Author Archive

Will Macroeconomists Solve the Crisis?

| Benito Arruñada |

One may doubt it after observing that Ben Bernanke was one of those believing in the Great Moderation — the claim that macroeconomic volatility had been reduced. Macroeconomic policymaking seems to be as unsafe as firefighting: extinguishing small fires creates the conditions for hell. Shouldn’t macroeconomists learn something from forest management? (For a start: “Fire Must Be Ally in Forest Management.”) Of course, if coupled with an acid-suppressing pill, they could even dare to read Hayek’s “Pretence of Knowledge.”

14 July 2009 at 1:27 am 1 comment

Does Economics Training Hinder Managers’ Ability?

| Benito Arruñada |

In a new paper with Xosé H. Vázquez we explore the consequences of using different behavioral assumptions in training managers on their future performance. We argue that training with an emphasis on the standard assumptions used in economics (rationality and self-interest) leads future managers to rely excessively on rational and explicit safeguarding, crowding out instinctive contractual heuristics and signaling a “bad” type to potential partners. In contrast, the behavioral assumptions used in management theories, because of their diverse, implicit, and even contradictory nature, do not conflict with the innate set of cooperative tools and may provide a good training ground for such tools.

We present tentative confirmatory evidence by examining how the weight given to behavioral assumptions in the core courses of the top 100 business schools influences the average salaries of their MBA graduates. Controlling for the average quality of their students and some other school characteristics, we find that average salaries are significantly higher at those schools whose core MBA courses contain a higher proportion of management courses as opposed to courses based on economics or technical disciplines. (more…)

8 July 2009 at 2:43 am 4 comments

How Active are Governments in the Morality Business?

| Benito Arruñada |

Brad Taylor doubts in his reaction to my previous post on organizations and markets in morality that:

The moral authority of the Church was anywhere near complete in even the most ardently Catholic societies. The Church claimed a monopoly on morality, and many people went along with it to a greater or lesser degree. This seems pretty close to what government does today. The state doesn’t simply create laws aimed at resolving the inevitable conflicts among people, but attempts to influence public opinion through various types of propaganda – telling people not to smoke or get drunk and dance, for example.

I would not claim that the Church enjoyed a monopoly, only that the production of morality was more organizational — i.e., it took place within organizations (the Church itself was divided in several organizations), was more centralized, and was made by specialized moralist experts (mainly, theologians and priests, but even with some specialization of priests between those who focused on taking care of parishes, preaching, and confessing). In contrast, I am inclined to think that morality is now produced more in the market: it is less centralized and is produced by generalists.

It is true, as Brad says, that governments play an increasing role, especially in many European countries where they (1) control most education, even introducing new mandatory courses on “Good Citizenship”; (2) run their own TV stations, with plenty of scope to manipulate its contents; and (3) are actively running advertising campaigns about everything from global warming to racism or the use of condoms.

However, there are many other powerful sources of morality that are purely market driven: e.g., Hollywood movies and commercial TV series; biologists, pop stars, and former politicians moonlighting as preachers for their favorite causes; reality shows; gossip media; and so on.

5 July 2009 at 8:25 am 1 comment

Organizations or Markets in Morality?

| Benito Arruñada |

Moral codes can be produced and enforced through markets or through organizations. In particular, Catholic theology can be interpreted as a paradigm of the organizational production of morality. In contrast, the dominant moral codes are now produced in something resembling more a market.

The organizational character of Catholicism comes from its centralized production and enforcement of the moral code by theologians and priests and the mediation role played by the Church between God and believers. The epitome of both features is the old institution of confession of sins, a cultural universal that reaches full sophistication — for good and for bad — within Catholicism. My forthcoming JSSR paper argues that confession was a strikingly organizational solution to the production and enforcement of morality, something that Western societies now do mostly through markets. (more…)

30 June 2009 at 4:19 am 3 comments

Why “Doing Business” Leads to Bad Policy

| Benito Arruñada |

In a post at the PSD blog, David Kaplan sees little difference between the “Doing Business” position and my own. He writes:

Part of Professor Arruñada’s argument is that the Doing Business indicators do not capture all the relevant components of the business environment. The writers of the Doing Business 2009 report agree. . . .

I believe that the debate is not mainly about what Doing Business measures. Really, the debate is about how these measures are used in shaping public policy. Critics of Doing Business are concerned that countries will ignore the above warnings and only reform in areas that are measured in Doing Business.

