Archive for February, 2013
Russian Summer School on Institutional Analysis
| Peter Klein |
The Center for Institutional Studies at Russia’s Higher School of Economics sponsors an annual summer school “aimed at creating and supporting the academic network of young researchers from all regions of Russia as well as from CIS and other countries, who work in the field of New Institutional Economics.” This year’s conference is 29 June – 5 July in Moscow, and the faculty includes former O&M guest blogger Scott Masten along with John Nye, Russell Pittman, Garrett Jones, and many others. The full program, along with registration and other info, is available at the conference site.
My Response to Shane (2012)
| Peter Klein |
Peter Lewin blogged earlier on the ten-year retrospectives by Scott Shane and Venkataraman et al. on the influential 2000 Shane and Venkataraman paper, “The Promise of Entrepreneurship as a Field of Research.” As Peter mentioned, Shane acknowledges critics of the opportunity construct such as Sharon Alvarez, Jay Barney, Per Davidsson, and me, but dismisses our concerns as trivial or irrelevant.
The January 2013 issue of AMR includes a formal response by Alvarez and Barney, as well as rejoinders by Shane (with Jon Eckhardt) and Venkataraman (with Saras Sarasvathy, Nick Dew, and William Forster). The dialogue is well worth reading. I didn’t participate in the symposium but do have a brief response to Shane.
My critique of Shane’s work, and the opportunity-discovery perspective more generally, is that the scientific understanding of entrepreneurship has been held back by the focus on opportunities. The basic idea is simple: “opportunities” do not exist objectively, but are only only subjective images, or conjectures, about future possibilities. They exist in the mind of the entrepreneur, who takes actions to try to bring them about. The very concept of opportunity makes sense only ex post, after actions have been taken and future outcomes realized, leading to realized profits and losses. Under uncertainty, there are no opportunities, only entrepreneurial forecasts, which may turn out to be correct or incorrect. (My critique is slightly different from that of Alvarez and Barney, who argue that some opportunities are “discovered,” but others are “created.” My position is that the whole idea of opportunity is at best redundant, and at worst misleading and harmful.) I maintain that the unit of analysis in entrepreneurship research should be action (investment) under uncertainty, not the discovery (or creation) of profit opportunities.
These arguments are laid out in my 2008 SEJ article and in the Foss-Klein 2012 book. They also came to the fore in a recent exchange with Israel Kirzner, the intellectual father of the opportunity construct. (more…)
Doug Allen on Alchian
| Peter Klein |
A remembrance from our friend Doug Allen:
I only met Armen once, but his influence on me was profound. In the fall of 1980 I was taking intermediate micro economics to fulfill a Business Degree requirement. The course was taught by the great Art DeVany, who had been a student of Armen’s at UCLA. Naturally he used “Exchange and Production” as his text. I remember vividly the day — it was a Thursday, late on a cloudy afternoon — when I entered a corner of a large hallway on campus. I was thinking about the concept covered in class that week: “prices are not determined by costs.” I went into that corner thinking like an accountant, and when I came out the other side I was thinking like an economist. It was an epiphany. I came out thinking “of course prices are not determined by costs!”
I quickly changed majors, decided to postpone law school for a detour in graduate economics, and have never looked back. Fortunately for me my advanced undergraduate theory class was taught by Chris Hall, an intellectual grandson of Armen’s via Steve Cheung. His text for the course was “Economic Forces at Work.” I loved Armen’s writing, his style, and his ease in making life a big puzzle to solve.
I mentioned that I have only met the great man once. It was at a PERC conference in the early 1990s. The small group sat around tables in alphabetical order, and so Alchian was first and (Doug) Allen was second. I jokingly said “ah, Alchain and Allen, together again.” I thought it was quite witty, but Armen ignored the remark. I made some other comments that he was similarly impressed with. So, remembering that “even a fool is counted wise when he keeps his mouth shut,” I just sat back and listened. It was a great treat, and Armen didn’t seem to mind having me tag along for the weekend. My favorite recollection was a long discussion we had over how Rockefeller actually made money.
As I think about his passing, the one thought that strikes me is “where is the Armen Alchain for today?” Where is the economist’s economist? I suppose there just never will be another AAA.
Armen Alchian (1914-2013)
| Peter Klein |
Armen Alchian passed away this morning at 98. We’ll have more to write soon, but note for now that Alchian is one of the most-often discussed scholars here at O&M. A father of the “UCLA” property-rights tradition and a pioneer in the theory of the firm, Alchian wrote on a dizzying variety of topics and was consistently insightful and original.
Alchian was very intellectually curious, always pushing in new directions and looking for new understandings, without much concern for his reputation or legacy. One personal story: I once asked him, as a naive and somewhat cocky junior scholar, how he reconciled the team-production theory of the firm in Alchian and Demsetz (1972) with the holdup theory in Klein, Crawford, and Alchian (1978). Aren’t these inconsistent? He replied — politely masking the irritation he must have felt — “Well, Harold came to me with this interesting problem to solve, and we worked up an explanation, and then, a few years later, Ben was working on a different problem, and we started talking about it….” In other words, he wasn’t thinking of developing and branding an “Alchian Theory of the Firm.” He was just trying to do interesting work.
