Archive for January, 2010

Generation Me

| Peter Klein |

HT to Randy.

18 January 2010 at 3:45 pm Leave a comment

Ennen and Richter on Complementarity

| Nicolai Foss |

The notion of complementarity unites a number of the key concerns of this blog: It has been central in Austrian capital theory since Menger, it is key both in (sociological) organization theory (e.g., here) and in organizational economics (e.g., here), and it is of considerable relevance to the explanation of (sustained) performance difference (e.g., here). (In organizational economics and strategic management, complementarity is usually given the specific interpretation of “Edgeworth complementarity“). Complementarity has also helped to link some of these areas (e.g., here and here).

In a paper, “The Whole is More Than the Sum of Its Parts, Or Is It? A Review of the Empirical Literature on Complementarities in Organizations,” in the most recent issue of the Journal of Management, Edgar Ennen and Ansgar Richter of the European Business perform what is probably the first stocktaking of the complementarity literature. It is very well done and in many ways an eye-opener. Of particular interest is their separation of the literature in those that take an “interaction approach,” focusing on specific interaction effects among specific (typically few) elements (e.g., of organization structure) and those that take a “systems approach” and consider the performance outcomes of entire sets of multiple elements. (My own work with Keld Laursen on complementarity falls in the latter category).  Here is the abstract:

The concept of complementarity denotes the beneficial interplay of the elements of a system where the presence of one element increases the value of others. However, the conceptual work on complementarities to date has not progressed sufficiently to constitute a theory that would offer specific predictions regarding the nature of the elements that form complementary relationships or the conditions for their emergence. To advance our understanding of complementarities, the authors provide a synoptic review of the empirical studies on this concept in leading journals in management, economics, and related disciplines over the period 1988-2008. The authors find that whether a study provides evidence of complementarities in organizations is at least partially driven by its investigative approach. On the basis of the findings, the authors argue that complementarities are most likely to materialize among multiple, heterogeneous factors in complex systems. Therefore, the absence of complementary relationships between a limited set of individual factors may not negate the possibility of complementarities, but rather point to the need for including further systems-specific factors in the analysis. The authors conclude by providing directions for future theoretical and empirical research and outlining managerial implications of the work.

17 January 2010 at 12:12 pm Leave a comment

The Division of Labor, 1886

| Peter Klein |

Another interesting passage from Graham Robb’s The Discovery of France:

Every [French] town and village was a living encyclopedia of crafts and trades. In 1886, most of the eight hundred and twenty-four inhabitants of Saint-Étienne-d’Orthe, on a low hill near the river Adour, were farmers and their dependents. Of the active population of two hundred and eleven, sixty-two had another trade: there were thirty-three seamstresses and weavers, six carpenters, five fishermen, four innkeepers, three cobblers, two shepherds, two blacksmiths, two millers, two masons, one baker, one rempailleur (upholsterer or chair-bottomer), and one witch (potentially useful in the absence of a doctor), but no butcher and no storekeeper other than two grocers. In addition to the local industries and the services provided by itinerant traders (see p. 146), most places also had snake collectors, rat catchers with trained ferrets, and mole catchers who either set traps or lay in wait with a spade. There were rebilhous, who called out the hours of the night, “cinderellas,” who collected and sold ashes used for laundering clothes, men called tétaïres, who performed the function of a breast pump by sucking mothers’ breasts to start the flow of milk, and all the other specialists that the census listed under “trades unknown” and “without trade,” which usually meant gypsies, prostitutes, and beggars (p. 99).

This book is filled with economics. Here’s a passage about repeated games:

Deceit was a particular specialty of pedlars from the Auvergne. A single piece of cloth could be made to last a whole season if it was sold with the promise that a tailor would come the next day and make up the clothes for nothing. The tailor would arrive, measure the customer, take the cloth, and never return. The drawback was that a dishonest salesman had to cover vast areas compared to a pedlar who earned the trust of his clientele (p. 150).

