Author Archive
More “New Economy” Hyperbole
| Peter Klein |
Wired’s Chris Anderson drinks the New Economy Kool-Aid. It’s the same old argument — information technology reduces transaction costs, leading to a radical disaggregation of industry and society — still supported by little more than a few colorful anecdotes, not any kind of systematic analysis. The new twist is the financial crisis, described by Anderson as “not just the trough of a cycle but the end of an era.”
What we have discovered over the past nine months are growing diseconomies of scale. Bigger firms are harder to run on cash flow alone, so they need more debt (oops!). Bigger companies have to place bigger bets but have less and less control over distribution and competition in an increasingly diverse marketplace. . . . The result is that the next new economy, the one rising from the ashes of this latest meltdown, will favor the small.
Nonsense. The major banks, the Chrysler corporation, and whoever is next to fail have not become nimbler and smaller, but larger; they have become part of the Federal government. Fannie and Freddie have swollen and taken on additional responsibilities. The financial crisis, as argued repeatedly on these pages, was spawned by a credit bubble brought about by loose monetary policy and massive government subsidization of the home mortgage market. It has nothing to do with firms being too large or somehow failing to take advantage of the Next Big Thing in social networking or cloud computing. I mean, seriously, is there anything here that couldn’t have been written ten years ago?
To all the usual reasons why small companies have an advantage, from nimbleness to risk-taking, add these new ones: The rise of cloud computing means that young firms no longer have to buy their own IT equipment, which helps them avoid having to raise money or take on debt. Likewise, the webification of the supply chain in many industries, from electronics to apparel, means that even the tiniest companies can now order globally, just like the giants. In the same way a musician with just a laptop and some gumption can accomplish most of what a record label does, an ambitious engineer can invent and produce a gadget with little more than that same laptop.
Bah. Humbug.
Economists or Catherine Zeta-Jones?
| Peter Klein |
Who would you rather spend time with? I mean, come on, really?
Deregulation and the Financial Crisis
| Peter Klein |
Niall Ferguson joins Charles Calomiris, Jerry O’Driscoll, Arnold Kling, and many others in questioning the supposed link between “deregulation” and the financial crisis. As Ferguson emphasizes, the timing is all wrong; there is no time-series correlation between specific patterns of regulation and deregulation and particular financial or economic outcomes. The relaxation of Glass-Steagall restrictions on universal banking is an oft-cited example, but, as these writers point out, no one has offered any specific mechanism by which universal banking contributed to the problem (indeed, the opposite is likely to be true). The “laissez-faire caused the crisis” meme may be pithy, but is there any systematic theoretical or empirical evidence for it?
Ferguson has the best line (suggested by Luke): “It is indeed impressive how rapidly the economists who failed to predict this crisis . . . have been able to produce such a satisfying story about its origins.”
Elfenbein and Zenger on Social Capital
| Peter Klein |
Congratulations to Dan Elfenbein and Todd Zenger for winning the ACAC Best Paper Award for “The Economics of Social Capital in De-Socialized Exchange.” Their paper addresses one of my pet peeves, the expansive use of “capital” to describe any ill-defined substance that accumulates and has value. Hence knowledge, experience, and skills become “human capital” or “knowledge capital”; relationships become “social capital”; brand names become “reputation capital”; and so on. I fear this terminology obfuscates more than it clarifies.
I don’t mind using these terms in a loose, colloquial sense: By going to school I’m investing in human capital or diversifying my stock of human capital; if this gets me a high-paying job I’m earning a good return on my human capital; as I get old I forget new things, so my human capital is depreciating rapidly; and so on.
But we shouldn’t take these metaphors too literally. In economic theory capital refers either to financial capital or to a stock of heterogeneous alienable assets, goods that can be exchanged in markets and analyzed using price theory. Their rental prices are determined by marginal revenue products and their purchase prices are given by the present discounted value of these future rents. Knowledge is not, strictly speaking, capital, because it is not traded in markets does not have a rental or purchase price. What markets trade and price is labor services, and it is impossible to decompose the payments to labor (wages) into separate “effort” and “rental return on human capital” components. Some labor services command a higher market price than others because they have a higher marginal revenue product. Some of this wage premium may be due to intelligence or experience, some due to complementarities with other human or nonhuman assets, some due to hard work, and so on. But these are all determinants of the MRP, and hence the wage, not different kinds of factor returns. (more…)
A Second Act for the CAFE Standards
| Peter Klein |
From former guest blogger David Gerard:
As you have no doubt learned, President Obama and Governor Schwarzenegger have teamed up for a healthy bump in the federal Corporate Average Fuel Economy (CAFE) standards, forcing automakers to boost their fleet averages to 35 miles per gallon by 2016. The announcement will dismay many economists, who for many, many reasons have advocated steeper gasoline taxes instead. Lester Lave and I argued that that there were some solid reasons to support some form of CAFE standards in conjunction with higher gasoline taxes. On pragmatic grounds, the CAFE standards have enjoyed public support and gas taxes decidedly have not, so CAFE has carried the day.
