Archive for March, 2013

More on Blogs and Social Media

| Peter Klein |

Nicolai was kind enough to mention my Facebook page but neglected to add that he has one too, and that O&M itself is on Facebook and Twitter. You can read, like, share, and comment on O&M posts at those sites as well as the main site. Which raises the interesting issue, is the blog format obsolete? We started O&M in 2006, an eon ago in Internet time. Since then, Twitter, Facebook, Google Plus, LinkedIn, and other social media platforms have appeared, and they duplicate most functions of the old-fashioned blog. They usually allow cross-posting and let you compose on one and push to the others. So, are blogging platforms like WordPress (which we use) on the way out? Google’s unfortunate decision to kill Google Reader has some people suggesting that RSS itself is dead. What should we do, to stay on the cutting edge? What’s the future of structured online group discussion? Should we create the first MOOOB (Massively Open Online Organizations Blog)?

31 March 2013 at 7:05 am 4 comments

Klein Fan Page on Facebook

| Nicolai Foss |

Our Moral Leader at O&M has his own fan page on Facebook.  He mixes entertaining libertarian outbursts with info on new conferences and links to cool new papers, articles, and so on–in other words, O&M en miniature. Pay a visit and like Peter’s page.

30 March 2013 at 12:39 pm Leave a comment

Henderson on Business Ethics

| Dick Langlois |

Rebecca Henderson, one of my favorite management scholars, has a new paper (with Karthik Ramanna) on – Milton Friedman and business ethics. Here’s the abstract.

Managers and Market Capitalism

In a capitalist system based on free markets, do managers have responsibilities to the system itself, and, in particular, should these responsibilities shape their behavior when they are attempting to structure those institutions of capitalism that are determined through a political process? A prevailing view — perhaps most eloquently argued by Milton Friedman — is that managers should act to maximize shareholder value, and thus that they should take every opportunity (within the bounds of the law) to structure market institutions so as to increase profitability. We maintain here that if the political process is sufficiently ‘thick,’ in that diverse views are well-represented and if politicians and regulators cannot be easily captured, then this shareholder-return view of political engagement is unlikely to reduce social welfare in the aggregate and thus damage the legitimacy of market capitalism. However, we contend that sometimes the political process of determining institutions of capitalism is ‘thin,’ in that managers find themselves with specialized technical knowledge unavailable to outsiders and with little political opposition — such as in the case of determining certain corporate accounting standards that define corporate profitability. In these circumstances, we argue that managers have a responsibility to structure market institutions so as to preserve the legitimacy of market capitalism, even if doing so is at the expense of corporate profits. We make this argument on grounds that it is both in managers’ self-interest and, expanding on Friedman, managers’ ethical duty. We provide a framework for future research to explore and develop these arguments.

On the one hand, we might quibble about whether they get Friedman right. Friedman meant in the first instance that managers should pursue their self-interest within the framework of “good” institutions, not in the (Public Choice) context of changing the institutional framework itself. I haven’t actually gone back to see what Friedman says about this, but here is how Henderson and Ramanna interpret the Chicago tradition: “Friedman and his colleagues were keenly aware that capitalism can only fulfill its normative promise when markets are free and unconstrained, and that managers (and others) have strong incentives to violate the conditions that support such markets (e.g., Stigler, 1971). But they argued both that dynamic markets tend to be self-healing in that the dynamics of competition itself generates the institutions and actions that maintain competition and that government could be relied on to maintain those institutions—such as the legal system—that are more effectively provided by the state (on this latter point, see, in particular, Hayek, 1951).” There is a sense in which Chicago saw (and economic liberals in general see) the system as self-healing in the longest of runs: every inefficiency is ultimately a profit opportunity for someone who can transmute deadweight loss into producer’s surplus; and economic growth cures a lot of ills. But one can hardly accuse Chicago of being insensitive to those bad incentives for rent-seeking in the short and medium term.

On the other hand, Henderson and Ramanna make a valuable point when they draw our attention to the gray area in which market-supporting institutions (the same term I tend to use) are often forged through private action or through public action in which the private actors possess the necessary local knowledge. There is a scattered literature on this – the setting of technical standards, for example – but it is not a major focus of Public Choice or political economy. Perhaps it is naïve to say that managers in this gray area have an ethical duty to support institutions that make the pie bigger rather than institutions that transfer income to them. But what else can we say? It’s a lot better than blathering on about “public-private partnerships,” which are frequently cover for rent-seeking behavior. One (possibly embarrassing) implication of this stance is that it makes a hero of the much-reviled Charles Koch, who funds opposition to many of the rent-seeking institutions from which his own company benefits.

