April | 2010 | Organizations and Markets

Archive for April, 2010

Nerd Merit Badges

| Peter Klein |

How many of these could you earn?

My favorite is Inbox Zero (right), perhaps because it’s the least attainable. (And no, I didn’t know what foursquare was either.) Thanks to Wired for the pointers.

The cynical among you may prefer The Onion’s take on merit badges.

29 April 2010 at 3:11 am Peter G. Klein 2 comments

Quote of the Day, Free Trade and Peace Edition

| Peter Klein |

Go into the London Stock Exchange — a more respectable place than many a court — and you will see representatives of all nations gathered there for the service of mankind. There the Jew, the Mohammedan, and the Christian deal with each other as if they were of the same religion, and give the name of the infidel only to those who go bankrupt. There the Presbyterian trusts the Anabaptist, and the Anglican accepts the Quaker’s promise. . . . If there were just one religion in England, despotism would threaten; if there were two religions, they would cut each other’s throats; but there are thirty religions, and they live together peacefully and happily.

—Voltaire (Letters on England, Letter 6)

Source.

28 April 2010 at 10:40 am Peter G. Klein 3 comments

Lazear on Leadership

| Peter Klein |

Ed Lazear tries his hand at the leadership literature in “Leadership: A Personnel Economics Approach.” The paper fits closely with his earlier work on entrepreneurship (here and here). Intuition:

The view presented [here] is that leaders are individuals who confront new situations often and choose the right direction in a high proportion of cases. Leaders also have the ability to identify situations where their skills will be needed and to do this frequently in a public setting. As a result of their success in choosing direction, and because the success is observable to others, leaders acquire followers who turn to the leaders for guidance in new and ambiguous situations. Individuals follow those who make correct decisions for a variety of reasons, the most direct of which is that they will boost their own probabilities of being correct by mimicking the decisions of the leaders. Thus, a leader is someone who has both vision and wisdom and who attracts a coterie of followers because of displayed superiority of decision making.

Because leaders are confronted with a wide variety of choices and because these choices span many fields, leaders tend to be generalists rather than specialists. Further, the broader the organization that an individual leads, the more general are the skills. . . .

An additional key ingredient is that leaders also possess the skills necessary to convince others that they have leadership ability. Consequently, communication skills are likely to be an important component in the leadership mix.

A formal model generates some testable propositions: “1. Ability and visibility, manifested in number of contacts per period, are complements. The most able seek to be the most visible in decision making settings. 2. The most able leaders are in the highest variance industries. 3. Leaders are generalists.” Survey data from Stanford MBAs are consistent with #2 and #3. Overall, a useful contribution to the small economics-of-leadership literature pioneered by Ben Hermalin.

Update: I neglected to mention this very important paper on leadership.

27 April 2010 at 11:33 am Peter G. Klein 3 comments

Business Ethics Symposium in Reason Papers

| Peter Klein |

From Reason Papers 31 (Fall 2009):

Articles: Business Ethics Symposium

Rival Paradigms in Business Ethics —Nicholas Capaldi

The Need for Realism in Business Ethics —Elaine Sternberg

The Virtue of Prudence as the Moral Basis of Commerce —Tibor R. Machan

Hume and Smith on the Moral Psychology of Market Relations, Practical Wisdom, and the Liberal Political Order —Jonathan Jacobs

Ethics without Profits —Douglas Den Uyl

Is a Market for Values a Value in Markets? —Alexei Marcoux

The Sloppiness of Business Ethics —Marianne Jennings

The Business Ethics of Incarceration: The Moral Implications of Treating Prisons Like Businesses —Daniel D’Amico & Joseph Butt

26 April 2010 at 9:35 pm Peter G. Klein 3 comments

O&M Four-Year Anniversary

| Peter Klein |

O&M went live April 25, 2006. Our inaugural post said: “Welcome to all readers. (Hopefully the plural is appropriate.)” Since then we’ve spread our message to literally tens of people around the world. Actually, the numbers aren’t bad: over these four years we’ve delivered 2,247 posts and 6,036 comments to 797,965 unique visitors (based on IP address). The comments are of consistently high quality too. Thanks to all current and former guest bloggers, commenters, pingbackers, lurkers, and other friends.

