Archive for March, 2009

Irrational Behavior and Rational Addiction

| Dick Langlois |

In 1962, Gary Becker published an article in the JPE called “Irrational Behavior and Economic Theory,” which prompted an interchange with Israel Kirzner (here, here, and here). Becker had tried to argue that one could derive the law of demand without recourse to an assumption of rationality: when relative prices change, the budget constraints of consumers will also change, making some previously available combinations infeasible. This will mean that, in the aggregate, consumers will demand less of the good that has become relatively more expensive. Kirzner pointed out that Becker still hadn’t eliminated rationality, since he is assuming that the consumers are price takers and that the prices are set on the supply side, presumably by firms who notice and respond rationally to price changes. (I discussed the issues here in some detail back in my 1986 book, which, by the way, is back in print in paperback thanks to the new technology of on-demand printing.)

I thought of the Becker-Kirzner exchange recently when I saw the abstract of this article: “So You Want to Quit Smoking: Have You Tried a Mobile Phone?”

Tobacco use, which is rising quickly in developing countries, kills 5.4 million people a year worldwide. This paper explores the impacts of mobile phone ownership on tobacco consumption. Indeed, mobile phone ownership could affect tobacco consumption because individuals might pay for their communication with money they would have spent on tobacco. Using panel data from 2,100 households in 135 communities of the Philippines collected in 2003 and 2006, the analysis finds that mobile phone ownership leads to a 20 percent decline in monthly tobacco consumption. Among households in which at least one member smoked in 2003, purchasing a mobile phone leads to a 32.6 percent decrease in tobacco consumption per adult over the age of 15. This is equivalent to one less pack of 20 cigarettes per month per adult. The results are robust to various estimation strategies. Further, they suggest that this impact materializes through a budget shift from tobacco to communication.

I leave it as an exercise to the reader to decide whether this sheds any light on the Becker-Kirzner exchange. Extra credit: what does this say about Becker’s theory of rational addiction?

6 March 2009 at 2:39 pm 10 comments

Best Time Waster of the Day

| Peter Klein |

No, not reading these. It’s this online version of wastepaper-basket basketball. I’ve already wasted about 30 minutes today playing. (Via EclectEcon)

6 March 2009 at 12:37 pm 2 comments

Top Four Implications for Competitive Advanatage

| Lasse Lien |

I recently blogged my top-three list of consequences of the financial crisis for firm boundaries. Here is my top-four list of consequences for competitive advantage. They are to be read as broad-stroke changes on the margin, and with a ceteris paribus clause.

1. Valuable: Kind of obvious, but cost-based advantages increase in value compared to differentiation-based advantages as prices fall and demand converges on no-frills offerings.

2. Rare: Cost-based advantages will be more contested, as competitors respond to demand changes by de-differentiating (cf. #1).

3. Imitable: Time-consuming imitation processes become less likely, as firms become more impatient and risk averse.

4. Substitutable: Advantages based on branding and product development will become more vulnerable to substitution from advantages based on scale and process development.

Now, who has a list of implications for intra-firm organization and management?

6 March 2009 at 7:58 am 3 comments

Our Collective Delusions

| Dick Langlois |

I just ran across a new NBER working paper by Roland Benabou called “Groupthink: Collective Delusions in Organizations and Markets.” Looks like an interesting paper. But why does he pick on this blog? I believe we here at O&M are far more resistant than most to groupthink. And I’m sure you all share this view.

5 March 2009 at 12:07 pm 6 comments

Ben Jones on the Burden of Knowledge

| Peter Klein |

Ben Jones, who does very interesting work on innovation and economic growth, has a new paper on the “burden of knowledge,” the idea that as an economy’s knowledge base increases, the amount of education necessary to be an effective innovator increases as well, mitigating the effects of knowledge accumulation on growth. Abstract:

This paper investigates a possibly fundamental aspect of technological progress. If knowledge accumulates as technology advances, then successive generations of innovators may face an increasing educational burden. Innovators can compensate through lengthening educational phases and narrowing expertise, but these responses come at the cost of reducing individual innovative capacities, with implications for the organization of innovative activity – a greater reliance on teamwork – and negative implications for growth. Building on this burden of knowledge mechanism, this paper first presents six facts about innovator behaviour. I show that age at first invention, specialization, and teamwork increase over time in a large micro-data set of inventors. Furthermore, in cross-section, specialization and teamwork appear greater in deeper areas of knowledge, while, surprisingly, age at first invention shows little variation across fields. A model then demonstrates how these facts can emerge in tandem. The theory further develops explicit implications for economic growth, providing an explanation for why productivity growth rates did not accelerate through the 20th century despite an enormous expansion in collective research effort. Upward trends in academic collaboration and lengthening doctorates, which have been noted in other research, can also be explained in this framework. The knowledge burden mechanism suggests that the nature of innovation is changing, with negative implications for long-run economic growth.

