Archive for October, 2013
Ronald Coase at Dundee
| Peter Klein |
The University of Dundee’s Scottish Centre for Economic Methodology is hosting a conference 18 November 2013, “Origins of the Theory of the Firm: Ronald Coase at Dundee, 1932-1934.” The program looks really interesting:
- Keith Tribe, “Dundee and Interwar Commercial Education.”
- Billy Kenefick, “‘A great industrial cul-de-sac, a grim monument to “man’s inhumanity to man.” ‘ Dundee by the early 1930s.”
- Carlo Morelli, “Market & Non-Market Co-ordination: Dundee and its Jute Industry – The Case Study for Ronald Coase?”
- David Campbell, “Agency, Authority and Co-operation in the Firm: Coase, Macneil, Marx.”
- Alice Belcher, “Coase and the Concept of Direction: How Valuable are Legal Concepts in the Theory of the Firm?”
- Brian Loasby, “Ronald Coase’s Theory of the Firm and the Scope of Economics.”
- Alistair Dow & Sheila Dow, “Coase and Scottish Political Economy.”
- Eyup Ozveren & Ilhan Can Ozen, “Coase versus Coase: What if the Market Were One Big Firm Instead?”
- Neil Kay, “Coase, The Nature of the Firm, and the Principles of Marginal Analysis.”
Easy Money and Asset Bubbles
| Peter Klein |
Central to the “Austrian” understanding of business cycles is the idea that monetary expansion — in Wicksellian terms, money printing that pushes interest rates below their “natural” levels — leads to overinvestment in long-term, capital-intensive projects and long-lived, durable assets (and underinvestment in other types of projects, hence the more general term “malinvestment”). As one example, Austrians interpret asset price bubbles — such as the US housing price bubble of the 1990s and 2000s, the tech bubble of the 1990s, the farmland bubble that may now be going on — as the result, at least partly, of loose monetary policy coming from the central bank. In contrast, some financial economists, such as Laureate Fama, deny that bubbles exist (or can even be defined), while others, such as Laureate Shiller, see bubbles as endemic but unrelated to government policy, resulting simply from irrationality on the part of market participants.
Michael Bordo and John Landon-Lane have released two new working papers on monetary policy and asset price bubbles, “Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence,” and “What Explains House Price Booms?: History and Empirical Evidence.” (Both are gated by NBER, unfortunately, but there may be ungated copies floating around.) These are technical, time-series econometrics papers, but in both cases, the conclusions are straightforward: easy money is a main cause of asset price bubbles. Other factors are also important, particularly regarding the recent US housing bubble (I suspect that housing regulation shows up in their residual terms), but the link between monetary policy and bubbles is very clear. To be sure, Bordo and Landon-Lane don’t define easy money in exactly the Austrian-Wicksellian way, which references natural rates (the rates that reflect the time preferences of borrowers and savers), but as interest rates below (or money growth rates above) the targets set by policymakers. Still, the general recognition that bubbles are not random, or endogenous to financial markets, but connected to specific government policies designed to stimulate the economy, is a very important result that will hopefully influence current economic policy debates.
Symposium on Allen’s Institutional Revolution
| Peter Klein |
Here is a symposium on Doug Allen’s very important book The Institutional Revolution (Chicago, 2011). The symposium features essays by Deirdre McCloskey, Joel Mokyr and José-Antonio Espín-Sánchez, and our own Dick Langlois, along with a reply by Doug. The issue revolves around the role of measurement, and Doug’s thesis that reductions in measurement costs are central to improved economic performance.
My favorite line, from Doug’s reply:
I have read “The Problem of Social Cost” more times than I can recall, and study as I may, I have never found a logical error in it. But here is the point: if the author, both at the time and 30 years later, still failed to fully grasp his own perfect work, then it is an understatement to note that the ideas are subtle.