For a blast from the past, why not try our random post link? You never know what you’ll find. . . .

25 April 2010 at 1:06 am Peter G. Klein 9 comments

Esther Duflo Wins Clark Medal

| Peter Klein |

Congratulations to MIT’s Esther Duflo for winning the John Bates Clark Medal. (NB: Unlike Richard T. Ely, J. B. Clark was actually a great economist.) Duflo is a pioneer in the use of randomized controlled trials (RCTs) which, along with natural experiments, is becoming an increasingly popular alternative to conventional regression models. Interestingly, the WSJ reports that Harvard’s Sendhil Mullainathan, another RCT person, was also on the short list. Given the extreme faddishness of social scientists we can expect a wave of RCT centers, experiments, and papers in the next few years.

23 April 2010 at 3:07 pm Peter G. Klein 3 comments

New Klein Book

| Peter Klein |

The Mises Institute is publishing a collection of my papers as The Capitalist and the Entrepreneur: Essays on Organizations and Markets (love that subtitle!). You can view some promotional materials, the table of contents, and drafts of the introduction and a sample chapter at the link above. Publication is scheduled for May 2010. I’ll post ordering information as soon as I have it. Start saving your pennies today!

22 April 2010 at 2:28 pm Peter G. Klein 11 comments

Raising Rivals’ Costs, Goldman Edition

| Peter Klein |

One could also call this “From the Department of ‘Duh'”:

A powerful alumni network plus bundles of campaign cash mean Goldman will get what it wants — and contrary to the media narrative, what Goldman wants is not laissez-faire.

Politico quoted a Goldman lobbyist Monday saying, “We’re not against regulation. We’re for regulation. We partner with regulators.” At least three times in Goldman’s conference call Tuesday, spokesmen trumpeted the firm’s support for more federal control. . . .

Goldman reported on the conference call that it holds 15 percent “Tier 1 capital,” meaning it is very liquid and not very risky. Goldman can play it safe, you see, without needing a regulation. But regulations prevent smaller competitors from taking the risks needed to compete with Goldman (and every competitor is smaller).

The article is also very good on Obama’s Goldman problem. (Link from Steve Horwitz via Per Bylund.)

21 April 2010 at 9:58 am Peter G. Klein 2 comments

Melnyk on Flew

| Peter Klein |

My Missouri colleague Andrew Melnyk penned this nice appreciation of Antony Flew, who passed away 8 April 2010. Flew “was for several decades a heroic defender of classically liberal political philosophy and indeed by far the best known professional philosopher in Britain over that period to champion classical liberalism.” As Andrew notes, “in challenging the spirit of the age as sharply and as unapologetically as he did, he was, and must have known that he was, irreparably damaging his reputation among his overwhelmingly left-leaning professional peers.”

Here are remarks on Flew’s political philosophy from David Gordon, David Conway, and Sean Gabb. Here’s a biographical sketch written for Flew’s 2001 Schlaurbaum Prize, and here’s the acceptance speech.

20 April 2010 at 11:19 am Peter G. Klein 1 comment

Goldman in the Dock

| Craig Pirrong |

I have several reactions to the SEC’s fraud complaint against Goldman.

