Archive for April, 2009
The Symbolic Uses of Politics
| Dick Langlois |
One of the most interesting law-and-economics scholars out there is Amitai Aviram at the University of Illinois, whom I met at a conference a few years ago. I only just discovered his recent work on what he calls bias arbitrage, “the extraction of private benefits through actions that identify and mitigate discrepancies between objective risks and the public’s perception of the same risks.” The idea is that people often misperceive the risks of various events. This creates an entrepreneurial opportunity for someone who can benefit from manipulating those misperceptions.
In some ways, this is an elaboration of Murray Jacob Edelman’s The Symbolic Uses of Politics (1964). In Edelman’s story, the citizenry are worried about various large issues about which they have no control: the Russians, global warming, swine flu, or — Edelman’s example, as I recall — the threat of business monopolies. In most cases, these fears are exaggerated or have no basis at all in fact — like the fear of spontaneous monopolies. But politicians can advance themselves by taking symbolic steps to allay these fears — like passing the Sherman Antitrust Act. (As Tom DiLorenzo, Jack High, Tom Hazlett, and others have suggested, the Sherman Act was also about diverting attention away from the McKinley tariffs, which would indeed transfer income from consumers to producers.)
Aviram’s spin is that there can be a welfare-improving effect to this process, to the extent that, by changing people’s perceptions of the underlying risks, entrepreneurs can bring people’s assessments in line with the actual underlying risks and thus get people to behave more efficiently. One example he uses is security measures at airports. After 9/11, people overestimated the probability of highjackings and shifted away in droves from air travel and toward automobile travel, which is actually a less-safe alternative. By instituting the ceremony of airline security, the government might have persuaded people that the probability of highjackings went down — even though it probably didn’t go down and was already low anyway — and therefore got them to return to (safer) air travel, an efficient outcome even taking into account the costs of the ceremony. (If you don’t believe that the ceremonies of the Transportation Security Administration are purely symbolic — or even if you do — check out this interesting piece in the Atlantic Monthly a while back.) Aviram understands perfectly well that this process can also lead to bad outcomes: the much-discussed case of seatbelt laws making car travel less safe might be an example. Whether the placebo effect (as Aviram calls it) has good or bad effects is a case-by-case question. One might well wonder whether today, eight years almost since 9/11, it isn’t the case that airport security ceremonies actually serve to remind people of terrorist threats and therefore to raise their assessments of the probabilities (?)
I thought of all of this recently in my own local context. Because of the recession, the State government has imposed on the University a variety of purely symbolic measures to demonstrate our frugality to the voting public. At least in principle, faculty can’t travel out of state even on money that came from grants or awards. And the library and museums were recently instructed to shorten their opening hours, even though those shorter hours don’t in fact save any money.
Macroeconomic Policy Quote of the Day
| Peter Klein |
Mike Rozeff makes the Hayekian point that is probably obvious to the O&M community, but virtually absent from public debate:
Bernanke is just a man. He is fallible. We learned this week that he pressured Bank of America into absorbing Merrill Lynch. In doing this, he pressured the leader of Bank of America into withholding critical information from his shareholders about Merrill Lynch losses. Technically, he can be charged with conspiracy to defraud. The loans he had the FED make to AIG look far from wise. A number of his other actions are highly questionable in making various kinds of loans to questionable borrowers.
I am saying that Bernanke doesn’t actually know what he’s doing. But I am using him only as an example. He’s not special. The more important point is that no one knows how to do fiscal and monetary policy, and they never have and never will. No one. For that reason alone, which is a narrowly practical one, no one should have those powers.
“New Economy” Bleg
| Peter Klein |
The heady dot-com days of the late 1990s brought breathy pronouncements from journalists and some academics that the “new economy” had changed all the old rules. Intellectual capital, not physical capital, is the source of value, so plant and equipment is irrelevant. Information goods are produced at zero marginal cost so firms should give away, rather than sell, their products. Profits don’t matter, only installed base counts. Managerial hierarchy is obsolete; cost curves are flat; supply-and-demand analysis is passé; even opportunity costs don’t matter anymore. The dot-com crash and subsequent shakeout brought many people back to their senses, but even today we continue to hear hyperbolic claims about the newness of the new economy.