Recent Videos from Top Business Professors
| Peter Klein |
Michael Porter: “Why Business Can Be Good at Solving Social Problems”
Costas Markides: “Strategy Is about Making Choices”
Clayton Christensen: “Disruptive Innovation”
Private, For-Profit Legal Education
| Peter Klein |
The WSJ profiles InfiLaw, a network of private-equity backed, for-profit law schools that is challenging the established model of legal education. From what I understand, InfiLaw seems to be the University of Phoenix of law schools, providing vocationally oriented training for the lower-end of the market (but, unlike for-profit business schools, charging upmarket prices).
InfiLaw’s schools aren’t designed to compete with the Harvards and Stanfords. The approach, the company says, has mostly been to target students, including many minorities, whose grade-point averages or LSAT scores don’t qualify them for admission at the top schools. . . .
Some in the academy think InfiLaw is compounding the problems in legal education, which is graduating far more students than there are entry-level jobs for lawyers. Critics, including former students who have sued Florida Coastal, see the company as a predatory outfit that peddles false promises to students in exchange for high tuitions.
Others think criticisms of InfiLaw are based on elitism embedded within the legal academy,
As we’ve noted before, it is unlikely that newer, private, for-profit colleges, universities, and professional schools can compete head-to-head with the traditional schools, but why should they? Certainly there is room for more creativity, experimentation, and innovation, structurally and pedagogically, in legal education, as with other forms of higher learning. InfiLaw may be ineffective, or even a scam, but viva la diversité!
Davenport’s Theory of Enterprise
| Peter Klein |
Kudos to Richard Ebeling for a nice piece on Herbert J. Davenport, one of the most American economists of the early twentieth century, mostly forgotten today. (One exception: Daveport was the founding Dean of the University of Missouri’s business school, which named its donor society after him.) Davenport, one of Frank Knight’s teachers, was an early adopter of the subjective theory of value introduced by Carl Menger and, along with Philip Wicksteed and Frank Fetter, helped to spread the marginal revolution in the English-speaking world.
Davenport was also a contributor to the economic theory of entrepreneurship, as noted by Ebeling:
Here was the mechanism by which the logical causality between demands and supplies was brought into actual implementation in the complexity of market activities. The entrepreneur stood, Davenport argued, “as the intermediary in the case, representing in his hiring and buying of productive factors, the demand of the purchasing public, and representing in his cost computations, the degree of scarcity of the productive factors relative to the demand for their products.”
On the one hand, it was “the entrepreneurs who furnished the demand for all . . . the things which are called production goods,” he explained. On the other hand, it was “the competition of the entrepreneurs of each industry with the other entrepreneurs of the same industry, and the competition of the entrepreneurs of each industry with those of other industries” that brought about the emergence of factor prices. All the money outlays, the objectified market “costs” that an entrepreneur had to incur, all traced back to the demand for other things as reflected in the bids of competing entrepreneurs. . . .
“The various markets in which he [the entrepreneur] must hire and buy are fluctuating in their prices,” he said. “And the price at which he will finally market his product is uncertain . . . His alternative lines of activities, also, are subject to uncertainties.” All of the entrepreneur’s calculations, therefore, were expectiational.
His computations of “costs of production,” Davenport went on, “appears to be backward-looking computation,” but in reality was “only a basis for a further and forward-looking computation.” The entrepreneur’s glance was turned towards those future – uncertain – opportunities that still lie before him, and from which he would have to choose the one that he believed offered the greatest net advantages.
Ultimately, then, the entrepreneur’s “cost” of production was reducible to his individual judgments,
Ebeling is quoting Davenport’s 1913 book The Economics of Enterprise, which hints at the “judgment-based view” of entrepreneurship elucidated more fully by Knight.
Nobel Miscellany
| Peter Klein |
1. I didn’t win.
2. The award is for asset pricing — Gene Fama’s work that underlies the efficient markets hypothesis, Robert Shiller’s contributions to behavioral finance, and Lars Hansen’s development of the Generalized Method of Moments (GMM) regression technique, which is often used in studies of asset prices. (I feel bad for Kenneth French, who could also have won with Fama.)
3. Many people had anticipated a possible Fama-Shiller award, recognizing two people working in the same field but using very different approaches and reaching radically different conclusions, much like the Hayek-Myrdal award of 1974. (Hansen was on the short list for an econometrics award, but not usually bundled with Fama and Shiller.)
