Archive for July, 2011

Confronting Convenient Historical Distortions

| Peter Lewin |

From management professor Richard Rumelt. This is very interesting.

Today, households carry a much greater relative debt burden than they did in 1929, largely due to a 25-year mortgage binge. Between 1980 and 2007, disposable income grew at 5.9% per year while household indebtedness grew at 8.7% per year — a clearly unsustainable situation. As in 1939, this hangover of debt blocks new rounds of consumption and dulls the impact of fiscal and monetary stimuli.

From today’s WSJ: here.

30 July 2011 at 12:00 pm 3 comments

The Downside of Case Studies

| Peter Klein |

As Herbert Simon once noted, while a case study is only a sample of one, a sample of one is infinitely more informative than a sample of none. This is surely true, but cases must be used with caution, particularly when more systematic evidence is available.

A couple months back I saw a Huffington Post piece claiming that, because Lincoln Electric retains workers even during recessions, and Lincoln Electric is a profitable company, firms should not fire workers when the demand for their products declines. QED. The author laments that business schools don’t teach the virtues of a “no-layoffs” policy more generally. As evidence that business schools are corrupt or incompetent, the author shows that management experts do not, in fact, believe that such a policy is desirable.

A more troubling reason is that many professors at Harvard and other MBA schools are deeply skeptical of offering workers such a bargain.

“It’s a terribly non-optimal and inefficient policy,” says George P. Baker, the co-chair of the HBS doctoral program. “Lincoln Electric is a special case. Unless there is some other reason for having it, as part of an incentive system, you would be wrong to recommend it.”

“I’m not unsympathetic to guaranteed employment and the long-term social strengths it builds,” says James Rebitzer, Chair of the Business Policy Department at Boston University’ School of Management, “But I think there are only a very few special circumstances where a commitment to no-layoffs actually improves operating efficiency.”

Harvard students such as Corey Crowell (MBA 2009), who read the [Lincoln Electric] case just days before we met, got the message: “I just worry that the sense of a guaranteed job would create complacency . . . look at the auto industry.”

There you have it. Despite a wealth of theory and evidence that guaranteed lifetime employment is generally harmful to firm performance, if one firm follows such a policy and prospers, then all firms should do so. That business schools don’t embrace the non sequitur is “troubling.” Okey dokey.

29 July 2011 at 9:52 pm 16 comments

No Wonder Our Readers Find Us Witty and Clever

| Peter Klein |

Confirmation bias, it appears, affects not only our scientific and political beliefs, but our aesthetic preferences as well. Now I understand why certain people read!

28 July 2011 at 8:18 am 1 comment

Another Benefit of Globalization

| Peter Klein |

Better management practice:

The Land that Lean Manufacturing Forgot? Management Practices in Transition Countries
Nicholas Bloom, Helena Schweiger, John Van Reenen
NBER Working Paper No. 17231, July 2011

We have conducted the first survey on management practices in transition countries. We found that Central Asian transition countries, such as Uzbekistan and Kazakhstan, have on average very poor management practices. Their average scores are below emerging countries such as Brazil, China and India. In contrast, the central European transition countries such as Poland and Lithuania operate with management practices that are only moderately worse than those of western European countries such as Germany. Since we find these practices are strongly linked to firm performance, this suggests poor management practices may be impeding the development of Central Asian transition countries. We find that competition, multinational ownership, private ownership and human capital are all strongly correlated with better management. This implies that the continued opening of markets to domestic and foreign competition, privatisation of state-owned firms and increased levels of workforce education should promote better management, and ultimately faster economic growth.

25 July 2011 at 9:55 pm 1 comment

What Do Universities Produce?

| Peter Lewin |

Naomi Riley’s new book on university tenure is creating a bit of a stir. It is of a kind with a number of similar works reflecting growing unease about the traditional arrangements in academe. One reads frequently about the lack of value for money that students get for persistently rising tuition fees. And a colleague of mine says he thought he was hired to do research and found out he was actually hired to create publications — and these can be drastically different things. (Witness the recent post by Nicolai).

I wonder how these arrangements have survived in the marketplace. Clearly, universities are multi-product firms. Education (for which tuition is paid) is only one of the products. Another is “research.” This is supposedly a public good (in large part — I guess some products of research could be proprietary). So it is reimbursed by the public purse — aka we have a rent-seeking situation with all its dysfunctions, including minimal feedback on product quality. There is no constituency of consumers to speak of. In effect the producers (the researchers) end up judging their own work and setting the standards and (perhaps most importantly) the rules of the game. Put this in motion and you get a system that serves only the players of the game — provides them with formidable isolating mechanisms and protections.

One implication is that the larger the share of revenue accounted for by tuition (as with liberal arts colleges) the higher the quality of teaching should be. And a growing share of tuition dollars should put pressure on these isolation mechanisms. Of course, where this tuition is paid mainly by the state (state schools) this would not be the case.

So, its a bit of a puzzle to me why the liberal arts colleges don’t have a larger market share. Why do the big “research” schools maintain their prestige attraction when they cost so much and produce such low quality teaching? Maybe its a kind of screening effect — the job market rewards students who graduate from prestigious schools so good students tend to go there and the teaching is irrelevant — a network effect.

24 July 2011 at 1:34 pm 18 comments

Two New Papers …

| Nicolai Foss |

… by Yours Truly. The Academy of Management Review just published my paper with Siegwart Lindenberg, “Managing Joint Production Motivation: The Role of Goal Framing and Governance Mechanisms,” and Organization Science just published “Linking Customer Interaction and Innovation: The Mediating Role of New Organizational Practices,” by me, Keld Laursen and Torben Pedersen.  Here are the abstracts: (more…)

24 July 2011 at 10:10 am 1 comment

More Serious Stuff

| Nicolai Foss |

Economists may have models of zero intelligence traders, but so far there are no models of zombie traders (that I know of). Possible inspiration for future modeling efforts here.

24 July 2011 at 9:49 am 1 comment

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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).
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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).
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