First, some of the more sensationalist reporting emphasizes that Goldman was short the RMBS structures that it was selling to its customers. (Yeah, it’s the NYT, basing its opinion on reporting by Wretched Gretchen Morgenson, so take it for what it’s worth–meaning not much.) Well, that’s true, but Goldman was also long. After all, it was the counterparty, the protection seller, to Paulson’s CDS. It then entered into offsetting transactions. Goldman was essentially a conduit of risk between other financial firms and Paulson. Note paragraph 66 of the complaint, which indicates that Goldman paid most of the $840 million it received on short positions in the Abacus deals to Paulson. Goldman claimed in its response to the government’s Wells Notice that it was actually long because it retained a slice of the risk; the protection it sold to Paulson was for a larger portion of the potential losses than covered by the protection it bought from ACA Capital. (more…)

19 April 2010 at 9:12 pm cpirrong Leave a comment

ICC Special Issue on Alfred Chandler

| Dick Langlois |

The most recent number of Industrial and Corporate Change is a special issue: Management Innovation-Essays in the Spirit of Alfred D. Chandler, Jr. Guest editors are Bill Lazonick and David Teece. Some interesting articles and definitely many interesting contributors. Yours truly was not involved — indeed, I didn’t learn about it until the table of contents appeared in my inbox. But I am cited in at least four of the papers. Indeed, the paper by Susan Helper and Mari Sako, both of whom I admire greatly, spends considerable time comparing my argument with Chandler’s. For the most part, I don’t disagree with their assessment except in respect of spin (more on which in a moment); but at one point they make an assertion that had me scratching my head.

Some argue that as a central tendency, the buffering and coordination functions of management are devolving to the mechanisms of modularity and the market — informational decomposition, flexibility, and risk spreading (Langlois, 2003: 377). In contrast, in Chandler’s world, “Increased specialization must, almost by definition, call for more carefully planned coordination if the volume of output demanded by the mass market is to be achieved” (Chandler, 1977: 490). The disagreement lies in different assumptions made. Langlois assumes that thickness of the market is exogenously given or that it is already established, while Chandler assumes that the mass market is something that has to be developed. Chandler’s view seems more correct here. (Helper and Sako 2010, p. 420)

Hello? One can argue that I have spent most of my career making precisely the point they attribute to Chandler: it’s the basis of the theory of dynamic transaction costs. Neither markets nor firms snap into existence but evolve slowly and — as I often quote Brian Loasby as pointing out — both require managerial coordination. (more…)

19 April 2010 at 2:56 pm Dick Langlois 4 comments

C. K. Prahalad (1941-2010)

| Peter Klein |

C. K. Prahalad died Friday at the age of 68. He’s best known for his “guru” work with Gary Hamel, but had turned his attention more recently to economic development , particularly the “bottom-of-the-pyramid” approach to poverty reduction. Here are thoughts and reminiscences from the WSJ, HBR, Ross Emmett, and the Ross School. HBR has already set up a Prahalad page. Here are previous O&M mentions. I last saw him at the 2009 SMS conference in Washington, D.C. where he spoke with Yves Doz on “The Future of Strategy.”

19 April 2010 at 1:40 pm Peter G. Klein 2 comments

Quoted in the WSJ, Kinda Sorta

| Peter Klein |

Earlier this week AFL-CIO president Richard Trumka wrote a predictable WSJ piece blaming private equity for various economic and social ills. PE firms, you see, are “unregulated and shrouded in secrecy, and they extract big profits while the companies, their employees and many of their investors lose.” Um, OK. A few sentences later he says it again: PE firms “function with virtually no oversight. Despite managing trillions of dollars and employing millions of Americans, they operate as a shadow financial system — in secret, free to take on outsized risks, and make huge bets with no outside supervision.” Hmmmm, one might think the limited partners who provide the funds — usually sophisticated, experienced investors holding substantial equity stakes — would exercise a wee bit of supervision, but never mind. Trumka goes on to demand that PE firms be forced to make all their information public, defeating one of the main purposes of private equity. (Hey, Rich, when will the minutes of that last AFL-CIO board meeting show up on your Twitter feed?)