Updates: Comments, remembrances, resources, links, etc.:
- Robert Higgs
- David Henderson (1, 2)
- Jerry O’Driscoll
- Alex Tabarrok
- Doug Allen
- Dan Benjamin
- A 1996 Alchian symposium (gated)
- Alchian and Woodward’s review of Williamson (1985): “The Firm Is Dead, Long Live the Firm”
Entrepreneurship and Knowledge
| Peter Klein |
Hayek famously argued that prices embody information and that economic actors, responding to price changes, act as if they knew the underlying circumstances generating these changes. “[I]n a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.” To economize, people don’t need “knowledge of the particular circumstances of time and place,” they only need access to prices. “The mere fact that there is one price for any commodity . . . brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.” Hayek illustrates with his famous example of the tin market: “All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply.”
Hayek offers a powerful argument against interference with the price mechanism. But we should remember that prices embody information about the past, and the entrepreneur’s job is to anticipate, or “appraise,” the future. Entrepreneurs, far from discovering and exploiting “gaps” in the existing structure of prices, deploy resources in anticipation of expected — but uncertain — profits generated by future prices. For this, they rely on what Mises called a “specific anticipative understanding of the conditions of the uncertain future,” an understanding that requires a lot of knowledge of particular circumstances of time and place!
The knowledge requirements of the successful entrepreneur or arbitrageur are vividly illustrated in this passage from Carsten Jensen’s magnificent novel, We the Drowned, in a passage about 19th-century ship brokers, entrepreneurs who own, lease, and manage ships and shipping contracts:
A ship broker needs to know how the Russo-Japanese War will hit the freight market. He doesn’t need to be interested in politics, but he has to pay attention to his skippers’ finances, so a knowledge of international conflict is essential. Opening up a newspaper — he’ll see a photograph of a head of state and if he’s bright enough, he’ll read his own future profits in the man’s face. He might not he interested in socialism, in fact he’ll swear he isn’t: he’s never heard such a load of starry-eyed nonsense. Until one day his crew lines up and demands higher wages, and he has to immerse himself in union issues and other newfangled notions about the future organization of society. A broker must keep up to date with the names of foreign heads of state, the political currents of the time, the various enmities between nations, and earthquakes in distant parts of the world. He makes money out of wars and disasters, but first and foremost he makes it because the world has become one big building site. Technology rearranges everything, and he needs to know its secrets, its latest inventions and discoveries. Saltpeter, divi-divi, soy cakes, pit props, soda, dyer’s broom — these aren’t just names to him. He’s neither touched saltpeter nor seen a swatch of dyer’s broom. He’s never tasted soy cake (for which he can count himself lucky), but he knows what it’s used for and where there’s a demand for it. He doesn’t want the world to stop changing. If it did, his office would have to close. He knows what a sailor is: an indispensable helper in the great workshop that technology has made of the world.
There was a time when all we ever carried was grain. We bought it in one place and sold it in another. Now we were circumnavigating the globe with a hold full of commodities whose names we had to learn to pronounce and whose use had to be explained to us. Our ships had become our schools. They were still powered by the wind in their sails, as they had been for thousands of years. But stacked in their holds lay the future.
New Review Paper on Multinational Firms
| Peter Klein |
The econ and strategy literatures on multinational firms have grown dramatically since the pioneering works of Caves, Casson, Teece, and others. Besides established journals like the Journal of International Economics and Journal of International Business Studies, there is the new Global Strategy Journal and plenty of space in the general-interest journals for issues dealing with multinationals.
Pol Antràs and Stephen Yeaple have written a new survey paper for the Handbook of International Economics, 4th edition, and it’s available as a NBER working paper, “Multinational Firms and the Structure of International Trade.” The review focuses on the mainstream economics literature but should be useful for management and organization scholars as well — particularly section 7 on firm boundaries which includes both transaction cost and property rights theories. Here’s the abstract:
This article reviews the state of the international trade literature on multinational firms. This literature addresses three main questions. First, why do some firms operate in more than one country while others do not? Second, what determines in which countries production facilities are located? Finally, why do firms own foreign facilities rather than simply contract with local producers or distributors? We organize our exposition of the trade literature on multinational firms around the workhorse monopolistic competition model with constant-elasticity-of-substitution (CES) preferences. On the theoretical side, we review alternative ways to introduce multinational activity into this unifying framework, illustrating some key mechanisms emphasized in the literature. On the empirical side, we discuss the key studies and provide updated empirical results and further robustness tests using new sources of data.
The NBER version is gated but I’m sure our intrepid readers can dig up an open-access copy.