I’d like to include some of these wildly exaggerated claims in my talk next week at the GMU/Microsoft forum. Can readers supply some quotes I can use (the more outrageous the better)? Like this:
[W]hen it comes to technology, even the most bearish analysts agree the microchip and Internet are changing almost everything in the economy.
— Greg Ip, WSJ, 18 January 2000
One curious aspect of the Network Economy would astound a citizen living in 1897: The very best gets cheaper each year. This rule of thumb is so ingrained in our contemporary lifestyle that we bank on it without marveling at it. But marvel we should, because this paradox is a major engine of the new economy. . . . Through most of the industrial age, consumers experienced slight improvements in quality for slight increases in price. But the arrival of the microprocessor flipped the price equation. In the information age, consumers quickly came to count on drastically superior quality for less price over time. The price and quality curves diverge so dramatically that it sometimes seems as if the better something is, the cheaper it will cost.
— Kevin Kelly, New Rules for the New Economy, 1998
Once a marketing gimmick, free has emerged as a full-fledged economy. . . . The rise of “freeconomics” is being driven by the underlying technologies that power the Web. Just as Moore’s law dictates that a unit of processing power halves in price every 18 months, the price of bandwidth and storage is dropping even faster. Which is to say, the trend lines that determine the cost of doing business online all point the same way: to zero.
— Chris Anderson, Wired, February 2008
Why have [stock] exchanges at all? Certainly not to help investors. Exchanges are at last being exposed as anachronisms, sustained by inertia and by the desire of incumbents, with help from regulators, to keep raking in monopoly rents. But the curtain is coming down.
— James Glassman, WSJ, 8 May 2000
I’m sure there are much more colorful statements (i.e., straw men for me to knock down) out there. Any suggestions?
Best Financial-Markets Sentence I Read Today
| Peter Klein |
From Gene Fama:
George Soros claims (in his op-ed in the Wall Street Journal) that the Efficient Market Hypothesis is invalid, because prices in financial markets “always provide a biased view of the future, and that distortions of prices in financial markets may affect the underlying reality.” Thoughts?
EFF: All the evidence I know says that market predictions are unbiased. It’s understandable, however, that hedge fund managers are immune to this evidence since it’s a threat to their existence.
Tweets That Might Get You Fired
| Peter Klein |
Some of these made me laugh (via FastCompany). I assume they’re real. If I had more time I’d perform a similar exercise, searching online for tweets that might get one of my students an F.
As ResumeBear reminds its readers:
It may not seem important to you now, but what you post and share online could come back to haunt you someday when you least expect it. Everything on the internet can be archived, which means it is also searchable. Your online profiles might be just for friends now, but later on, your online content might keep you from getting that scholarship, the job of your dreams or even prevent you from running for public office.
Think before you post — especially before you post to social networking sites or blogs.
Wait a minute, I blog, don’t I?
Knights, Raiders, and Targets
| Peter Klein |
When doing my dissertation research long, long ago I was influenced by an edited volume called Knights, Raiders, and Targets: The Impact of the Hostile Takeover (Oxford University Press, 1988). It collected the proceedings of a 1985 Columbia Law School conference that must have been terrific. The authors include Robert Shiller, John Coffee, Mel Eisenberg, Oliver Williamson, David Ravenscraft and F. M. Scherer (previewing results of their important 1987 book), Richard Roll, Michael Bradley, and Gregg Jarrell, among others, with several contributions appearing in a comments-and-replies format. I just learned that one of the editors, Louis Lowenstein of Columbia Law, passed away this month. I’m not familiar with his best-known book, What’s Wrong With Wall Street: Short-Term Gain and the Individual Shareholder (1988). Apparently it proposes a tax on short-term trading profits to reward buy-and-hold investors, which doesn’t sound great to me.
Take My Joke, Please
| Peter Klein |
Like other boring professors, I try to liven up my lectures and after-dinner speeches with a few jokes. Naturally, this effort is plagued by radical uncertainty. And of course I steal the jokes. Indeed, I maintain a computer file of one-liners and funny stories — none original — for possible future use. Then again, as Fabio notes, many stand-up comedians are known as prodigious copiers. Milton Berle once said another comedian made him laugh so hard, “I nearly dropped my pencil.”