5 March 2009 at 10:39 am 5 comments

Reducing Transaction Costs in Government Procurement

| Mike Sykuta |

Lest anyone think I (or, by association, O&M) am just a disgruntled Obama-basher, let me applaud the Administration’s announcement today of its intent to overhaul the ways in which the government contracts for goods and services, particularly in the Department of Defense. I suspect the collective “we” are all in favor of identifying methods and processes that will reduce transaction costs (and overall costs) in government procurement programs.

On this point, there is economic research that should help guide the Administration’s deliberations. To wit, William Rogerson provides a pretty thorough assessment of the economic incentives in defense procurement (JEP, 1994) and has a follow-up article on the optimal structure of fixed-priced cost reimbursement contracts (AER, 2003). Bajari and Tadelis (RAND J., 2001) provide a study of incentives versus transaction costs in procurement contracts. Although focused on private-sector construction, their findings are likely relevant to government procurement as well. Important lesson: cost-plus is not necessarily bad.

4 March 2009 at 1:30 pm 6 comments

Blue Eagle Redux

| Peter Klein |

aara_logo_2Assuming this is not a joke, Obama has unveiled a new stimulus-plan logo. Projects funded by the American Recovery and Reinvestment Act — primarily roads and bridges, I presume — will sport this handsome emblem. It lacks the 1930s-era fascist style of the NRA’s Blue Eagle but is much in the same spirit. Will those who maintain these roads and bridges be fined for failing to display the logo? (Business owners without  a Blue Eagle could be fined up to $500 — more than $8,000 in today’s dollars — and get six months in jail.) Will consumers be encouraged to bycott those without the colorful insignia?

blueeaglegif-image-1x1-pixelsJason Taylor and I have written that the Blue Eagle may be more important than economic historians have realized. In the early days of the NRA it seems to have played a strong cartel-enforcement role. Eventually business owners and consumers learned that NRA officials were not punishing cartel violations and the Blue Eagle began to disappear from store windows and newspaper advertisements. Our analysis is game-theoretic, but I’m sure our friends from that other discipline would proffer a different explanation based on institutional legitimacy and that stuff.

4 March 2009 at 11:45 am 5 comments

Helland at Missouri

| Mike Sykuta |

Eric Helland will be on campus this Friday, 6 March, to give a seminar on the effects of insurance reimbursement policies on the provision of medical services. In this paper, Helland and his co-author Paul Heaton compare the level and number of treatments recommended for auto-injury trauma patients in Colorado before and after a change in state law that shifted the burden from more generous auto-policy reimbursements to less generous, traditional health-insurance policies. Following the change, doctors recommended more reimbursable treatments per patient despite negligible changes in the character of auto injuries or in the health outcomes of those cases.

This is the latest in a stream of research Eric has done examining the (sometimes perverse) incentive systems created by different market and regulatory structures and the political economy of such outcomes, including issues of corporate governance (here), class-action lawsuits (here), and workings of the judicial system (here and here).

Eric’s talk is part of the Economics Department’s seminar series. If you are within driving distance, I’m sure you would find it worth your while.

3 March 2009 at 5:44 pm Leave a comment

Blogging to Fame on CNN

| Mike Sykuta |

Nicolai’s recent post about improving your impact factor led to some friendly banter about the efficacy of being cited on O&M as a means to increase one’s exposure. Turns out there may be some truth in that nifty little nugget. I was contacted last week by a senior producer at CNN concerning my skeptical views on the U.S. stimulus package. I can only imagine some of my posts on O&M and my appearance on Brad Delong’s list of ethics-free-Republican-hacks had something to do with my reputation as an stimulus stickler.

The CNN crew came to town yesterday as part of their reporting on how (and how well) stimulus funds are being spent and interviewed me regarding the wisdom (or lack thereof) in the stimulus effort and the veracity of claims about job creation. I’m told the segment will air twice tonight on CNN, once on Campbell Brown’s “No Bias. No Bull” (8:00pm Eastern) and again on Anderson Cooper 360 (10:00pm Eastern). I tried to figure out a way to reference O&M directly. I hope the administrators will forgive my inability to work it into the conversation.

