Archive for June, 2009

Factor-Biased Technological Change

| Dick Langlois |

Back in October, I blogged about Daron Acemoglu’s presentation at the Economic History Association meeting. There now seems to be an NBER working paper version of that talk, called “When Does Labor Scarcity Encourage Innovation?” Here is the abstract.

This paper studies the conditions under which the scarcity of a factor (in particular, labor) encourages technological progress and technology adoption. In standard endogenous growth models, which feature a strong scale effect, an increase in the supply of labor encourages technological progress. In contrast, the famous Habakkuk hypothesis in economic history claims that technological progress was more rapid in 19th-century United States than in Britain because of labor scarcity in the former country. Similar ideas are often suggested as possible reasons for why high wages might have encouraged rapid adoption of certain technologies in continental Europe over the past several decades, and as a potential reason for why environmental regulations can spur more rapid innovation. I present a general framework for the analysis of these questions. I define technology as strongly labor saving if the aggregate production function of the economy exhibits decreasing differences in the appropriate index of technology, theta, and labor. Conversely, technology is strongly labor complementary if the production function exhibits increasing differences in theta and labor. The main result of the paper shows that labor scarcity will encourage technological advances if technology is strongly labor saving. In contrast, labor scarcity will discourage technological advances if technology is strongly labor complementary. I provide examples of environments in which technology can be strongly labor saving and also show that such a result is not possible in certain canonical macroeconomic models. These results clarify the conditions under which labor scarcity and high wages encourage technological advances and the reason why such results were obtained or conjectured in certain settings, but do not always apply in many models used in the growth literature.

15 June 2009 at 11:39 am 5 comments

Peter L. Bernstein (1919-2009)

| Peter Klein |

I was saddened to learn (from Kenneth Anderson) that Peter L. Bernstein, author of Against the Gods: The Remarkable Story of Risk and other popular works, died June 5. Bernstein was a terrific writer and a clear and provocative thinker with a gift for making difficult concepts accessible. I was greatly influenced by an earlier book, Capital Ideas: The Improbable Origins of Modern Wall Street, which I came across in graduate school while searching for a dissertation topic. Bertstein’s characterization of the brokerage industry in the 1960s and early 1970s, before the deregulation of brokerage fees — an Old Boys Club, lacking competition and innovation — inspired me to examine the role of corporate internal capital markets in replicating the resource-allocation function normally performed by external capital markets, and how the growth and development of financial markets following liberalization contributed to the end of the conglomerate period.

Here are obituaries in the WSJ and NYT and here is Bernstein’s wiki.

15 June 2009 at 6:50 am 1 comment

Men of Few Words

| Peter Klein |

Those of you into Flesch-Kincaid scores and similar metrics probably appreciate men who can say a lot with a few words. The Bud Light “Dude” guy — whose Fog index, if my calculations are correct, is 1 — may be the best-known modern example:

He’s good, but before him there was Donnie Brasco:

Can your favorite academic writers be that parsimonious?


13 June 2009 at 12:05 am 3 comments

Mises and Hayek in Progress in Human Geography

| Nicolai Foss |

It is surprising, even bizarre, to see Mises and Hayek, as well as other luminaries of 20th-century classical liberalism, being extensively cited, quoted, and discussed in one of the leading geography journals, Progress in Human Geography (here is the wiki on the field of “human geography”), specifically in the form of the printed version of an invited lecture by Jamie Peck. (more…)

10 June 2009 at 12:27 pm 2 comments

Sid Winter and Alice Rivlin on the Current Crisis

| Nicolai Foss |

Sidney G. Winter is a towering figure in management research, essentially being the current thought leader in the strategic management field as it pertains to issues of capabilities, routines, knowledge assets, etc. Most of his work in strategic management is founded on his earlier work in evolutionary economics (notably this seminal volume). Winter is married to Alice Rivlin, a long-time critic of Reagan-era economic policies and a high-ranking bureaucrat under Johnson and Clinton.

Here is Winter and Rivlin on “fixing the global financial system.” Winter thinks that business schools are partly to blame, but is not very concrete in his critique (at least he doesn’t blame agency theory). And here is Winter answering the question, “Is capitalism dead?” Note his comments about “people on the extreme right.” Neither Winter nor Rivlin leave much doubt about where they stand politically.

UPDATE: There is more Winter on YouTube: “Inflation or Deflation,” “Economic Cassandras,” and “The Price of Oil.” They are all very recent and done under the auspices of the Australian School of Business.

