Author Archive
The Management Myth?
| Peter Klein |
Lots of chatter on the net about an article in the June 2006 Atlantic, “The Management Myth,” by Oxford-trained philosopher and former consultant Matthew Stewart. (Online version for magazine subscribers only.)
Most of management theory is inane, writes our correspondent, the founder of a consulting firm. If you want to succeed in business, don’t get an M.B.A. Study philosophy instead.
Most commentators (1, 2, 3) seem to find the article challenging and profound. Paul Kedrosky demurs, saying Stewart “accomplished the impossible. He made me like management theory, MBAs, and consultants more, while liking philosophy (and Oxford philosophers) less.” Kedrosky calls the article “disjointed, dull, obvious, smug, poorly written, and full of falsely-elevated faux philosophy chatter.” Hmmmm, sounds like a perfect candidate for Academy of Management Review! (Note to AMR editors and referees: just kidding.)
Update: Lynne Kiesling likes Stewart’s book on Spinoza and Leibnitz.
Wicksteed on “Economic Man”
| Peter Klein |
As an economist, I'm continually frustrated by complaints from my fellow social scientists that economics falsely conceives human beings as narrow, selfish, greedy materialists — a canard refuted in even the most elementary textbooks. Economics is a theory of preference and action; it assumes nothing whatsoever about the content of people's preferences, whether they be noble or base, pure or vile, or whatever.
The proper conception of economics as a general theory of action has been around for, I don't know, about a hundred years, at least. I recently came across this nice statement from Lionel Robbins, introducing the 1933 edition of Philip Wicksteed's Common Sense of Political Economy (1910).
Before Wicksteed wrote, it was still possible for intelligent men to give countenance to the belief that the whole structure of Economics depends upon the assumption of a world of economic men, each actuated by egocentric or hedonistic motives. For anyone who has read the Common Sense, the expression of such a view is no longer consistent with intellectual honesty. Wicksteed shattered this misconception once and for all. . . .
[Modern value theory has] thrown the whole corpus of economic science into an entirely new light — a light in which Economics is seen to be a discussion not of the nature of certain kinds of behavior arbitrarily separated off from all others, but of a certain aspect of behavior viewed as a whole. . . . [W]hen [the] final history [of modern economics] comes to be written, I think it will be found that Wicksteed's exhaustive examination of the "economic relationship," and his insistence that there can be no logical dividing line between the operations of the market and other forms of rational action, are by no means among the least important or least original." (pp. xxi-xxii)
I wonder how much of the current contretemps over economic methods in organization and management is simply a re-hash of controversies already covered by Wicksteed, Clark (1, 2), Robbins, etc.
Another New Buzzword: Adjacencies
| Peter Klein |
From today's WSJ feature on Time-Warner we learn that "synergies" are out. Now it's all about "adjacencies."
In deal after deal, [Time-Warner] executives promised to create a well-oiled, "vertically integrated" profit machine. Books and magazines and music would feed television and movie and Internet empires, each strengthening the others. But this vision never panned out. . . . Now divisions are encouraged to cooperate only if they can't get a better deal on the open market. The company's units are expected to be "best in class" — corporate-speak for being an industry leader — and those that fall short are threatened with being sold.
A return to the 1960s and "management by the numbers"? (We do know, for instance, that the conglomerates weren't so bad after all — see this, this, and this.)
Who will write the first RBV paper on adjacencies?
Crowdsourcing
| Peter Klein |
Combine increasingly thick markets for key inputs, rapidly declining costs of producing these inputs, and low transaction costs of organizing suppliers, and what do you get? Crowdsourcing, in which individual web users, mostly amateurs, compete to supply cheap inputs. Tim Swanson offers links and commentary at the Mises Blog. (A "wisdom of crowds" reference gives me a chance to plug the extremely interesting book by my college classmate Jim Surowiecki, The Wisdom of Crowds.)
Nudity, Law, and Social Norms
| Peter Klein |
From Bryan Caplan I learn that Berkeley's "Naked Guy," a campus fixture during my graduate-school years there in the early 1990s, committed suicide last week. Bryan, then a Berkeley undergraduate, adds this astute observation: "At the time, I often pointed out that the Naked Guy was proof that social norms, not the law, were the foundation of civility: Even if nudity were legalized, only one student out of tens of thousands would take it all off."