At one point Henderson and Ramanna mention the Great Depression as a “market failure” that incubated anti-capitalist sentiment. The second part of that assertion is certainly true, but the Depression was not a market failure but a spectacular failure of government. (Read Friedman (!), whose once-controversial view about this is now widely accepted by economic historians and monetary economists, including Ben Bernanke.) The Depression is actually an interesting case study in the gray area of institutions. Before the Fed, private financiers acted collectively to provide the public good of stopping bank panics. Now that role has fallen to the state, with private interests – and their asymmetrical local knowledge – influencing the bailout process. Which system was less corrupt? A more general question: are there any examples of fully private creation of institutions in which the self-interest of the participants led to inefficient rent-seeking?

27 March 2013 at 2:33 pm 2 comments

Rational Inattention

| Dick Langlois |

The idea of attention as a scarce resource goes back at least to Herbert Simon and Nelson and Winter. I hadn’t seen much application of this idea in a while until I ran across this interesting paper called “Rational Inattention and Organizational Focus” by Wouter Dessein, Andrea Galeotti, and Tano Santos. Here’s the abstract:

We examine the allocation of scarce attention in team production. Each team member is in charge of a specialized task, which must be adapted to a privately observed shock and coordinated with other tasks. Coordination requires that agents pay attention to each other, but attention is in limited supply. We show how organizational focus and leadership naturally arise as the result of a fundamental complementarity between the attention devoted to an agent and the amount of initiative taken by that agent. At the optimum, all attention is evenly allocated to a select number of “leaders”. The organization then excels in a small number of focal tasks at the expense of all others. Our results shed light on the importance of leadership, strategy and “core competences” in team production, as well as new trends in organization design. We also derive implications for the optimal size or “scope” of organizations: a more variable environment results in smaller organizations with more leaders. Surprisingly, improvements in communication technology may also result in smaller but more balanced and adaptive organizations.

Apparently, Dessein has been working on attention models for some time, though I hadn’t noticed. (But, of course, Peter had.) I should also note that this model is similar in spirit to the work of Sharon Gifford, now 20 years old, which Dessein et al. do not cite.

22 March 2013 at 2:49 pm Leave a comment

Coasean Bargaining Opportunity

| Peter Klein |

Forget Wrigley Field: here’s a colorful example for classroom discussions of property rights, external costs, bargaining, and the Coase Theorem. Literally colorful. (Via Bob Subrick.)

19 March 2013 at 2:21 pm Leave a comment

Incomplete Contracts and the Internal Organization of Firms

| Peter Klein |

That’s the title of a new NBER paper by Philippe Aghion, Nicholas Bloom, and John Van Reenen, indicating that organization design, from the perspective of incomplete-contracting theory, continues to be a hot topic among the top economists. Like all NBER papers this one is gated, but intrepid readers may be able to locate a freebie.

Incomplete Contracts and the Internal Organization of Firms
Philippe Aghion, Nicholas Bloom, John Van Reenen

NBER Working Paper No. 18842, February 2013

We survey the theoretical and empirical literature on decentralization within firms. We first discuss how the concept of incomplete contracts shapes our views about the organization of decision-making within firms. We then overview the empirical evidence on the determinants of decentralization and on the effects of decentralization on firm performance. A number of factors highlighted in the theory are shown to be important in accounting for delegation, such as heterogeneity and congruence of preferences as proxied by trust. Empirically, competition, human capital and IT also appear to foster decentralization. There are substantial gaps between theoretical and empirical work and we suggest avenues for future research in bridging this gap.

15 March 2013 at 5:46 pm 2 comments

Trento Summer School on Modularity

| Dick Langlois |

This summer I am directing a two-week summer school on “Modularity and Design for Innovation,” July 1-12. I am working closely with Carliss Baldwin, who will be the featured speaker. Other guest speakers will include Stefano Brusoni, Annabelle Gawer, Luigi Marengo, and Jason Woodard.

The school is intended for Ph.D. students, post-docs, and newly minted researchers in technology and operations management, strategy, finance, and the economics of organizations and institutions. The school provides meals and accommodations at the beautiful Hotel Villa Madruzzo outside Trento. Students have to provide their own travel. More information and application here.

This is the fourteenth in a series of summer schools organized at Trento by Enrico Zaninotto and Axel Leijonhufvud. In 2004, I directed one on institutional economics.

12 March 2013 at 5:28 am 1 comment

I, Coke Can

coke-can-198x300| Peter Klein |

Via Craig Newmark, a modern riff on Leonard Read’s classic:

The number of individuals who know how to make a can of Coke is zero. The number of individual nations that could produce a can of Coke is zero. This famously American product is not American at all. Invention and creation is something we are all in together. Modern tool chains are so long and complex that they bind us into one people and one planet. They are not only chains of tools, they are also chains of minds: local and foreign, ancient and modern, living and dead — the result of disparate invention and intelligence distributed over time and space. Coca-Cola did not teach the world to sing, no matter what its commercials suggest, yet every can of Coke contains humanity’s choir.