10 June 2009 at 8:16 am 9 comments

Is the Future in Contract Manufacturing?

| Benito Arruñada |

The purchase of Opel by Magna shows the strength of contract manufacturers and their strategies, which I discussed with Xosé H. Vázquez in our 2006 article in the Harvard Business Review. Once thought of as a lifebelt for the decreasing margins of large-brand owners, contract manufacturing has now become a major source of competition. Shanghai Automotive Industry Corporation (SAIC), which learned the business by producing initially for Volkswagen and GM, has actually started to sell its own cars in Europe and North America. It has even bought R&D knowledge, acquiring from bankrupt MG Rover the drawings needed to build the Rover 25, Rover 45, and Rover 75.

The economic crisis is accelerating this process. The need to liberate assets to increase ROI has been facilitated by technological and organizational change. This is stimulating business practices at the corporate level that are pushing outsourcing practices to dangerous limits. The wrong management of contract manufacturing will thus increasingly provoke knowledge leaks to direct competitors and the loss of internal manufacturing knowledge; more importantly, it will continue to eliminate barriers to entry, allowing large distributors and contract manufacturers themselves to market their own brands much more easily.

9 June 2009 at 1:09 pm 4 comments

De Figueiredo on Political Strategy

| Peter Klein |

We’ve previously mentioned the chapters by Nicolai and Nils Stieglitz and by Lasse and me in the forthcoming Advances in Strategic Management volume titled Economic Institutions of Strategy. John de Figueiredo’s chapter, “Integrated Political Strategy,” is now available as an NBER Working Paper. John is a leader of this emerging field, which studies how firms attempt to influence the legal and political environment to achieve competitive advantage. As he points out:

Legal and acceptable competitive behavior is determined endogenously by legislators, regulators and judges who are influenced, positively and negatively, by the very same firms the regulations are designed to control. By understanding the theories of how firms affect politics, one can better determine how to gain competitive advantage through political institutions. This is a natural extension of the traditional tools of strategic management. Moreover, for young scholars, this is an area in which the lines of investigation are clear and the openings for serious research opportunities available. In this sense, it is robust area for future research and major contributions to understanding firm performance.

9 June 2009 at 10:01 am 1 comment

2009 SES Boot Camp

| Peter Klein |

Just received the Call for Papers for the 2009 edition of the Society for Entrepreneurship Scholars Manuscript  Boot Camp, this year at Johns Hopkins University right before the SMS Conference in October. I participated last year and had a terrific experience (OK, it was at a ski resort, but that has nothing to do with it). Submissions due 4 August 2009. Details below the fold. (more…)

7 June 2009 at 6:19 pm Leave a comment

A Reason To Keep Laptops Out of the Classroom

| Peter Klein |

I missed this Doonesbury strip when it came out in 2007 (click to enlarge). Made me cringe. (HT: John Drobak)


6 June 2009 at 12:06 pm 2 comments

Thanks to Mike Sykuta

| Peter Klein |

Thanks to Mike Sykuta for a great series of guest posts on contracting, transaction cost theory, and the crazy political and regulatory world around us. We look forward to Mike’s continued participation in the O&M comment threads and elsewhere in the blogosphere. If you need Mike you can reach him through the usual virtual channels or, if you prefer something meatier, let me know and I’ll walk the 10 feet to his office and bop him over the head.

6 June 2009 at 11:34 am Leave a comment

The MBA Oath

| Peter Klein |

As a manager, my purpose is to serve the greater good by bringing people and resources together to create value that no single individual can create alone. Therefore I will seek a course that enhances the value my enterprise can create for society over the long term. I recognize my decisions can have far-reaching consequences that affect the well-being of individuals inside and outside my enterprise, today and in the future. As I reconcile the interests of different constituencies, I will face choices that are not easy for me and others.

Therefore I promise:

  • I will act with utmost integrity and pursue my work in an ethical manner.
  • I will safeguard the interests of my shareholders, co-workers, customers and the society in which we operate.
  • I will manage my enterprise in good faith, guarding against decisions and behavior that advance my own narrow ambitions but harm the enterprise and the societies it serves.
  • I will understand and uphold, both in letter and in spirit, the laws and contracts governing my own conduct and that of my enterprise.
  • I will take responsibility for my actions, and I will represent the performance and risks of my enterprise accurately and honestly.
  • I will develop both myself and other managers under my supervision so that the profession continues to grow and contribute to the well-being of society.
  • I will strive to create sustainable economic, social, and environmental prosperity worldwide.
  • I will be accountable to my peers and they will be accountable to me for living by this oath.

