Archive for May, 2010

Readings for Hayek-Klein Day

| Peter Klein |

Here are some readings to help you celebrate tomorrow’s Hayek-Klein Day:

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7 May 2010 at 11:05 am 8 comments

The Invention of Enterprise: Reviews

| Peter Klein |

If you haven’t yet had a chance to read Landes, Mokyr, and Baumol’s 600-page baby, The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times, here are reviews by Mansel Blackford and Reuven Brenner. Blackford is impressed; Brenner, not so much. Brenner is worth quoting at length:

[L]arge chunks of the book are more about the topic of inhibitions to enterprise and both the variety of ideas people came up with to rationalize them and the institutions rulers and governments put in place to enforce these ideologies. . . .

Unfortunately most of the chapters dealing with the topic of inhibitions miss the forest from the trees, as not one addresses what is to me the basic issue when examining “the invention of enterprise.” There is nothing more threatening to an established order — any order — than opening up, deepening, democratizing capital markets — accountably, allowing people to leverage their inventive, enterprising spirit. True, this would also disperse power — political power in particular. The deeper capital markets would also threaten established industries and commerce. Entrepreneurs, brilliant and ambitious as they might be, are not a threat. They can be sent to Siberia, forced into complacency by the Maos of this world, and the opportunistic ones will channel their ambition through the established powers.

But entrepreneurs with access to different, independent sources of risk capital — now that’s threatening, be they Brin and Page, Jobs or Milken at the time (quickly taking away much of the banks’ bread and butter of providing loans). Understanding this, even if not wanting to articulate it, provides enough incentives for those in power to subsidize, spread, and promote ideas and institutions inhibiting the deepening of capital markets under a wide variety of jargons, and thus inhibiting the invention and reinvention of enterprises. With time, people get accustomed to these institutions, their origins lost in the mist of time, inhibiting entrepreneurship and business for centuries. Today this may be happening a bit before our eyes. Suddenly, everything becomes a “bubble” — Internet, oil, houses, gold, bonds. Guess what: if everything is — why have capital markets to start with? If pricing no longer offers guidance to allocate capital; if stock and bond markets are not there to help correct mistakes faster — why should they continue to exist? And if they do not exist, who else remains but politicians, bureaucrats and the academics surrounding them — none of whom ever worked in a business even one day in their lives — who would then tax and borrow and subsequently allocate capital and “invent enterprises” based on — well — whatever.

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6 May 2010 at 9:31 am 2 comments

Religion and Economic Development

| Peter Klein |

Thanks to Tyler for calling my attention to Davide Cantoni’s job-market paper, “The Economic Effects of the Protestant Reformation: Testing the Weber Hypothesis in the German Lands”:

Many theories, most famously Max Weber’s essay on the ‘Protestant ethic,’ have hypothesized that Protestantism should have favored economic development. With their considerable religious heterogeneity and stability of denominational affiliations until the 19th century, the German Lands of the Holy Roman Empire present an ideal testing ground for this hypothesis. Using population figures in a dataset comprising 276 cities in the years 1300-1900, I find no effects of Protestantism on economic growth. The finding is robust to the inclusion of a variety of controls, and does not appear to depend on data selection or small sample size. In addition, Protestantism has no effect when interacted with other likely determinants of economic development. I also analyze the endogeneity of religious choice; instrumental variables estimates of the effects of Protestantism are similar to the OLS results.

In my AE 8050 class last semester we discussed several papers on religion, and other aspects of culture, as they affect economic development (e.g., Stulz and Williamson, 2003). Cantoni’s paper will go on my reading list next year.

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5 May 2010 at 1:18 am Leave a comment

Why People Resist Marginal Cost Pricing

| Peter Klein |

Hahn and Passell get it right, I think:

Consumers everywhere seem to like all-you-can-eat/drink/exercise/drive pricing, even if their own consumption is modest and they are net losers in the process. This may simply be irrational. But (as cruise ship lines understand very well) it may also reflect the real psychological benefits of being able to imagine oneself in an environment of no scarcity, in which everything is “free” including calories. By the same token, salad-bar-style blanket pricing may relieve consumers of the very real costs of weighing costs against benefits at every turn of the menu.

One could interpret this in terms of bounded rationality, e.g., Akerlof and Yellen’s concept of near-rationality (1, 2): small deviations from “rational” behavior aren’t too costly, in such cases, so why be fully rational? Alternatively, call these decision-making costs some kind of transaction costs and deem the behavior fully rational, once all relevant costs are taken into consideration. (Some hand-waving required in both cases.) But some kind of cognitive explanation is probably best here.

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3 May 2010 at 10:50 am 4 comments

Greenstein on Innovation

| Peter Klein |

One of my regular lectures at the Mises University deals with the economics of networks and information technology, with a particular focus on the history of the internet. A few years ago I wrote up my notes for a daily article, which appeared as “Government Did Invent the Internet, But the Market Made It Glorious.” Shane Greensteinn’s new NBER paper could used the same title, though he chose something meatier: “Nurturing the Accumulation of Innovations: Lessons from the Internet.” Okay, the paper is a bit meatier too. Check it out:

The innovations that became the foundation for the Internet originate from two eras that illustrate two distinct models for accumulating innovations over the long haul. The pre-commercial era illustrates the operation of several useful non-market institutional arrangements. It also illustrates a potential drawback to government sponsorship — in this instance, truncation of exploratory activity. The commercial era illustrates a rather different set of lessons. It highlights the extraordinary power of market-oriented and widely distributed investment and adoption, which illustrates the power of market experimentation to foster innovative activity. It also illustrates a few of the conditions necessary to unleash value creation from such accumulated lessons, such as standards development and competition, and nurturing legal and regulatory policies.

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1 May 2010 at 4:34 pm 5 comments

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
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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).
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