Archive for April, 2009

Macroeconomics Quote of the Day

| Peter Klein |

From Kenneth Boulding’s review essay on Samuelson’s Foundations, published in the JPE in 1948:

ken1[I]t is a question of acute importance for economics as to why the macroeconomics predictions of the mathematical economists have been on the whole less successful than the hunches of the mathematically unwashed. The answer seems to be that when we write, for instance, “let i, Y, and I stand, respectively, for the interest rate, income, and investment,” we stand committed to the assumption that the internal structures of these aggregates or averages are not important for the problem in hand. In fact, of course, they may be very important, and no amount of subsequent mathematical analysis of the variables can overcome the fatal defect of their heterogeneity.

More on heterogeneity in macroeconomics here.

22 April 2009 at 8:36 am 1 comment

More Economic Institutions of Strategy

| Nicolai Foss |

In his post of yesterday, Peter failed to mention that among the O&M bloggers not just Klein and Lien but also yours truly contributed to the Nickerson and Silverman 2009 edition of Advances in Strategic Management. Specifically, with Stieglitz (Nils — and with an “e”) I have written “Opportunities and New Business Models: Transaction Costs and Property Rights Perspectives on Entrepreneurship.” The paper can be downloaded from SSRN.

21 April 2009 at 3:26 pm 1 comment

Thanks to O&M

| David Gerard |

I would like to thank Peter and the O&M bloggers for giving me some space here over the past few months. Blogging certainly has its challenges, such as finding something interesting to say, taking the trouble to write it down, and actually having a point. Or at least one of those three. Unfortunately, I haven’t been as prolific as I might have been on these fronts, nor have I been able to foment a syllabus exchange on organizations, industrial organizations, organizational economics, etc. . . . I hope to get another chance to contribute later on.

21 April 2009 at 10:46 am 1 comment

Call for Papers for a Special Issue of JMS: “Micro-Level Origins of Routines and Capabilities”

| Nicolai Foss |

The micro-foundations theme is gaining increased attention in management research. As a partial reflection of this, please check the Call for Papers below for a SI of the Journal of Management Studies on the topic in the title of this post.  Submit a paper! (more…)

21 April 2009 at 7:46 am Leave a comment

Contracting Hazards (Adult Edition)

| Lasse Lien |

If you need a rich example of the hazards of contracting, this one is particularly pregnant. Make sure you read it through to the end. Best suited for mature audiences.

21 April 2009 at 7:18 am 10 comments

Killing the Fax

| Lasse Lien |

I’m in Spain, and I just got a fax. It’s been quite a while since I got one of those (faxes). The experience got me thinking about why the fax network still exists. The technology is clearly inferior to other technologies for any use I can think of, and has been so for quite a while now. Still you will be hard-pressed to find a business address that does not include a fax number. We seem to be in a prisoner’s dilemma situation now. The aggregate benefits are probably smaller than the aggregate costs, but nobody wants to exit first.

In general there seems to be a bias in the literature on network technologies, where a lot of attention has been devoted to bandwagon effects on the adoption side, but little has been said about the exit phase (based on a 5-minute poolside literature review). This could be because the two phases are completely symmetric, with the disincentive to exit early mirroring the disincentive to enter early. If the two phases are not fully symmetric, however, it would be nice to know more about the exit side. Since new network technologies are invading our lives at an accelerating pace (MsN, Facebook, Twitter, etc.), the problem of exit is IMHO as acute as the problem of adoption.

HT: Peter Klein (who adopts them all).

21 April 2009 at 6:52 am 5 comments

New Foss Sell-Out (?) Paper

| Nicolai Foss |

With Siegwart Lindenberg, Professor of Cognitive Sociology at the University of Groningen, I have written “Why Firms Work?  A Goal-Framing Theory of the Firm.” Colleagues already refer to it as the “Foss sell-out paper” (but wait until I blog on that recent sell-out paper on entrepreneurship and the government by a certain O&M blogger . . . ). 

Whatever that is, the paper starts from the familiar and long-standing debate between organizational economists and proponents of the knowledge-based view, and the many interesting recent attempts to merge key insights from TCE with ideas on learning and capabilities (Argyres, Nickerson, Mayer, Leiblein, Zenger, Hoettker, and others). The underlying idea is that additional explanatory leverage, for example, with respect to understanding the boundaries of the firm, will emerge from an integration of the two (clusters of) theories. (more…)

21 April 2009 at 6:08 am 6 comments

Dynamic Capabilities: The Emperor’s New Clothes?

| Nicolai Foss |

One of the most delightful innovations in the recent history of management journals is the “SO!apbox Editorial Essays” in Strategic Organization.  These are short and pointed “opinion pieces” by thought leaders, designed to provoke and raise debate. (Interestingly, these essays seem to be the most cited contributions to the journal).

