall tax burden, and regulators have expressed concerns about diversified multinationals putting downward pressure on environmental and labor regulations (by threatening to withdraw production from countries with high tax or regulatory burdens). Of course we know that as industries mature, firms are more likely to open lobbying offices in state or national capitols. But, in general, we know little about how firms organize to take advantage of political processes and institutions.

Joseph Fan, Jun Huang, Randall Morck, and Bernard Yeung have a new NBER paper on vertical integreation in China showing that vertical integration in highly interventionist environments may be aimed not at reducing transaction costs, protecting relationship-specific investments, and the like, but at rent-seeking and the pursuit of other forms of political privilege. Abstract:

Where legal systems and market forces enforce contracts inadequately, vertical integration can circumvent these transaction difficulties. But, such environments often also feature highly interventionist government, and even corruption. Vertical integration might then enhance returns to political rent-seeking aimed at securing and extending market power. Thus, where political rent seeking is minimal, vertical integration should add to firm value and economy performance; but where political rent seeking is substantial, firm value might rise as economy performance decays. China offers a suitable background for empirical examination of these issues because her legal and market institutions are generally weak, but nonetheless exhibit substantial province-level variation. Vertical integration is more common where legal institutions are weaker and where regional governments are of lower quality or more interventionist. In such provinces, firms led by insiders with political connections are more likely to be vertically integrated. Vertical integration is negatively associated with firm value if the top corporate insider is politically connected, but weakly positively associated with public share valuations if the politically connected firm is independently audited. Finally, provinces whose vertical integrated firms tend to have politically unconnected CEOs exhibit elevated per capita GDP growth, while provinces whose vertically integrated firms tend to have political insiders as CEOs exhibit depressed per capita GDP growth.

14 March 2009 at 11:49 am Leave a comment

High-Tech Austrians

| Peter Klein |

Austrian economists are social and cultural conservatives who bury their noses in thousand-page tomes, favor bow ties and vests, and gaze longingly toward Old Vienna, right? Guess again! These guys are on the cutting edge. To wit:

  • You can follow the (in-progress) Austrian Scholars Conference on Twitter and watch the plenary sessions online.
  • Both volumes of Murray Rothbard’s Austrian Perspective on the History of Economic Thought are now available as free e-books (1, 2).
  • There are a bunch of Austrian economics groups on Facebook; this is the largest.

12 March 2009 at 4:44 pm 4 comments

The Farmer’s Cow

| Dick Langlois |

This morning I read a story in the Hartford Courant about the state legislature’s proposals to save the small local dairy farmer. The naïveté and economic illiteracy of the article filled me with a sudden (and, for me, unusual) urge to post a comment on the newspaper’s website. Here is what I wrote.

This article is awash in errors of commission and omission.

First: it is misleading to the point of mendacity to say that the federal government “tells farmers what prices to set.” The government effectively specifies the price floor — it mandates that farmers set a price no lower than the floor, but it permits farmers to raise the price if they like. What is forcing prices down to the floor is supply and demand.

Second: the plight of the farmers is entirely the fault of the byzantine federal farm-price system, which creates a myriad bad incentives. For a short description with further references, see:

Third: it is wrong to imply that the beneficiaries of the current supply and demand situation are the supermarkets. Retailing milk is a highly competitive industry — milk is often a price loss-leader for convenience stores. The real point is that the milk price support system, and the proposals being considered by the State legislature, will raise the prices consumers pay for milk. This is what economists call a “regressive” transfer. Since poor people spend a larger fraction of their incomes on milk than do affluent people, raising milk prices to keep farmers afloat transfers income from the poorer people in Connecticut to a group whose income is above the state average.

Finally: if you have a Romantic desire to save small or local farmers, you are free to pay extra to buy their milk. Marketing associations like The Farmer’s Cow explicitly brand their milk as local. If it pleases you to do so, spend your own money on local farmers; don’t force poor Connecticut consumers and taxpayers to do it for you.

12 March 2009 at 10:13 am 3 comments

Why They Heart Keynes

| Peter Klein |

Luigi Zingales offers Straight Talk on Keynes (via Casey Mulligan):

Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behavior. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington.

Three comments: First, the “hangover” metaphor, while not exactly accurate, is an effective way to communicate the basics of the Mises-Hayek malinvestment theory of the business cycle. Use it! Second, Zingales’s description applies equally well to the 1930s and 1940s, when the Keynesian consensus emerged. It’s important to remember that massive deficit spending to “cure” the Depression began with Hoover and Roosevelt in the early 1930s, long before the General Theory appeared. Keynes’s book did not propose a new direction for economic policy; it provided an allegedly scientific rationale for policies already in place, policies government officials were eager to defend and protect. (The use of expansionary fiscal and monetary policy to increase output had long been derided by serious economists as nonsense, as the domain of “monetary cranks” and other snake-oil  salesmen).

Third, the Keynesian delusion afflicts not only policymakers, but professional economists as well. I’ve long suspected that the appeal of Keynes to people like Krugman and DeLong is ultimately based on aesthetic, not scientific, grounds. Deep in their hearts, they just don’t like private property, markets, and individual choice. They don’t think ordinary people are capable of making wise decisions and think they, the elites, should be in charge. They resent the fact that most people don’t want their lives controlled by liberal intellectuals. Technical arguments about the effectiveness of monetary and fiscal policy, the relationship between aggregate demand and output, the experience of the 1930s, and the like are really beside the point. For Keynesian economists, the belief that markets are naturally unstable in the absence of government planning is a matter of faith.

