Archive for April, 2010

Why the Movie Industry Doesn’t Like “Trading Places” as a Reality Show

| Craig Pirrong |

The most recent derivatives/speculation kerfuffle involves something novel — futures contracts on movie box office receipts. Two entities, Cantor Fitzgerald and Movie Derivatives, Inc. have announced plans to introduce such contracts. The film industry is in a tizzy at the prospect, and has enlisted the help of the usual anti-speculation suspects on Capitol Hill.

The virulence of the reaction is interesting, and deserves explanation. Here’s my initial stab at the problem. (more…)

9 April 2010 at 9:10 pm 4 comments


| Dick Langlois |

I just received an email from John Hagel informing me that I am among the inaugural class of what he and John Seeley Brown call the Edgerati. According the website, “Edgerati are people who venture out onto various edges, engage with participants on those edges, develop deep insight from their involvement on the edge and report back to the rest of the world what they have learned.” I’m glad to learn that what I had always thought to be the fringe or the margin is actually the edge. (Actually, I’m genuinely flattered.) Among the other Edgerati is one Nicolai Foss.

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9 April 2010 at 11:25 am 2 comments

A Hayekian Story About Taxis

| Peter Klein |

No, not taxis, but taxis. You know the old story about colleges placing paved footpaths along the paths already worn down by students, relying on “spontaneous order” to select the best routes across campus? Here’s a similar story involving New York City taxicabs. This New York Times infographic tracks taxi traffic and pick-up/drop-off locations across Manhattan throughout a typical week. You can see where traffic clusters during the weekly commute, on Saturday night, and so on. If the city were going to improve certain roads, build taxi stands, re-time traffic signals, and the like, these data could allow for a sort of Hayekian solution. (Via Cliff Kuang, who provides interesting commentary as usual, including this link to a similar San Francisco project.)

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9 April 2010 at 11:17 am Leave a comment

Outsourcing TAs?

| Peter Klein |

An interesting make-or-buy decision for colleges and universities. Best line, from Roosevelt University B-school dean Terry Friel: “Faculty have this opinion that grading is their job, . . . but then they’ll turn right around and give papers to graduate teaching assistants. . . . What’s the difference in grading work online and grading it online from India?”

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8 April 2010 at 11:06 am 5 comments

Westhoff’s The Economics of Food

| Peter Klein |

Congratulations to my colleague Pat Westhoff for his new book, The Economics of Food: How Feeding and Fueling the Planet Affects Food Prices (Financial Times Press, 2010). A highly readable account of food markets and food and agricultural policy. Includes some wise words about forecasting:

One thing FAPRI has learned over the years is that people who make and use market projections need a good sense of perspective — and humor. In a rapidly changing world, even the best projections have a very short shelf life. The economic models used to develop the projections necessarily rely on a long series of assumptions, and at least some of these assumptions always prove to be incorrect when viewed with 20-20 hindsight. . . .

For all these reasons, this book uses market projections by FAPRI and other institutions simply to illustrate important points, rather than to predict what will actually happen. If there is one lesson readers should take away from this book, it is that analysts who say they know exactly who food prices will evolve in the future are misleading their audience or fooling themselves.

Update (20 April 2010): While stranded in Germany waiting for a flight home, Pat wrote an item for Freakonomics.

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8 April 2010 at 9:12 am Leave a comment

Lachmannian Entrepreneurship

| Dick Langlois |

The new issue of Organization Studies carries an article by John Mathews called “Lachmannian Insights into Strategic Entrepreneurship: Resources, Activities, and Routines in a Disequilibrium World.” Here’s the abstract.

Recent contributions to the organizational literature see the radical subjectivist and disequilibrium framework of Ludwig Lachmann as providing a suitable foundation for strategic entrepreneurial studies, in that his approach seeks independence from conventional equilibrium-based reasoning. In a Lachmannian spirit, this article suggests that strategizing can fruitfully be viewed as choices made by the entrepreneur in terms of the organization’s constituent resources, activities and routines together with their recombinations and complexifications. Cast in a general, disequilibrium setting, the strategic goals that guide the organizational entrepreneur’s strategizing can be formulated in terms of the construction and capture of resource complementarities, the pursuit of increasing returns through activities reconfiguration, and the generation of learning and dynamic capabilities through reconfiguration of routines. Once formulated in this way, the strategizing issues may be seen to make sense not just in the comparative static and imperfect equilibrium frameworks within which they have hitherto been posed, but in a more general dynamic and disequilibrium setting that corresponds to the real conditions in which firms are required to make entrepreneurial decisions. The simplified framework offers some hope for overcoming the balkanization of management scholarship that is so widely deplored.