Hayek and Organizational Studies
| Peter Klein |
That’s the title of a new review paper by Nicolai and me for the forthcoming Oxford Handbook of Sociology, Social Theory, and Organizational Studies, edited by Paul Adler, Paul du Gay, Glenn Morgan, and Mike Reed (Oxford University Press, 2013). No, we haven’t gone over to the Dark Side (I mean, the good side), we just think Hayek’s work deserves to be better known among all scholars of organization, not only economists. Unlike many treatments of Hayek, we don’t focus exclusively, or even primarily, on tacit knowledge, but on capital theory, procedural rules, and other aspects of Hayek’s “Austrian” thinking.
You can download the paper at SSRN. Here’s the abstract:
We briefly survey Hayek’s work and argue for its increasing relevance for organizational scholars. Hayek’s work inspired aspects of the transaction cost approach to the firm as well as knowledge management and knowledge-based view of the firm. But Hayek is usually seen within organizational scholarship as a narrow, technical economist. We hope to change that perception here by pointing to his work on rules, evolution, entrepreneurship and other aspects of his wide-ranging oeuvre with substantive implications for organizational theory.
Arrunada Seminar: Benito Arruñada – Underprovision of Public Registries?
| Benito Arruñada |
Underprovision of Public Registries?
Organizing registries is harder than it seems. Governments struggled for almost ten centuries to organize reliable registries that could make enabling rules safely applicable to real property. Similarly, company registries were adopted by most governments only in the nineteenth century, after the Industrial Revolution. Moreover, though most countries have now been running property and company registries for more than a century, only a few have succeeded in making them fully functional: in most countries, adding a mortgage guarantee to a loan does not significantly reduce its interest rate.
US registries show that these difficulties do not only affect developing countries. Many US registries are stunted, shaky institutions whose functions are partly provided by private palliatives. In land, the public county record offices have been unable to keep up with market demands for speed and uniform legal assurance. Palliative solutions such as title insurance duplicate costs only to provide incomplete in personam guarantees or even multiply costs, as Mortgage Electronic Registry Systems (MERS) did by being unable to safely and comprehensively record mortgage loan assignments. In company registries, their lack of ownership information means that they are of little help in fighting fraud, and their sparse legal review implies that US transactions require more extensive legal opinions. In patents, a speed-oriented US Patent and Trademark Office combines with a strongly motivated patent bar to cause an upsurge of litigation of arguably dangerous consequences for innovation.
The introduction of registries has often been protracted because part of the benefits of registering accrue to others. They also have to compete with private producers of palliative services (i.e., documentary formalization by lawyers and notaries) who usually prefer weak or dysfunctional registries, as they increase the demand for their services. Moreover, most legal resources, including the human capital of judges, scholars, and practitioners is adapted to personal instead of impersonal and registry-mediated exchange.
Information and communication technologies have opened new possibilities for impersonal trade, thus increasing the demand for the institutions, such as registries, that support impersonal trade. Economic development therefore hinges, more than ever, on governments’ ability to overcome these difficulties, which are allegedly holding back the effective registries needed to enable impersonal exchange and exhaust trade opportunities.
Creativity and Property Rights
| Peter Klein |
I haven’t been following the Cato Unbound debate on US copyright law, but Adam Mossoff directs me to Mark Schultz’s post, “Where are the Creators? Consider Creators in Copyright Reform.” Mark thinks current debates over copyright law neglect the role of creativity: “Too often, the modern copyright debate overlooks the fact that copyright concerns creative works made by real people, and that the creation and commercialization of these works requires entrepreneurial risk taking. A debate that overlooks these facts is factually, morally, and economically deficient. Any reform that arises from such a context is likely to be both unjust and economically harmful.” Adam thinks Mark’s position “calls out the cramped, reductionist view of copyright policy that leads some libertarians and conservatives to castigate this property right as ‘regulation’ or as ‘monopoly.'”
As one of those libertarians critical of copyright law, but also an enthusiast for the fundamental creativity of the entrepreneurial act, let me respond briefly. Mark is certainly right that creative works are created by individuals (not, “discovered,” as some of the entrepreneurship literature might lead you to believe). But I don’t see the implications for copyright law. The legal issue is not the ontology of creative works, but the legal rights of others to use their own justly owned property in relation to these creative works. Copyright law is, after all, about delineating property rights, and whether legal protection should be extended to X does not follow directly from the fact that X was “created” instead of “discovered.”
Mark uses the language of entrepreneurship, and I think this argues against his conclusion. Property law protects the property of the entrepreneur, and the ventures he creates, not the stream of income accruing to those ventures. Suppose Mark has the brilliant insight to open a Brooklyn-style deli on a street corner here in Columbia, Missouri, makes lots of money, and then I open a similar shop across the street, cutting into his revenues. No one would argue that I’ve violated Mark’s property rights; the law rightly protects the physical integrity of Mark’s shop, such that I can’t break in and steal his equipment, but doesn’t protect him against pecuniary externalities. The fact that Mark’s restaurant wouldn’t have existed if he hadn’t created it — that “real people make this stuff,” as he puts it — has no bearing on the legality of my opening up a competing restaurant, even though this harms him economically.
Organizations and Markets 
Recent Comments