Today’s paper includes several responses, some supplying actual arguments and evidence on the nature and effects of private equity. One letter notes that “[r]esearchers at the University of Missouri found that private equity-backed companies that exited between 1984 and 2006 grew employment by an average of more than 13% a year over the life of the private-equity investment.” The writer is citing my paper with John Chapman, “Value Creation in Middle-Market Buyouts: A Transaction-Level Analysis,” which came out earlier this year in a Wiley finance handbook series. (You can download an SSRN version here.) We report financial, operating, and employment performance for a sample of 288 middle-market transactions collected, through surveys and interviews, from 13 US PE firms. The results suggest that PE firms create substantial economic value. A shout-out by name would have been nice, but it’s nice to be noticed.

17 April 2010 at 10:53 pm Peter G. Klein Leave a comment

Neuroeconomics and Methodological Individualism

| Peter Klein |

Methodological individualists, following Schumpeter (1908), hold that aggregates like firms, societies, nations, etc. should be modeled as organizations or ecosystems composed of smaller decision-making units. But the reduction has to stop somewhere — it can’t be turtles all the way down (the Matrix-within-the-Matrix problem). Economists typically define the individual actor as the relevant unit of analysis; we don’t go further down to the level of, say, the gene (see Nicolai’s earlier discussion of the “driver’s seat fallacy”).

Neuroeconomics — the latest advance of the behavioralist revolution — rejects the conventional perspective, however. Isabelle Brocas and Juan Carrillo conclude their recent useful summary of neuroeconomic research by likening individuals to organizations:

Neuroeconomic theory will soon play a crucial role in the building of new reliable theories capable of explaining and predicting individual behaviour and strategic choices. The main message is that the individual is not one coherent body. The brain is a multi-system entity (with conflicting objectives, restricted information, etc.) and therefore the decision-maker must be modelled as an organisation. We conclude with an analogy. Before the so-called modern theory of the firm, organisations were modelled as individual players characterised by an input-output production function. The systematic study of interactions between agents and decision processes within organisations (acknowledging informational asymmetries, incentive problems, restricted communications channels, hierarchical structures, etc.) led to novel economic insights. Applying a similar methodology to study individual decision-making is, in our view, the most fruitful way to understand the bounds of rationality.

Hmmm, I admit that my brain often has trouble motivating other parts of my body to achieve the brain’s objectives, but I’ve never thought of these as agency costs. And I suppose that leprosy — in which the nervous system fails to communicate information about damage to bodily extremities to the brain – could be described as a failure to make effective use of dispersed specific knowledge. But I don’t quite see the value added.

More generally, my own view is that neuroeconomics represents a potentially interesting branch of applied psychology, but has little to do with economics per se. Economics is about the logical relationships between means and ends, not the psychology of preferences and beliefs. But mine is a minority view.

17 April 2010 at 2:47 pm Peter G. Klein 8 comments

IRB Flames

| Peter Klein |

Zachary Schrag’s excellent Institutional Review Blog highlights the discussion on a recent Chronicle post about IRBs. As you can imagine, most of the comments are from frustrated researchers who see the campus IRB as their enemy, not their ally. Sample: “At my current institution, humanities scholars are subject to an IRB that only makes sense for scientists collecting blood and doing life-threatening experiments on small children.” Zach points out that a few comments defend the local IRB, but these comments “are vaguer and less eloquent,” and “none tells a story of an IRB review that proved necessary.”

I suspect that some of this researcher frustration can be alleviated by recognizing that IRBs exist not to protect research subjects, but to protect the university. The IRB’s goal is to prevent the university from being sued or otherwise losing Federal funding. Protecting research subjects, improving research methods, and contributing to the growth of knowledge are incidental.

15 April 2010 at 9:08 pm Peter G. Klein 7 comments

Strategy Making and PowerPoint

| Nicolai Foss |

We have blogged more than two dozen times on PowerPoint (here) and at least as many times on pomo (here), never realizing that the two themes are connected. In a recent paper, “Strategy and PowerPoint: An Inquiry into the Epistemic Culture and Machinery of Strategy Making” (forthcoming in Organization Science), the ever-interesting Sarah Kaplan poses the question, “How is PowerPoint engaged in the discursive practices that make up the epistemic culture of strategy making?”