16 January 2010 at 3:41 pm Leave a comment

Josh Lerner on Public Policy Toward Entrepreneurship

| Peter Klein |

Speaking of public entrepreneurship, here’s an interview with Josh Lerner about his new book Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do About It (Princeton, 2009). Excerpt:

There are two well-documented problems that can derail government programs to boost new venture activity. First, they can simply get it wrong: allocating funds and support in an inept or, even worse, a counterproductive manner. Decisions that seem plausible within the halls of a legislative body or a government bureaucracy can be wildly at odds with what entrepreneurs and their backers really need. . . .

Economists have also focused on a second problem, delineated in the theory of regulatory capture. These writings suggest that private and public sector entities will organize to capture direct and indirect subsidies that the public sector hands out. For instance, programs geared toward boosting nascent entrepreneurs may instead end up boosting cronies of the nation’s rulers or legislators. The annals of government venturing programs abound with examples of efforts that have been hijacked in such a manner.

Thanks to Ross Emmett for the tip.

15 January 2010 at 3:17 am 2 comments

Recession and Recovery: Six Fundamental Errors of the Current Orthodoxy

| Peter Klein |

A very good summary by Bob Higgs of “vulgar Keynesianism,” defined by Bob as the “pseudointellectual mishmash . . . that has passed for economic wisdom in this country for more than fifty years.” The key feature of VK is an emphasis on crude aggregates (“national income,” “the employment rate,” “the interest rate,” etc.) at the expense of relative prices, firm and industry effects, and cause and effect. Echoing one of this blog’s favorite themes, Bob highlights the VK economist’s inability to grasp the concept of capital structure, “the fine-grained patterns of specialization and interrelation among the countless specific forms of capital goods in which past saving and investment have become embodied. In [the VK] framework of analysis, it matters not whether firms invest in new telephones or new hydroelectric dams: capital is capital is capital.”

Update: See also David  Henderson on aggregation.

14 January 2010 at 1:57 am 2 comments

Designing Internal Organization for External Knowledge Sourcing

| Nicolai Foss |

The heading to this post is the title of an upcoming special issue of the European Management Review, edited by my colleague at the Center for Strategic Management and Globalization at CBS, Dr. Larissa Rabbiosi, in collaboration with Dr. Toke Reichstein (also at CBS) and Prof. Massimo Colombo of the Politecnico di Milano. Two previous workshops organized by Larissa and Toke have dealt with similar issues (here and here). The theme of the workshop may be seen as concerning the organizational dimensions of “absorptive capacity,” a somewhat elusive concept. It has the potential of integrating key aspects of organizational economics with key ideas of the capabilities view. Submit a paper!

13 January 2010 at 2:54 pm Leave a comment

Separated at Birth?

| Dick Langlois |

In reading the obituary of French New Wave director Eric Rohmer, I was struck by his uncanny resemblance to (fellow Frenchman) Gérard Debreu. Many things to ponder here, including the relationship of general-equilibrium theory to the cinema of the nouvelle vague.

13 January 2010 at 9:59 am 1 comment

New Book: The Invention of Enterprise

| Peter Klein |

I’m putting this one on my Amazon wish list: The Invention of Enterprise:
Entrepreneurship from Ancient Mesopotamia to Modern Times
edited by David Landes, Joel Mokyr, and Will Baumol (Princeton, 2010). Check out the Table of Contents — an all-star lineup of entrepreneurship scholars and economic and business historians.