Good thing I’m not a professional comedian. According to this paper by Dotan Oliar and Christopher Jon Sprigman, the community of stand-up comedians is characterized by strong social norms that take the place of formal rules in enforcing “ownership” of jokes. A complex system of norms has emerged over the last half-century that “regulates issues such as authorship, ownership, transfer of rights, exceptions to informal ownership claims and the imposition of sanctions on norms violators. Under the norms system, the level of investment in original material has increased substantially.” Presumably the community of professional comedians satisfies the Ellickson requirements of being a small, well-defined, close-knit group. Lucky for me I’m not in it. (HT: orgtheory commentator Johann.)
O&M Turns Three
| Peter Klein |
Saturday, April 25, 2009, marked this blog’s three-year anniversary. During the past three years we’ve served up 1,801 posts, hosted 4,597 comments, and entertained 525,624 unique users (that last figure comes from StatCounter and may or may not mean anything). Thanks to the O&M community for making blogging such a fun and interesting experience!
Jargon Watch: “Green Shoots” of Recovery
| Peter Klein |
Thanks to Bill Easterly for noticing that Chauncey Gardner is In the House. G7 officials are now telling us they see “green shoots” of recovery. Can’t you just imagine this behind-the-scenes conversation at the summit?
President “Bobby”: Mr. Gardner, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?
[Long pause]
Chance the Gardener: As long as the roots are not severed, all is well. And all will be well in the garden.
President “Bobby”: In the garden.
Chance the Gardener: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
President “Bobby”: Spring and summer.
Chance the Gardener: Yes.
President “Bobby”: Then fall and winter.
Chance the Gardener: Yes.
Benjamin Rand: I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we’re upset by the seasons of our economy.
Chance the Gardener: Yes! There will be growth in the spring!
Benjamin Rand: Hmm!
Chance the Gardener: Hmm!
President “Bobby”: Hm. Well, Mr. Gardner, I must admit that is one of the most refreshing and optimistic statements I’ve heard in a very, very long time.
[Benjamin Rand applauds]
President “Bobby”: I admire your good, solid sense. That’s precisely what we lack on Capitol Hill.
Actually, this level of analysis can also be found at the typical graduate macroecomomics seminar. Oops, did I say that?
My Working Relationship with Lasse
| Peter Klein |
Every coauthoring relationship is unique. Scholars bring different strengths and weaknesses to the table, and there are many opportunities to exploit gains from trade. The best coauthoring relationships are marked by strong complementarities (a theorist and an empiricst, a conceptual thinker and a detail-oriented person, an expert in literature A and an expert in literature B, a “starter” and a “finisher,” etc.). It doesn’t always work, but — as has been frequently noted — sole-authored papers are increasingly rare in business and the social sciences, suggesting that the benefits, on average, outweigh the costs.
Lasse and I have an excellent working relationship resulting in several published and forthcoming papers, numerous works in progress, some joint teaching projects, and more. If there were any doubt that my role in the partnership is basically that of a glorified research assistant, this website, in which one Peter Klein offers “Pre-Lien Services,” should put those doubts to rest.
Tragedy in Athens, Georgia
| Peter Klein |
You may have heard about George Zinkhan, a University of Georgia marketing professor who reportedly shot to death his wife and two others this afternoon before fleeing the scene. As of this writing he remains on the loose and is considered armed and dangerous. A nationwide manhunt is supposedly under way. (Here’s the Google News feed.)
I was Zinkhan’s colleague at UGA’s Terry College of Business from 1995 to 2002 and knew him casually. We had lunch together on occasion and played basketball together in a faculty/staff league. I didn’t know much about his personal life, only that he had two young children (I think from a second marriage). He was head of the Marketing department when I was there and was, by all accounts, a productive scholar and an effective teacher.
What a surreal experience to see pictures of SWAT teams assembled outside Brooks Hall — apparently staked out in case Zinkhan went there after the shootings, which occurred off campus — where I had my office and taught most of my classes.
One More Ill-Defined, Un-Measured (?) Core Construct: Routines
| Nicolai Foss |
It seems that O&M may usefully introduce a new category: “Constructs that are central to one or more management fields, but so far have not been measured.” Yesterday, we blogged on opportunity discovery, and could report only one existing scale in the entrepreneurship literature. Today the focus is on routines, a frequently discussed topic here on O&M.
