Author Archive
Cooking by the Numbers
| Peter Klein |
Management by the numbers is out; will cooking by the numbers be next? The WSJ reports:
[A]s people look for quicker and easier ways to make everyday meals, some are moving away from the rigidity of recipes and advocating improvisational cooking, where measurements are approximations and ingredients are interchangeable.
It’s common to distinguish between two personalities in the kitchen: the deliberate, systematic, careful personality, which tends to excel in baking, and the wilder, risk-taking, adjust-on-the-fly personality, which does better with other types of cooking. But the use of careful and precise measurements has been a staple of most kinds of home cooking for a hundred years:
The rise of recipes that use precise measurements is widely credited to Fannie Farmer, a student, and later, director of the Boston Cooking School, who published “The Boston Cooking-School Cookbook” in 1896. Until Ms. Farmer’s manual, cookbooks were written in prose, calling for a pinch of this or a handful of that.
“The Boston Cooking-School Cookbook,” which survives today as “The Fannie Farmer Cookbook,” featured nearly 2,000 recipes that gave detailed instructions using a standardized system of measurement (teaspoon, cup, etc.). Ms. Farmer also included scientific explanations with her recipes, and wrote essays on housekeeping and cleaning. The rising middle-class and subsequent growth in the number of women looking to homemaking as a profession turned Ms. Farmer’s book into a hit — it has sold more than 4 million copies to date. (more…)
April Fool’s!
| Peter Klein |
I’m too lazy to come up with an April Fool’s post (this comment notwithstanding), so I’ll just recycle a couple of old ones:
Here are some other good ones.
Adam Smith’s Famous Metaphor
| Peter Klein |
The indefatigable Gavin Kennedy explains, for the umpteenth time, that Adam Smith was ambivalent about market capitalism and that the famous metaphor of the “invisible hand” was not meant as a generalized defense of the market. As Gavin points out, Smith’s detailed analysis of the market economy appears in Books I and II of the Wealth of Nations, while the invisible hand metaphor appears only once, in Book IV, where Smith defends British merchants who, despite mercantilist export subsidies, preferred to keep their capital invested at home, to the benefit of the British economy. Notes Gavin:
So inconsequential was [Smith’s] use of The Metaphor that neither he, nor anybody else until the late 19th century, commented upon it. . . .
Moreover, it was only in Chicago in the 1930s that The Metaphor was generalised into Smith’s so-called “law” of markets. Paul Samuelson (1948, 1st edition), in his famous textbook, Economics (16 editions), publicised this invention with the inevitable affect on modern economics, as tens of thousands of his readers took it on trust as true.
To be sure, the relevant passage in Smith also includes the famous lines, “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good,” and the remark that “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.” But Smith’s statements need to be understood in context; he is discussing the specific problem of trade monopoly, arguing against trade and industrial policies that subsidize particular markets or industries.
Imaginary Tweets
| Peter Klein |
If Twitter had been around way back then (courtesy of Norman Chad):
Michelangelo: “Sistine Chapel ceiling larger than it looks; back is killing me.”
Christopher Columbus: “No sign of land yet.”
Robert Peary: “Man, it’s cold up here.”
And Adam Chudy imagines Obama’s tweets:
Just spent $3.5 billion …
Just spent $30 billion …
Just spent $787 billion …
Smoke break …
Just spent $285 billion …
On a related note, here’s a new stream worth following: Twecipie.
Big Bucks for Coach Anderson
| Peter Klein |
In light of our recent discussions of salaries for US college coaches (1, 2), I note that Missouri basketball coach Mike Anderson, whose team lost over the weekend to the Connecticut Huskies (good thing Dick Langlois and I didn’t have a wager on that), is likely to get a big raise this year. Anderson’s base salary is $850,000, a pittance compared to Jim Calhoun’s $1.6 million. (Indeed, Anderson’s predecessor Quinn Snyder, fired at the end of the 2006 season, pulled down $1.2 million.) Local media outlets guess that at least $1.3 million will be required to keep Anderson from bolting for openings at Georgia, Virgnia, or Arizona (and Memphis, if John Calipari takes the Kentucky job). University System President Gary Forsee, Chancellor Brady Deaton, and even Missouri Governor Jay Nixon made public statements over the weekend expressing their desire to keep Anderson. Not one mentioned the University’s delicate financial situation (a huge revenue shortfall has led to cuts in academic programs, research support, faculty and staff benefits, and other expenditures). I can understand the argument for “investing” in a big-time coach but, given the recession, wouldn’t you expect campus officials to be a wee bit more discrete when tossing around these big numbers?
