Archive for January, 2010

Apocalypse Averted

| Dick Langlois |

In a recent post, I lamented the willingness of pundits (and dissenting Justices) to see rights as a consequential exercise: we should restrict the speech of group X, in this case private corporations, because allowing such speech would lead to a bad outcome, in this case the corruption of democracy by corporate interests. (Feel free to substitute here your own favorite candidate for silencing and your own associated bad outcome.) But, of course, those who argue in this manner must also demonstrate that the asserted bad outcome would actually happen. A recent article in the Times — bless some reporter’s or editor’s contrarian heart — asks the question: so, what effect does corporate money actually have on democracy?” The answer seems to be: none at all. One of the economists cited is Peter’s Missouri colleague, and my former student, Jeff Milyo: “There is just no good evidence that campaign finance laws have any effect on actual corruption.”

And while we are at it, a study by the Insurance Institute for Highway Safety finds no effect of cell phone laws on traffic accidents. This hasn’t stopped Connecticut’s Governor from calling for even stricter cell phone laws.

31 January 2010 at 7:15 pm 6 comments

Infographic of the Day: Bailouts Around the World

| Peter Klein |

Via HBR, bank bailouts and stimulus packages as percentages of GDP. China tops (bottoms?) the list with stimulus goodies worth a whopping 47% of GDP.

29 January 2010 at 3:09 pm 1 comment

Now That’s a Complete Contract!

| Peter Klein |

A major theme of the contracting literature in organizational economics is that formal contracts are inevitably incomplete, meaning that they do not specify actions and remedies for every possible set of circumstances. Given genuine uncertainty about the future, parties may decide that formal contracts to not adequately protect relationship-specific investments, providing an important rationale for vertical integration or another mechanism to protect quasi-rents (alliances, equity-sharing arrangements, reputation, and other “hybrids”).

A recent WSJ piece suggests that writing complete contracts may not be so hard after all:

Decked out in sequined black and gold dresses, Anne Harrison and the other women in her Bulgarian folk-singing group were lined up to try out for NBC’s “America’s Got Talent” TV show when they noticed peculiar wording in the release papers they were asked to sign.

Any of their actions that day last February, the contract said, could be “edited, in all media, throughout the universe, in perpetuity.”

My Mom says she once told me I was the best little boy in the world, to which I responded, “and all the planets too?” The WSJ gives several examples of similarly expansive coverage:

  • The terms of use listed on, where people can post to message boards among other things, tell users that they give up the rights to any content submissions “throughout the universe and/or to incorporate it in other works in any form, media or technology now known or hereafter developed.”
  • In a May 15, 2008, “expedition agreement” between JWM Productions LLC, a film-production company, and Odyssey Marine Exploration Inc., a shipwreck-exploration outfit, JWM seeks the rights to footage from an Odyssey expedition. The contract covers rights “in any media, whether now known or hereafter devised, or in any form whether now known or hereafter devised, an unlimited number of times throughout the universe and forever, including, but not limited to, interactive television, CD-ROMs, computer services and the Internet.”

And my personal favorite:

A 189-word sentence in a September agreement between Denver-based Spicy Pickle Franchising Inc. and investment bank Midtown Partners & Co. — which has helped raise capital for the sandwich and pickle shops dotted across the region — unconditionally releases Spicy Pickle from all claims “from the beginning of time” until the date of the agreement.

Says Spicy Pickle’s Marc Geman, “the length of the paragraph is only limited by the creativity of the attorney.”

29 January 2010 at 12:27 pm 4 comments

The Era of Laissez-Faire?

| Peter Klein |

One of the established memes about the financial crisis is that it demonstrates the failure of unfettered capitalism, the dog-eat-dog, laissez-faire environment that prevailed in the West over the last few decades, all driven by the ideology of “free-market fundamentalism.” This seems to be a truism among most of the Commentariat. Of course, as pointed out repeatedly on this blog, the truth is virtually the opposite: there was never any “deregulation,” the Bush Administration spent public money like a drunken sailor, and government continued to expand as it always does. But a picture is worth a thousand words, so try these on for size. (US data; click charts for sources.)