Routines are, of course, absolutely central in much management research, notably strategic management, international business, technology strategy, organizational theory and much else. The construct itself was essentially introduced to management research in Nelson and Winter’s 1982 book, An Evolutionary Theory of Economic Change, although it is often argued that it originates somewhat earlier, namely with the behavioralists (Simon, Cyert, & March; for a critique of this interpretation, see this paper).
The boundaries of the concept are, even for management research, highly ill-defined and virtually everything in an organization, save for physícal capital, that has some degree of stability has been called a routine by some author. As if this extreme inclusiveness wasn’t enough, it has even been argued that routines can be “sources of continuous change.”
Such conceptual fuzziness would seem to imply that almost anything goes, empirically speaking. In fact, there is quite a lot of empirical work on routines, and of a rather diverse nature. However, it all seems to be qualitative in nature (e.g., this recent paper), as least as far as I can see.
So, do you know of any attempts to grapple empirically with routines in the sense of actual measurement? Are there any scales out there?
One Part of the Financial Sector Is Still Growing
| Peter Klein |
Courtesy of EconomPicData:
It takes money to make money, you know.
Vive la Révolution!
| Peter Klein |
So says the all-star team of Acemoglu, Cantoni, Johnson, and Robinson in “The Consequences of Radical Reform: The French Revolution.” Check it out:
The French Revolution of 1789 had a momentous impact on neighboring countries. The French Revolutionary armies during the 1790s and later under Napoleon invaded and controlled large parts of Europe. Together with invasion came various radical institutional changes. French invasion removed the legal and economic barriers that had protected the nobility, clergy, guilds, and urban oligarchies and established the principle of equality before the law. The evidence suggests that areas that were occupied by the French and that underwent radical institutional reform experienced more rapid urbanization and economic growth, especially after 1850. There is no evidence of a negative effect of French invasion. Our interpretation is that the Revolution destroyed (the institutional underpinnings of) the power of oligarchies and elites opposed to economic change; combined with the arrival of new economic and industrial opportunities in the second half of the 19th century, this helped pave the way for future economic growth. The evidence does not provide any support for several other views, most notably, that evolved institutions are inherently superior to those ‘designed’; that institutions must be ‘appropriate’ and cannot be ‘transplanted’; and that the civil code and other French institutions have adverse economic effects.
Think of this as a fixed-effects model estimating the within-country effect of legal origin; what happens when a society’s institutional (particularly, legal) environment changes suddenly and unexpectedly? If a common-law country is invaded and occupied by a civil-law country, what happens to financial-market development? An interesting counterpoint to the cross-sectional studies that are the norm in this field.
The Latest Management Bestseller
| Peter Klein |
Followers of the management-guru literature won’t be surprised by this Daily Telegraph report that Mein Kampf is a business bestseller in India. Alas, like Good to Great, the book suffers from the fatal flaws of sampling on the dependent variable and choosing a non-representative sample period. (In a longitudinal sample, the Führer’s managerial performance doesn’t doesn’t look so great, does it?)
As is often the case, the best commentary on this (apparently true) story comes from the Onion: “Well, they sure don’t want to follow Gandhi’s model. All that guy ever did was lose money.”
Opportunity Discovery Measurement Scale Bleg
| Nicolai Foss |
Opportunity discovery is a key construct in large parts of the recent management literature on entrepreneurship (e.g., this important paper). We have often blogged on opportunity discovery here on O&M, for example, noting the problematic relation of the management construct of opportunity discovery to Kirzner’s original notion, and suggesting that new projects may be superior units of analysis for certain purposes.
