Archive for May, 2010

Norway Workshop on Org Econ and Org Capabilities

| Nicolai Foss |

With Nick Argyres, Teppo Felin, and Todd Zenger, I am editing a special issue of Organization Science on “Organizational Capabilities and Organizational Economics: From Opposition and Complementarity to Real Integration.” We received 84 submissions and invited a fair amount of R&Rs. To help improve those R&Rs and to stimulate discussed, we organized, with the (practical) help of Professor Sven Haugland and (financial help) the Norwegian School of Economics and Business Administration, a small workshop that took place this Friday and Saturday (28-29 May) at the magnificent Hotel Solstrand, outside of Bergen. The discussions were informative, high-level, and friendly; the weather behaved (Bergen is the most rainy city in Europe); the food was excellent; etc. A model workshop, in short. 

A few key points (I will refrain from commenting on the R&R  papers):

  • Out of 11 papers, 1 was theoretical, 2 were simulation papers, and the rest  were empirical. All creatively brought both capabilities and OE ideas to bear on issues of economic organization (including internal organization).
  • I argued that virtually all debate on capabilities and economic organization had been dominated by a “capabilities first” heuristic, in which capabilities are primary and transaction costs were, as it were, second-order (e.g., transaction costs moderate the relation between capabilities and vertical scope). It is time to reverse causality and examine how capabilities emerge from “transacting.”
  • Nick Argyres and Todd Zenger presented a paper that followed up on this by showing how capabilities can be understood as reflecting specific investments.
  • Nevertheless, there was some skepticism regarding whether it is useful to talk about a debate, not just because of the dominance of the capabilities view in that debate, but also because it was better to consider problems “agnostically” and choose flexibly among the available tools, whether drawn from the capabilities or the TCE toolbox. Michael Jacobides argued this point with so much passion that everyone cracked up when Teppo Felin observed that Michael was more of a high-priest than an agnostic.  
  • “OE” was generally interpreted as “transaction cost economics”; not a single paper brought agency and property rights issues to bear on these issues.

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30 May 2010 at 6:32 am 1 comment

Economics of Creativity

| Peter Klein |

David Galenson has written a series of papers on the creative arts, including songwriting, architecture, filmmaking, photography, and many kinds of visual art. A new paper, “Understanding Creativity,” summarizes and synthesizes much of this work. A central theme is the distinction between “experimental” and “conceptual” innovators. Experimental innovators focus on perception, proceed incrementally, and tend to make their most important contributions late in their careers. Conceptual innovators emphasize emotions, proceed in bold strokes, and tend to peak early. (A cinematic example: John Ford and Alfred Hitchcock fall in the former category, Orson Welles and Jean-Luc Godard in the latter.)

There are obvious parallels with the study of technological innovation, management, and entrepreneurship. Think of incremental versus systemic innovation, sustaining versus disruptive change, low-key management versus charismatic leadership, Kirznerian coordination versus Schumpeterian innovation. The analogies are inexact, but nonetheless intriguing (particularly the life-cycle aspects). What connections do you see?

The abstract of “Understanding Creativity” is below the fold. (The paper itself is gated, unfortunately). (more…)

28 May 2010 at 2:40 pm Leave a comment

The “Knowledge Filter” and the New Economy

| Dick Langlois |

I recently ran across a paper by Bo Carlsson, Zoltan Acs, David Audretsch, and Pontus Braunerhjelm called “The Knowledge Filter, Entrepreneurship, and Economic Growth.” It’s actually a 2007 paper, part of a series these authors in various combination have been writing about the idea of a “knowledge filter.” The standard story about knowledge (in the new growth theory, but long before that as well) is what I think of as the R&D sausage-machine: one pours inputs like capital and labor into the meat grinder of R&D and out comes knowledge, which shifts the production function. In a series of papers, Carlsson et al. have argued that there is a “filter” somewhere within the meat grinder that determines how effectively the inputs get turned into useful knowledge. Although I’m sympathetic to criticism of the sausage machine story, you can imagine why I don’t think the knowledge-filter idea helps much: it’s just another black box that can be sized to fit whichever facts (stylized or real) one has at hand. Why not do away with the model altogether and instead think hard about the structure of knowledge and how it has interacted with institutions and organizational forms?