One response I sometimes hear is “Sure, there are more regulations and more government spending, but the set of things that should be regulated and the amount of government spending the economy needs are growing even faster!” This is essentially the Krugman-DeLong view about the stimulus: it just wasn’t big enough. Or they say that financial markets were “deregulated,” de facto, because the number of regulations and regulators increased more slowly than the number of new financial instruments and new markets. I wonder, though: are these falsifiable propositions? No matter how big the government is, if there are any problems, it’s always because the government isn’t big enough!

28 January 2010 at 2:08 pm 14 comments

Hayekian Comments on Student Papers

| Peter Klein |

A grad student inspired these:

“The writer clearly suffers from a fatal conceit.”

“Reading this proposal helps me understand the knowledge problem.”

“Your paper appears to be the result of human action, but not human design.”

“The proposed outline reveals how little people really know about what they imagine they can design.”

Your suggestions?

27 January 2010 at 1:40 pm 6 comments

ISNIE 2010 Call for Papers

| Peter Klein |

The Call for Papers is out for the International Society for New Institutional Economics’s 2010 meeting, 17-19 June in Stirling, Scotland. Proposals are due 1 March. President-Elect Frank Stephen is putting together an impressive program with keynotes from Bruno Frey and two longtime ISNIE members you may have heard of: Elinor Ostrom and Oliver Williamson. Don’t miss it!

27 January 2010 at 9:40 am Leave a comment

Keynes vs. Hayek Rap Battle

| Lasse Lien |

If you’re teaching macro or the history of economic thought and you feel you’re not getting through to the kids, this video might be worth a try.

Thanks to Eirik Sjåholm Knudsen for the pointer.

26 January 2010 at 9:18 am 2 comments

Mutual Admiration Clubs

| Lasse Lien |

Check out this cool paper by Wing Suen, titled “Mutual Admiration Clubs.”

This article proposes a theory of group formation based on the motive to seek informed opinion. Because an individual evaluates whether others are informed or not using his own priors, he identifies people with similar beliefs to be more informed than those with different beliefs. The result is an equilibrium in which like-minded individuals self-select into distinct groups, with members of each group believing that their own group is superior.

So is O&M a Mutual Admiration Club? I guess if we all agree that we are not, that is evidence that we are. So please disagree with each other on this issue.

26 January 2010 at 4:53 am 5 comments

New Issue of ICC

| Dick Langlois |

A new issue of Industrial and Corporate Change is out (TOC here) with a bunch of interesting articles. Prominent among them is a well-researched and nicely written piece by Pierre Desrochers that argues a politically unpopular view about corporations and the environment. Free speech in action?

25 January 2010 at 3:18 pm Leave a comment

Corporations Are People Too

| Craig Pirrong |

Legally, in some respects, anyways. That was a key issue in the recent Supreme Court decision re McCain-Feingold (see Dick’s post). I don’t have a lot to say about the specifics of the decision, as campaign finance law is way too arcane for me. Suffice it to say that I am inherently skeptical about any regulation regarding elections designed by incumbent politicians. People yammer about conflicts of interest all the time, but there’s a colossal one for you.

I just wanted to make a quick point about a debate between Stevens and Scalia carried out in the opinion and the dissent. Stevens noted that the Founders were deeply skeptical of corporations. Indeed so. Scalia noted that there are so many corporations today. Also true. The interesting question is how we got from A (Stevens) to B (Scalia).

The story is told in the North, Wallis and Weingast natural-state book Violence and Social Orders I’ve blogged about several times over at Streetwise Professor, mostly in the context of Russia. The relevant chapter is primarily based on John Wallis’s work. The basic story is that hostility to corporations — reflected very well in Adam Smith’s Wealth of Nations — was due to the fact that historically, English corporations were created by the crown, and were essentially very profitable favors provided to the politically connected. They were, in NWW terms, part of the “closed order” of the natural state, in which access to certain contracting forms was limited to a select powerful few. This animus towards corporations was inherited in the United States, but in the early years of the 19th century, state legislatures confronting issues associated with the financing of new infrastructure turned the corporate form into a prop of an open-order system in which this contracting form was made available to all. Rather than limit the right of incorporation to an elite, they made it available to everybody. The system changed from one in which legislatures had to grant every incorporation, to one in which pretty much anybody could incorporate if they met a set of general, universally applicable requirements. Hence, the proliferation of corporations. (more…)

