Archive for March, 2010
Top Recruiting Classes
| Peter Klein |
Memphis, Ohio State, and North Carolina have the top-ranked US college basketball recruiting classes for 2010. But how about the Berkeley economics department’s 1963 recruiting class? As I learned this weekend, department head Andreas Papandreou hired five brand-new assistant professors that year: Dan McFadden, Oliver Williamson, Sid Winter, Peter Diamond, and David Laidler. Not a bad haul!
Are Index Funds Immoral?
| Lasse Lien |
If I had money to invest, which I don’t, I would probably invest via an index fund. I know just enough empirical finance to realize that beating an index fund is very difficult (impossible according to some) unless you are either very lucky or an inside trader. The reason is of course the efficient markets hypothesis. The stock market factors in all relevant information at lightning speed and without bias. However, this can only be so because there are enough investors that do not invest via index funds. If everyone did, the pricing would not be informative at all. One might argue that index fund investors are free riders on those that do fundamental analysis, and a sinister threat to the very market efficiency that they thrive on.
I guess in equilibrium one would expect index investing to increase until market pricing is so inefficient that the expected returns from it is driven down to around the levels of the best alternative.
Mundaneum: The Google of 1910
| Peter Klein |
Fascinating article by Molly Springfield in Triple Canopy on the Mundaneum, an effort by two Belgian lawyers to collect and classify all the world’s information, using notecards and an innovative filing system. Information scientist Paul Otlet “was the first to imagine all the world’s knowledge as one vast ‘web,’ connected by ‘links’ and accessed remotely through desktop screens, and because of this he can be seen as the kooky grandfather of the Internet.” Unfortunately, the analog technology of the early twentieth century was not up to the task. (Here’s the wiki on the Mundaneum, which incidentally might make a good title for my next book.)
See also: The Victorian Internet by Tom Standage.
Posner on Institutions and Organizations, Round Two
| Peter Klein |
Remember the infamous Posner-Coase-Williamson exchange from JITE, 1993? Posner dismissed the New Institutional Economics as a derivative form of Posnerian law and economics, prompting unhappy replies from Coase and Williamson. Here’s Coase:
Posner [1993, 79] says that the first part of his paper describes “the conception of the field [the new institutional economics] held by Ronald Coase.” Reading this part of his paper recalled to my mind Horace Walpole’s opening remarks in his book on King Richard the Third: “So incompetent has the generality of historians been for the province that they have undertaken, that it is almost a question, whether, if the dead of past ages could revive, they would be able to reconnoitre the events of their own times, as transmitted to us by ignorance and misrepresentation” (Walpole [1768, 1]). I have only one foot through the door but should the final yank come before this piece is published, Horace Walpole’s words would apply exactly to Posner’s highly inaccurate account of my views.
Adds Williamson, wryly: “Richard Posner is a prolific writer and distinguished jurist. He is frequently asked to speak with wisdom and authority on many issues. Whether he hits the mark or misses varies with his depth of knowledge and understanding of those issues. . . . I content that Posner’s [1993] commentary mainly misses.”
Now Geoff Hodgson has produced a reboot: a long essay by Posner in the Journal of Institutional Economics titled “From the New Institutional Economics to Organization Economics: with Applications to Corporate Governance, Government Agencies, and Legal Institutions,” with replies from Jürgen Backhaus, Bruno Frey, Lin Ostrom, John Roberts, Tom Ulen, and several others (but not Coase or Williamson!). Posner focuses almost exclusively on the principal-agent problem, perhaps unaware that information, delegation, coordination, and adaptation are also important issues in organizational economics. His main conclusion seems to be that both private firms and public agencies are equally inefficient. Interesting reading, to be sure (and much better than Posner’s solipsistic essay on his conversion to Keynesianism, inexplicably published by the New Republic).
Share with First-Year MBA Students
| Peter Klein |
Mark Goetz’s new wallpaper (via Lynne Kiesling). Cory Doctorow translates: “Militant arm of the infoviz movement gets serious about PowerPoint.”
New Issue of EJPE
| Peter Klein |
The new issue of the Erasmus Journal for Philosophy and Economics has several interesting items. Here’s Sen on Adam Smith:
In ethics, Smith’s concept of an impartial spectator who is able to view our situation from a critical distance has much to contribute to a fuller understanding of the requirements of justice, particularly through an understanding of impartiality as going beyond the interests and concerns of a local contracting group. Smith’s open, realization-focussed and comparative approach to evaluation contrasts with what I call the “transcendental institutionalism” popular in contemporary political philosophy and associated particularly with the work of John Rawls.
An essay on Gerard Debreu’s methodology looks promising, along with several of the book reviews. Check it out!
