Archive for June, 2012

Ockham’s Razor

| Peter Klein |

This looks like a mighty interesting conference:

Scientific theory choice is guided by judgments of simplicity, a bias frequently referred to as “Ockham’s Razor”. But what is simplicity and how, if at all, does it help science find the truth? Should we view simple theories as means for obtaining accurate predictions, as classical statisticians recommend? Or should we believe the theories themselves, as Bayesian methods seem to justify? The aim of this workshop is to re-examine the foundations of Ockham’s razor, with a firm focus on the connections, if any, between simplicity and truth.

The conference started yesterday; here’s a report on day 1 from Cosma Shalizi. Parsimony, for example, turns out to be more complicated than it appears; here is Shalizi on (recent University of Missouri visitor) Elliott Sober:

What he mostly addressed is when parsimony . . . ranks hypotheses in the same order as likelihood. . . . The conditions needed for parsimony and likelihood to agree are rather complicated and disjunctive, making parsimony seem like a mere short-cut or hack — if you think it should be matching likelihood. He was, however, clear in saying that he didn’t think hypotheses should always be evaluated in terms of likelihood alone. He ended by suggesting that “parsimony” or “simplicity” is probably many different things in many different areas of science (safe enough), and that when there is a legitimate preference for parsimony, it can be explained “reductively”, in terms of service to some more compelling goal than sheer simplicity.

23 June 2012 at 12:52 am 2 comments

Today’s Mini-Rant

| Peter Klein |

From my colleague John Howe. Here’s the news item:

MarketWatch (June 20, Orol), meanwhile, has learned that “regulatory observers urged policy makers on Wednesday to require companies to make road-show discussions available to the broader public.” Among them was Ann Sherman, associate professor of finance at DePaul University. She spoke at the Senate Banking Committee hearing that was devoted to whether the IPO process was working for ordinary investors and stated: “It is very important that we try to give everyone the same information.” Lise Buyer, founder of Class V Group LLC, a firm that guides IPO-bound companies, agreed with Sherman. She added that one way to improve the flow of information would be to require companies on a road show to hold a scheduled “Ask the Management” Q&A session via the Internet.

John asks:

Do people actually think we can level the information playing field?  Not only is that naive (stupid), but it leads small/individual investors to the wrong conclusion — that they are not at a comparative disadvantage in the financial markets. They are, and they’re better off knowing it.

21 June 2012 at 3:51 pm Leave a comment

What Is a Firm?

| Peter Klein |

Some of you have heard me suggest — at least half seriously — that we ban the word “entrepreneurship” from scientific discourse. The word has so many definitions that its use often obfuscates rather than clarifies. (If you mean self-employment, better to say say “self-employment”; if you mean opportunity discovery, say “opportunity discovery”; and so on.)

Yoram Barzel (right) listens to Harold Demsetz.

Harold Demsetz gave an interesting and entertaining presentation yesterday at ISNIE, in a session honoring Yoram Barzel on his 80th birthday. Demsetz’s remarks made me wonder if we should ban “firm” as well. Demsetz pointed out, quite rightly, that Coase (1937) defines the firm in terms of the employment relation. A one-person operation, in this definition, is not a firm, and vertical integration deals with the question of adding producers of intermediate products to the firm’s employment roll. Demsetz thinks independent contractors are firms, and hence it makes little sense to speak of “firm” and “market” as alternatives, as Coase does. (Oliver Williamson, during an earlier session, noted that Coase expressed more interest in intermediate product markets in his 1988 article than in “The Nature of the Firm.”)

For Knight, Williamson, Hart, and other notables, in contrast, the firm is defined not by the employment relationship, but by the ownership of alienable assets. In this approach, the question is who owns what, not who is employed by whom. (Dan Spulber offers yet another approach, defining the firm as nexus of transactions with objectives different from those of its owners.) Of course, even in the Knightian approach, to get from the one-person firm to the multi-person firm requires some theory about the relative transaction costs of employment versus independent contracting, a theory Nicolai and I try to provide in chapter 8 of our recent book, focusing on the conditions under which the entrepreneur to delegate judgment to subordinates.

So, what is a firm? Perhaps the better question is, What are the important research questions that can be answered when the firm is defined as X?