4. Fama holds that markets are “rational” and bubbles can’t exist. Shiller holds that markets are irrational and that bubbles are common, resulting from “animal spirits.” As usual, the Austrians take the balanced, reasonable, middle ground, holding that asset bubbles do exist, not because of irrational exuberance, but because of central-bank manipulation of the money supply and interest rates. Down with extremists!
5. Fama’s work on agency theory, while less well known than the efficient markets hypothesis, should be of particular interest to O&M readers. His “Agency Problems and the Theory of the Firm” (1980) argued that competition among managers (current and potential) can help mitigate discretionary behavior, and his “Separation of Ownership and Control” (1983, with Mike Jensen) pointed out that contracts can sometimes substitute for equity ownership in reducing agency costs.
6. I’m not a huge fan of Shiller, but I appreciate his position here:
“Economists seem to miss things that are important” because they’re so busy. “Specialization coupled with strong competitive pressures within academia leads to a situation in which academics often feel that they just do not have time to ponder broad issues and learn even basic simple facts outside their specialty,” the Shiller paper says. “Their general knowledge may be embarrassingly limited, and so they may retreat into their own specialty and produce research which contributes in small ways to the development of the field, but fails to pay attention to the larger picture.”
Update: Here’s a detailed explanation of Fama’s contributions from his Chicago colleague John Cochrane.
Bulletin: Brian Arthur Has Just Invented Austrian Economics
| Dick Langlois |
Surprisingly, the following passage is not from O’Driscoll and Rizzo (1985). It is the abstract of a new paper by Brian Arthur called “Complexity Economics: A Different Framework for Economic Thought.”
This paper provides a logical framework for complexity economics. Complexity economics builds from the proposition that the economy is not necessarily in equilibrium: economic agents (firms, consumers, investors) constantly change their actions and strategies in response to the outcome they mutually create. This further changes the outcome, which requires them to adjust afresh. Agents thus live in a world where their beliefs and strategies are constantly being “tested” for survival within an outcome or “ecology” these beliefs and strategies together create. Economics has largely avoided this nonequilibrium view in the past, but if we allow it, we see patterns or phenomena not visible to equilibrium analysis. These emerge probabilistically, last for some time and dissipate, and they correspond to complex structures in other fields. We also see the economy not as something given and existing but forming from a constantly developing set of technological innovations, institutions, and arrangements that draw forth further innovations, institutions and arrangements. Complexity economics sees the economy as in motion, perpetually “computing” itself— perpetually constructing itself anew. Where equilibrium economics emphasizes order, determinacy, deduction, and stasis, complexity economics emphasizes contingency, indeterminacy, sense-making, and openness to change. In this framework time, in the sense of real historical time, becomes important, and a solution is no longer necessarily a set of mathematical conditions but a pattern, a set of emergent phenomena, a set of changes that may induce further changes, a set of existing entities creating novel entities. Equilibrium economics is a special case of nonequilibrium and hence complexity economics, therefore complexity economics is economics done in a more general way. It shows us an economy perpetually inventing itself, creating novel structures and possibilities for exploitation, and perpetually open to response.
Arthur does acknowledge that people like Marshall, Veblen, Schumpeter, Hayek, and Shackle have had much to say about exactly these issues. “But the thinking was largely history-specific, particular, case-based, and intuitive—in a word, literary—and therefore held to be beyond the reach of generalizable reasoning, so in time what had come to be called political economy became pushed to the side, acknowledged as practical and useful but not always respected.” So what Arthur has in mind is a mathematical theory, no doubt a form of what Roger Koppl – who is cited obscurely in a footnote – calls BRACE Economics.
World Interdisciplinary Network for Institutional Research
| Dick Langlois |
I have recently become involved with a new organization that many readers may be interested in. It’s called the World Interdisciplinary Network for Institutional Research (WINIR). From the website:
WINIR is a specialist but global network. It is set up to complement rather than rival other organisations that have the study of institutions on their agenda. Unconfined to any single academic discipline, it accepts contributions from any approach that can help us understand the nature and role of institutions. While other organisations are intended to act as broad forums for all kinds of research in the social sciences, WINIR aims to build an adaptable and interdisciplinary theoretical consensus concerning core issues, which can be a basis for cumulative learning and scientific progress in the exciting and rapidly-expanding area of institutional research.