New Online Books
| Peter Klein |
Thanks to the Mises Institute, the Institute of Economic Affairs, the Library of Economics and Liberty, and other organizations, great works in social science continue to appear in free online editions. Some of the newest include:
- Carl Menger’s Investigations into the Method of the Social Sciences (1883), which features the famous section (book 3, chapter 2) on unintended consequences;
- Larry White’s Free Banking in Britain (1984); and
- Hayek’s Individualism and Economic Order (1948), which contains the classic essays “Economics and Knowledge,” “The Use of Knowledge in Society,” and “The Meaning of Competition,” among others.
Relative Prices Matter
| Peter Klein |
Hate to keep flogging a dead horse, and perhaps preaching to the choir, but the point can’t be made often enough: relative prices matter. The childish Keynesianism of people like DeLong and Krugman, like Bernanke and Geithner, understands only aggregate concepts like “national output,” “employment,” and “the price level.” A consistent theme of this blog’s rants is that resources are heterogeneous (1, 2) and, consequently, relative prices must be free to adjust to changes in demand, technology, market conditions, and so on. When government policy generates an artificial boom in a particular market, such as housing — drawing resources away from other parts of the economy — the key to recovery is to let resources flow out of that market and back to the sectors of the economy where those resources belong (i.e., to match the pattern of consumer demands). It’s quite simple: home prices should be falling, interest rates should be rising, savings rates should be going up, and debt levels should be going down. The Administration’s policies, like that of the last Administration, are designed to achieve exactly the opposite. Why? Because relative prices don’t matter, the allocation of resources across activities doesn’t matter, all that matters is to keep any sector from shrinking, any prices from falling, any firms from failing, any consumers from reducing their consumption. A child thinks only about what he can see. The unseen doesn’t exist.
Here are some excellent posts on the subject. Craig Pirrong notes that Sherwin Rosen had a colorful way of emphasizing relative price effects. Mario Rizzo (1, 2) points to data on the housing market and the Fed’s continuing attempt to keep resources from flowing out of this bloated sector. And here’s a snippet from Israel Kirzner’s short book on Mises explaining that insolvent financial institutions should be liquidated, not rescued. Good reading for grown-ups.
Public Entrepreneurship
| Peter Klein |
A surprising aspect of the recent growth in the entrepreneurship literature is the number of papers, projects, courses, centers, etc. studying entrepreneurship in non-market settings: “social entrepreneurship,” “cultural entrepreneurship,” “environmental entrepreneurship,” and so on. At my own university students can take entrepreneurship courses not only in the Colleges of Business or Engineering but in the College of Agriculture, the School of Natural Resources, the College of Journalism, and even the School of Social Work. (One of my colleagues organized a conference last year aimed at cattle ranchers seeking to market their, um, byproducts as fertilizer, with the classic title: “Manure Entrepreneurship: Turning Brown into Green.”
Translating concepts, theories, and research methods from the entrepreneurship literature to non-market settings raises challenging issue, however. How is entrepreneurship defined? What corresponds to entrepreneurial profit and loss? What is the entrepreneur’s objective function? Are there competitive processes that select for the better entrepreneurs? None of the classic writers on entrepreneurship — Cantillon, Say, Schumpeter, Knight, Mises, Kirzner — wrote explicitly on entrepreneurship in non-market settings, as far as I am aware. Mises, in fact, distinguishes sharply between “profit management” (or entrepreneurial management) and “bureaucratic management,” identifying the former with initiative, responsibility, creativity, and novelty and the latter with rule-following within strict guidelines (see Bureaucracy, 1944, and chapter 15, section 10 of Human Action, 1949). (more…)
Dutch Treat
| Peter Klein |
There’s only two things I hate in this world. People who are intolerant of other people’s cultures, and the Dutch. — Nigel Powers
Karel Davids’s new book, The Rise and Decline of Dutch Technological Leadership: Technology, Economy, and Culture in the Netherlands, 1350–1800 (Brill, 2008), provides an interesting look at knowledge flows within and between regions, an important idea in the modern literatures on economic geography and regional innovation. Writes EH.Net reviewer William TeBrake:
According to Davids, the northern Netherlands, the territory encompassed by the Dutch Republic, was the technological leader during much of the seventeenth and eighteenth centuries, before relinquishing that role to England by 1800, and in the process of explicating the rise and fall of Dutch technological leadership, he has called into question a number of commonplace assumptions found in the historiography of the period in question. . . .
One of the most interesting features of his study is the attention he pays to the truly remarkable concentration during the seventeenth and eighteenth centuries of literally hundreds of industries powered by windmills in the Zaan district, just across the IJ/harbor from Amsterdam, forcing the reader to reconsider how revolutionary the English Industrial Revolution really was. Further, there are several important areas in which he has significantly revised current understanding of the course of technology, economy, and society during the late-medieval and early-modern periods. . . . [For example], Davids makes clear that technological leadership in the Dutch Republic was much less tied to economic advancement than is usually assumed. Indeed, the Republic’s technological leadership began to peak only when the economy of the Dutch Republic already had begun to decline, during the late seventeenth century, and such leadership continued for another century thereafter, before giving way to England only after 1780. Finally, Davids makes a compelling case for locating the causes of technological leadership (and its decline) not only in market forces but also in institutional and cultural conditions, including the relative openness or secrecy of economic, cultural, and political life.