12 January 2010 at 5:11 pm Leave a comment

Is Grad School a Cult?

| Peter Klein |

A Chronicle piece by a pseudonymous English professor, urging prospective humanities PhD students to consider alternative career paths, generated some buzz last week. I prefer the same writer’s 2004 article, “Is Graduate School a Cult?” (via Vedran Vuk). “For all its claims to the contrary, graduate education does not seem to enhance the mental freedom of many students, some of whom are psychologically damaged by the experience.” The writer focuses on the humanities, but the arguments could just as well apply to the social sciences. Check out this list of cult characteristics, and see if they sound familiar:

  • Behavior control: “major time commitment required for indoctrination sessions and group rituals”; “need to ask permission for major decisions”; “need to report thoughts, feelings, and activities to superiors.”
  • Information control: “access to non-cult sources of information minimized or discouraged (keep members so busy they don’t have time to think)” and “extensive use of cult-generated information (newsletters, magazines, journals, audio tapes, videotapes, etc.).”
  • Thought control: “need to internalize the group’s doctrine as ‘Truth’ (black and white thinking; good vs. evil; us vs. them, inside vs. outside)” and “no critical questions about leader, doctrine, or policy seen as legitimate.”
  • Emotional control: “excessive use of guilt (identity guilt: not living up to your potential; social guilt; historical guilt)”; “phobia indoctrination (irrational fears of ever leaving the group or even questioning the leader’s authority; cannot visualize a positive, fulfilled future without being in the group; shunning of leave takers; never a legitimate reason to leave”; and “from the group’s perspective, people who leave are ‘weak,’ ‘undisciplined.'”

Comments are open for everyone except University of Missouri graduate students.

11 January 2010 at 3:17 pm 2 comments

Deja Vu?

| Craig Pirrong |

Writing near to the event, in Capitalism, Socialism, and Democracy, Schumpeter argued that policy shocks, and policy uncertainty generally, lengthened the Great Depression:

The subnormal recovery to 1935, the subnormal prosperity to 1937 and the slump after that are easily accounted for by the difficulties incident to a new fiscal policy, the new labor legislation and a general change in the attitude of government to private enterprise all of which can, in a sense to be defined later, be distinguished from the working of the productive apparatus as such.

Since misunderstandings at this point would be especially undesirable, I wish to emphasize that the last sentence does not in itself imply either an adverse criticism of the New Deal policies or the proposition — which I do believe to be true but which I do not need right now — that policies of that type are in the long run incompatible with the effective working of the system of private enterprise. All I mean to imply is that so extensive and rapid a change in the social scene naturally affects productive performance for a time, and so much the most ardent New Dealer must and also can admit. I for one do not see how it would otherwise be possible for the fact that this country which had the best chance of recovering quickly was precisely the one to experience the most unsatisfactory recovery. [Emphasis in original]

Some of the specifics are different (e.g., health care legislation vs. labor legislation) but the overall thrust of Schumpeter’s analysis of the 1930s is quite applicable today. An “extensive and rapid change in the social scene” is currently in progress, and like Schumpeter, I believe that “policies of [the] type [being considered] are in the long run incompatible with the effective working of the system of private enterprise.” And even if you don’t buy into that, as Schumpeter notes, just the massive rise in uncertainty associated with this policy ferment is sufficient to impede measured economic performance because it is rational for businesses and individuals to delay investment and hiring decisions until the uncertainty is resolved.

10 January 2010 at 9:05 am 4 comments

Socialist Calculation Meets the OTC Markets

| Craig Pirrong |

A new Federal Reserve Bank of NY staff report by Darrell Duffie, Ada Li, and Theo Lubke, “Policy Perspectives on OTC Derivatives Market Infrastructure” has received a lot of attention in the press.

There are some good things in the paper. Notably, it is suitably cautionary about the potential systemic risks posed by central counterparties, and the consequent need for prudential regulation thereof. It also makes a good case for data repositories, and for the role of the Fed and other government agencies in reducing the costs that intermediaries incur to coordinate risk-reducing actions, such as portfolio compression and improvements in the process of confirming deals.

But overall the paper is extremely disappointing. Its tone is Olympian and prescriptive. The word “should” is used 61 times 21 pages of text (that includes several space-eating tables and charts).

