Archive for October, 2010

Do Economic Freedom and Entrepreneurship Impact Total Factor Productivity?

| Nicolai Foss |

Cross-country studies of the antecedents and consequences of entrepreneurship have become something of a cottage industry. My contribution to the industry is an earlier paper with Christian Bjørnskov, as well as rather recent one, also written with Christian, “Do Economic Freedom and Entrepreneurship Impact Total Factor Productivity?” (and we have a third paper in the works with a certain Klein).

In the former paper we analyzed institutions and economic policies as determinants of entrepreneurship, paying particular attention to “freedom variables,” like sound money and a stable legal framework. In the latter paper, we focus on where the action is in the growth process, namely Total Factor Productivity, and proffer Austro-institutional arguments why entrepreneurship and the institutions associated with a free society may be expected to positively impact TFP.

While we find that entrepreneurship strongly and significantly impacts TFP, our results only partially support the intuition that institutions of liberty as well as liberal economic policies promote growth in productivity. In fact, we find no significant effects of sound money and legal quality on TFP in the medium run. When some of the freedom variables are interacted with the entrepreneurship variable, we in fact find that entrepreneurial activity is more effective in raising levels of TFP in environments dominated or strongly influenced by government activity, either through production in government-owned enterprises and investments or in its financing activities. Thus, increasing the active involvement of the government in the economy as well as the tax burden actually increases the impact of entrepreneurship on TFP. Our explanation of this somewhat surprising finding is that a reduced supply of entrepreneurship increases the marginal productivity of entrepreneurship; thus, the best ideas do survive even in the relatively hostile welfare state environment. (more…)

12 October 2010 at 2:50 pm 3 comments

The Vromen/Abell-Felin-Foss Debate

| Nicolai Foss |

As readers of this blog will know (probably ad nauseam), Teppo Felin and I have been engaged over the last five years or so in a minor crusade in favor of building micro-foundations for, particularly, strategic management research (e.g., this paper with Peter Abell). I think it is fair to say that we have had some success with this project, as talk of micro-foundations has now become a part of contemporary strategic management discourse. 

One of our critical targets have been the extant literature on capabilities and routines which we argue work with collective-level constructs that have no clear micro-foundations. We make use of the famous Coleman “bathtub” diagram to explicate these ideas.

In a paper, “Micro-foundations in strategic management: Squaring Coleman’s diagram,” that just been published  online in Erkenntnis, Jack Vromen, criticizes our reading of the routines and capabilities literature and, in particular, our use of the Coleman diagram to explicate our criticism. Basically, he argues that we are confused about the key distinction between constitutive and causal relations. Here is our Reply. The abstracts are copied in below.  (more…)

12 October 2010 at 5:58 am 1 comment

We Resemble That Remark

| Peter Klein |

The BBC’s Andrew Marr: “A lot of bloggers seem to be socially inadequate, pimpled, single, slightly seedy, bald, cauliflower-nosed young men sitting in their mother’s basements and ranting. They are very angry people.” Ha ha, the joke’s on him — I haven’t been “young” in years!

11 October 2010 at 4:29 pm 6 comments

Nobel 2010

| Peter Klein |

I hope to have something intelligent and interesting to say about this year’s prize to Diamond, Mortensen, and Pissarides — not as much as last year, of course — but for now I just have a small snark. Here’s me, a couple of weeks ago:

It is said that when the Nobel Prize in economics was first established, prizes were given for using economics to teach people things they didn’t already know, e.g., that economic growth might increase inequality, that depressions are caused by central banks, that macroeconomic stabilization policy doesn’t work, etc. Now, prizes are given to economists who teach other economists things that regular people already know — politicians are self-interested, you shouldn’t put all your eggs in one basket, institutions matter, different people know different things, etc.

From today’s official press release, on the Laureates’ subject matter:

On many markets, buyers and sellers do not always make contact with one another immediately. This concerns, for example, employers who are looking for employees and workers who are trying to find jobs. Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish. Simultaneously, there are both job vacancies and unemployment on the labor market.

Addendum: In other Nobel news, Maurice Allais passed away this weekend. I was going to blog something about Allais and the Austrians but Alex Tabarrok beat me to it.

