Archive for December, 2009

Peter the Great

| Lasse Lien |

Peter is having a great year, I can tell you that. First he is cited in the scientific statement for Williamson’s Nobel Prize. Recently, it also became clear that he is on Wiley’s most-read-articles list, an honor he shares with the very same Williamson. Peter’s paper tops the list for the Strategic Entrepreneurship Journal. A link to the list of top papers can be found here.

Way to go, Peter!

15 December 2009 at 3:53 pm 1 comment

“This Paper Fills a Much-Needed Gap in the Literature”: Today’s Edition

| Peter Klein |

I was thumbing through the MDE issue containing Lasse and Nicolai’s paper when this sentence caught my eye: “Despite the widespread use of the production frontier approach to assess the efficiency of firms, there are no studies on ski lift operators.”

OK, I actually like the paper, “Are Multi-Resort Ski Conglomerates More Efficient?” by Martin Falk. It shows that resorts affiliated with a particular operator, Intrawest, have higher efficiency scores than independent resorts (and those affiliated with other ski conglomerates). There isn’t much theory, and I worry about endogeneity and unobserved heterogeneity — the major themes in recent empirical work on diversification — but I certainly agree that parental affiliation is an important, and often overlooked, issue. (Indeed, one of my favorite Brad De Long papers, from the old days before he became a full-time polemicist, deals with this problem.)

Maybe I’m just jealous that I didn’t think of this particular application when doing my own research on conglomerates. Oh, the travel grants I could have applied for!

15 December 2009 at 11:36 am 4 comments

Samuelson and Schumpeter

| Peter Klein |

Paul Samuelson, the enormously influential economic theorist, textbook writer, and teacher, died yesterday. The Times calls him “the foremost academic economist of the 20th century,” which may be true, depending what’s meant by “foremost.” He was certainly brilliant, talented, and creative. His Foundations of Economic Analysis (1949) changed forever the way economists think about their discipline (formerly a distinct, mostly verbal, logical science, economics became a branch of classical mechanics). His textbook Economics established a new style for introductory texts: lengthy, comprehensive, but ad hoc and unsystematic (Murray Rothbard called it a “vast potpourri . . . of bits and smidgens of technique and of data, none of them integrated into any sort of digestible or comprehensible whole”).

The blogosphere is beginning to spew out commentary, not all of it flattering (Krugman fawns, Ed Glaeser and Arnold Kling are more nuanced, Yuri Maltsev is gracious, Mario Rizzo is blunt). I don’t have much to add specifically for O&M readers, but I’m curious about one issue that may not get much play: the influence on Samuelson’s thought of Joseph Schumpeter, Samuelson’s dissertation supervisor at Harvard.

In many ways, they were opposites: Schumpeter the flamboyant, dramatic innovator, Samuelson the careful, rigorous systematizer; Schumpeter the defender of capitalism and critic of Keynes, Samuelson the interventionist and foremost American Keynesian; Schumpeter, someone I greatly admire, Samuelson. . . . well, you get the picture. Both were brilliant and egocentric (you all know the Schumpeter quip about wishing to become the greatest horseman, economist,  and lover in Vienna, but achieving only two of the three; Samuelson once declared, “I can claim in talking about modern economics I am talking about me”).

Samuelson is mentioned in the Schumpeter biographies, including McCraw’s, mostly to illustrate Schumpeter’s enthusiasm for Samuelson’s brand of mathematical economics, which Schumpeter greatly admired even if he himself was not a practitioner. Samuelson has written a bit on his old teacher, mostly to praise Schumpeter’s brilliance (and celebrate his quirkiness, particularly in the classroom), but not much on Schumpeter’s specific theoretical contributions. (Here is Samuelson’s 1951 paper “Schumpeter as a Teacher and Economic Theorist,” which is a good read but not, ultimately, very informative; here is Samuelson’s critique of Schumpeter’s theory of equilibrium interest rates). Samuelson certainly didn’t give the entrepreneur a prominent place in his own system (here is a technical paper on innovation); what did he think of Schumpeter’s account of entrepreneurship and economic change?