This is extremely dangerous because these prescriptions and dictates are not based on a a rigorous analysis of costs and benefits. Most disturbingly, there is virtually no discussion whatsoever of the informational demands inherent in the prescriptions. We’re told that regulators should set the right capital and collateral requirements on non-cleared deals, and that CCPs should maintain “high collateral standards.” (more…)

9 January 2010 at 11:55 am 3 comments

Do Top Scholars Make the Best University Leaders?

| Peter Klein |

Yes, says Amanda Goodall here and here. Here’s a summary and here’s some commentary. Her argument is based on inside knowledge, the ability to set appropriate standards, signaling, and legitimacy. Signaling strikes me as the most plausible (non-academic administrators may not have knowledge or legitimacy but they can hire subordinates who do). I haven’t studied the work carefully, however. Kudos to Goodall for tackling an important subject.

Her Vox article singles out economist-administrators for special mention. They seem to be doing quite well, Larry Summers notwithstanding.

8 January 2010 at 3:11 pm 2 comments

A Ranking We Like

| Peter Klein |

An analysis published in the Eastern Economic Journal ranks O&M the sixth-best economics blog, based on the academic reputation of its authors. As you can see from Table 2, we outpaced such obscure sites as Freakonomics, DeLong’s blog, Marginal Revolution, and The Blog Formerly Known as the Austrian Economists. I wonder how we would fare against our good-twin site, were it included?

7 January 2010 at 6:49 pm 14 comments

Murray N. Rothbard

| Peter Klein |

Jeff Tucker reminds me that Murray Rothbard passed away 15 years ago today. I remember the moment when I heard the news, from Parth Shah at a restaurant in DC, where we were attending the American Economic Association meeting. (This was before smartphones, Twitter, and the like, and news traveled more slowly.) I was stunned — Rothbard was not yet 70 — but my wife reminded us that he hadn’t looked well when we saw him the last time, the previous summer at the Mises Institute instructional conference in Claremont. (He died of congestive heart failure.) Check out the photo montage at Jeff’s post — see if you can identify younger versions of Ralph Raico, Roger Garrison, Bill Evers, George Reisman, Leonard Liggio, and others.

I consider Rothbard one of the great theorists of the twentieth century, and think his contributions to technical economics are greatly undervalued, even by many of his Austrian-school admirers. My own work has been heavily influenced by Rothbard (one of my most-cited papers is basically a gloss on a Rothbardian idea). Joe Salerno and I are working on a price-theory text (based on our lecture series) that builds heavily on Rothbard’s analysis in Man, Economy, and State. We hope it contributes to renewed interest in mundane Austrian economics.

7 January 2010 at 12:18 pm 5 comments

Measuring the Returns to R&D

| Peter Klein |

A new paper by Bronwyn Hall, Jacques Mairesse, and Pierre Mohnen surveys the technical literature on private and aggregate returns to R&D, focusing on econometric issues. A great overview, with the relevant factoids conveniently summarized in tables. The version linked above is gated; I don’t know if there is an ungated one.

Dilbert takes a somewhat different perspective.

Update: an ungated version is available on Bronwyn’s research papers page.

6 January 2010 at 9:17 am Leave a comment

A Tale of Two Papers, or, Humpty Dumpty Writes About Exchanges

| Craig Pirrong |

The American Economic Association/American Finance Association Meetings are just about over. I made a quick trip there to comment on a paper. Upon returning home, I downloaded a couple of the papers presented that seemed of interest. Good call on one, bad call on the other.

The bad one is “Centralized versus Over The Counter Markets” by Viral Acharya of LBS and NYU, and Alberto Bisin of NYU. Although the motivation of the paper is admirable, the execution is execrable, and is representative of a lot of what is wrong in the profession.

The motivation is to compare the efficiencies of alternative ways of organizing derivatives trades: centralized exchanges and over-the-counter (OTC) markets. Great. Big question. I’ve written a lot about it, and would be very interested in seeing other takes thoughtful on the subject.