Still, the sensing, perception, discovery of, etc. opportunities is surely relevant in entrepreneurship studies and should not be bypassed. Which brings us to the issue of, How is it measured? Given that dozens of articles have been written now with “opportunity discovery” in the title, I am struck by the paucity of empirical work that actually makes a stab at measuring opportunity discovery. Most articles on opportunity discovery are theoretical. And most consider the antecedents of opportunity discovery (e.g., personal knowledge, psychological attributes, search costs) rather than the discovery itself. (more…)
Peters Against Aggregation
| Peter Klein |
When I saw the title of Brayden’s post, “Don’t Give Up on Aggregation Yet, Peter,” I thought he’d been reading my macroeconomics posts. Alas, Brayden, prefers meatier fare, such as this post by Barnard College sociologist Peter Levin. Levin is worried about the aggregation of knowledge represented by the open-source, wikified, crowdsourcing movement about which people are all, well, atwitter. (We’ve expressed more than a few reservations about this stuff ourselves.) His main concern, if I understand correctly, is the possibility of information cascades. However, much of the cascades literature deals not with the wisdom of crowds, but the wisdom of experts (tulip-bulb traders, mortgage-backed securities underwriters, etc.). The more expertise decision-makers grant to their peers, the more likely they — in the face of uncertainty — will interpret their peers’ (ostensibly expert) opinions as reliable indicators of underlying reality, and hence the greater the likelihood of cascades.
Brayden takes a different tack, arguing that aggregation mechanisms can be designed to mitigate the chance of outliers biasing the results. I think Brayden is right but am not sure his comments address the underlying mechanism — the microfoundations, to use a certain co-blogger’s favorite term — that Levin is worried about.
SecondMarket
| Peter Klein |
Props to Molly Burress for pointing me to this article in today’s NYT on SecondMarket, a website that acts as a market-maker for illiquid assets. According to the Times SecondMarket is developing secondary markets for restricted public equities, bankruptcy claims, mortgage-backed securities, collateralized debt obligations, and other non-marketed financial claims. As the Times points out, the weak IPO market of the last few years has made VCs reluctant to invest in early-stage ventures; by giving VCs an additional exit option, SecondMarket may increase the flow of venture funding.
Not addressed in the article: If SecondMarket succeeds, and grows, and begins to impose disclosure requirements on the companies whose (now-liquid) assets are traded, will private equity lose its purported advantrages over public equity, in the Jensen (1989) sense?
Diversity of Opinion at the University of Missouri
| Peter Klein |
Who says the modern US university doesn’t reflect the full diversity of American social, cultural, and political opinion? Sure, most of the faculty at my university are Birkenstock-wearing, tree-hugging, Prius-driving, union-loving, New-York-Review-of-Books reading ACLU supporters, but they also like to hear from the other side:
Chairperson of U.S. Communist Party to Speak on Campus
Sam Webb, the Chair of the Communist Party, USA, will be speaking on Tuesday April 28th at 7:00pm in Ellis Auditorium. The event is free and open to the public. Sam Webb’s speech will address the current role of/possibilities for the Communist Party, USA and other progressives in the current political climate, confronted as our country is with the economic crisis, environmental crises and two wars. Webb writes extensively on politics, economics, international affairs, and Marxism, and is the author of a number of theoretical pamphlets, including “Reflections on Socialism,” and “The Nature, Role and Work of the Communist Party,” both of which were published in English and Spanish.
Announcement sponsored by ORG — Organization Resource Group
Thanks to Per for noticing.
The Extreme Makeover of the AMR
| Nicolai Foss |
I just received my copy of the April issue of the Academy of Management Review, stuffed with matrices, probability density functions, NKC models, Boolean algebra, isoquants, Max This and Max That, etc. etc. Yes — that’s right: The Academy of Management Review, the journal that over the last decade has only published one single formal article.
Of course, this is the long-awaited special issue, “Special Topic Forum on Formal Approaches to Management Theory,” edited by Ron Adner, Laszlo Polos, Michael Ryall, and Olav Sorenson. (One of the papers has already been extensively discussed here at O&M). The papers are a mixed bag in terms of the formal approaches that are applied, i.e., analytic methods, simulation, and formal logic. I have only read a couple of the papers (Alvarez & Parker on “Emerging Firms and the Allocation of Control Rights: a Bayesian Approach”) and Postrel’s “Multitasking Teams with Variable Complementarity: Challenges for Capability Management,” which both are excellent, but I look forward to reading the rest.
The editors supply an introduction which reiterates the often claimed benefits — familiar to those with an economics background — of formalization in terms of precision and transparency, logical consistency, and unanticipated implications (for a general treatment, see Suppes’s 1968 classic). They are careful to say that they “would not claim that verbal theorizing . . . has no place in management research”! (p. 206). (more…)
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