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7 April 2010 at 4:34 pm Leave a comment

Behavioral Corporate Strategy

| Peter Klein |

I’m not a huge fan of behavioral economics, though I obviously recognize its substantial and growing influence in economics, finance, entrepreneurship, and potentially, strategy. Many academics and commentators see the financial crisis as a vindication for behavioral economics research. Behavioral reasoning  underlies the New Paternalism. I see the importance and implications of behavioral economics as overstated — the literature typically focuses on straw-man versions of “rationality” and largely ignores the effect of biases and heuristics on political decision-making — but it raises interesting issues in applied psychology.

My old friend Dan Lovallo has a nice piece (with Olivier Sibony) in the new McKinsey Quarterly making “The Case for Behavioral Strategy.” (It’s gated, but registration is free.) They make good arguments for applying behavioral insights into corporate decision making. The basic claim is that “we need new norms for activities such as managing meetings . . . , gathering data, discussing analogies, and stimulating debate that together can diminish the impact of cognitive biases on critical decisions. To support those new norms, we also need a simple language for recognizing and discussing biases, one that is grounded in the reality of corporate life, as opposed to the sometimes-arcane language of academia.” I agree, and urge you to check it out.

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7 April 2010 at 7:48 am 1 comment

An Industry Lobbyist’s Definition of “Efficiency”

| Peter Klein |

Gordon Smith, head of the US National Association of Broadcasters (not the good Gordon Smith), explains his understanding of “efficiency”:

In calling for broadcast TV spectrum to be reallocated for mobile broadband use, [Gary] Shapiro falsely suggests that TV broadcasters are “inefficient” users of spectrum. We are not. In fact, when compared with Internet-enabled handheld devices — the primary beneficiaries of Mr. Shapiro’s spectrum plan — TV broadcasters are far more efficient.

Indeed, every single American could turn on his TV set right now without placing any additional capacity strain on the airwaves. You can’t be more efficient than that.

Right. Massive excess capacity, near-zero consumer demand . . . perfect efficiency! (File under economic illiteracy, or maybe public choice.)

6 April 2010 at 1:07 pm Leave a comment

The Chris Dodd Strangle Entrepreneurship Act, or, Where’s Creative Destruction When You Need It?

| Craig Pirrong |

Back in January, Tool Time star Tom Friedman lamented that Mr. Cool had turned his back on the “amazing, young, Internet-enabled, grass-roots movement he mobilized to get elected.” Friedman all but begged Obama to spur entrepreneurship and innovation:

Obama should launch his own moon shot. What the country needs most now is not more government stimulus, but more stimulation. We need to get millions of American kids, not just the geniuses, excited about innovation and entrepreneurship again. We need to make 2010 what Obama should have made 2009: the year of innovation, the year of making our pie bigger, the year of “Start-Up America.”

How’s that working out for you, Tom? With all the taxes on capital in the health care law, and the implicit tax on business expansion in the law (e.g., insurance mandates on companies with more than 50 employees), and all the taxes to come (there are murmurs of a VAT), it is becoming the year of Shut-Down America. The whole Obama program is poison to entrepreneurship.

And that’s just the start. Dodd’s banking bill explicitly targets startups:

Dodd’s bill would require startups raising funding to register with the Securities and Exchange Commission, and then wait 120 days for the S.E.C. to review their filing. A second provision raises the wealth requirements for an “accredited investor” who can invest in startups — if the bill passes, investors would need assets of more than $2.3 million (up from $1 million) or income of more than $450,000 (up from $250,000). The third restriction removes the federal pre-emption allowing angel and venture financing in the United States to follow federal regulations, rather than face different rules between states.

And just what are the apparatchiks in the SEC going to do in that 120 days? Just what knowledge and expertise can they bring to bear in evaluating the funding plans? The question answers itself; this adds costs and delay, for no perceivable benefit. And what reason is there to restrict the free flow of capital from consenting adults with over $1mm to startups? (more…)

5 April 2010 at 8:40 pm 2 comments

Why Are the Dutch So Clean?

| Nicolai Foss |

Folk wisdom holds that people stopped bathing after the fall of the Roman Empire. Thus, it is commonly held that all of Europe was, until recently, quite smelly indeed. Some hold the view that this is still the case.

There were serious exceptions, of course. I cannot resist mentioning a particularly well taken example, reported by the prior of St. Fridswides, John of Wallingford, “who complained bitterly that the Danes bathed once a week, combed their hair regularly, and changed their clothes regularly. The result was that English women were easily seduced by the nice-smelling Danes” (here).