This oath I make freely, and upon my honor.

This comes from a group of second-year Harvard MBAs and was featured in last Friday’s New York Times (HT: MGK). Here’s their blog. I eagerly await the analysis of the O&M commentariat.

5 June 2009 at 8:43 am 8 comments

Seat-of-the-Pants Sports Management

| Peter Klein |

The WSJ recently ran a sort of anti-Moneyball piece on the NBA’s Denver Nuggets that belongs in our “by the numbers” series. Love the title: “Textbook Management? Hardly. — Assembled Largely by Instinct, the Denver Nuggets Keep Winning; Mastering a ‘Curious Business.'” Here’s the central passage:

[The Nuggets] don’t describe their success as the inevitable result of a carefully designed strategy. Rather, in an era when sports executives like to play themselves off as masters of mathematical analysis and risk management — and in a year when most NBA teams chose fiscal prudence over expensive superstars — the Nuggets are an anomaly. They owe their success to a bizarre combination of luck, good health, opportunism and a management strategy that is more six-shooter than Six Sigma.

The story caught my eye partly because it profiles Nuggest owner Stan Kroenke, a real estate developer who lives here in Columbia, Missouri and whose son Josh was Mizzou’s starting shooting guard from 2000 to 2003. (Stan’s wife also happens to be Ann Walton Kroenke, one of Sam Walton’s two nieces; it’s nice to have connections!)

4 June 2009 at 9:49 am 3 comments

World Bank’s “Doing Business” Changing Course

| Benito Arruñada |

Thanks to O&M for the opportunity to join the conversation. I plan to be blogging about some issues discussed in my book.

One of my recent research areas is the cost of business formalization. In particular, I have criticized the World Bank’s Doing Business project for the narrow focus of its “Starting a Business” indicator on reducing the initial costs of incorporating companies (Arruñada, 20072009), which disregards the more important role of business registers as a source of reliable information for judges, which is essential for reducing transaction costs in future business dealings. In many developing countries, registers produce documents that judges do not trust and, therefore, registration does not facilitate impersonal transactions that it should be supporting. Reducing the explicit cost of registers and speeding production of useless paperwork will not help. The priorities of reform policies should therefore be thoroughly reviewed, aiming first for registers to achieve a minimum reliability. (See this discussion).

In April, following continuing pressure by Barney Frank, chairman of the US House Financial Services Committee, the World Bank decided to drop Doing Business’s “Employing Workers Indicator” and develop a new “Worker Protection Indicator” after concluding that the first indicator “does not represent World Bank policy and should not be used as a basis for policy advice or in any country programme documents that outline or evaluate the development strategy or assistance programme for a recipient country” (Aslam, 2009).

In line with my argument about registration, meaningful indicators of institutional quality should be comprehensive of costs and values. Therefore, an indicator of the quality of employment regulation should consider not only workers’ protection but other aspects, such as, most prominently, unemployment rates.

4 June 2009 at 9:46 am 1 comment

Introducing Guest Blogger Benito Arruñada

| Peter Klein |

We’re delighted to announce Benito Arruñada as our newest guest blogger. Benito is Professor of Business Organization at Pompeu Fabra University in Barcelona, a former President of ISNIE, and a prolific researcher in the areas of organization, law and economics. Most of his work focuses on the organizational conditions that facilitate impersonal exchange, from property titling or business regulation to moral systems. He has published widely in journals such the Journal of Law and Economics, Industrial & Corporate Change, Harvard Business Review, Journal of Law, Economics, and Organization, Journal of Economic Behavior & Organization, Journal of Comparative Economics, and International Review of Law and Economics.

Benito will be blogging about his new book on property and business formalization, Building Market Institutions: Property Rights, Business Formalization, and Economic Development, coming out next year from the University of Chicago Press, and other topics that strike his fancy. Welcome, Benito!

3 June 2009 at 12:45 pm 1 comment

Government-Made Cars

| Peter Klein |

Former Romanian car czar Ion Mihai Pacepa’s confession in today’s WSJ, and Jeff Tucker’s commentary, reminds me of our Trabant series from a while back (the video link is still among our most popular). Look forward to a future video of a GM (i.e., government) worker putting the finishing touches on the next Nova.