In fact, of course, that is what the authors actually do to some extent in this paper: one can read it without having to buy into the “filter” part. What caught my attention, in fact, is that this paper is ultimately an argument about the causes of the New Economy, and I am a collector of such arguments. The authors seem completely innocent of the large Post-Chandlerian literature on this topic, and they try to explain the transition from the large Chandlerian firm to more specialized entrepreneurial units strictly in terms of trends in R&D and knowledge creation.

[T]he industrial revolution was based in part on turning knowledge into economically useful knowledge and … university education and research in the United States became practically and vocationally oriented (in comparison with European universities), partly through the land-grant universities established in the mid- to late 19th century. In the early part of the 20th century, corporate research and development labs began to emerge as major vehicles of basic industrial research. Virtually all of the funded research prior to World War II was conducted in corporate or federal labs. In conjunction with a rapidly increasing share of the population with a college education, this made for high absorptive capacity on the part of industry and, as a result, a “thin” knowledge filter. In subsequent sections we discuss the emergence of the research university, the dramatic increase in research and development spending, and the shift of basic research toward the universities, especially during and following World War II. During the 1960s and 1970s, this led to a thickening of the knowledge filter in the form of an increasing need to “translate” basic (academic) research into economic activity. New firms have increasingly become the vehicle to translate research into growth; this can be seen in the greater role of small business and entrepreneurship from the 1970s onward.

Interesting. But I see two serious problems with this. First off, it misunderstands and vastly oversells the research labs of the mid-twentieth century. In most cases these were not drivers of innovation but absorbers of ideas invented outside the company by networks of smaller inventors — much like today. And when they did perform genuinely basic research, as in the case of Bell Labs, they were not at all tightly coupled to application. These labs were good at systemic development, that is, developing technologies that required a lot of disparate pieces to be created and put together. Color TV at RCA is an example. But they were not good at generating genuinely new useful knowledge or at more modular kinds of innovation — or, at least, weren’t as good as diffuse networks of inventors. In fact, as I mentioned in my previous post, the concentration of research (and patents) in the labs of RCA arguably slowed innovation in radio and consumer electronics generally. This leads to my second point: it’s not clear that one can explain everything just by looking at knowledge and R&D. There is actually a lot similarity between the regime of government funding of research through Land Grant institutions and the post-War grant system of Vannevar Bush: it was always channeled through the universities. Changes in government funding thus can’t really explain why there were large R&D labs at one time and small entrepreneurial firms at another. For that one has to think about issues of organization that go beyond the R&D function.

28 May 2010 at 2:21 pm 3 comments

Study this Summer with Klein

| Peter Klein |

I’m participating in a distance-learning experiment this summer — no, not Bootsy Collins’s Funk University, but the Mises Academy, a new Mises Institute service offering short, non-degree courses to university students, management professionals, and the general public. Everything’s online — lectures, readings, discussions, assignments. I’m teaching “Entrepreneurship in the Capitalist Economy,” a course based on my favorite book (as Mankiw would put it). The course runs for 9 weeks from 7 June to 7 August and costs a mere $255 — that’s less than one or two of Nicolai’s books!

The course is pitched at the undergraduate/MBA level, with no formal prerequisites except intellectual curiosity, a good work ethic, and a sense of humor. Perhaps I’ll offer special extra-credit assignments for O&M readers. . . .

Drop me a line if you have any questions. I’d love to have you join me on this journey!

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26 May 2010 at 4:35 pm 3 comments

The Unbearable Lightness of Economics (?)

| Nicolai Foss |

The always-helpful Peter suggested “a quick-and-easy Foss blog post,” specifically a post on what sounds like an interesting conference on “Economics Made Fun in the Face of the Economic Crisis,” organized by Jack Vromen and N.E. Aydinonat, at the Erasmus University Rotterdam, 10-11 December 2010. The Call builds up a tension between the emerging econ-made-fun genre (Levitt, Cowen et al.) with its implied view of econ as a universal tool for understanding behaviors and their implications, and the claimed inability of econ to come to grips with the current crisis. You may think what you like of this claimed tension, but Jack Vromen always represents quality, and with keynote speakers like Diana Coyle, Robert Frank, and Ariel Rubinstein, this conference will be fun.