25 January 2010 at 2:39 pm 2 comments

Paging John Stuart Mill

| Dick Langlois |

I have been amused by the firestorm of outrage in the press over the Supreme Court’s recent mild affirmation of the free-speech rights of corporations. As many readers of this blog will probably appreciate, the point of a right to free speech is that it must apply even to speech, and to speakers, we don’t like. Many if not most angry commentators, like the writers of the Times editorial on the subject, don’t even bother to worry about the nature of rights. To the Times and many others, constitutional jurisprudence is a purely consequentialist exercise no different from legislation (which, sadly, may be often be true in practice). But other writers and organizations aghast at the Court’s decision have a thorny problem of argument, to the extent that they have themselves invoked the First Amendment in an effort to protect speech of which they approve (or, more generally, to protect specific sub-spheres of discourse in which they themselves participate). A case in point is People for the American Way, which has called for a constitutional amendment to outlaw corporate political speech (via William Saletan). “People For the American Way,” they write, “has been at the forefront of defense of free speech and the First Amendment for almost 30 years. We continue in that role today.” In order to square the circle, PFAM and like-minded pundits and Justices have to find a way to define corporate speech as not speech. The answer? Spending is not speech and corporations aren’t people. So: does this mean that it would be OK under this logic for the government, say, to decree that the New York Times must limit its editorial budget — limiting dollars not ideas, after all — because the Times is a corporation not an individual? Why should this logic not apply to the other Amendments as well? The Times should flat-out not have freedom of the press because it is a corporation; and the Roman Catholic Church should certainly not have freedom of religion.

My favorite line, from Justice Stevens (in dissent): “The Court’s blinkered and aphoristic approach to the First Amendment may well promote corporate power at the cost of the individual and collective self-expression the Amendment was meant to serve.” So freedom of speech is really a neoclassical or Benthamite exercise in which we aren’t trying to protect individual (let alone corporate) speech but are instead trying to maximize the total amount of self-expression in society.

In its recent obituary of Erich Segal, the Times cites the following cringe-inducing line, spoken by college-student protagonist Oliver Barrett IV, as a measure of the literary caliber of Segal’s novel Love Story: “Jenny, for Christ’s sake, how can I read John Stuart Mill when every single second I’m dying to make love to you?” This suggests that many a Justice, editorial writer, and pundit must have fallen prey to similar distractions in college. They certainly failed to read John Stuart Mill.

25 January 2010 at 1:36 pm 5 comments

Endogenous Indoctrination

| Dick Langlois |

I have been wanting for some time to write about an interesting paper by Gilles St. Paul called “Endogenous Indoctrination.” (I wasn’t familiar with his work, but he seems to do interesting things, including this.) Here’s the abstract:

Much of the political economy analysis of reform focuses on the conflict of interest between groups that stand to gain or lose from the competing policy proposals. In reality, there is also a lot of disagreement about the working of the policy: in addition to conflicting interests, conflicting views play an important role. Those views are shaped in part by an educational bureaucracy. It is documented that the beliefs of that bureaucracy differ substantially from those of the broader constituency. I analyse a model where this effect originates in the self-selection of workers in the educational occupation, and is partly reinforced by the insulation of the educational profession from the real economy (an effect which had been discussed by Hayek). The bias makes it harder for the population to learn the true parameters of the economy if these are favourable to the market economy. Two parameters that govern this capacity to learn are social entropy and heritability. Social entropy defines how predictable one’s occupation is as a function of one’s beliefs. Heritability is the weight of the family’s beliefs in the determination of the priors of a new generation. Both heritability and social entropy reduce the bias and makes it easier to learn that the market economy is “good,” under the assumption that it is. Finally I argue that the capacity to learn from experience is itself affected by economic institutions. A society which does not trust markets is more likely to favour labour market rigidities that in turn reduces the exposure of individuals to the market economy, and thus their ability to learn from experience. This in turn reinforces the weight of the educational system in the formation of beliefs, thus validating the initial presumption against the market economy. This sustains an equilibrium where beliefs and institutions reinforce each other in slowing or preventing people from learning the correct underlying parameters.

