Archive for July, 2010

Summary of Dodd-Frank Act

| Peter Klein |

The Dodd-Frank Wall Street Reform and Consumer Protection Act — I’ll refrain from snarks about the title — was signed into law today by President Obama. Here is a very useful summary by William Sweet of the Act’s contents and likely consequences. In a nutshell: “The Dodd-Frank Act effects a profound increase in regulation of the financial services industry. The Act gives U.S. governmental authorities more funding, more information and more power. In broad and significant areas, the Act endows regulators with wholly discretionary authority to write and interpret new rules.” Aren’t you shocked that it passed?

Update: Larry Ribstein is not happy. Weil Gotshal provides further details.

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21 July 2010 at 11:33 am 5 comments

The Organizational Economics of the BP Oil Spill

| Peter Klein |

Now that passions are cooling regarding the BP disaster, it’s time to bring organizational issues into the discussion.

1. Everyone knows about the liability caps and the role they may have played in encouraging moral hazard. Just as bank deposits are guaranteed by government deposit insurance, and large banks themselves are probably Too Big to Fail, liability for property damage from oil spills off US waters is limited to $75 million (plus cleanup costs), based on a 1990 law passed after the Exxon Valdiz spill. This presumably mitigates drillers’ incentives to manage environmental risk. Indeed, oil companies enjoy a very cozy relationship with their ostensible guardians; as the NY Times noted, “[d]ecades of law and custom have joined government and the oil industry in the pursuit of petroleum and profit.” The federal agency that oversees drilling, the Minerals Management Service, rakes $13 billion a year in fees in what amounts to a public-private partnership. And does anyone really think the British government would “stand idly by” if BP’s status as an ongoing concern were threatened by criminal or civil penalties?

2. As Bill Shughart points out, BP did not own the Deepwater Horizon platform, but leased it from a company called Transocean. To Bill this suggests “a classic principal-agent problem in which the duties and responsibilities of lessor and lessee undoubtedly were not spelled out fully, especially with respect to maintenance and testing of the rig’s blowout preventer as well as to the advisability of installing a second ‘blind sheer ram,’ which may have been able to plug the well after the first (and only one then in service) failed to do so.” Would BP have paid more attention to safety if it owned, rather than leased, the platform? (more…)

20 July 2010 at 11:58 am 7 comments

Misc Academic Links

| Peter Klein |

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19 July 2010 at 12:49 pm 2 comments

Political and Methodological Individualism

| Peter Klein |

Further to Nicolai’s post, it is also widely believed that methodological individualism — the chief explanatory principle of economics and rational-choice sociology and political science — implies or justifies political individualism or, even worse, some kind of metaphysical or ontological individualism. “But people are social beings!” cry the critics. Well, sure. Methodological individualism is simply the view that social phenomena should be explained, or understood, in terms of the values, beliefs, plans, and actions of the individual that make up the social whole. It makes no claims about the ultimate source of these values and beliefs, the degree to which people are influenced by society, etc. It is a principle of explanation, nothing more.

Here’s a plain statement from Schumpeter, the guy who coined the term “methodological individualism” (okay, he used methodische Individualismus, and borrowed the concept from Weber), writing in 1908:

[W]e must strictly differentiate between political and methodological individualism, as the two have virtually nothing in common. the former starts form the general assumption that freedom, more than anything, contributes to the development of the individual and the well-being of society as a whole and puts forward a number of practical propositions in support of this. The latter is quite different. It has no specific propositions and no prerequisites, it just means that it bases certain economic processes on the actions of individuals. Therefore the question really is: is it practical to use the individual as a basis and would there be enough scope in doing so, or would it be better, in view of specific problems and the national economy as a whole, to use society as a basis. This question is purely methodological and involves no important principle. The socialists can answer it in terms of methodological individualism and the political individualists in terms of their social concept of things, without getting into conflict with their convictions.

See also the Mises quotes discussed here.

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18 July 2010 at 3:23 pm 8 comments

“De Gustibus Non Est Disputandum”?

| Nicolai Foss |

History of econ nerds (wonks?) will know that John Stuart Mill was trained by his father (James Mill) from the age of three in the Greek and Latin languages. Since Mill, economists’ Latin capabilities have deteriorated rather badly (a result of the dominance of Greek notation? ;-)). In fact, most economists only know two Latin sentences (or rather, dicta) that, however, they love to blurt out, often with a smug smile. One is a sound analytical principle, namely the ceteris paribus principle. The other is a much more problematic (if applied outside of economics) claim, made famous to economists by George Stigler and Gary Becker, namely “de gustibus non est disputandum.”

I have always been surprised by the readiness of many economists to endorse this claim as a general claim that goes beyond the simple implication that in economics we take preferences as given and applies on the aesthetic domain (perhaps this simply reflects the fact that many people nowadays subscribe to total or near-total relativism in aesthetics). However, understood as an aesthetic claim, “de gustibus non est disputandum” lies entirely outside of the orbit of economics (and economists-as-economists should shut up), and is emphatically not implied by subjective value theory, or any related branch of subjectivism in economics. (more…)

18 July 2010 at 5:07 am 2 comments

Miscellaneous Organizational Links

| Peter Klein |

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16 July 2010 at 12:22 am 3 comments

Mises Quote of the Day

| Peter Klein |

From Human Action, chapter 15, section 11 (via JGL):

In order to succeed in business a man does not need a degree from a school of business administration. These schools train the subalterns for routine jobs. They certainly do not train entrepreneurs. An entrepreneur cannot be trained. A man becomes an entrepreneur in seizing an opportunity and filling the gap. No special education is required for such a display of keen judgment, foresight, and energy. The most successful businessmen were often uneducated when measured by the scholastic standards of the teaching profession. But they were equal to their social function of adjusting production to the most urgent demand. Because of these merits the consumers chose them for business leadership.

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15 July 2010 at 11:25 am 4 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).
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).