Addendum II: Here’s a nontechnical summary of some of the Laureates’ contributions from Sandeep Baliga.

11 October 2010 at 8:40 am 13 comments

Mises Quote of the Day

| Peter Klein |

Mises is known for his uncompromising defense of apriorism in economics, yet he began his career as a historicist, trained by Karl Grünberg, a Marxist and prominent member of the German Historical School. (Mises’s first publications were on land reform in his native Galicia and child-labor laws in Austria, both tediously empirical and inductive.) It was only later, after encountering Menger’s Principles, that Mises turned to social theory.

One of this week’s Mises Dailies features an excerpt from Mises’s 1957 book Theory and History and I can’t resist passing along this nugget, which is hopelessly out of touch with today’s enthusiasm for all things experimental:

[H]istorical experience is always the experience of complex phenomena, of the joint effects brought about by the operation of a multiplicity of elements. Such historical experience does not give the observer facts in the sense in which the natural sciences apply this term to the results obtained in laboratory experiments. (People who call their offices, studies, and libraries “laboratories” for research in economics, statistics, or the social sciences are hopelessly muddle-headed.)

Mises isn’t talking about the literal laboratories used by today’s experimental economists, but the casual use of such scientistic jargon when collecting and analyzing non-experimental data, whether or primary or secondary. (He likewise rejected the language of “hypothesis testing” and the like when applied to social science.) Anyway, agree or disagree, you have to admit there are a lot of hopelessly muddle-headed people on university campuses.

9 October 2010 at 8:24 am 9 comments

Suing in America

| Lasse Lien |

As a temporary resident of the US I find much to enjoy and admire. What I find slightly less admirable is the American litigiousness and the transaction costs it creates (for example the endless number of forms and paperwork needed to get simple services ). Here are some “random” examples of lawsuits (via Clean Laughs):

An inmate filed a $5 million lawsuit against himself (he claimed that he violated his own civil rights by getting arrested) — then asked the state to pay because he has no income in jail. He said, “I want to pay myself 5 million dollars, but ask the state to pay it on my behalf since I can’t work and am a ward of the state.” The judge was not impressed by his ingenuity, and dismissed the suit as frivolous. (Source: CALA)

A convicted bank robber on parole robbed a California Savings and Loan Branch. The bank robber placed the money roll containing the hidden Security Pac in his front pants pocket. The Security Pac released tear gas and red dye resulting in second and third degree burns requiring treatment at a hospital. The bank robber sued the bank, the Security Pac manufacturer, the city the police and the hospital. (Source: ATRA)

A writer was sued for $60 million dollars after writing a book about a convicted Orange County serial killer. Although the inmate is on death row, he claimed that he was innocent in all 16 murders, so the characterization of him as a serial killer was false, misleading and “defamed his good name”. In addition, he claimed those falsehoods would cause him to be “shunned by society and unable to find decent employment” once he returned to private life. The case was thrown out in a record 46 seconds, but only after $30,000 in legal fees were incurred by the writer’s publisher. (Source: CALA)

A minister and his wife sued a guide-dog school for $160,000 after a blind man learning to use a seeing-eye dog trod on the woman’s toes in a shopping mall. South-eastern Guide Dogs Inc., a 13-year old guide-dog school and the only one of its kind in the Southeast, raises and trains seeing-eye dogs at no cost to the visually impaired. The school is located about 35 miles south of Tampa. The lawsuit was brought by Carolyn Christian and her husband, the Rev. William Christian. Each sought $80,000. The couple filed suit 13 months after Ms Christian’s toe was stepped on and reportedly broken by a blind man who was learning to use his new guide dog, Freddy, under the supervision of an instructor. They were practicing at a shopping mall. According to witnesses, Ms Christian made no effort to get out of the blind man’s way because she “wanted to see if the dog would walk around me”. (Source: ATRA and Houston Chronicle, 95-10-27) (more…)

8 October 2010 at 6:10 pm 9 comments

Fire Footnote

| Scott Masten |

Apropos our earlier discussion, today is the anniversary of the Great Chicago Fire of 1871.