You can learn more and sign up here. If you join now, you will be considered a founding member. WINIR is tentatively planning a conference for next year near London and one the year after that in Rio.
New Paper on Austrian Capital Theory
| Nicolai Foss |
In my Hayek Lecture at last year’s Austrian Economics Scholars Conference I argued that Austrian capital theory is deserving of a comeback as an absolute integral part of Austrian economics. I argued that ACT directs attention to the essential importance of heterogeneity and I argued that notions of capital heterogeneity serves to bring the entrepreneur, transaction costs and institutions directly into our understanding of the growth process.
An essential part of ACT is, of course, the work of Eugen von Böhm-Bawerk. On the one hand, Böhm’s work is absolutely seminal, on the other hand, its too strong emphasis on aggregates and simplifying assumptions arguably side-tracked the development of ACT in some key ways. Needless to say, to mainstream economists ACT is Böhm-Bawerkian capital theory because it lends itself to formalization.
A recent example of formalizing Böhm’s theory is Renaud Fillieule’s “A comprehensive graphical exposition of the macroeconomic theory of Böhm-Bawerk.” Fillieule makes a strong case for Böhm’s theory as a precursor of Solowian growth theory and of macroeconomics in general. In contrast to many other commentators on ACT, he is familiar with modern Austrian work on the subject. A very elegant article and most definitely worth a read. Here is the abstract:
This paper offers a comprehensive graphical exposition of Böhm-Bawerk’s formalised macroeconomic theory. This graphical model is used here for the first time to study the effects of the changes in the explanatory variables (quantity of capital, number of workers and level of technical knowledge) on the dependent variables (interest rate, wage and period of production). This systematic application of the model shows that some of the conclusions drawn by Böhm-Bawerk are incorrect and need to be amended. A comparison with Solow’s model also shows that Böhm-Bawerk can legitimately be considered as one of the main originators of the standard contemporary approach in macroeconomics of equilibrium and growth.
From MOOC to MOOR
| Peter Klein |
Via John Hagel, a story on MOOR — Massively Open Online Research. A UC San Diego computer science and engineering professor is teaching a MOOC (massively open online course) that includes a research component. “All students who sign up for the course will be given an opportunity to work on specific research projects under the leadership of prominent bioinformatics scientists from different countries, who have agreed to interact and mentor their respective teams.” The idea of crowdsourcing research isn’t completely new, but this particular blend of MOO-ish teaching and research constitutes an interesting experiment (see also this). The MOO model is gaining some traction in the scientific publishing world as well.
On Academic Writing
| Peter Klein |
The Strategic Management Society’s annual conference wrapped up yesterday. It was an excellent event with many fine papers, panels, workshops, and entertainments. We’ll be posting more about the substance of the conference in the coming days. However, I want to mention today a small gripe, not about the conference, but about the strategic management literature more generally. This is something that struck me in particular during the conference. Specifically, there is too much bad writing. The strategic management field is becoming as bad as some of the humanities — maybe even sociology — in its use of pretentious, clumsy, and awkward words and phrases. You can see this most easily in the paper titles: “An Analysis of the Effects of Intra-Firm Group Identity and Power Imbalance on the Deployment of Collaborative Teams in the North Waziristani Ball-Bearing Industry, 1992-2005.” OK, I made that one up, but it gives you the flavor. I’m reminded of Orwell’s example:
Here is a well-known verse from Ecclesiastes:
I returned and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.
Here it is in modern [1946] English:
Objective considerations of contemporary phenomena compel the conclusion that success or failure in competitive activities exhibits no tendency to be commensurate with innate capacity, but that a considerable element of the unpredictable must invariably be taken into account.
This is a parody, but not a very gross one.
I’m pretty sure the latter version appeared in the abstract of a recent SMJ paper!
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