No surprises here to students of open innovation, but a vivid illustration nonetheless.

11 March 2013 at 10:53 am 4 comments

The First Modern Organizational Chart

| Peter Klein |

It was designed in 1854 for the New York and Erie Railroad and reflects a highly decentralized structure, with operational decisions concentrated at the local level. McKinsey’s Caitlin Rosenthal describes it as an early attempt to grapple with “big data,” one of today’s favored buzzwords. See her article, “Big Data in the Age of the Telegraph,” for a fascinating discussion. And remember, there’s little new under the sun (1, 23).

erierr_fullmap

5 March 2013 at 12:19 pm 1 comment

Sequestration and the Death of Mainstream Journalism

| Peter Klein |

Much virtual ink has been spilled over the decline of the mainstream media, measured by circulation, advertising revenue, or a general sense of irrelevance. Usual explanations relate to the changing economics of news gathering and publication, the growth of social media, demographic and cultural shifts, and the like. These are all important but the main issue, I believe, is the characteristics of the product itself. Specifically, news consumers increasingly recognize that the mainstream media outlets are basically public relations services for government agencies, large companies, and other influential organizations. Journalists do very little actual journalism — independent investigation, analysis, reporting. They are told what stories are “important” and, for each story, there is an official Narrative, explaining the key issues and acceptable opinions on these issues. Journalists’ primary sources are off-the-record, anonymous briefings by government officials or other insiders, who provide the Narrative. A news outlet that deviates from the Narrative by doing its own investigation or offering its own interpretation risks being cut off from the flow of anonymous briefings (and, potentially, excluded from the White House Press Corps and similar groups), which means a loss of prestige and a lower status. Basically, the mainstream news outlets offer their readers a neatly packaged summary of the politically correct positions on various issues. In exchange for sticking to the Narrative, they get access to official sources. Give up one, you lose the other. Readers are beginning to recognize this, and they don’t want to pay.

Nowhere is this situation more apparent than the mainstream reporting on budget sequestration. The Narrative is that sequestration imposes large and dangerous cuts — $85 billion, a Really Big Number! — to essential government services, and that the public reaction should be outrage at the President and Congress (mostly Congressional Republicans) for failing to “cut a deal.” You can picture the reporters and editors grabbing their thesauruses to find the right words to describe the cuts — “sweeping,” “drastic,” “draconian,” “devastating.” In virtually none of these stories will you find any basic facts about the budget, which are easily found on the CBO’s website, e.g.:

  • Sequestration reduces the rate of increase in federal spending. It does not cut a penny of actual (nominal) spending. 
  • The CBO’s estimate of the reduction in increased spending between 2012 and 2013 is $43 billion, not $85 billion.
  • Total federal spending in 2012 was $3.53 trillion. The President’s budget request for 2013 was $3.59 trillion, an increase of $68 billion (about 2%). Under sequestration, total federal spending in 2013 will be $3.55 trillion, an increase of only $25 billion (a little less than 1%). 
  • Did you catch that? Under sequestration, total federal spending goes up, just by less than it would have gone up without sequestration. This is what the Narrative calls a “cut” in spending! It’s as if you asked your boss for a 10% raise, and got only a 5% raise, then told your friends you got a 5% pay cut.
  • Of course, these are nominal figures. In real terms, expenditures could go down, depending on the rate of inflation. Even so, the cuts would be tiny — 1 or 2%.
  • The news media also talk a lot about “debt reduction,” but what they mean is a reduction in the rate at which the debt increases. Even with sequestration, there is a projected budget deficit — the government will spend more than it takes in — during every year until 2023, the last year of the CBO estimates. The Narrative grudgingly admits that sequestration might be necessary to reduce the national debt, but sequestration doesn’t even do that. It’s as if you went on a “dramatic” weight-loss plan by gaining 5 pounds every year instead of 10.

This is all public information, easily accessible from the usual places. But mainstream news reporters can’t be bothered to look is up, and don’t feel any need to, because they have the Narrative, which tells them what to say. Seriously, have you read anything in the New York Times, Washington Post, or Wall Street Journal or heard anything on CNN or MSNBC clarifying that the “cuts” are reductions in the rate of increase? Even Wikipedia, much maligned by the establishment media, gets it right: ” sequestration refers to across the board reductions to the planned increases in federal spending that began on March 1, 2013.” If we have Wikipedia, why on earth would we pay for expensive government PR firms?

NB: See also earlier comments on the mainstream media here and here.

4 March 2013 at 12:13 pm 7 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).