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26 May 2010 at 12:23 pm Leave a comment

The Role of Assumptions in Management Research

| Nicolai Foss |

A striking difference between economics and (most) management research is that while economists are obsessed with the role of assumptions in theorizing, management scholars as a rule don’t seem to spend much time on assumptions, at best tucking them away under “boundary conditions,” and, in general, having rather little patience with “assumptions discussions.” In particular, the eyes of management scholars of the more descriptive (“phenomenological”) stripe glaze over from boredom or inattention when the issue is raised.

Major economists (Samuelson and Friedman come immediately to mind) have written famous methodological papers on assumptions. A significant portion of what passes as “economic methodology” is taken up with the nature and status of assumptions. Prominent philosophers have written on the role of assumptions in economics (e.g., Alan Musgrave, Daniel Hausman). However, I know of not a single paper in management research dedicated to the issue. (more…)

26 May 2010 at 12:10 pm 8 comments

CFP: “Law, Economics, and Finance”

| Peter Klein |

Mike Jensen keynotes this September 2010 conference at York University in Toronto on the links between ethics and finance:

As the world economy struggles out of the financially induced recession, the concept of ethical or socially responsible investment, along with corresponding calls for regulation, will play an increasingly important role in the study of finance for both privately held and publicly traded companies. While there has been a growing literature on law and finance, largely through cross-country studies of publicly traded companies, with somewhat less work on the ethics and finance of publicly traded companies, there has been comparatively little work at the intersection of these topics. As well, there has been comparatively little work on the intersection between law and finance and/or between the ethics and finance of privately held companies. We believe this gap needs to be filled.

The submission deadline is 1 June, so get your manuscripts ready. Full details below the fold: (more…)

25 May 2010 at 10:49 pm 1 comment

Handbook of the Economics of Innovation

| Peter Klein |

Elsevier has just released the Handbook of the Economics of Innovation, edited by Bronwyn Hall and Nathan Rosenberg. At USD 250 for the two-volume set (a bit less at Amazon), it’s not exactly cheap, but I expect a high ratio of good ideas to pages. You can read the introduction here, and here’s a draft of one of the chapters.

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24 May 2010 at 8:56 am Leave a comment

Does Behavioral Economics Offer Anything New and True?

| Peter Klein |

One of my frustrations with behavioral economics is that it often seems to restate common, obvious, well-known ideas as if they are really novel insights (e.g., that preferences aren’t stable and predictable over time). More novel propositions are questionable at best (e.g, the paradox of choice).

Dan Ariely’s column in this month’s HBR is particularly frustrating. He claims as a unique insight of behavioral economics that when people are evaluated according to quantitative measures of performance, they tend to focus on the measures, not the underlying behavior being measured. Well, duh. This is pretty much a staple of introductory lectures on agency theory (and features prominently in Steve Kerr’s classic 1975 article). Ariely goes on to suggest that CEOs should be rewarded not on the basis of a single measure of performance, but multiple measures. Double-duh. Holmström (1979) called this the “informativeness principle” and it’s in all the standard textbooks on contract design and compensation structure (e.g., Milgrom and Roberts, Brickley et al., etc.) (Of course, agency theory also recognizes that gathering information is costly, and that additional metrics are valuable, on the margin, only if the benefits exceed the costs, a point unmentioned by Ariely.)

Ariely says firms should not evaluate CEO’s on stock price, but on a variety of measures. What, for example? Here the story gets a bit murky:

Ideally, they’d vary by industry, situation, and mission, but here are a few obvious choices: How many new jobs have been created at your firm? How strong is your pipeline of new patents? How satisfied are your customers? Your employees? What’s the level of trust in your company and brand? How much carbon dioxide do you emit?

Ariely seems unaware that stock price is the most frequently used measure of firm performance precisely because it is a composite measure that captures all of those things. Stock price reflects the best available information about current and expected future performance — products, jobs, customer satisfaction, etc. Is it a perfect measure? Hardly. But it isn’t obvious how owners or Boards can create their own quantitative, composite measure by by picking their favorite elements, proxies, weighting schemes, and so on, in a way that provides better overall assessments of performance than market valuations. Boards, after all, may be predictably irrational too.

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21 May 2010 at 11:53 am 26 comments

Intellectual Steam

| Dick Langlois |

There’s nothing like a rousing academic argument, especially when it deals with an intriguing historical case. “The Fable of the Keys” by Liebowitz and Margolis is the paradigm here. I recently stumbled upon another example, the (apparently ongoing) dispute that pits George Selgin and John Turner against Michele Boldrin and David Levine on the question of to what extent James Watt’s steam-engine patents retarded innovation in steam technology and slowed the British industrial revolution.