Sarasvathy Slides
| Peter Klein |
Saras Sarasvathy has kindly agreed to share the slides from her recent presentation on effectuation.
Thoughts on AIG
| Peter Klein |
Nothing has annoyed me more in the last 24 hours than the constant parade of angry, self-righteous, and ill-informed denunciations of AIG coming from Capitol Hill and the mainstream media. No one, of course, likes the thought of a failing, taxpayer-supported firm paying large bonuses to executives. But let’s talk some common sense here.
- The main lesson is that AIG should never, ever have been bailed out with taxpayer dollars. I said that at the beginning, and I stand by it even more today. AIG should have declared bankruptcy. Under bankruptcy there are well-established, orderly procedures for winding down a firm, distributing the remaining assets among the various legal claimants, and so on. Injecting taxpayer money without any serious thought about the implications of government subsidy and/or ownership for management and governance is just plain dumb. Naturally, that’s what Congress and the last President — people who know exactly zilch about what companies do and how they are run — did.
- Performance-based pay is a complicated subject. There are dozens, if not hundreds, of theoretical and empirical studies on the effects of performance-based pay on company performance, the benefits and costs of various compensation formulas, and the like. As Jensen and Murphy wrote back in 1990, “It’s Not How Much You Pay, But How.” Of course, the people screaming the loudest right now haven’t a clue about any of this. (more…)
Management Theory and the Current Crisis
| Peter Klein |
Here is a short piece by Nicolai and me written for a general audience, “Management Theory Is Not to Blame.” We discuss the role of resource heterogeneity in management theory and critique the vulgar Keynesianism that dominates mainstream commentary on the crisis. The graphic with the shovel alone is worth the click. Comments welcome here or at the Mises blog.
L’effet de Klein
| Peter Klein |
In 2006 I spent two weeks in Paris to visit colleagues and give a series of seminars. My first seminar was scheduled for a Tuesday in March. That day students decided to go on strike to protest a proposed labor law, the host university was closed, and my seminar was canceled. The next seminar was scheduled for the following Tuesday. Sure enough, that was the next day of protests, and that talk was canceled as well.
Now I am in France again to give some lectures at the University of Angers and ESC Rouen. Tomorrow I was planning to go by train from Angers to Rouen for an afternoon seminar. So, guess what’s planned for tomorrow? You guessed it: general strike. Trains are shut down, so no Rouen seminar for me.
Sooner or later someone in France is going to run some Granger causality tests and I will be banned from the country forever.
Update (Thursday): Here are some photos I took of this morning’s activity in Angers. For those who can’t read French, the signs say “Klein Go Home” and “French Lectures for French Professors.”
John Nash’s Dissertation
| Peter Klein |
Thanks to Dave Prychitko for linking to the original, which I hadn’t seen before. Things I didn’t know about the dissertation:
- The symbols and equations are hand-written (standard practice for 1950, I assume).
- There is no discussion of social-science applications — in fact, no discussion of any applications other than poker.
- The bibliography contains two items, von Neumann and Morgenstern (1944) and an earlier paper by Nash.
- The whole thing is only 27 pages long.
Conference on Law and New Institutional Economics
| Peter Klein |
Vic Fleischer and Phil Weiser have organized a conference on Law and New Institutional Economics at the University of Colorado, 4-5 June 2009. Along with Lee Fennel, Mark Ramseyer, Henry Smith, and Eric Talley, Vic and Phil will facilitate discussion of classic (Demsetz 1967, Klein, Crawford, and Alchian, 1978) and contemporary papers dealing with property rights, contract design, behavioral finance, the teaching of NIE, and more. See the link for details.
“I’m 30 Years Old, and I Made $600 Last Year”
| Peter Klein |
Bart Simpson explains graduate school (via Per):
My favorite Matt Groening take on grad school remains this one.
Rizzo on Ideology
| Peter Klein |
Arguments about ideology are often the last refuge of the (intellectual) scoundrel. If you can’t refute someone’s scientific and technical arguments, accuse him of being an “ideologue,” thus rendering all his opinions tainted. Those of us sympathetic to markets are familiar with this rhetorical trick. “Only a free-market ideologue could oppose this government program. . . .” In other words, practical, open-minded, technocratic types all favor X, so only an irrational ideologue could favor Y. Of course, this argument cuts both ways. The point of my post on the ideology of Keynesian economists was to point out that one can just as easily say that interventionists are led by statist ideology to reject scientific and technical arguments in favor of laissez-faire.