The February issue of Strategic Organization contains an excellent critique of the dynamic capabilities view (DCV) — launched in the beginning of the 1990s by David Teece (however, the much cited Teece, Pisano, and Shuen paper wasn’t published until 1997) — by Richard Arend and Phil Bromiley, “Assessing the Dynamic Capabilities View: Spare Change, Anyone?” As Arend and Bromiley notes the DCV is the “new touchstone firm-based performance-focused theory” (p. 75).

Some of their critiques have been around for some time, but this is the first systematic compilation of these critiques, and the authors add quite a number of novel critical points. Inspired by Larry Laudan’s work in the theory of science, Arend and Bromiley assess the “ability of the DCV to explain successful change with logical consistency, conceptual clarity and empirical rigor” (p. 75). (more…)

20 April 2009 at 1:48 pm 7 comments

Economists More Ethical; US Researchers Not

| Mike Sykuta |

Thanks to Josh Wright over at TOTM, I found Ben Edelman and Ian Larkin’s recent HBS Working Paper on “Demographics, Career Concerns or Social Comparison: Who Games SSRN Download Counts?” Their abstract reads:

We use a unique database of every SSRN paper download over the course of seven years, along with detailed resume data on a random sample of SSRN authors, to examine the role of demographic factors, career concerns, and social comparisons on the commission of a particular type of gaming: the selfdownloading of an author’s own SSRN working paper solely to inflate the paper’s reported download count. We find significant evidence that authors are more likely to inflate their papers’ download counts when a higher count greatly improves the visibility of a paper on the SSRN network. We also find limited evidence of gaming due to demographic factors and career concerns, and strong evidence of gaming driven by social comparisons with various peer groups. These results indicate the importance of including psychological factors in the study of deceptive behavior.

Their results suggest that papers published in the Economics Research Network of SSRN are significantly less likely to have “fraudulent” downloads (as measured in their paper) while papers in the Finance, Legal, and Accounting Networks are significantly more likely to have fraudulent downloads. Aren’t these the places in which ethics are being more broadly taught? Business and Law?

Among their other interesting results, papers by non-US authors are less likely to have fraudulent downloads. Perhaps surprisingly, one’s status on the tenure track seems not to be important, but one’s peer comparisons do. Sadly, there is no attempt to directly measure the O&M effect.

20 April 2009 at 11:08 am Leave a comment

Economic Institutions of Strategy

| Peter Klein |

That’s the title of a forthcoming volume of Advances in Strategic Management edited by Jackson Nickerson and Brian Silverman. You’ll recognize the allusion to a certain classic book. Like that book, this volume maps out an ambitious agenda for new scholarship on institutions and organizations, particularly within the field of strategic management. The chapters provide critical reviews and syntheses of various strands of the strategy literature, intended to support and to challenge new and established scholars starting work in these areas. (They should make excellent readings, for example, for doctoral courses in strategy and the economics of organization.)

Lasse and I contributed a chapter, “Diversification, Industry Structure, and Firm Strategy: An Organizational Economics Perspective,” that you can download on SSRN. Here’s the abstract:

We review theory and evidence on corporate diversification, industry structure, and firm strategy from an organizational economics perspective. First, we examine the implications of transaction cost economics (TCE) for diversification decisions. TCE is essentially a theory about the costs of contracting, and TCE sheds light on the firm’s choice to diversify into a new industry rather than contract out any assets that are valuable in that industry. While TCE does not predict much about the specific industries into which a firm will diversify, it can be combined with other approaches, such as the resource-based and capabilities views, that describe which assets are useful where. We also discuss the transaction-cost rationale for unrelated diversification, which focuses on the potential efficiencies from exploiting internal capital markets. We review this argument as it emerged in the transaction cost literature in the 1970s and 1980s and, more recently, theoretical and empirical literature in industrial organization and corporate finance. We then discuss how diversification decisions, both related and unrelated, affect industry structure and industry evolution. Here, the stylized facts suggest that diversifying firms have a crucial impact on industry evolution because they are larger than average at entry, grow faster than average, and exit less often than the average firm. We conclude with thoughts on unresolved theoretical, methodological, and empirical issues and problems and provide suggestions for future research.