Yes, this does smack of hardcore pomo, and would prima facie seem to be up for hard lashing under the O&M rubric of “Pomo Periscope.” However, upon reading, it turns out that this is highly reasonable, well executed, and meaningful pomo. In a nutshell, Sarah argues that PP is a privileged strategy-making support tool, and that it may usefully be analyzed as a genre. And it matters to strategy making, as suggested in this key passage in the paper:

I show how the affordances of PowerPoint enabled the difficult task of collaborating to negotiate meaning in a highly uncertain environment, creating a space for discussion, making combinations and recombinations possible, allowing for rapid adjustments as ideas evolved and providing access to a wide range of actors, no matter how dispersed over space or time. Yet, I found, these affordances also supported cartographic efforts to draw boundaries around the scope of a strategy, certifying certain ideas and not others, and allowing document owners to include or exclude certain slides or participants and control access to information. Cartography in the world of ideas is similar to cartography of the physical landscape: drawing maps and defining boundaries help people navigate otherwise uncertain terrain. These collaborative and cartographic practices shaped the strategic choices and actions taken in the organization.

(more…)

14 April 2010 at 2:21 pm Nicolai Foss 3 comments

Miscellaneous Conference and Paper Links

| Peter Klein |

SSRN has a new Philosophy and Methodology of Economics working-paper series, sponsored by the International Network for Economic Method.

Here’s a CFP for a Special Issue of the E-conomics e-Journal on the Social Returns to Higher Education, R&D and Innovation.

You can watch a live stream of this weekend’s SEJ Special Issue Conference on Knowledge Spillovers & Strategic Entrepreneurship.

The registration and accommodations section of the ISNIE 2010 website is now open.

14 April 2010 at 10:12 am Peter G. Klein Leave a comment

A Real Hostage Model

| Peter Klein |

Forget Williamson (1983). Check out Randall Morck and Fan Yang’s analysis of the 19th-century banks Shanxi, China. These banks featured a dual-class equity structure and, to mitigate agency problems created by entrenched insiders, not only gave insiders few voting rights, but also allowed outsiders to enslave insiders’ wives and children and hold their relatives as hostages. As Morck and Yang observe, with dry humor: “Modern civil libertarians might question some of these governance innovations, but others provide lessons to modern corporations, regulators, and lawmakers.”

13 April 2010 at 12:51 pm Peter G. Klein Leave a comment

Recommendation Letters

| Peter Klein |

Like most academics, I often write recommendation letters for students and colleagues, and sometimes ask for them myself. There’s an art to getting a good recommendation letter, much of it nicely summarized by Jodi Glickman Brown on her HBR blog. In short, 1) highlight [the writer’s] qualifications, 2) provide a template, and 3) offer a “no questions asked” policy. I’d add a conceptual note: Consider the recommendation letter an additional channel for information, beyond those the letter-reader will already have. Letters that simply repeat information contained in the candidate’s CV, academic transcripts, writing samples, application forms, and the like do not add value Ask yourself what you want the reader to know about you that isn’t otherwise be obvious from the rest of your dossier. The letter is your opportunity to get this information out. But the letter-writer has to know what you have in mind.

12 April 2010 at 11:46 am Peter G. Klein 3 comments

Best Acknowledgements Section in an Academic Book

| Peter Klein |

From the preface to James Scott’s The Art of Not Being Governed: An Anarchist History of Upland Southeast Asia (which I heard about from Drake Bennett, via LRC):

There is a large number of colleagues who, having better things to do with their time, nevertheless read part or all of the manuscript and gave me their frank advice. I hope they see, here and there, evidence of their impact as I bobbed and weaved my way to a more nuanced and defensible argument. They include, in no particular order, . . . [a list of 60 names follows]. Wait! I have secreted in this list four colleagues who failed to send their comments. You know who you are. For shame! If, on the other hand, you collapsed trying to carry the manuscript from the printer to your desk, my apologies.