I was catalyzed to write today because of a related article I recently saw in the Times, which enthuses giddily about a paper called “Why Are Professors Liberal?” by two sociologists called Fosse [N. B. not Foss] and Gross. The Times lauds the paper for its sophistication and use of the quantitative. (more…)

24 January 2010 at 2:56 pm 6 comments

Top Scholar Presidents and University Performance

| Nicolai Foss |

Last Friday my unit at CBS, the Center for Strategic Management and Globalization, sponsored a seminar with Dr. Amanda Goodall, the author of Socrates in the Boardroom: Why Research Universities Should be Led by Top Scholars. (For an earlier O&M post on Goodall, see here). Not only did the upper CBS echolons show up (the Research Dean and the President — both highly cited scholars, BTW), but we also had a long and lively discussion. A highly undull seminar!

Goodall’s findings are mainly based on UK data. Roughly, they are that university rankings correlate rather closely with how well-cited the presidents of the relevant universities are, and that there is strong evidence of the research standing of presidents driving university performance. It is hard to understand why this finding (or the book in general) was dissed by Tyler as a “radical attack on economic reasoning” (here).

Anyway, Goodall’s findings made me wonder whether the finding of causality from president/vice-chancellor/BSchool dean generalizes to other university bureaucrats, notably department heads (and deans in general, not just BSchool deans). Many of the things that are being said in the book of the top scholar-president (an example, somebody who defines the standard, an expert etc.) are things that can be said of department heads in well-functioning research universities. Perhaps one of the ways in which university presidents/VCs/deans matter to research performance is by picking good department heads. Also,Goodall claims that top scholars will not have positive performance consequences if they assume the presidency of bad or mediocre universities. She doesn’t really present evidence for this claim, although it does sound intuitive that a Nobel Prize winner is not best placed at the helm of University of Crapville. However, it may be interesting to look at less extreme cases. I do think there are cases of highly regarded scientists helping rather mediocre universities to improve.

24 January 2010 at 12:23 pm 4 comments

Positive Spillovers from Bad Behavior

| Peter Klein |

When I introduce in class the concept of influence activities I emphasize that these, like other forms of discretionary behavior, can have benefits as well as costs. Think of self-assessments, such as a faculty member’s annual report to the department head or Dean. Certainly, faculty will find creative ways to overstate their accomplishments, minimize their failures, make themselves look better relative to their peers, and so on, and the time and energy spent doing this can be considered influence costs. At the same time, a savvy department head or Dean knows how to read between the lines, to separate signal from noise, and generally how to extract useful information from these reports, information he or she might not otherwise have. The challenge for organizational design, then, is not to eliminate influence activities altogether, but to limit them to the point where marginal benefit equals marginal cost.

This popped into my mind the other day when I read (courtesy of Stephan Kinsella) the confessions of a self-described “law school asshole.” University of Pennsylvania 3L Steve Mendelsohn (writing in 1990) tells his fellow students: “You know who we are. We’re the ones who always have our hands up in class volunteering to answer the professor’s questions, or ready to ask one of our own at seemingly any and every opportunity. Everytime you hear one of our names called, you groan and turn to the person next to you and slowly shake your head from side to side.” He even admits his name was in the center square of the Asshole Bingo cards his fellow students would bring to class.

As with influence activities, however, law-school assholery seems to have public benefits: keeping the discussion going and the atmosphere lively, eliciting from the professor information that other students would like to have but are afraid to ask for, and so on. I confess that, as an instructor, I’d rather have a few such assholes in class than a room full of polite, well-behaved dullards.

The serious question is whether this applies to organizations more generally. Are “civilized” workplaces necessarily better than rough-and-rowdy ones? It’s easy to come up with examples of organizations run by jerks that failed, but do we have systematic empirical evidence that nice-guy firms finish first? Do the marginal costs of costs of placing rude, self-centered people in management positions outweigh the marginal benefits?