A perhaps better-known example of European cleanliness is that of the Dutch. It is also the most seriously researched example. In the 17th and 18th century, visitors to Holland wondered about Dutch cleanliness, indeed, obsession with hygiene. Some have argued that this, somehow, reflected Dutch Calvinism. No, argue Bas van Bavel and Oscar Gelderblom in “The Economic Origins of Cleanliness in the Dutch Golden Age,” the reason is . . . butter! And here is the explanation (Abstract):

This paper explores why early modern Holland, and particularly its women, had an international reputation for cleanliness. We argue that economic factors were crucially important in shaping this habit. Between 1500 and 1800 numerous travellers reported on the habit housewives and maids had of meticulously cleaning the interior and exterior of their houses. We argue that it was the commercialization of dairy farming that led to improvements in household hygiene. In the fourteenth century peasants as well as urban dwellers began to produce large quantities of butter and cheese for the market. In their small production units women, and their daughters, worked to secure a clean environment for proper curdling and churning. We estimate that, at the turn of the sixteenth century, half of all rural households and up to one third of urban households in Holland produced butter and cheese. These numbers declined in the sixteenth century as peasants sold their land and larger farms were set up. Initially the migration of entire peasant families to towns, the hiring of farmers’ daughters as housemaids, and the exceptionally high consumption of dairy products continued to encourage the habit of regular cleaning in urban households. However, by the mid-seventeenth century the direct link between dairy farming and cleanliness was, for the most part, lost.

5 April 2010 at 1:42 pm 4 comments

Hayekian Ants

| Dick Langlois |

A former student of mine (thanks, Don) sent me a link to a fascinating piece in the Proceedings of the Royal Society called “Rationality in Collective Decision-making by Ant Colonies.” Here’s the abstract.

Economic models of animal behaviour assume that decision-makers are rational, meaning that they assess options according to intrinsic fitness value and not by comparison with available alternatives. This expectation is frequently violated, but the significance of irrational behaviour remains controversial. One possibility is that irrationality arises from cognitive constraints that necessitate short cuts like comparative evaluation. If so, the study of whether and when irrationality occurs can illuminate cognitive mechanisms. We applied this logic in a novel setting: the collective decisions of insect societies. We tested for irrationality in colonies of Temnothorax ants choosing between two nest sites that varied in multiple attributes, such that neither site was clearly superior. In similar situations, individual animals show irrational changes in preference when a third relatively unattractive option is introduced. In contrast, we found no such effect in colonies. We suggest that immunity to irrationality in this case may result from the ants’ decentralized decision mechanism. A colony’s choice does not depend on site comparison by individuals, but instead self-organizes from the interactions of multiple ants, most of which are aware of only a single site. This strategy may filter out comparative effects, preventing systematic errors that would otherwise arise from the cognitive limitations of individuals.

5 April 2010 at 1:07 pm 5 comments

Where to Submit?

| Lasse Lien |

If you havent optimized your submission strategy this paper might be useful. Here’s the abstract:

In this paper, we analyze the problem faced by impatient researchers attempting to balance the considerations of journal quality, submission lags, and acceptance probabilities in choosing appropriate outlets for their work. We first study the case in which probabilities of submission outcomes are exogenous parameters and show that authors can find the optimal submission path through the use of journal ‘scores’ based only on the journals’ characteristics and the author’s degree of impatience. Then, we analyze a more realistic framework in which acceptance probability is determined by the quality of the manuscript, in which the reviewing process may be imperfect, and in which authors may not be certain of the manuscript’s quality. Throughout, we illustrate our analysis with data on actual economics journals. We also consider the problem of journals facing a large number of submissions, limited space, and limited resources to review papers and, in particular, we examine the relative effectiveness of using submission fees and reviewing lags to ration article submissions.

Reference: Martin Heintzelman and Diego Nocetti, Diego (2009), “Where Should we Submit our Manuscript? An Analysis of Journal Submission Strategies,” The B.E. Journal of Economic Analysis & Policy: 9 : Iss. 1 (Advances), Article 39.

5 April 2010 at 7:47 am 2 comments

Third Searle Center Entrepreneurship Symposium

| Peter Klein |

The schedule is up for the Third Annual Searle Research Symposium on the Economics and Law of the Entrepreneur, 17-18 June 2010 in Chicago. Registration information is here. I participated in the 2008 version and enjoyed it very much.

2 April 2010 at 10:01 pm 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).