The original CAFE measures did not do much in terms of pushing the envelope of vehicle technology, as a change in consumer tastes toward more fuel efficient vehicles in the late 1970s. As a result, the standards were met by altering the mix of vehicles sold, not by any radical improvements in technology. It wasn’t until the early 1980s when oil prices tanked that the CAFE became a serious binding constraint. In contrast, the CAFE standards announced Monday are very aggressive. However, setting the standard is only the first part of the story. The real action takes place during the second act. What happens as the deadline approaches if firms are unable to meet the stricter standards? (more…)
Tweeting Too Hard
| Peter Klein |
Do these people remind you of any of your favorite bloggers — or academic seminar participants? (Via Cliff.)
Plowing Under Rural Sociology
| Peter Klein |
From Randy Westgren:
The aggie world, and to a lesser extent, the sociology world, is reacting to a decision by Washington State University to dissolve its Department of Community and Rural Sociology. There is a great deal of rancor developing about this type of budget-cutting strategy, as opposed to making everyone suffer equally. If one looks closely at the budget documents made public by WSU, the ag school is getting a smaller cut (5% teaching + 8% research) than many colleges, including the B-school (13%, 12 vacant positions). The budget plan can be found here. It looks like the Dean’s decision, rather than the CEO’s (The Dean is an agricultural economist).
I was stunned to see a comment to a piece written in Inside Higher Education on this battle from an engineering prof — well, not actually stunned, more like chagrined.
“As for the rural sociology department, while I can sympathize with their plight in Pullman I do not see the loss as intellectually serious. As a member of an engineering faculty at a major university for more than 25 years, I’ve known quite a few sociologists. Most of them publish little stories that are not much sounder empirically, and usually less interesting substantively, that a good fiction writer. With very few exceptions, sociologists I know and have known are mathophobes! The few who have some ability in math use it on their omnibus snapshots of human populations taken at widely spaced intervals and then try to figure out from those “data” what happened and why. Ridiculous! Continuous observation is probably not possible, but you need closely spaced observations that focus on the specific processes that are the point of your investigation! If you have continuous-time observations, you need calculus in order to analyze your data. If you have closely spaced discrete-time observations, you need something more than shotgun regressions to analyze your data. Most of what sociologists publish is a waste of time and money.”
Obviously, this scholar has not followed the closely reasoned defense of fuzzy, ill-defined concepts at orgtheory.net.
Teppo and Brayden, if you are watching, ask Dave Whetten about his take on the Chancellor of SUNY Albany who undertook a similar department-cutting strategy during the New York State budget difficulties of the late 1970s.
More on Adam Smith’s Metaphor
| Peter Klein |
If you enjoyed our earlier discussion of social science’s most famous metaphor — come on, guys, is “iron cage” even in the same ballpark? — see the current issue of EconJournalWatch, which features essays on the invisible hand by Gavin Kennedy and Dan Klein.
ACAC Schedule
| Peter Klein |
The Atlanta Competitive Advantage Conference begins tomorrow. The updated schedule, along with other logistical information, is here. You can also download many of the papers. Emory, Georgia Tech, and Georgia State Universities have co-hosted this event the past five years and it’s become one of the main events for research in strategy, organizational economics, entrepreneurship, and related fields.
Bad to Awful?
| Peter Klein |
Via John Hagel, here’s a Business Week preview of Jim Collins’s new book, How the Mighty Fall, and How Some Companies Never Give In, a profile of once-successful firms that go under. Will the new book avoid the core methodological fallacy that doomed Collins’s earlier work? Unfortunately, it doesn’t appear so:
At our research lab [sic], we’d already been discussing the possibility of a project on corporate decline, in part because some of the great companies we’d profiled in the books Good to Great and Built to Last had subsequently lost their positions of prominence. On one level this fact didn’t cause much angst; just because a company falls doesn’t invalidate what we can learn by studying that company when it was at its historical best.