8 October 2010 at 3:17 pm 1 comment

Best Paper Excerpt I Read Today

| Peter Klein |

What I call here an “orthodox” or mainstream Austrian theory of the firm is an attempt to reshape a Coasian notion of the firm as a centrally planned hierarchy, by merging it with general Austrian theory of the market process and entrepreneurship. The principal Austrians of the present (Klein and Foss, 2005, Foss 1994, Langlois and Foss, 1997) developed a theory of the firm by trying to synthesize this Coasian notion of the firm as a hierarchical entity dominated by commands and orders, with a distinct Misesian theory of entrepreneurship and monetary calculation as preconditions of rational economic planning. This approach is entirely rejected in this paper.

Source. I always thought of myself as a Young Turk, but I guess I’m now Old Guard.

8 October 2010 at 8:35 am 6 comments

Hail to the Hackers

| Scott Masten |

You may have read recently that District of Columbia election officials put out an invitation to computer scientists to hack an experimental Internet voting system. Apparently a team from the University of Michigan successfully took over the system within 36 hours. The part I found amusing, however, is that they programmed the system to play “Hail to the Victors” (official name “The Victors”) after each vote was cast.

8 October 2010 at 7:15 am 5 comments

The (Very) Early Adoption of Modern HRM Practices

| Peter Klein |

Bruce Kaufman’s book Hired Hands or Human Resources? Case Studies of HRM Programs and Practices in Early American Industry (Cornell U. P., 2010) shows that US firms started adopting “modern” HRM practices around World War I, not during the New Deal, and they did so primarily to increase productivity, not in response to union or government pressure. Writes reviewer Chad Pearson:

Kaufman illustrates the ways in which several companies created professional human resource management (HRM) models after World War I. This is the most valuable part of the book principally because he used the records of the Industrial Relations Councilors (IRC), a consulting firm that began assisting employers in the 1910s. The IRC offered consulting services, provided research, and ran courses on industrial relations topics throughout the nation. Kaufman, the first scholar to examine these records, believes that “no other [industrial relations consulting firm] before World War II had IRC’s reach and influence” (p. 108). . . .

In most cases, these firms, in consultation with the IRC, began to, in Kaufman’s words, treat labor not as “a short-term commodity,” as was common in previous decades, but rather as “a longer-term human capital asset (the ‘human resource’ approach)” (p. 219). Why? Pressure from unions and the law were factors, but “they were less than half the story in the time period we are examining” (p. 228). In his view, employers’ desires to improve “management and productivity” better explain why companies improved workplace conditions (p. 227).

Labor historians and specialists in business regulation used to focus on the Progressive Era as a watershed period — e.g., Wiebe (1962), Weinstein (1981), and of course Kolko (1977) — but interest seems to have waned.

7 October 2010 at 9:28 am 3 comments

Burning Down the House

| Scott Masten |

Peter posted a Facebook link to a Jeff Tucker post on the Mises Economics Blog commenting on the news report about the Tennessee man who didn’t pay his annual $75 fire protection services fee, and the fire department from the neighboring town let his house burn down. Peter, Jeff, and Clifford Grammich (who commented on Peter’s post) cover the issues pretty well. My guess is that the reason governments rather than private companies generally provide fire services has a lot to do with the difficulty of pricing fire services. (The Tennessee case involved a quasi-market transaction in that residents outside of South Fulton paid the city of South Fulton for fire protection.) It is certainly conceivable that private fire companies could offer homeowners and businesses a choice between (i) prepaid fire service for an annual fee and (ii) on-demand fire service. But how would you determine the price of the latter? I’m pretty sure you wouldn’t want to negotiate the price while your house is burning down. (Talk about temporal specificity!) And you wouldn’t want to negotiate the price after the fact either: Gee, guys, thanks for saving my house; can I buy you all a beer? (more…)

6 October 2010 at 8:10 pm 16 comments

The Ownership of the Firm under a Property Rights Approach

| Dick Langlois |

That’s the title of a new working paper by my Ph.D. student Leshui He. Here’s the abstract:

The boundaries of the firm and the ownership of the firm have been two of the main themes of the economics of organization over the past several decades. In this paper, I develop a general multi-party framework that integrates the ownership of the firm into the property-rights approach to the firm. I consider the ownership of the firm as the ownership of the rights to terminate cooperation with any party while maintaining a contractual or employment relation with all the other related parties of the firm. The model in this paper allows for the separation of the ownership of the firm from the ownership of the alienable assets that partly constitute it. Such a general multi-party setup may provide new tools for the study of the problem of the firm’s boundaries as well as inspiration for further applications of the theory of property rights.