14 December 2009 at 11:24 am 12 comments

Congratulations to Dick and Sid

| Peter Klein |

A comment from Dave Hoopes reminded me to congratulate Dick and Sid — Nelson and Winter, that is — for winning this year’s Dan and Mary Lou Schendel Best Paper Award from the Strategic Management Society, Dick for his 1991 paper “Why Do Firms Differ, and How Does it Matter?” and Sid for his 2003 paper “Understanding Dynamic Capabilities.” Dick’s paper is a particularly good introduction for economists wanting to understand what the strategy field is all about. I’m not a huge fan of dynamic capabilities — a friend calls the dynamic capabilities literature the “Derrida of strategic management” — but Sid’s paper strikes me as a particularly sensible approach.

On a personal note, many years ago I interviewed for a faculty position with Dick’s group at Columbia. I didn’t get the job, but Dick was a charming and gracious host. He has what you might call an impish sense of humor (I’m sure Dick Langlois can add some good stories). Sid Winter is a brilliant scholar and mentor to many in the strategy field (I only wish his views on macroeconomics were more, well, Kleinian).

Congratulations, gentlemen!

13 December 2009 at 3:32 pm 1 comment

Paper Titles I Wish I’d Written

| Peter Klein |

“Shift Work and Business Cycles,” by Lucas Engelhardt, a PhD candidate at Ohio State (and former participant in the Rothbard Graduate Seminar).

Oh, wait, it’s “shift” work. . . . I thought it was a study of my daily routines and their effect on the economy.

12 December 2009 at 11:55 am 1 comment

A Piece on Financial Derivatives Regulation in FT Alphaville

| Craig Pirrong |

FT Alphaville, one of the Financial Times’ blogs, kindly asked me to contribute a guest post on the financial-markets regulation legislation currently working it’s way through Congress. (Thanks, Stacy-Marie.) Here’s what I wrote:

Lawmakers in DC are due to resume debate on major financial-reform legislation currently working its way through the US House of Representatives. One closely watched aspect of that debate is sweeping overhaul of over-the-counter derivatives markets. Lawmakers are pushing to mandate that most derivatives be centrally cleared and traded either on exchanges or swap execution facilities. Professor Craig Pirrong of the University of Houston discusses some of the proposals.

In attempting to impose standardization on the ways that derivatives are traded, and derivatives counterparty risks are managed and shared, the legislation reflects a one-size-fits-all mentality (not to say fetish) that is sadly typical of most legislative attempts to construct markets. These standardization directives fail to recognize that market participants are diverse, with diverse needs and preferences, and that as a consequence, it is desirable to have diverse trading mechanisms to accommodate them. (more…)

11 December 2009 at 11:04 am 1 comment

The Professor and the Princess

| Peter Klein |

Writes my source: “Madeleine is the youngest of the three royal children and referred to as the ‘party princess.’ Is that why he looks scared?”

11 December 2009 at 10:24 am Leave a comment

Peer Review ca. 1945

| Lasse Lien |

Here is a typical reaction to the peer-review process around 1945. I reckon it hasn’t changed all that much. (Not for the faint at heart.)

HT: Svenn-Åge Dahl

11 December 2009 at 7:13 am 4 comments

Words of Wisdom from Williamson’s Banquet Speech

| Peter Klein |

The transcript is here. My favorite bit, which can be read as a response to the econ-bashers:

Being hard-headed means that we aspire to tell it like it is — be it good news or bad. Although we take no joy in the downside, it is our duty candidly to confront all circumstances whatsoever. Our abiding concern is with improving the condition of mankind. Myopia, denial, and obfuscation are the enemy.

Only as we admit to and, of even greater importance, come to understand the problems that confront us — be they current or impending, obvious or obscure, real or imagined — by identifying and explicating the mechanisms that are responsible for these problems, can we expect to make informed decisions. Since, moreover, things that we do not understand at the outset sometimes have redeeming purposes, such efforts to get at the essence will often uncover real or latent benefits. Altogether, our capacity to work in the service of mankind increases as complex contract and economic and political organization become more susceptible to analysis.

Tuesday’s Prize lecture, in case you missed my earlier link, is here. I don’t see a video of the banquet speech on the Nobel site, but maybe that’s coming later. (Thank goodness they found time to post the seating chart!)