3 June 2009 at 9:01 am 1 comment

Shop Class as Soulcraft

| Peter Klein |

20090526_shopclassw70After hearing Matthew Crawford interviewed this morning on the Diane Rehm show I’ve put his book, Shop Class as Soulcraft: An Inquiry Into the Value of Work, on my summer reading list. After earning a PhD in political philosophy at Chicago and doing a postdoc with the Committee on Social Thought, he worked for a while in a DC policy shop, then gave it up to start a motorcycle-repair business. Fixing bikes, he explains, involves complex analytical reasoning, application of scientific methods, Verstehen, and related cognitive skills far beyond those he used in his white-collar job. He also finds the work much more intellectually and emotionally satisfying than typical desk work. “The trades suffer from low prestige,” writes Crawford (see this excerpt published in last week’s Times), “and I believe this is based on a simple mistake. Because the work is dirty, many people assume it is also stupid. This is not my experience.” By contrast:

As in any learned profession, you just have to know a lot. If the motorcycle is 30 years old, from an obscure maker that went out of business 20 years ago, its tendencies are known mostly through lore. It would probably be impossible to do such work in isolation, without access to a collective historical memory; you have to be embedded in a community of mechanic-antiquarians. These relationships are maintained by telephone, in a network of reciprocal favors that spans the country. My most reliable source, Fred, has such an encyclopedic knowledge of obscure European motorcycles that all I have been able to offer him in exchange is deliveries of obscure European beer.

There is always a risk of introducing new complications when working on old motorcycles, and this enters the diagnostic logic. . . .  The attractiveness of any hypothesis is determined in part by physical circumstances that have no logical connection to the diagnostic problem at hand. The mechanic’s proper response to the situation cannot be anticipated by a set of rules or algorithms.”

In the excerpt and in this 2006 essay, on which the book is based, Crawford draws out broader social, political, and personal implications of the joy of working with your hands, not all of which I necessarily buy. But I think I understand where he’s coming from. Personally, I don’t really know how to build stuff (unlike, say, Kevin Murphy), but I do enjoy cooking, and find that creating a wonderful meal is, in some ways, more satisfying than producing a wonderful journal article. (No wisecracks about the half-life of the meal versus the article, please.)

2 June 2009 at 11:39 am 3 comments

The Hawthorne Effect Revisited

| Peter Klein |

The ever-resourceful Steve Levitt, working with John List, uncovers the original data from the Hawthorne experiments — data long thought to have been lost or destroyed — and finds there actually wasn’t much of a Hawthorne effect:

Our analysis of the newly found data reveals little evidence to support the existence of a Hawthorne effect as commonly described; i.e., there is no systematic evidence that productivity jumped whenever changes in lighting occurred. On the other hand, we do uncover some weak evidence consistent with more subtle manifestations of Hawthorne effects in the data. In particular, output tends to be higher when experimental manipulations are ongoing relative to when there is no experimentation. Also consistent with a Hawthorne effect is that productivity is more responsive to experimenter manipulations of light than naturally-occurring fluctuations. . . . We conclude that the evidence for a Hawthorne effect in the studies that gave the phenomenon its name is far more subtle than has been previously acknowledged.

The short paper, “Was there Really a Hawthorne Effect at the Hawthorne Plant? An Analysis of the Original Illumination Experiments,” is available from NBER. I couldn’t find an ungated copy but the search led me to a large secondary literature, much of it by organizational and industrial psychologists, also questioning the original findings, though apparently without use of the primary data.

2 June 2009 at 8:27 am 9 comments

And Meet the New Bud Fox

| Peter Klein |

Further to my Wall Street post: There’s another scene in which we learn that Bud Fox, the twenty-something broker played by Charlie Sheen, will be made CEO of Blue Star Airlines during its reorganization if Gordon Gekko’s hostile takeover is successful. We’re supposed to laugh at the absurdity of a baby-faced kid with an Ivy League education but no knowledge of airplanes or management running an airline. But when the federal government does it, it’s all good. (HT: Randy.)

1 June 2009 at 5:33 pm Leave a comment

Obama’s Facebook Feed

| Peter Klein |

I admit, it made me laugh. (Thanks to Cliff for the pointer.)

I like pensionbook too.

1 June 2009 at 5:21 pm 2 comments

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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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