The Newcomen steam engine was a low-pressure device that, by using steam to create a vacuum, actually used air pressure to drive the engine. Watt invented and patented an improvement to the vacuum engine that involved a separate condenser to cool the steam, thus increasing efficiency. On the strength of his patent, Watt was bankrolled by the industrialist Matthew Boulton, and together they licensed the technology to others and did their best to block competing technology. Boldrin and Levine claim that the Watt patent constituted a wide-scope blocking patent, of the kind described by Merges and Nelson, which slowed development of rival technologies, including the high-pressure steam engine that was to be crucial in textiles and elsewhere. As a result, the Boulton-Watt patents and legal stratagems “delayed the industrial revolution by a couple of decades.” Selgin and Turner take issue with both facts and conclusions, arguing that patent law at the time, which derived from the 1625 Statute of Monopolies, actually forbade the patenting of a general idea and insisted that an innovation be instantiated in specific technology, in this case in the form of the condenser. In other words, they argue that patent scope was kept sensibly low in eighteenth-century Britain, something of which Merges and Nelson would approve. Thus Boulton and Watt could not, and in fact did not, slow the development of high-pressure steam through intellectual property, though they may have had an effect on the culture of contemporary inventors, who doubted the economies and feared the dangers of high-pressure steam at a time when complementary metallurgical technology was not yet up to the task. (Note to Selgin and Turner: here is a better reference on the dangers of high-pressure boilers in American steamboats.) (more…)

19 May 2010 at 1:38 pm 4 comments

Strategic Entrepreneurship Conference at CBS

| Nicolai Foss |

As many O&M readers will know, “strategic entrepreneurship” has emerged as an exciting new research field in the intersection of, well, strategic management and entrepreneurship. In a very broad (perhaps too broad) reading, the field is taken up with explaining the emergence of essentially entrepreneurial acts of those competitive advantages that are so central to the strategic management field.  In recognition of the very close links between the strategic entrepreneurship field and the strategic management field, the  Strategic Entrepreneurship Journal was established in 2007 as a sister journal to the Strategic Management Journal.

However, like many other macro management fields, strategic entrepreneurship pays rather little attention to the micro-foundations of the explanation of its macro explanandum, firm-level entrepreneurship. Moreover, the influence of formal structure and organizational control on the discovery, evaluation and implementation of opportunities at the firm level has been remarkably under-researched. 

To meet these challenges, I have arranged, assisted by my two highly able PhD students, Stefan Linder and Jacob Lyngsie, a conference, “Strategic Entrepreneurship: Bringing Organization Design and Micro-foundations Into the Field,” to take place at the Copenhagen Business School, 11-12 November 11-12 2010. Keynote speakers include such luminaries as Jeff Hornsby, Bill Schulze, Mike Wright and Shaker Zahra. Peter Klein fans will be pleased to be informed that it is quite likely that he will participate!

Here is the — still quite preliminary — conference site. Submit a paper!

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19 May 2010 at 12:01 pm 8 comments

Facebook Discussion Threads

| Peter Klein |

Those of you in our Facebook group can click on the “Discussions” tab to access an unmoderated forum for all things organizational and marketish. Let the flamewars begin!

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19 May 2010 at 8:02 am Leave a comment

Intro to The Capitalist and the Entrepreneur

| Peter Klein |

Here’s a nicely formatted HTML version of the introduction to The Capitalist and the Entrepreneur. I’d apologize for the self-promotion but, well, isn’t that the whole point of blogging?

(PS: Those of you who like to run your transactions through Amazon can get the book here. Not sure about a Kindle edition but I’m told an epub version will be available soon.)

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17 May 2010 at 4:52 pm 1 comment

Manne on Fama and French

| Peter Klein |

An open letter to Gene Fama and Ken French from Henry Manne (also running today at Truth on the Market):

Dear Gene and Ken:

I must say that I was totally flabbergasted when I read your recent blog posting on insider trading. I know that your usual posts on investments, which I often cite to friends, are well-informed and empirically supported; your work over the years on these topics is important and influential — and rightly so. Unfortunately, in this post, you have deviated from your usual high quality. Anyone current on the topic of insider trading will recognize that you have been careless in your selection of anti-insider-trading arguments and that you omitted from your brief note the major part of the argument about insider trading: whether and how much it contributes to market efficiency. To say this is a strange omission coming from Fama and French would be an understatement.