True, but without some mechanism for distinguishing treatment and control, such an investigation can never be anything more than a collection of interesting vignettes. Collins and his team seem unable to grasp the fundamental scientific principle of cause and effect. Just because a particular behavior corresponds to a particular outcome (be it success or failure), there is no way to know if that behavior contributed to the outcome, without studying individuals or organizations that exhibited the same behavior but experienced a different outcome.
I eagerly await Phil Rosenzweig’s next book: The Horns-and-Pitchfork Effect.
Headline of the Day
| Peter Klein |
Sandy Ikeda gets the prize for his blog entry on the Obama Administration’s decision not to auction landing slots at NYC airports: “Coase, but No Cigar.”
I wasn’t nearly as clever when I wrote about this problem a while back. I’m still wondering about the question I posed then: Is the political resistance to using prices to allocate scarce resources best explained by public-choice concerns, or by ignorance of how the price mechanism works?
Sid Winter on the Crisis
| Peter Klein |
From a short piece at Knowledge@Wharton:
As computers have grown more powerful, academics have come to rely on mathematical models to figure how various economic forces will interact. But many of those models simply dispense with certain variables that stand in the way of clear conclusions, says Wharton management professor Sidney G. Winter. Commonly missing are hard-to-measure factors like human psychology and people’s expectations about the future, he notes.
Among the most damning examples of the blind spot this created, Winter says, was the failure by many economists and business people to acknowledge the common-sense fact that home prices could not continue rising faster than household incomes.
Says Winter: “The most remarkable fact is that serious people were willing to commit, both intellectually and financially, to the idea that housing prices would rise indefinitely, a really bizarre idea.”
Presumably Sid is referring here to some kind of behavioral anomaly, but what I see is the standard malinvestment story from Austrian business-cycle theory. Even investors with rational expectations, who know that a credit-induced artificial boom can’t last forever, won’t know exactly when the bubble will burst, and can profit from taking advantage of artificially low interest rates while they last.
Design by the Numbers
| Peter Klein |
A new item for our “by the numbers” series. Former Google lead designer Doug Bowman recently quit to take a position at Twitter, citing frustration with Google’s engineer-oriented, data-driven culture:
When a company is filled with engineers, it turns to engineering to solve problems. Reduce each decision to a simple logic problem. Remove all subjectivity and just look at the data. Data in your favor? Ok, launch it. Data shows negative effects? Back to the drawing board. And that data eventually becomes a crutch for every decision, paralyzing the company and preventing it from making any daring design decisions.
Yes, it’s true that a team at Google couldn’t decide between two blues, so they’re testing 41 shades between each blue to see which one performs better. I had a recent debate over whether a border should be 3, 4 or 5 pixels wide, and was asked to prove my case. I can’t operate in an environment like that. . . .
I’ll miss working with the incredibly smart and talented people I got to know there. But I won’t miss a design philosophy that lives or dies strictly by the sword of data.
Adds Keith Sawyer:
Google’s engineer-dominated culture wants to see the numbers, the proof. Artists and designers don’t think that way — they know a design that works in their gut, somehow, when they see it. It’s a holistic phenomenon, and it emerges in some unpredictable way from hundreds of tiny design decisions about line widths and color shades. How, they would ask, could you possibly test every single combination, every possible design? . . . Numbers get you focused on the trees and you forget you’re inside of a forest.
I hold to the basic Misesian position that quantitative empirical analysis is a complement to, not a substitute for, other forms of knowledge acquisition such as a priori theorizing and Verstehen. Needless to say, this doesn’t mean I approve of fuzzy constructs in social-science research.
Confidence
| Peter Klein |
Craig Pirrong is concerned about the stress tests:
[Bernanke] emphasized that they were a “confidence-building exercise.” That seems like assuming the conclusion. I would like a fact-finding exercise, with a clear statement of the findings, good or bad. Stating that the objective is to build confidence suggests a pre-ordained result — Kabuki Theater. It’s like saying that something is needed to build “self-esteem.” Success builds self-esteem, not the other way around. Similarly, success builds confidence; confidence-building does not ensure success.