One tiny nit-pick: Williamson quotes Carlyle’s famous “dismal science” line, implicitly equating “dismal” with “mean-spirited,” but of course Carlyle’s barb had nothing to do with Malthus or scarcity or trade-offs, but with the classical economists’ opposition to slavery, which Carlyle, Dickens, Ruskin, and other literary critics of capitalism strongly supported (1, 2).

10 December 2009 at 6:41 pm 5 comments

Relatedness and Industry Structure

| Lasse Lien |

According to this, shameless self-promotion is OK. So here is a recent Lien and Foss paper (from MDE). The abstract goes as follows:

This paper reports two new empirical regularities concerning industry concentration. First, concentration levels closely correlate in related industries. Second, the correlation is moderated by the degree of relatedness between the industries. These regularities are derived from the Trinet database, using a survivor-based measure of relatedness. We argue that these previously overlooked relations may be explained in terms of (1) spillover effects between industries and (2) life cycle factors.

10 December 2009 at 9:54 am 3 comments

Boeing and the Higgs Effect

| Peter Klein |

In their calls for greatly expanding the Federal Reserve System’s and Treasury Department’s roles in the economy, Chairman Bernanke, Secretaries Paulson and Geithner, and their academic enablers have repeatedly emphasized the temporary nature of these “emergency” measures. “History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs. In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation,” said Bernanke in September. Yeah, no kidding. But, we are assured, the basic structure of our “free-enterprise” system remains soundly in place.

However, as Bob Higgs has taught us, “temporary,” “emergency” government measures are never that. Indeed, virtually all the major, permanent expansions of US government in the twentieth-century resulted from supposedly temporary measures adapted during war, recession, or some other “crisis,” real or imaginary. Cousin Naomi’s “disaster capitalism” thesis is exactly backward: it is socialism, or interventionism, that thrives during the crisis, and Washington, DC never looks back. I mean, does anyone seriously believe that the Fed will deny, or give back, the authority to purchase whatever financial assets it wishes at some future date when it deems the crisis officially “over”? Will the Treasury credibly commit never again to purchase equity or guarantee debt or otherwise protect some major industrial or financial firm after the economy returns to “normal”? Not a chance. Everything the authorities have done in the last two years to deal with this “emergency” will become part of the federal government’s permanent tool kit.

Today’s WSJ has a good example of Higgs’s ratchet effect, a front-pager on Boeing’s dependence on export loan guarantees from the Export-Import Bank, a federal government agency created in — you guessed it — 1934, as a temporary agency to deal with the Great Depression. “No company has deeper relations with Ex-Im Bank than Chicago-based Boeing. Without Ex-Im, aviation officials say, Boeing this year could have been forced to slash production, endangering hundreds of U.S. suppliers, thousands of skilled American jobs and billions of dollars in export contracts.” Bank official Bob Morin is described as “Ex-Im Bank’s rainmaker. His Boeing deals accounted for almost 40% of the bank’s $21 billion in business last year. To help Boeing through the credit crunch, his team has spent the past year developing government-backed bonds that promise to raise billions.” So, a massive industrial-planning apparatus, supposedly born during a temporary crisis, lives on as the lifeblood of a huge, politically connected US company.

Thank goodness all that money flowing to Goldman Sachs is only temporary!

Update: Here’s a short Higgs piece from 2000 on the Ex-Im Bank, appropriately titled “Unmitigated Mercantilism.”

9 December 2009 at 2:41 pm 1 comment

Mechanism Design and the Office Holiday Party

| Peter Klein |

Holiday office parties, far from being a waste of time (and booze), can be effective screening mechanisms, according to information forwarded by Doug French:

The Banc Investment Group’s “Banc Investment Daily” email report from December 6, 2005, urged its banker readers to turn the troops loose at the holiday season, because “the holiday party serves an important professional purpose — Darwinian selection.”

It turns out that people do and say the darnedest things while under the influence. Christmas party incidents are relived over and over for years at the office. Banc Investment points out that those employees who make the holiday party highlight film, “tend to do the same things at the office, but co-workers don’t notice as much.” . . .

Holiday parties are “effective at highlighting trouble makers,” according to Banc Investment Daily. “Now while we admit that one banker’s inappropriate behavior is another’s entertainment, knowing where your trouble spots are is a gift worth opening every year.”