20 April 2009 at 7:13 am Leave a comment

GM vs. TCE: Another “Block Upon Block”?

| Mike Sykuta |

Ronald Coase has spent the past two decades or more lamenting the lack of progress in economic theory. He bemoans the fact that economics, unlike its physical-science counterparts, fails to dispose of (or pursue new versions of) theories when facts show that prevailing theories are inaccurate or incomplete.

Among his many arguments, Coase has pointed to Williamson’s Transaction Cost Economics (TCE) as one that seems impervious to the facts. Part of Coase’s discontent with the TCE story rests on his observation that many firms sustain relationships characterized by high degrees of asset specificity using contractual means. While Ben Klein and others pointed to General Motors-Fisher Body as evidence to support the TCE story, Coase pointed to relations with auto frame manufacturer A.O. Smith at the same time that were not subsumed by vertical integration. This eventually led to the infamous GM-Fisher Body debate that seems for want of a real conclusion (see some of Peter’s previous comments on this here, here and here).

Well once again, General Motors seemingly plays the foil against TCE. Several weeks ago, GM announced plans to purchase Delphi Group’s global steering manufacturing operations. Delphi operated the steering unit solely for GM’s use. Delphi, in bankruptcy since October 2005, has been able to use GM’s dependence on Delphi’s operations to secure roughly $450 million in liquidity capital from GM to maintain its operations. Sounds like the classic hold-up problem, doesn’t it? But wait! (more…)

17 April 2009 at 2:13 pm 14 comments

Information Encountering

| Peter Klein |

I recently attended an interesting workshop by my colleague Sanda Erdelez from the School of Information Science and Learning Technologies (what used to be called library science, back when we had libraries). Sanda has developed the concept of information encountering, defined as

a memorable experience of an unexpected discovery of useful or interesting information. Information encountering occurs when one is looking for information relating to one topic and finds information relating to another one. However, it also occurs upon bumping into information while carrying on a routine activity.

During the workshop we discussed the parallels between information encountering and Kirzner’s notion of entrepreneurial discovery. Both are different from systematic search, yet more than pure accident. (As Sanda reminded us, “serendipity,” often used today as a synonym for luck, originally meant the discovery of one thing while searching systematically for another.) More generally, we agreed that the entrepreneurship and  information-science literatures can learn from each other. We also discussed Nicholas Carr’s recent Atlantic Monthly piece, “Is Google Making Us Stupid?” which argues, in part, that the ability to find specific information quickly makes us less likely to discover useful information accidentally.

Here is more of Sanda’s research. The terms “accidental discovery of information” and “incidental information acquisition” are also used in the information-science literature.

16 April 2009 at 10:24 am 2 comments

Antitrust and the Theory of the Firm

| Peter Klein |

Josh has a nice post at Truth on the Market on the place of antitrust research and practice within the legal academy. “[C]ontrary to the conventional wisdom I hear from the legal academy, it is an incredibly exciting time to practice, think about, and write about antitrust issues. . . . I suspect that right now is one of the most intellectually active antitrust eras in history.” Josh proposes several hypotheses on the increasingly popularity of antitrust analysis in law schools and within the law-and-economics movement.

Josh’s post got me thinking about the economic theory of the firm. The pioneers in this field — Coase, Williamson, Klein, Alchian, Demsetz, Teece, Masten — were actively interest in antitrust issues. The subtitle of Williamson’s Markets and Hierarchies (1975), after all, is “Analysis and Antitrust Implications.” In the more recent literature, however, antitrust doesn’t make much of an appearance. None of the leading scholars, such as Oliver Hart, Bengt Holmström, Jean Tirole, John Moore, Bob Gibbons, George Baker, Kevin Murphy, Tom Hubbard, or Steve Tadelis works juch on antitrust (please correct me if I’m wrong). Even giants like Foss, Klein, Langlois, and Lien are not active in this area.

One might respond that antitrust is an economic policy issue, not a firm-strategy issue, and note that transaction cost economics (TCE) has migrated from economics departments to business schools, where it joins the resource-based view (RBV) as a leading theoretical perspective on the the firm. Indeed, while the people mentioned above are economists, mostly teaching in economics departments, Williamsonian TCE has largely been supplanted by the Grossman-Hart-Moore model among mainstream economists, while it remains highly influential within the fields of strategic management, organization theory, and marketing.

This leaves us with two questions: (1) Why isn’t the property-rights or Grossman-Hart-Moore approach to the firm more influential in antitrust economics? (2) Why isn’t antitrust a bigger topic within strategic management (e.g., as part of a firm’s legal and political strategy)?