The importance of informal norms and social conventions is increasingly recognized in economics (and law). The literature in this area goes back at least to Menger's (1883) analysis of institutions, and includes contributions from Schelling (1960), Ullman-Margalit (1977), Schotter (1981), Sugden (1986), Benson (1990), and Ellickson (1991). Recent work by Baker, Gibbons, and Murphy (2002) on relational contracting, focusing on the narrower question of firm boundaries, belongs on this list as well. This literature interprets social norms as equilibrium solutions to the kinds of coordination games popularized by Schelling (1960). Credible threats of reciprocity are the key. In these models agents abide by informal rules not out of a sense of moral duty, or from a process of unconscious socialization, but because it is in their rational self-interest to do so.
My sense is that management theory, and organizational behavior in particular, has yet to grapple with the insights from this strand of literature. Am I wrong?
Review Paper on the Economics of Clusters
| Peter Klein |
Pierre Desrochers calls my attention to this review essay for practitioners on the economics of clusters, published by Brookings in March. The paper cites Pierre's Review of Austrian Economics paper with Frederic Sautet, whch is a good sign.
New Institutional Economics: What My Students Ask
| Peter Klein |
At the September 2005 meeting of the International Society for New Institutional Economics (ISNIE) in Barcelona I participated in a roundtable organized by Claude Menard and Mary Shirley, “Challenges and New Directions in NIE,” celebrating the Handbook of New Institutional Economics (Springer, 2005). Because I teach a required first-year PhD course in the NIE, I thought it would be interesting to discuss how students react to the material as the seek to integrate it with what they are learning in the general economics curriculum. Many scholars research and teach aspects of the NIE, but only rarely step back and evaluate the entire field, as a whole. Preparing to teach this course for the first time last year gave me an opportunity to do so.
Here are the most common questions students ask about the NIE and my course, “Economics of Institutions and Organizations”:
1. Is this a tools course or a field course?
In other words, is the NIE foundational to all fields of economics (and, possibly management), or an applied field like industrial organization, labor economics, international trade, etc.? (more…)
Ken Lay, Local Boy
| Peter Klein |
Today’s edition of my local paper, the Columbia (Missouri) Daily Tribune, adds a little local color to the Enron story with this item on Ken Lay, a Missouri minister’s son who attended the University of Missouri in the 1960s and earned BA and MA degrees in economics. Lay was a protégé of economics professor Pinkney Walker, who brought Lay to Washington when Walker was appointed by Richard Nixon to head the Federal Power Commission (now FERC). That, for better or worse, is where Lay learned about the energy industry.
A 1991 profile of Lay in the Houston Chronicle goes further in crediting — certain people would say “blaming” — Lay’s economics training for his later accomplishments. “His sophomore year at the University of Missouri, in professor Pinkney Walker’s introductory economics class, the small-town boy who had never been outside the Missouri state line became hooked on the world of money, from Wall Street horse-trading to monetary policy and international trade. ‘It all became so clear, so logical,’ Lay says. ‘I could see how markets worked, how firms worked. All of it just sort of fit together.’ ”
Of course, Lay understood markets well, but was no friend of free ones. (more…)
Non-Monetary Compensation
| Peter Klein |
Managers: Looking for effective forms of non-monetary compensation? Scott Adams has suggestions here, here, and here.
Interview With Mark Blaug
| Peter Klein |
You readers with a passion for economic methodology (yes, both of you) will enjoy this interview with Mark Blaug. (HT to Rafe Champion, who calls Blaug "the man who did more than anyone to generate the cottage industry of 'new philosophy of science applied to economics.' ")
One excerpt: Blaug's problem with contemporary economics is
not just that economics has become technical; it is that economics prizes technicalities above everything else, and that is why I call it formalism. Formalism is the tendency to worship the form rather than the content of the argument. That is the kind of subject it has become. We care only about the form in which an economic theory or hypothesis is presented, and we care almost nothing about the actual content of the hypothesis.