11 March 2009 at 1:26 pm 11 comments

New McKinsey Videos

| Peter Klein |

Acumen Fund founder and CEO Jacqueline Novogratz shares stories of social-sector entrepreneurship in an excerpt from her new book, The Blue Sweater. A video interview with the author takes you behind the book.

Google’s chief economist says executives in wired organizations need a sharper understanding of how technology empowers innovation.

Tarun Khanna says their common optimistic entrepreneurialism makes them a formidable force.

10 March 2009 at 10:32 pm Leave a comment

The Adults Are In Charge

| David Gerard |

adults-in2 A common refrain heralding the arrival of a new Administration is that “the adults are in charge now.” The expression came to mind when I saw that this classic Calvin and Hobbes strip was making the internet rounds.

I certainly don’t envy the adults these days.

10 March 2009 at 4:05 pm 1 comment

Watching the Growth of Walmart

| Peter Klein |

This animated map showing the US growth of Walmart from 1965 to 2007 proves the adage that a picture is worth a thousand words. Lots of other cool visualizations at FlowingData, like the Heavy Metal Band Names Flowchart. (Thanks to SKK.)

10 March 2009 at 12:10 am 3 comments

Global (Daylight) Savings Glut?

| David Gerard |

I almost hate to bring this up given the levels of scorn and derision I was subjected to over this (and that was just from my friends), but a few years ago Paul Fischbeck and I used our traffic safety website to look at the change in risks and fatalities surrounding daylight savings time. There weren’t any obvious changes for drivers and vehicle occupants, but there did appear to be some dramatic changes in pedestrian risks (e.g., deaths per trip). For the “Spring” forward, we observed considerably lower risks during the evening rush offset by elevated morning risks.

Because we observed pedestrian risk numbers spike during the time change and then return to trend, we attributed the effect to people adjusting to the time change. This conjecture is consistent with some published research that looked at this question. Our basic message (we thought) was to “look both ways or you might get run over,” and thought we might get some good Samaritan points along with the people who remind you to change your fire alarm batteries.

Instead, what we found was that the time change is quite the lightning rod for controversy, over energy savings, traffic fatalities, depression, heart attacks, and many other societal ills. As a policy matter, however, we received feedback from across the spectrum. These are some of the tamer selections:

I am a professional working adult, actually a senior, and I as well as hundreds of others, would like to have our clocks left alone. All of us do not enjoy driving to and from work in darkness. The psychological effects are more than depressing as I am sure you are aware. — Muriel

Thank you both for helping our cities to understand that people should come before cars. — Steve

Now do a study about the dangers of children waiting for school buses in the dark. My elementary school age child was leaving the house in the dark at 7am to get her bus until daylight savings time ended this week. — Sylvia

I am not sure what to conclude from all of this. I have no idea what a benefit-cost analysis of the alternatives would look like, but we certainly learned there are more dimensions of the policy issue than we imagined. As a political economy story, the status quo does not appear to be completely locked in.  A few years back, the federal government pushed back the return to standard time until after Halloween in order to reduce the risk of vehicular trick-or-treating incidents.

Perhaps in November I will be able to shed some additional light on the issue.

9 March 2009 at 8:38 pm 2 comments

Change Management Bleg

| Peter Klein |

I am giving some lectures next week at the University of Angers, France, a series on change management and another on globalization. (And hanging out with old friend Guido Hülsmann.) I have some change-management materials prepared but am looking for additional readings, classroom exercises, cases, etc. If you have any teaching materials on change management suitable for MBAs or undergraduates (whose first language isn’t English!), I’d appreciate seeing them.

9 March 2009 at 12:34 pm 3 comments

Yes, You Should Use PowerPoint

| Peter Klein |

7 March 2009 at 12:16 pm 5 comments

Ah, Democracy!

| Peter Klein |

I learned this week from Doug French that Dissident Books has published a new edition of H. L. Mencken’s classic and extremely politically incorrect Notes on Democracy. Who but Mencken could write that the common man “is not actually happy when free; he is uncomfortable, a bit alarmed, and intolerably lonely. He longs for the warm, reassuring smell of the herd, and is willing to take the herdsman with it.” As for democratically elected politicians, Mencken reminds us how quickly all those sappy paeans to the people’s will evaporate when a “crisis,” real or imagined, is on the horizon. “All the great tribunes of democracy, on such occasions, convert themselves, by a process as simple as taking a deep breath, into despots of an almost fabulous ferocity. Lincoln, Roosevelt and Wilson come instantly to mind.”

This was on my mind when I read (via Kathryn Muratore) about a new study appearing in Science finding that children looking at pictures of political candidates correctly pick the eventual winner 64% of the time. Apparently we are hard-wired to prefer pretty faces, even when supposedly choosing based on policy views, ideology, “the issues,” etc . So much for the rational voter.

7 March 2009 at 12:05 pm 1 comment

What Does a Trillion Dollars Look Like?

| Peter Klein |

As they say, trillion is the new billion, where bailouts and government debt are concerned (1, 2). Just how much is a trillion dollars anyway? Here it is in pictures (via MGK).

6 March 2009 at 6:12 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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