17 June 2012 at 11:58 am 14 comments

ISNIE 2012

| Peter Klein |

The 16th annual meeting of the International Society for New Institutional Economics starts today at the USC Gould School of Law at the University of Southern California. President-Elect Lee Epstein has put together a very interesting program with the usual set of good papers and keynotes, including two special sessions in honor of Yoram Barzel on his 80th birthday. No live streaming, but the papers are available online, and I’ll pass along any good gossip to the O&M readership.

14 June 2012 at 6:19 am Leave a comment

Elinor Ostrom (1933-2012)

| Peter Klein |

A guest post from former guest blogger Joe Mahoney, the Caterpillar Chair in Business and Director of Graduate Studies in the Department of Business Administration, University of Illinois:

As many readers of O&M know by now, Elinor Ostrom of Indiana University (born August 7, 1933) died of pancreatic cancer on Tuesday, June 12th at the age of 78.  She shared the Nobel Prize in Economics in 2009 with Professor Oliver Williamson (UC-Berkeley). Elinor along with her husband Vincent Ostrom (now 93) founded Indiana University’s Workshop in Political Theory and Policy in the mid-1960s, in which she remained active until this Spring, only a couple of weeks before her hospitalization. She also donated most of her Nobel Prize money to the Workshop, as Elinor and Vincent had no children and few living relatives.  Williamson said in a statement that Ostrom was “a great human being,” an inspiring teacher and colleague and accomplished social scientist. “She had a wonderful sense of joy about the importance of her work that she successfully communicated to others,” he said. A record five women won Nobel prizes in 2009, and Elinor Ostrom is the only woman to have been awarded the prize in Economics.

Elinor Ostrom, who was born and raised in Los Angeles as a child of the Great Depression, and received her education from undergraduate through Ph.D. at UCLA, contributed to our understanding of the evolution of institutions for collective action in common resource contexts such as forests, fisheries, oil fields, and grazing lands. She emphasized citizen involvement, the creativity of local communities, and cutting through sterile dichotomous classifications and ideological “solutions” that are glib and inaccurate. Ostrom states that “neither the State nor the market is uniformly successful in enabling individuals to sustain long-term, productive use of natural resources” (1990: 1). She emphasized the complementarities between public and private mechanisms for solving collective good problems (see Governing the Commons, Cambridge University Press, 1990.) Ostrom conducted field studies of the world’s fisheries, roamed with shepherds in Swiss pastures, and trudged around the Los Angeles water basin (during her dissertation work) to distill the essentials of harnessing cooperation. She writes in the preface to her 1990 book: “It is my conviction that knowledge accrues by the continual process of moving back and forth from empirical observation to serious efforts at theoretical formulation.” From this theoretically informed field case study method Elinor Ostrom concludes that instead of presuming that individuals sharing a common resource are “inevitably caught in a trap from which they cannot escape, . . . the capacity of individuals to extricate themselves from various types of dilemma situations varies from situation to situation” (1990: 14).

Ostrom championed unlocking the spirit of “public entrepreneurship” — a term she coined in her 1965 UCLA dissertation. Her spirit can live on within us, if we decide to “make it so.” Good years.

13 June 2012 at 6:44 pm 2 comments

Collected Works of F. A. Hayek, Vol. 7: Business Cycles

| Nicolai Foss |

The University of Chicago Press has just published the seventh volume, “Business Cycles, Part I and II,” in their nineteen volumes Collected Works of F.A. Hayek project. The two books contain most of Hayek’s well-known interwar work on the business cycle, particularly his more methodological Monetary Theory and the Trade Cycle (originally published in 1928) and, of course, Prices and Production, in addition to a number of essays on, as they were called, “industrial fluctuations.” The two parts of Volume 7 both have excellent 40+ pages introductions penned by Hansjoerg Klausinger who may well be the scholar in the world with the deepest knowledge of Hayek’s contributions to business cycle theory and who does a superb job in terms of discussing Hayek’s work through the lens of modern economics.

13 June 2012 at 3:57 am 2 comments

Zero (Human) Intelligence Traders on Sex Markets

| Nicolai Foss |


12 June 2012 at 2:03 pm 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).