This will be Leshui’s job market paper. Comments (and job offers) welcome.

5 October 2010 at 2:31 pm Leave a comment

Misbehavioral Antitrust

| Peter Klein |

I suggested earlier that behavioral economics could use a dose of comparative institutional analysis. The New Paternalists are very worried about various biases and forms of “irrationality” on the part of consumers, managers, entrepreneurs, investors, etc. but have little or nothing to say about the rationality of regulators, legislators, judges, and other non-market actors. Josh Wright and Judd Stone offer a parallel critique of behavioral economics applied to antitrust law: the behavioralists focus on presumed bias and irrationality on the part of incumbents, while largely ignoring the cognitive attributes of rivals and potential entrants. Josh and Judd propose an “irrelevance theorem”: “If one assumes a given behavioral bias applies to all firms — both incumbents and entrants — behavioral antitrust policy implications do not differ from those generated by the rational choice models of mainstream antitrust analysis.”

Addendum: Steve Horwitz made the comparative institutional argument in an earlier post that I unfortunately missed.

5 October 2010 at 1:48 pm Leave a comment

Mmmmmm. . . . Bacon!

| Peter Klein |

This post begged to be written. It started last weekend when I heard Jim Gaffigan’s bacon routine on the Slacker Comedy Channel. Then, during the week, the Mises Institute ran an excerpt from Murray Rothbard’s History of Economic Thought on Francis Bacon. (Rothbard wasn’t impressed, calling Bacon “the prophet of primitive and naive empiricism, the guru of fact grubbing.”) As if that weren’t enough, Rafe Champion decided around the same time to summarize Terence Kealey’s Economic Laws of Scientific Research, the first chapter of which contrasts Bacon’s and Adam Smith’s views on the relationship between science and economic growth. (Bacon’s model: State support -> Basic Research -> Technology -> Progress in human welfare. Smith’s model: Old technology -> New Technology -> Wealth and Welfare.) Bacon — you just can’t get enough!

3 October 2010 at 11:31 pm 3 comments

Tilburg Conference on Private Ordering

| Scott Masten |

O&M readers might be interested in a conference held this week (Sept. 30 – Oct. 1) at the Tilburg Law and Economics Center on the topic “Economic Governance and Competition: The Pros and Cons of Private Ordering in the Shadow of the Law.” The conference was organized by Jens Prüfer and featured keynote presentations by Lisa Bernstein, Avinash Dixit, Robert Gibbons, and Bentley MacLeod. Many interesting papers, several of the authors of which will be familiar to the O&M/ISNIE crowd. The full program, including downloadable papers, can be found here. (Would have liked to attended but classes interfered.)

2 October 2010 at 10:26 am Leave a comment

Ig Nobel Economics and Management Prizes

| Peter Klein |

Thanks to Stéphane Saussier for reminding me that the 2010 Ig Nobel Prizes have been announced. The Economics award is a bit  predictable:

ECONOMICS PRIZE: The executives and directors of Goldman Sachs, AIG, Lehman Brothers, Bear Stearns, Merrill Lynch, and Magnetar for creating and promoting new ways to invest money — ways that maximize financial gain and minimize financial risk for the world economy, or for a portion thereof.

But I’m particularly interested in the Management prize. I hadn’t heard of the paper, but anything with “Peter” in the title must be good:

MANAGEMENT PRIZE: Alessandro Pluchino, Andrea Rapisarda, and Cesare Garofalo of the University of Catania, Italy, for demonstrating mathematically that organizations would become more efficient if they promoted people at random.

REFERENCE: “The Peter Principle Revisited: A Computational Study,” Alessandro Pluchino, Andrea Rapisarda, and Cesare Garofalo, Physica A, vol. 389, no. 3, February 2010, pp. 467-72.

1 October 2010 at 9:27 am 5 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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