A New Organizational Chart
| Peter Klein |
Fodder for dozens of future PhD dissertations, no doubt! (Click to enlarge.)
Too Blue for You
| Peter Klein |
I’m partial to Klein Blue, but some of you may prefer Prussian Blue — apparently the first Crayola color to be renamed, as US kids had no idea who or what a “Prussian” could be. See this very cool online essay (via William Bostwick).
Rothbard, Friedman on Health Care
| Peter Klein |
Murray Rothbard and Milton Friedman are no longer with us, unfortunately, but their opinions live on. Lew Rockwell is running a 1994 piece by Rothbard on what was then called Hillarycare, while the Saturday WSJ reprinted a 1996 essay by Friedman on “Soviet-Style Health Care.” My favorite excerpts:
Rothbard on “universal access”:
[T]here is one simple entity, in any sort of free society, that provides “universal access” to every conceivable good or service, and not just to health or education or food. That entity is not a voucher or a Clintonian ID card; it’s called a “dollar.” Dollars not only provide universal access to all goods and services, they provide it to each dollar-holder for each product only to the extent that the dollar-holder desires.
Friedman, quoting a a physician character in Solzhenitsyn’s 1967 novel The Cancer Ward, on Soviet-style “free” health care:
What do you mean by “free”? The doctors don’t work without pay. It’s just that the patient doesn’t pay them, they’re paid out of the public budget. The public budget comes from these same patients. Treatment isn’t free, it’s just depersonalized. If the cost of it were left with the patient, he’d turn the ten rubles over and over in his hands. But when he really needed help he’d come to the doctor five times over. . . .
Is it better the way it is now? You’d pay anything for careful and sympathetic attention from the doctor, but everywhere there’s a schedule, a quota the doctors have to meet; next! . . . And what do patients come for? For a certificate to be absent from work, for sick leave, for certification for invalids’ pensions: and the doctor’s job is to catch the frauds. Doctor and patient as enemies — is that medicine?
Agribusiness Economics and Management
| Peter Klein |
Congratulations to my colleague Mike Cook for his review paper on “Agribusiness Economics and Management” (with Rob King, Mike Boehlje, and Steve Sonka) in the new issue of the American Journal of Agricultural Economics. It’s a special issue commemorating the centennial of the American Agricultural Economics Association. Lots of good stuff here on the history and development of management theory and pedagogy, the evolution of the food sector, and the effects of the institutional environment on firm structure. Here’s the abstract:
Agribusiness scholarship emphasizes an integrated view of the food system that extends from research and input supply through production, processing, and distribution to retail outlets and the consumer. This article traces development of agribusiness scholarship over the past century by describing nine significant areas of contribution by our profession: (1) economics of cooperative marketing and management, (2) design and development of credit market institutions, (3) organizational design, (4) market structure and performance analysis, (5) supply chain management and design, (6) optimization of operational efficiency, (7) development of data and analysis for financial management, (8) strategic management, and (9) agribusiness education.
Kauffman Economics Bloggers Forum
| Peter Klein |
I’ll be in Kansas City tomorrow for the Kauffman Economics Bloggers Forum. Speakers include David Warsh, Paul Romer, Tim Kane, Bob Litan, Donald Marron, and many others. You can watch it live here. Hopefully I’ll get some good ideas for increasing blog revenue, so watch out for our new paid subscription policy. Ha ha ha ha.
Jargon Watch
| Peter Klein |
- Hydrocarbon denier — you know who you are
- YouTube or it didn’t happen — common response from young people to a report of some event
- The G-2 — the US and China, jointly controlling the world economy
- Acluistic — clueless
- Break your crayons — what that last journal reviewer did to me
Bonus material: Andrew Gelman’s urban dictionary for stats
Financial Constraints and Innovation
| Peter Klein |
Why are firms in poor countries less productive than firms in rich countries? Is it lack of technical know-how? Poor infrastructure? Insufficient human capital? Weak intellectual-property protection? Actually, the evidence suggests a more prosaic explanation: financial constraints.
One stylized fact that appears from emerging markets and transition economies . . . is that foreign owned fi rms tend to be more productive than domestically owned firms. . . . To the extent that foreign owned fi rms embody the technological frontier, one can interpret this fact as suggesting that some forces prevent domestically owned firms from emulating the best practices and techniques. . . .
We show that a fi rm’s decision to invest into innovative and exporting activities is sensitive to fi nancial frictions which can prevent fi rms from developing and adopting better technologies. Furthermore, we demonstrate that in a world without financial frictions, innovation and exporting goods are complementary activities. Thus, easing financial frictions can have an ampli ed eff ect on firms’ innovation eff ort and consequently the level of productivity. However, as financial frictions become increasingly severe, these activities become eff ectively substitutes since both exporting and innovation rely on internal funds of fi rms.