Of course, there’s also the entertainment value for the rank-and-file: “For us, the appeal of the holiday bank party is the same as watching NASCAR. We know the bulk of the time will be a total snooze, but you have to go to see the outfits and the spectacular crashes.”

9 December 2009 at 10:43 am 3 comments

Rejecta Mathematica

| Peter Klein |

Rejecta Mathematica is an open-access journal featuring papers rejected by peer-reviewed mathematics journals. Each article includes an author’s statement describing the peer-review experience and explaining why the paper shouldn’t have been rejected. Great concept! (Link from Sheen Levine via Konstantina Kiousis.)

I eagerly await the first issues of Rejecta Economica and Rejecta Stratetgica.

8 December 2009 at 5:05 pm 4 comments

Williamson Nobel Lecture Is Streaming Now

| Peter Klein |

Watch it here.

Money quotes so far:

  • After questioning the design of the Department of Homeland Security: “The US has a Council of Economic Advisers; I look forward to the day when there’s also a Council of Organizational Advisers” [paraphrase].
  • “That brings us to the ‘remediableness’ criterion. That word doesn’t exactly roll of the tongue. But my students have learned to say it after much repetition.”

Update: The stream is over, I’ll post a link to the archived file when I find it. Note that the ceremony is December 10, to be streamed here.

Update II: Via the ever-reliable Per Bylund, the archive link is here.

8 December 2009 at 10:06 am Leave a comment

Becker and Posner on Williamson and Organizational Economics

| Peter Klein |

Ruminations on the field of organizational economics from Becker and Posner. Both are inspired by Williamson’s Nobel but neither discusses his contributions very directly. Posner’s comment, the longer of the two, describes some of his own work (with Luis Garicano) on public organizations.

PS: I’ve been looking for some time for an electronic copy of the 1993 Journal of Institutional and Theoretical Economics exchange between Posner, Coase, and Williamson. If anyone has it, can you email me a copy?

7 December 2009 at 5:38 pm 1 comment

Internal and External Corporate Governance

| Peter Klein |

Most of the corporate governance literature focuses on external mechanisms for limiting managerial discretion: competition in product and factor markets; discipline from banks, institutional investors, and other large capital suppliers; and, of course, the market for corporate control. Firms have access to internal control mechanisms as well — performance-based pay, internal audits, a strong Board, competition among the top-management team, adoption of the M-form structure, and so on — but these are usually considered weaker, less effective instruments.

Viral Acharya, Stewart Myers, and Raghu Rajan have a new theory paper, “The Internal Governance of Firms,” on internal control mechanisms, focusing on dividend policy as a means of satisfying both internal and external constituents. NBER version here, ungated version here, older SSRN version here. Abstract:

We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors. Internal governance works best when both top management and subordinates are important in generating cash flow. External governance, even if crude and uninformed, can complement internal governance and improve efficiency. This leads to a theory of investment and dividend policy, where dividends are paid by self-interested CEOs to maintain a balance between internal and external control. Our paper can explain why firms with limited external oversight, and firms in countries with poor external governance, can have substantial value.

7 December 2009 at 11:34 am Leave a comment

The WSJ on Vertical Integration

| Peter Klein |

It’s not as bad as this 2006 piece from Slate, but Monday’s WSJ front-pager, “Companies More Prone to Go ‘Vertical,'” is underwhelming at best. It shares a few interesting anecdotes about recent vertical mergers, but falls flat on two major grounds. First, like the Slate piece, it assumes that the advances in IT over the last few decades led to some sort of tectonic shift away from vertical integration, against which firms are now reacting by “rediscovering” the benefits of vertical coordination. Actually there’s little evidence for such a shift. Second, and more important, the article doesn’t bother to mention any theories about what vertical integration is and does. There are vague references to commodity-price volatility and the need to “control” the supply chain, but no recognition that risk-management and control over inputs can be achieved through contract as well as integration. Given that one of this year’s Nobel Laureates won the prize for his work on precisely this problem, you’d think some reference to transaction costs might be appropriate. Old Media, R.I.P.