24 January 2010 at 1:09 am 1 comment

CFP: “Understanding Firm Growth”

| Peter Klein |

The Ratio Institute invites paper proposals from young scholars (sorry, O&M bloggers!) in economics, economic history, entrepreneurship, management, sociology, statistics, psychology, and related disciplines for a workshop on firm growth in Stockholm, 12-14 August 2010. David Audretsch and Alex Coad are keynoting. Suggested topics include the role of high-growth firms, determinants of the growth of firms, growth ambitions and attitudes towards growth, firm growth and the characteristics of the entrepreneur, the persistence of firm growth, barriers to growth, post-entry performance, firm growth in a historical perspective, and innovation and firm growth. Details here.

21 January 2010 at 5:38 pm Leave a comment

The Virtual Firm

| Peter Klein |

If the proprietor has been to business school, it can never be smaller than two persons:

Bonus material, via Craig Newmark: the Boston Globe ponders “The End of the Office.” But it won’t happen, IMHO.

21 January 2010 at 10:08 am 3 comments

OECD Data on Entrepreneurship

| Peter Klein |

A new OECD report provides data on startups and similar measures for 39 countries. Lots of variables, e.g.:

  • Number of enterprises by size class
  • Employment by size class
  • Value added by size class
  • Exports by size class
  • Employer enterprise birth rates (manufacturing and services by industry, by size class)
  • Employer enterprise death rates (manufacturing and services, by industry, by size class)
  • One- and two-year survival rates (manufacturing and services)
  • Share of one- and two-year-old employer enterprises in the population (manufacturing and services)
  • Share of high-growth firms (employment)
  • Share of high-growth firms (turnover)
  • Share of gazelles (employment)
  • Share of gazelles (turnover)
  • Employment creation by enterprise deaths

20 January 2010 at 11:52 pm Leave a comment

PowerPoint Version of “I Have a Dream”

| Peter Klein |

Bill Easterly tries his hand at PPTParody and hits a winner. The Gettysburg Address version remains the standard, of course. See also our PowerPoint archive.

20 January 2010 at 10:39 am Leave a comment

Call for Applications: “International Business in Historical Perspective: The Emergence of Global Entrepreneurship”

| Peter Klein |

The Henley Business School at the University of Reading and the Institute for Economic and Social History at the Georg August University of Göttingen are organizing a Conference/Summer School on “International Business in Historical Perspective: The Emergence of Global Entrepreneurship,” 19-20 March (conference) and 21-25 March (summer school) 2010. Details here. “During the combined conference and summer school, scholars and students will explore the concept of entrepreneurship applied to historical examples in an international context. Topics include, for instance, the performance of multinationals in foreign markets, immigrant entrepreneurship, international family firms, and the institutional framework in which entrepreneurial decisions were made.”

19 January 2010 at 3:19 pm Leave a comment

Experimental versus Conceptual Entrepreneurs?

| Peter Klein |

The latest paper in David Galenson’s artist series deals with architects, distinguishing between “experimental” and “conceptual” designers. The distinction calls to mind the different emphases of Knight’s and Kirzner’s concepts of the entrepreneur, the former centered on action and market feedback, the latter on the cognitive act of discovery. What do you think?

Innovators: Architects
David W. Galenson
NBER Working Paper No. 15661
Issued in January 2010

Frank Lloyd Wright, Le Corbusier, and Frank Gehry were experimental architects: all worked visually, and arrived at their designs by discovering forms as they sketched. Their styles evolved gradually over long periods, and all three produced the buildings that are generally considered their greatest masterpieces after the age of 60. In contrast, Maya Lin is a conceptual architect: her designs originate in ideas, and they arrive fully formed. The work that dominates her career, the Vietnam Veterans Memorial, was designed as an assignment for a course she took during her senior year of college. The dominance of a single early work makes Lin’s career comparable to those of a number of precocious conceptual innovators in other arts, including the painter Paul Sérusier, the sculptor Meret Oppenheim, the novelist J.D. Salinger, and the poet Allen Ginsberg.

18 January 2010 at 11:53 pm 4 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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