I doubt that one can separate what DB measures and how it does it from how DB measures are used in the field. My main complaint, however, is different, namely that the DB method has often led to bad policy. (more…)

26 June 2009 at 8:16 am 3 comments

Capitalism’s Challenges: Cycles of Expropriation

| Benito Arruñada |

Following up my previous entry on cycles of statism, I ask next: How important are cycles of expropriation? Consider, for example, how Bolivia has nationalized foreign oil firms every 34 years. In the most recent round, the nationalizing decree read:

Consider that Bolivia was the first country on the Continent to nationalize ts hydrocarbons, in 1937 with  Standard Oil Co, a heroic measure, and done again in 1969 with Gulf Oil, leading the present generation to carry on the third and definitive nationalization. (Supreme Decree 28701, Evo Morales, President, May 2006).

In an experiment with Marco Casari we find similar patterns under more “democratic” circumstances. You may download the paper here.

22 June 2009 at 3:13 pm Leave a comment

Does Capitalism Suffer Cycles of Statism?

| Benito Arruñada |

Does the current expansion of the State reverse a previous reduction, to be reduced once again in the future? Or, alternatively, is there a sort of ratchet effect, with a trend towards greater statism disguised by cycles along such increasing trend?

cycles1I am inclined to think that cycling has not taken place around a stationary average but around an increasing tendency (see the figures). But perhaps a better way of facing these questions would be to disaggregate in different dimensions. For instance, in several papers with Veneta Andonova we argue that freedom cycles2of contract has been in  decline for more than a century in Western Law, both in civil- and common-law countries. Something similar could probably be said about trade, but in the opposite direction. However, in both freedom of contract and trade, it might be the case that exchange opportunities have expanded mainly as a result of technological change (e.g., cheaper transportation and communications), whatever the legal constraints. In terms of research, how could these trends be measured?

These thoughts were triggered by a timely and extremely suggestive paper by Witold J. Henisz presented at the Workshop on “Manufacturing Markets” organized last week in Villa Finaly, Florence, by Eric Brousseau and Jean-Michel Glachant.  My next few blogs will address other aspects of Henisz’s views on the broader challenges facing capitalism.

18 June 2009 at 8:52 am 2 comments

Is the Future in Contract Manufacturing?

| Benito Arruñada |

The purchase of Opel by Magna shows the strength of contract manufacturers and their strategies, which I discussed with Xosé H. Vázquez in our 2006 article in the Harvard Business Review. Once thought of as a lifebelt for the decreasing margins of large-brand owners, contract manufacturing has now become a major source of competition. Shanghai Automotive Industry Corporation (SAIC), which learned the business by producing initially for Volkswagen and GM, has actually started to sell its own cars in Europe and North America. It has even bought R&D knowledge, acquiring from bankrupt MG Rover the drawings needed to build the Rover 25, Rover 45, and Rover 75.

The economic crisis is accelerating this process. The need to liberate assets to increase ROI has been facilitated by technological and organizational change. This is stimulating business practices at the corporate level that are pushing outsourcing practices to dangerous limits. The wrong management of contract manufacturing will thus increasingly provoke knowledge leaks to direct competitors and the loss of internal manufacturing knowledge; more importantly, it will continue to eliminate barriers to entry, allowing large distributors and contract manufacturers themselves to market their own brands much more easily.

9 June 2009 at 1:09 pm 4 comments

World Bank’s “Doing Business” Changing Course

| Benito Arruñada |

Thanks to O&M for the opportunity to join the conversation. I plan to be blogging about some issues discussed in my book.

One of my recent research areas is the cost of business formalization. In particular, I have criticized the World Bank’s Doing Business project for the narrow focus of its “Starting a Business” indicator on reducing the initial costs of incorporating companies (Arruñada, 20072009), which disregards the more important role of business registers as a source of reliable information for judges, which is essential for reducing transaction costs in future business dealings. In many developing countries, registers produce documents that judges do not trust and, therefore, registration does not facilitate impersonal transactions that it should be supporting. Reducing the explicit cost of registers and speeding production of useless paperwork will not help. The priorities of reform policies should therefore be thoroughly reviewed, aiming first for registers to achieve a minimum reliability. (See this discussion).

In April, following continuing pressure by Barney Frank, chairman of the US House Financial Services Committee, the World Bank decided to drop Doing Business’s “Employing Workers Indicator” and develop a new “Worker Protection Indicator” after concluding that the first indicator “does not represent World Bank policy and should not be used as a basis for policy advice or in any country programme documents that outline or evaluate the development strategy or assistance programme for a recipient country” (Aslam, 2009).

In line with my argument about registration, meaningful indicators of institutional quality should be comprehensive of costs and values. Therefore, an indicator of the quality of employment regulation should consider not only workers’ protection but other aspects, such as, most prominently, unemployment rates.

4 June 2009 at 9:46 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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