I have my own problems with formalism, but I think Blaug overstates his case. His characterization may apply to general-equilibrium models in macroeconomics, growth theory, and some other fields, but in applied microeconomics (contract theory, agency theory, labor economics, parts of industrial organization) the situation is not nearly so dire. (more…)
Measuring Entrepreneurship
| Peter Klein |
Earlier this week the Kauffman Foundation released an Index of Entrepreneurial Activity for the US and for individual US states. A local TV station asked me to comment on the report (my state, Missouri, ranked sixth from the bottom, provoking much consternation), so I prepared a few sound bites. Here they are:
1. Entrepreneurship is difficult to define, let alone measure. The Kauffman index estimates the percentage of adults, not already owners of a business, who start a new business each month. But the common notion of "entrepreneurship" encompasses imagination, creativity, risk-taking, judgmental decision-making, and so on, activities or attributes not necessarily reflected in new firm formation.
2. The Kauffman index measures the rate at which new firms are established, not the number of firms that exist. The Census Bureau's Survey of Business Owners provides one measure of the latter. I haven't examined it in detail, state by state, but spot-checking suggests that its ranking doesn't correspond closely to the Kauffman ranking. (Missouri, for example, is 30 of 50 in the number of independent establishments.) (more…)
Austrian Economists and the Wealth of Nations
| Peter Klein |
David Warsh's Knowledge and the Wealth of Nations is eliciting praise from many quarters (Tyler Cowen; Paul Krugman; The Economist; Brayden King). Peter Gordon likes it too, but notes that "the book and its story are poignant for Austrian economists, whose contributions are hardly acknowledged. The question that goes unasked is: What has the neo-classicists' journey of discovery, as sketched by Warsh, contributed that is worthy beyond the Austrians' long-held focus on entrepreneurial discovery?"
Non-Market Motivators
| Peter Klein |
Some scholars and consultants say that incentive plans are harmful, that managers should instead try to create within organizations a sense of duty, collective identity, and overall communitarian spirit. If so, why not dump that dreadful motivational art and decorate the office with these Soviet propaganda posters? (HT: Jeff Tucker)
A Fruity Response
| Peter Klein |
Much of the resistance to markets and “market-like” mechanisms within firms seems to flow from a belief that market exchange is somehow crass, profane, and uninspiring, at least compared to communal or family relationships. An example is the horrified reaction of many bioethicists to economists’ proposals to allow markets for cadaveric organs, particularly kidneys.
I’ve avoided commenting on the organ-market controversy, though I’ve been using it as an example in my introductory courses for years. I have little to add to the excellent discussions by Kaserman and Barnett, Epstein, Mankiw, Becker, etc. (not to mention this observation from Robin Hanson). But I can’t resist pointing to a letter in today’s Wall Street Journal by one Charles Fruit, chairman of the National Kidney Foundation. Responding to Richard Epstein’s earlier op-ed in favor of markets, Mr. Fruit declares himself “among the millions of other ‘high-minded moralists’ who oppose treating life-saving organs as commodities.” Closing his letter with a presumed coup-de-grâce, Fruit adds: “We moralists can only pray that [Epstein’s] proposed market mechanism for the transaction of hearts, lungs, kidneys and other life-saving human organs would work a little better than it does for the nation’s consumers of gasoline.”
Cute. But how exactly should gasoline be allocated to consumers? (more…)
Formal Economic Theory: Beautiful but Useless?
| Peter Klein |
Greg Mankiw, reflecting on the "poetry" of Paul Romer's growth theory, offers this assessment of modern, mathematical, neoclassical economic theory: "Too much of it is beautiful but useless."
Let's leave beauty in the eye of the beholder, for now, and focus on the second part of Mankiw's description. How much has formal, mathematical economic theory contributed to our understanding of the world? What economic phenomena do we understand better today than we did, say, before World War II, when the principal language of English-speaking economists was, well, English? (more…)
Natural and Artificial States, and Firms
| Peter Klein |
Among the last published papers of the libertarian polymath Murray N. Rothbard — one of my intellectual heroes — is his 1994 article “Nations by Consent: Decomposing the Nation-State.” Here Rothbard distinguishes sharply between the state, as a political entity, and the nation, a “complex and varying constellation of different forms of communities, languages, ethnic groups, or religions.” He goes on to develop a theory of appropriate national boundaries, based on the principle of volunary association and the empirical claim that people tend to associate with particular familial, linguistic, cultural, and religious groups. “One goal for libertarians should be to transform existing nation-states into national entities whose boundaries could be called just, in the same sense that private property boundaries are just; that is, to decompose existing coercive nation-states into genuine nations, or nations by consent.”