That’s from “Financial Constraints and Innovation: Why Poor Countries Don’t Catch Up” by Yuriy Gorodnichenko and Monika Schnitzer. One implication is that diversified firms, whose operating units have access to the firm’s internal capital market, have particular advantages in developing countries, an argument explored in several papers by Khanna and Palepu (e.g., here). In the US, these advantages may not outweigh other drawbacks of unrelated diversification.
Ross Emmett on Innovation
| Peter Klein |
Here are some provocative videos on innovation from Ross Emmett. The series is called “The Constitution of Innovation.” The first three are posted at vimeo:
- Why “Picking Winners” Robs Us All of a Better Future
- National Innovation Systems: Too “National”; Not “Constitutional”
- The Promise of Failure
See Ross’s website for more information.
Mannepalooza at Austrian Scholars Conference
| Peter Klein |
Tune in here at 3:45 EST today for a live broadcast of the ASC session, “The Contributions of Henry G. Manne,” organized by yours truly. Panelists include me, Alexandre Padilla, Richard Vedder, Thomas DiLorenzo, and Henry Manne. And buy your copy of the Collected Works.
Update: audio files are now available: Klein, Padilla, Vedder, DiLorenzo, Manne.
Interesting Paper on Research Design
| Peter Klein |
Ed Leamer famously argued, back in 1983, that empirical economists should do more sensitivity analysis. A new NBER paper by Joshua Angrist and Jörn-Steffen Pischke says that econometric practice has indeed gotten much better, not because of sensitivity analysis, but because of a new focus on research design. “[T]he credibility revolution in empirical work can be traced to the rise of a design-based approach that emphasizes the identification of causal effects. Design-based studies typically feature either real or natural experiments and are distinguished by their prima facie credibility and by the attention investigators devote to making the case for a causal interpretation of the findings their designs generate.” They are clearly right that identification has become a Really Big Deal (choosing a dissertation topic in economics is sometimes referred to these days as “the search for a good instrument”). But natural experiments and instrumental variables have their own potential problems as well. Perhaps Verstehen can still play a role.
Shareholder-Stakeholder Smackdown: Jensen, Freeman, Mintzberg, Khurana
| Peter Klein |
This looks like a fun event. Watch the Big Guys debate the future of the firm, management, and management education. It’s Fordham University’s W. Edwards Deming Memorial Conference, 11 May 2010 in New York City. Kudos to Mike Jensen for his willingness to walk into what will be, presumably, a line of fire. And remember, management theory is not to blame.
Assessing the Critiques of the RBV
| Nicolai Foss |
There is little doubt that the resource-based view, in its various guises and manifestations (e.g., see Gavetti & Levinthal’s distinction between “high church” and “low church” approaches to the RBV), is the dominant perspective in strategic management research. Naturally, all dominant approaches attract critique like flies. This is amplified by the fact that the RBV is still evolving; many things have been unclear (e.g., what exactly is assumed about managerial rationality, the game forms that describe strategic factor markets, the interaction (if any) between factor market and product market behaviors, etc.), and those things that have been reasonably clear (e.g., the RBV’s reliance on competitive equilibrium models) have been controversial. Some of the critiques of the RBV are fairly well-known, for example, the Priem and Butler tautology charge, while other critiques are less generally known.
Given that many of the critiques have basically been around for two decades or more, it is surprising that the first comprehensive treatment of the many critiques of the RBV has just been published — namely Kraaijenbrink, Spender, and Groen’s “The Resource-based View: A Review and Assessment of Its Critiques.” (more…)
Why Academic Freedom?
| Nicolai Foss |
At least in Europe, academic freedom is under siege. Politicians justify their meddling with the fact that universities are (largely) financed by taxpayers’ money, and they are assisted in their meddling by a growing class of bureaucrats in ministries, the EU and increasingly in universities themselves. All this derives legitimacy from a questionable ideology of Mode II research that broadly asserts that most important scientific advance (now) happens in the intersection of disciplines and as a result of collaborative relations between universities and business (here is the Wiki on Mode II).
Given this, it seems necessary to rethink the defense of academia and academic freedom. There is, of course, Polanyi’s application of Hayek’s unplanned order idea in the context of the “republic of science.” However, that argument lacks concreteness and cutting power against those bureaucrats/politicians who wants to intervene just a tiny bit but doesn’t want centrally planned science.
In a recent paper, “Academic Freedom, Private-sector Focus, and the Process of Innovation,” Aghion, Dewatripont, and Stein provide a rationale — derived from property rights economics rather than from considerations of appropriability — for academia. Academia is defined as an organizational form which “represents a precommitment to leave control over the choice of research strategy in the hands of individual scientists” (p. 621) (note that this does not necessarily entail public funding). (more…)
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