3 March 2009 at 5:06 pm 1 comment

Mises Quote of the Day

| Peter Klein |

OK, so the great line attributed to George W. Bush — “the problem with the French is they don’t have a word for entrepreneur” — turns out to be apocryphal. But check out this passage from the recent Mises collection, Marxism Unmasked, as noted in David Gordon’s review:

In French, the words “organize” and “organizer” were unknown before the end of the eighteenth century or the beginning of the nineteenth century. With regard to the term “organize,” Balzac observed “This is a new-fangled Napoleonic term. This means you alone are the dictator and you deal with the individual as the builder deals with stones.” (p. 45)

Thanks to Jeff Herbener for the pointer.

3 March 2009 at 12:02 pm 1 comment

Sarasvathy at Missouri

| Peter Klein |

Saras Sarasvathy comes to our campus this Thursday, 5 March, for a seminar on the effectuation approach to entrepreneurship. Details are at the McQuinn Center site. Those of you within driving distance to Columbia should consider coming over. Friday she’s keynoting the Gateway Entrepreneurship Research Conference at St. Louis University.

Saras presented this material last summer at SMG, before Nicolai; here’s another opportunity to brainwash her into adopting the Foss-Klein perspective. Kool-Aid for lunch!

Update: Can she build on the excitement generated by Jimmy John?

2 March 2009 at 5:17 pm Leave a comment

Computable Entrepreneurship

| Dick Langlois |

I just returned from New York, where I was a discussant at a session on entrepreneurship. (Peter was supposed to have been part of the session — too bad he couldn’t make it.) I discussed a presentation by my old friend Roger Koppl. I have written before about Roger’s work on forensic science administration. This presentation, which drew on a couple of Roger’s recent papers (see here and here), was called “Who Needs Entrepreneurs?” Here is the abstract:

The mathematics of “computable economics” proves that entrepreneurship policy is unlikely to succeed if it presumes policy makers can replace the unplanned results of the entrepreneurial market process with ex ante judgments about which enterprises are best. It is mathematically impossible for policy makers or their assignees to make the required computations of opportunity costs. Some business professors dream of finding a grand algorithm that will allow them to guide entrepreneurial decisions and to judge in advance which decisions are good and which bad. The logic of computable economics, however, reveals this dream to be a form of magical thinking.

This is fascinating stuff that should be of considerable interest to O&M readers.

2 March 2009 at 1:24 pm 10 comments

Waugh’s House of Wittgenstein

| Peter Klein |

The Saturday Wall Street Journal features Janes Penrose’s review of Alexander Waugh’s House of Wittgenstein, a profile of the prominent Viennese family that produced not only the philosopher Ludwig, considered by many the greatest of the twentieth century, but also pianist Paul. Their father, Karl, was an important Austrian industrialist, and their home, nicknamed Palais Wittgenstein, a Viennese landmark. The WSJ also offers a sample chapter.

Hayek enthusiasts will of course remember that Hayek and Wittgenstein were second cousins, though they did not appear to know each other well (see Hayek’s “Remembering My Cousin Ludwig Wittgenstein” in Hayek, Collected Works, vol. 4, pp. 176-81). My old boss Bill Bartley, founding editor of Hayek’s Collected Works, wrote a controversial Wittgenstein biography in 1973 (Bartley’s book was the first to discuss Wittgenstein’s homosexuality publicly, for which Bartley was condemned by Wittgenstein’s literary executors and outcast by the Wittgenstein establishment). Hayek is also mentioned briefly in the popular book Wittgenstein’s Poker, which we discussed before.

John Gray argues that Hayek’s theory of language, as presented especially in The Sensory Order, was strongly influenced by Wittgenstein (even the numbering system copies that of the Tractatus). There are, writes Gray, “many evidences that Wittgenstein’s work reinforced Hayek’s conviction that the study of language is a necessary precondition of the study of human thought, and an indispensable prophylactic to the principal disorders of the intellect. Examples which may be adduced are Hayek’s studies of the confusion of language in political thought and, most obviously, perhaps, of his emphasis on the role of social rules in the transmission of practical knowledge.”

1 March 2009 at 4:19 pm 1 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).