The paper concludes that organized exchanges are (constrained) first best efficient, and more efficient than OTC markets. A quick review of the paper makes it clear, however, that they’ve rigged the game to produce that result. (more…)

5 January 2010 at 3:09 pm 6 comments

The Collected Works of Henry Manne

| Peter Klein |

Via Geoff Manne, a description and ordering information for the new Collected Works of Henry Manne, produced by Liberty Fund. A great collection of scholarly articles, reviews, and shorter popular pieces divided into three volumes, “The Economics of Corporations and Corporate Law,” “Insider Trading,” and “Liberty and Freedom in the Economic Ordering of Society.” Order your copy today!

5 January 2010 at 12:22 pm Leave a comment

A New Hawthorne Study

| Peter Klein |

Tanjim Hossain and John List have done a Hawthorne-type study on a Chinese high-tech manufacturing company. The paper, “The Behavioralist Visits the Factory: Increasing Productivity Using Simple Framing Manipulations,” is unfortunately gated at NBER. I’m surprised it’s taken this long for someone to take advantage of the current craze for field experiments to do this kind of study. (I wonder if IRB approval is easier when the test subjects are in China?) Check out the abstract:

Recent discoveries in behavioral economics have led to important new insights concerning what can happen in markets. Such gains in knowledge have come primarily via laboratory experiments — a missing piece of the puzzle in many cases is parallel evidence drawn from naturally-occurring field counterparts. We provide a small movement in this direction by taking advantage of a unique opportunity to work with a Chinese high-tech manufacturing facility. Our study revolves around using insights gained from one of the most influential lines of behavioral research — framing manipulations — in an attempt to increase worker productivity in the facility. Using a natural field experiment, we report several insights. For example, conditional incentives framed as both “losses” and “gains” increase productivity for both individuals and teams. In addition, teams more acutely respond to bonuses posed as losses than as comparable bonuses posed as gains. The magnitude of the effect is roughly 1%: that is, total team productivity is enhanced by 1% purely due to the framing manipulation. Importantly, we find that neither the framing nor the incentive effect lose their importance over time; rather the effects are observed over the entire sample period. Moreover, we learn that worker reputation and conditionality of the bonus contract are substitutes for sustenance of incentive effects in the long-run production function.

See also List’s paper with Levitt on the original Hawthorne experiments.

5 January 2010 at 9:48 am Leave a comment

For Hire: Neo-Schumpeterian Economist

| Dick Langlois |

I was recently contacted by Robert Atkinson of the Information Technology and Innovation Foundation in Washington. His group is looking for a neo-Schumpeterian economist interested in the role of innovation in addressing climate change. Here’s the position listing. Surely there is a reader of O&M out there who fills the bill.

4 January 2010 at 2:38 pm 2 comments

Studying Entrepreneurs

| Peter Klein |

Great opening from Robert Whaples’s EH.Net review of T.J. Stiles, The First Tycoon: The Epic Life of Cornelius Vanderbilt (Knopf, 2009):

Economists have always had a hard time dealing with entrepreneurs — as individuals and in the aggregate. We sort of know what entrepreneurship is and that it can have a profound impact on economic performance, but it’s usually just too difficult to model and measure. What we do not understand, we simply ignore and leave to others. After all, we are firm believers in comparative advantage and studying entrepreneurship — even if it is economically important — doesn’t seem to be our comparative advantage. In the view of most economic historians, it is the rules of the game — the incentives and the institutions — that really matter, not the players. American economic history has been cast as the story of millions of diligent and clever beavers working away and transforming the landscape. Take one of them away and nothing of great importance will really change. (In fact, most of us seem to believe that if you take away an entire technological complex, like the railroads, little of much importance would really change.)

Why, then, should economic historians study the careers of entrepreneurs? Not all of us should. But for some, the study of entrepreneurs will illuminate the past and the present — and put life into our cliometric narrative.

Joe Salerno has a valuable treatment of this problem in his 2008 paper “The Entrepreneur: Real and Imagined.”

4 January 2010 at 12:32 am Leave a comment

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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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