A March 2006 working paper by Alberto Alesina, William Easterly, and Janina Matuszeski, “Artificial States,” proposes several measures of the degree to which state boundaries are “natural” — corresponding roughly to Rothbard’s nations — or “artificial.” One measure identifies state borders that split ethnic groups into separate states, while another uses fractal geometry to characterize borders as straight or squiggly, assuming that straight borders are more likely to be articifially drawn and not corresponding to natural geographic or ethnic boundaries. The authors show that their measures are closely correlated with the usual measures of national economic performance (the more natural, the better).
What does all this have to do with organizations? The capabilities literature distinguishes between firm boundaries that are “natural,” or organic, and those that are artificially constructed. (more…)
Capabilities as Compensation
| Peter Klein |
Lots of blogospheric buzz today about this paper on local production externalities and researcher compensation (Mankiw, Caplan). The paper examines output and pay for economics and finance professors and concludes that the productivity effect of being at an “elite” university — i.e., having daily personal contact with top-notch colleagues and students — has fallen sharply over the last three decades. (Advances in information technology are seen as the likely cause.) Moreover, as compensation theory would predict, these spillover effects and faculty salaries appear to be substitutes; as the intangible benefits of co-location decrease, universities must increase wages to retain top staff.
The empirical approach used in the paper has obvious applications to the knowledge-management and capabilities literatures more generally. To the extent that the firm’s capabilities are consumed by employees — XYZ Company is an exciting, dynamic, enjoyable place to work — the firm should be able to pay lower wages, other things equal. Using panel data and fixed effects it should be possible, econometrically, to estimate firm-specific capabilities that are reflected in below-market wages. I’m not aware of any capabilities or knowledge-management papers that utilize this approach, however. Am I wrong?
Those Right-Wing Economists
| Peter Klein |
Several posts below allude to arguments by Jeffrey Pfeffer, Sumantra Ghoshal, and others that economic models and concepts (agency problems, transaction costs, opportunism, and the like) are taking management theory in the wrong direction and are harmful to management practice. A subtext of these arguments is that economists are ideologically biased toward the free market, against community and informal social ties, and toward cynical, atomistic, and even “reactionary” views of human nature. (Even if we’re not actually dismal.)
Surveys of economists’ political preferences reveal a more complex picture, however. A forthcoming article in Public Choice by Daniel Klein and Charlotta Stern analyzes a 2003 American Economic Association member survey:
The responses show that most economists are supporters of safety regulations, gun control, redistribution, public schooling, and anti-discrimination laws. They are evenly mixed on personal choice issues, military action, and the minimum wage. Most economists oppose tighter immigration controls, government ownership of enterprise and tariffs. In voting, the Democratic:Republican ratio is 2.5:1.
A Democratic-to-Republican ratio of only 2.5 to 1 may seem shockingly low to our colleagues in sociology or cultural studies, but hardly seems to indicate pervasive “right-wing” bias.
Happy Hierarchies
| Peter Klein |
Nicolai and I have tended to be skeptical about the new wave of happiness research, particularly as applied to intrinsic motivation, empowerment, and other trendy organizational issues. Economists Tyler Cowen and Arnold Kling agree. Corporate law professor Stephen Bainbridge, in his latest column, attacks the idea that participatory management increases worker happiness (and, presumably, productivity). On the contrary, says Bainbridge, workers often prefer hierarchy, for a variety of reasons (risk aversion, resistance to change, preference for standardized rules and procedures, and so on). “Whether the taste for participation or for hierarchy is more common is hard to say from the evidence to date, but at the very least the history of participatory management has taught us that not everyone wants more autonomy, challenge, and responsibility.”
Further details are provided in Bainbridge’s Williamsonian paper “Privately Ordered Participatory Management: An Organizational Failures Analysis.”
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