4 December 2009 at 2:55 pm 3 comments

War, Taxes, and Doux Commerce

| Dick Langlois |

Uwe Reinhardt, a health economist at Princeton, is eminently familiar with the idea of moral hazard. In a recent blog in the New York Times, he applies the idea to war. “If the monetary and the blood cost of war are shifted mainly to citizens other than the elites who are empowered to declare war and decide how it is conducted,” he writes, “then that elite is more likely to embrace war and to spend on it.” (I’m sure others have said this before, though I’ll rely on my colleagues and readers to supply the cites. Bob Higgs?) Reinhardt points out that, rather than raise taxes to pay for war, Bush cut taxes after entering Afghanistan. This had the effect of hiding the cost and pushing the financing into deficit spending, which is less easy for voters to detect. Those of us of a certain age remember how Lyndon Johnson, with the acquiescence of the Fed, financed Vietnam (and his domestic programs) largely through inflation. Apparently, some in Congress are calling for a law that would require a tax surcharge whenever war is declared.

As I say, these ideas may already be familiar to O&M readers and may even have been touched on in previous posts. But the Reinhardt piece reminded me of an idea I’ve been playing with for a long time. There is a large literature on the doux commerce thesis (see especially Albert Hirschman): the idea that increasing trade and wealth (increasing capitalism, if you will) leads to less violent and warlike societies. Oversimplifying more than a bit, the idea is that increased wealth increases the opportunity cost of war and violence. Maybe this is already in Hirschman or elsewhere, but it seems to me, however, that there must be not just a substitution effect but also an income effect. Higher GDP increases the opportunity cost of war on average (even if, as Reinhardt points out, not necessarily for the elites). At the same time, however, a wealthier society is more able to buy more war, all other things equal. Someone with the wherewithal might try to see which effect is more important by using cross-country historical data sets in the Acemoglu-Johnson-Robinson vein. If you ever run into somebody doing that sort of thing, remember that you heard it here first.

4 December 2009 at 1:27 pm 6 comments

User Innovation and Collaborative Innovation

| Dick Langlois |

Two of my favorite scholars, Carliss Baldwin and Eric von Hippel, have bridged the Charles to team up on a joint manifesto pushing their related views on innovation. The paper is subtitled (or is it supertitled?) “Modeling a Paradigm Shift.” Here is the abstract.

In this paper we assess the economic viability of innovation by producers relative to two increasingly important alternative models: Innovations by single user individuals or firms, and open collaborative innovation projects. We analyze the design costs and architectures and communication costs associated with each model. We conclude that innovation by individual users and also open collaborative innovation increasingly compete with — and may displace — producer innovation in many parts of the economy. We argue that a transition from producer innovation to open single user and open collaborative innovation is desirable in terms of social welfare, and so worthy of support by policymakers.

Carliss has always been more willing than I am to make a normative case for modularity, which is the idea underlying the collaborative model. But she does have some analytical arguments to back that up. The “worthy of support by policymakers” part actually turns out to be a healthy argument against present-day political forces in the direction of stronger intellectual property rights. As this blog has noted in the past, these political forces are moving opposite to increased patent skepticism among scholars.

4 December 2009 at 12:48 pm 2 comments

My Naïveté

| Peter Klein |

I hoped Christy Romer would be a voice of reason within Obama’s economic team. What was I thinking? If yesterday’s WSJ op-ed is any indication, her role has been reduced to that of cheerleader for the President’s preposterous “stimulus” program. The editorial is a string of banalities, unsupported by argument or evidence, about the wonderful effects of stimulus and the need to “confront the challenges” that remain. For example, noting that real GDP increased slightly in the third quarter of 2009, after a sharp fall in the first quarter, she says that the “vast majority of professional forecasters attribute much of this dramatic turnaround to the fiscal stimulus.” Professional forecasters? Of course, we have no idea what GDP would have been in the absence of stimulus. And what of the secondary consequences, both short- and long-term? What of the unseen? She even praises the cash-for-clunkers program, recently skewered by my old friend John Chapman.

She knows all this. As Christy’s teaching assistant at Berkeley I saw her explain, patiently and carefully, how government programs have side effects, often unintended (she specifically used the airplane-child-safety-seat example of the Peltzman effect). All forgotten now. Some version of Lord Acton’s dictum, I guess.

3 December 2009 at 2:58 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).