This reminds me of something I read the other day from Isabel Paterson, quoted by Stephen Cox:
[I am] tired of being told that “credit depends on confidence.” Fudge. Credit depends on real assets, sound money and a clean record. . . . When any one asks us to have confidence we are glad to inform him that the request of itself would shatter any remaining confidence in our mind.
Missouri J-School Tastes the Apple
| Peter Klein |
Many colleges and universities require students to purchase a laptop with particular capabilities. Some schools are considering requiring Kindles or similar book readers. The University of Missouri School of Journalism, however, is going one better by mandating not just a particular type of device — in this case, a portable media player — but a particular brand. In a decision sure to warm Teppo’s heart, the school announced last week that incoming freshmen will be required to own an iPhone or iPod Touch. Not only are these high-end devices, for their class, but in the case of the phone a 2-year AT&T service contract is part of the package. The ostensible reason is to allow students to listen to recorded lectures and other multimedia presentations related to their coursework and projects.
If you think this places an unfair burden on students, given that they can listen to these materials on any personal computer and most portable music players, don’t worry: university officials immediately announced that the requirement won’t be enforced, but is merely a cynical ploy to let students add the cost of the fancy toy to their financial aid applications. No doubt makers of rival devices are delighted by the university’s move.
Remembering Hayek
| Peter Klein |
In honor of today’s special day several writers have written personal reminisces of F. A. Hayek. Here are two by David Gordon and Mario Rizzo. (And here’s a 2003 remembrance from Ronald Hamowy.) The boys at orgtheory will get a kick out of the Merton reference in Gordon’s post.
Here’s an indirect Hayek reference that will amuse one or two of you. I was reading emails on my BlackBerry this afternoon while walking through the St. Louis airport and came across this passage, sent by a friend, from Terry Eagleton’s new book:
Because there is no necessity about the cosmos, we cannot deduce the laws which govern it from a priori principles, but need instead to look at how it actually works. This is the task of science. There is thus a curious connection between the doctrine of creation out of nothing and the career of Richard Dawkins. Without God, Dawkins would be out of a job. It is thus particularly churlish of him to call the existence of his employer into question.
Right after reading this, and pondering the word “cosmos,” I look up and see that I’m walking under a big sign, “Taxis.”
My “No New Economy” Slides
| Peter Klein |
Here, for the curious, are my slides from this morning’s talk at the Law and Economics of Innovation conference, titled “Does the New Economy Need a New Economics?” (Short answer: no.) This will eventually morph into a paper so comments are most welcome (and thanks to those who have already helped). I’m looking forward to Susan Athey’s keynote later today.
Phishing Scam Targets Academics
| Peter Klein |
Some of you may have received a weird email this morning, purportedly from Elsevier, soliciting “manuscripts in all Fields of human Endeavour.” It has the general form of a call for submissions but gets the details wrong, e.g., asking authors to submit all papers to a central address, with Elsevier then deciding which of its subject-area journals is appropriate — a “special publication procedure,” it says — and, craziest of all, promising decisions within one week of submission. It also bears the usual marks of a phishing scam, such as as reply-to address that does not end in “elsevier.com.”
My guess is that naive authors, after being sucked into corresponding with the fake editors, will at some point be asked for credit card information to cover submission fees or page charges. Sadly, our publish-or-perish climate will probably lead some inexperienced scholars to fall for it. Anybody know of similar scams targeting academics?
M&A Bloggers Needed
| Peter Klein|
The Law Professors Blogs Network needs someone to take over its Mergers and Acquisitions Law Blog. Details here.
Zupan on Leadership
| Peter Klein |
I’m not sure if leadership counts as an ill-defined, un-measured core construct but it certainly is an elusive one. Here is Mark Zupan’s attempt to get a handle on it. In brief, he describes leadership as the ability to convert a single-period prisoner’s dilemma game into a multiple-period game. “In a very fundamental way, leadership involves creating opportunity from a seemingly intractable setting that, if otherwise left to its own resolution, confines us to an inferior equilibrium. . . . This paper shows how effective leaders make this traverse through vision; enrolling others to participate in the ongoing play of the reformulated prisoner’s dilemma; commitment; integrity; communication; and authenticity.” Check it out.
My old friend Dwight Lee and I used to joke that we’d respond to the rise of leadership courses and programs in the MBA curriculum by developing our own program in followership, letting us exercise our comparative (and absolute) advantage freely. Of course no management concept is too droll to have its own academic literature.
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