14 April 2009 at 9:48 am 5 comments

Law and Economics of Innovation

| Peter Klein |

I’m speaking at this year’s edition of the Law and Economics of Innovation, organized by Geoff Manne and Josh Wright and co-sponsored by GMU Law and Microsoft. It’s May 7 in Arlington. Check out the slick conference website (and Geoff’s post at ToTM). If you don’t want to hear me, at least come for Susan Athey’s keynote. Tom Hazlett has the best paper subtitle: “Of Newtons, Blackberries, iPhones & G-Phones.” How many of you youngsters have heard of the Newton?

13 April 2009 at 2:21 pm 2 comments

Down with Strunk and White

| Peter Klein |

Geoffrey Pullum does’t think much of the ubiquitous grammar guide, celebrating its 50th anniversary this week. The Elements of Style “does not deserve the enormous esteem in which it is held by American college graduates. Its advice ranges from limp platitudes to inconsistent nonsense. Its enormous influence has not improved American students’ grasp of English grammar; it has significantly degraded it.” (Thanks to Gary Peters for this link to a free version, available for just a few days.)

13 April 2009 at 9:34 am 19 comments

Missouri’s View of Charter Schools

| Peter Klein |

Missouri Democrat Chris Kelly, who represents my district in the state legislature, has introduced a bill rescinding a 2007 Missouri state board of education rule restricting the sale of public school buildings to charter schools. The 2007 rule prevents public school buildings from being sold to “charter schools, liquor stores, adult entertainment venues, distilleries, and landfills.”

13 April 2009 at 9:03 am Leave a comment

Follow O&M on Twitter!

| Peter Klein |

Twitterers or Tweetheads or whatever the correct term is can now receive O&M updates by following orgsandmarkets. This works through TwitterFeed, which I learned about from Lynne. Kool!

11 April 2009 at 12:35 am 1 comment

Keynesian Economics in a Nutshell

| Peter Klein |

An earlier post on Keynesian economics in four paragraphs has proven extremely popular. Here’s Keynesian economics in just one-and-a-half paragraphs, courtesy of Mario Rizzo:

Clearly, DeLong is a rigid aggregate demand theorist. He talks about output and employment as if it were some homogeneous thing. In his mind, macroeconomics is just about spending to increase the production of stuff. Yes, there is lip service to the idea that the stuff should have economic value. But that is easy when you assume that the only alternative is value-less idleness. . . .

The sectoral problems generated, not only by exogenous shocks but by the low interest rate policy of the Fed, are of critical importance. The aggregate demanders are blind to this.

Here at O&M we take the opposite perspective, namely that heterogeneity matters. Actually, as Mario has pointed out in a series of posts (1, 2, 3), Keynes himself was much better than his latter-day followers. Keynes may have been wrong — deeply, deeply wrong, in my view — but he was no fool. As for today’s Keynesians. . . .

Update (14 April): See also Mario’s fine essay in the April Freeman, “A Microeconomist’s Protest.”

10 April 2009 at 3:47 pm Leave a comment

René Stulz on Derivatives

| Peter Klein |

In case you missed it, Tuesday’s WSJ ran an op-ed by René Stulz, one of the world’s elite researchers in empirical corporate finance, “In Defense of Derivatives and How to Regulate Them.” Highlights:

That derivatives benefit our financial system and our national economy is well established. Twenty-nine of the 30 companies that make up the Dow Jones Industrial Average use derivatives. According to data from Greenwich Associates, two-thirds of large companies (those that have sales of more than $2 billion) use over-the-counter derivatives and more than half of all mid-size companies (those that have sales between $500 million and $2 billion) are very active in derivatives markets. Derivatives are necessary and helpful tools for companies seeking to manage financial risk.

The most important benefit of derivatives is that they allow businesses to hedge risks that otherwise could not be hedged. This does a number of positive things. It transfers risk, allowing firms to guard against being forced into financial distress. It also frees lenders to offer credit on better terms, giving companies access to funds that they can use to keep their doors open, lights on and, even, invest in new technologies, build new plants, or hire new employees. (more…)

10 April 2009 at 1:17 pm Leave a comment

Program for Searle Center Conference, “The Economics and Law of the Entrepreneur”

| Peter Klein |

Here. I participated in last year’s conference and thought it was terrific. Old friend Henry Butler is doing a fine job making the Searle Center a major player in the entrepreneurship field.

9 April 2009 at 10:39 am Leave a comment

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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).