Your first error is to assume that the insider trading debate is about informed trading only by “top management.” I suspect that this error may flow from my original argument for using insider trading to compensate for entrepreneurial services in a publicly held company, a matter you do not mention and which I will not pursue here except to note that “entrepreneurial services” does not equate to top management. Strangely no one seems to notice that most of the celebrated cases on the subject have not involved corporate personnel at all (a printer, a financial analyst, a lawyer, and Martha Stewart). (more…)

17 May 2010 at 1:45 pm Leave a comment

This Makes Me Think of Hayek’s Sensory Order

| Peter Klein |

From Wired:

Karl Popper, the great philosopher of science, once divided the world into two categories: clocks and clouds. Clocks are neat, orderly systems that can be solved through reduction; clouds are an epistemic mess, “highly irregular, disorderly, and more or less unpredictable.” The mistake of modern science is to pretend that everything is a clock, which is why we get seduced again and again by the false promises of brain scanners and gene sequencers. We want to believe we will understand nature if we find the exact right tool to cut its joints. But that approach is doomed to failure. We live in a universe not of clocks but of clouds.

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15 May 2010 at 2:37 pm 3 comments

Scribd Version of Book

| Peter Klein |

I just learned I can embed the full document right here in a blog entry. Very cool!

View this document on Scribd

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13 May 2010 at 10:07 pm 8 comments

The Capitalist and The Entrepreneur: Available Now!

| Peter Klein |

My new book, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010), is now available. For a limited time, you can get it for just $15 — a bargain at half the price! Actually, the resource-constrained among you can read the Full Monty here, free of charge. A PDF version is also available. A promotional essay appears today on

The editorial and production staff did a terrific job, and I’m thrilled with the volume’s look and feel. The contents aren’t bad either!

Order two or more and I will personally send you a set of Ginsu knives.

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13 May 2010 at 8:43 am 8 comments

Personnel Economics Survey

| Peter Klein |

Paul Oyer and Scott Schaefer provide a helpful overview:

Personnel Economics: Hiring and Incentives
Paul Oyer, Scott Schaefer
NBER Working Paper No. 15977

We survey the Personnel Economics literature, focusing on how firms establish, maintain, and end employment relationships and on how firms provide incentives to employees. This literature has been very successful in generating models and empirical work about incentive systems. Some of the unanswered questions in this area — for example, the empirical relevance of the risk/incentive tradeoff and the question of whether CEO pay arrangements reflect competitive markets and efficient contracting — are likely to be very difficult to answer due to measurement problems. The literature has been less successful at explaining how firms can find the right employees in the first place. Economists understand the broad economic forces — matching with costly search and bilateral asymmetric information — that firms face in trying to hire. But the main models in this area treat firms as simple black-box production functions. Less work has been done to understand how different firms approach the hiring problem, what determines the firm-level heterogeneity in hiring strategies, and whether these patterns conform to theory. We survey some literature in this area and suggest areas for further research.

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12 May 2010 at 12:26 am Leave a comment


| Dick Langlois |

Slate has a piece on a video game called Admongo, which the Federal Trade Commission has created to teach children the dangers of commercial advertising. Characteristically, the author rather likes this idea, and the only criticism of this micro-Orwellianism he can imagine is that it doesn’t go far enough in bashing commercial advertising and is fact in bed with commercial interests like Scholastic.

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11 May 2010 at 8:30 am 4 comments

Transaction Costs and the Virtual Personal Assistant

| Peter Klein |

You can outsource grading, paralegal work, and other services, so why not personal assistance? Some credit cards now feature a concierge service that acts like a crowdsourced, virtual, personal assistant. By exploiting scale economies (a network of specialist assistants that can respond quickly and cheaply to specific client requests) and reducing excess capacity, such services offer dramatically lowered production costs, compared to the conventional model of one dedicated assistant per client (or small group of clients). But the lack of bilateral commitment may make it difficult to encourage relationship-specific investments, so the transaction-cost effects are ambiguous. (Thanks to Chihmao for the pointer.)

If you want to discuss this further, have your people contact my people.

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10 May 2010 at 11:20 am 3 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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