Mario Rizzo has an excellent post on the proper use of “reasonable ideology” in framing political discussions. As Mario points out, ideology represents a set of default beliefs, beliefs that need not be irrational, but can be based on the accumulation of prior evidence. Like a Kuhnian paradigm, an ideology helps prioritize different types of evidence, helps establish ground rules for thinking about problems, and facilitates the operation of “normal science.” Like Bayesian priors, ideologies change slowly, as new information is revealed; indeed, they shouldn’t be abandoned based on one or two pieces of supposedly contrary evidence.
Reasonable ideologues of the world, you have nothing to apologize for.
The Political Economy of Vertical Integration
| Peter Klein |
An understudied area in the organizations literature is the effect of organizational form on lobbying, rent-seeking, tax-rate arbitrage, and similar kinds of political behavior. The accounting literature on transfer pricing looks at the ability of vertically integrated multinationals to shift income between tax jurisdictions to reduce the overall tax burden, and regulators have expressed concerns about diversified multinationals putting downward pressure on environmental and labor regulations (by threatening to withdraw production from countries with high tax or regulatory burdens). Of course we know that as industries mature, firms are more likely to open lobbying offices in state or national capitols. But, in general, we know little about how firms organize to take advantage of political processes and institutions.
Joseph Fan, Jun Huang, Randall Morck, and Bernard Yeung have a new NBER paper on vertical integreation in China showing that vertical integration in highly interventionist environments may be aimed not at reducing transaction costs, protecting relationship-specific investments, and the like, but at rent-seeking and the pursuit of other forms of political privilege. Abstract:
Where legal systems and market forces enforce contracts inadequately, vertical integration can circumvent these transaction difficulties. But, such environments often also feature highly interventionist government, and even corruption. Vertical integration might then enhance returns to political rent-seeking aimed at securing and extending market power. Thus, where political rent seeking is minimal, vertical integration should add to firm value and economy performance; but where political rent seeking is substantial, firm value might rise as economy performance decays. China offers a suitable background for empirical examination of these issues because her legal and market institutions are generally weak, but nonetheless exhibit substantial province-level variation. Vertical integration is more common where legal institutions are weaker and where regional governments are of lower quality or more interventionist. In such provinces, firms led by insiders with political connections are more likely to be vertically integrated. Vertical integration is negatively associated with firm value if the top corporate insider is politically connected, but weakly positively associated with public share valuations if the politically connected firm is independently audited. Finally, provinces whose vertical integrated firms tend to have politically unconnected CEOs exhibit elevated per capita GDP growth, while provinces whose vertically integrated firms tend to have political insiders as CEOs exhibit depressed per capita GDP growth.
High-Tech Austrians
| Peter Klein |
Austrian economists are social and cultural conservatives who bury their noses in thousand-page tomes, favor bow ties and vests, and gaze longingly toward Old Vienna, right? Guess again! These guys are on the cutting edge. To wit:
- You can follow the (in-progress) Austrian Scholars Conference on Twitter and watch the plenary sessions online.
- Both volumes of Murray Rothbard’s Austrian Perspective on the History of Economic Thought are now available as free e-books (1, 2).
- There are a bunch of Austrian economics groups on Facebook; this is the largest.
Why They Heart Keynes
| Peter Klein |
Luigi Zingales offers Straight Talk on Keynes (via Casey Mulligan):
Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behavior. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington.
Three comments: First, the “hangover” metaphor, while not exactly accurate, is an effective way to communicate the basics of the Mises-Hayek malinvestment theory of the business cycle. Use it! Second, Zingales’s description applies equally well to the 1930s and 1940s, when the Keynesian consensus emerged. It’s important to remember that massive deficit spending to “cure” the Depression began with Hoover and Roosevelt in the early 1930s, long before the General Theory appeared. Keynes’s book did not propose a new direction for economic policy; it provided an allegedly scientific rationale for policies already in place, policies government officials were eager to defend and protect. (The use of expansionary fiscal and monetary policy to increase output had long been derided by serious economists as nonsense, as the domain of “monetary cranks” and other snake-oil salesmen).
Third, the Keynesian delusion afflicts not only policymakers, but professional economists as well. I’ve long suspected that the appeal of Keynes to people like Krugman and DeLong is ultimately based on aesthetic, not scientific, grounds. Deep in their hearts, they just don’t like private property, markets, and individual choice. They don’t think ordinary people are capable of making wise decisions and think they, the elites, should be in charge. They resent the fact that most people don’t want their lives controlled by liberal intellectuals. Technical arguments about the effectiveness of monetary and fiscal policy, the relationship between aggregate demand and output, the experience of the 1930s, and the like are really beside the point. For Keynesian economists, the belief that markets are naturally unstable in the absence of government planning is a matter of faith.
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