Author Archive
In Praise of the US Auto Industry
| Peter Klein |
The proposed bailout of GM, Ford, and Chrysler overlooks an important fact. The US has one of the most vibrant, dynamic, and efficient automobile industries in the world. It produces several million cars, trucks, and SUVs per year, employing (in 2006) 402,800 Americans at an average salary of $63,358. That’s vehicle assembly alone; the rest of the supply chain employs even more people and generates more income. It’s an industry to be proud of. Its products are among the best in the world. Their names are Toyota, Honda, Nissan, BMW, Mercedes, Hyundai, Mazda, Mitsubishi, and Subaru.
Oh, yes, there’s also a legacy industry, based in Detroit, but it’s rapidly, and thankfully, going the way of the horse-and-buggy business.
I pulled these numbers from Matthew Slaughter’s fine piece in yesterday’s WSJ, “An Auto Bailout Would Be Terrible for Free Trade,” which points out that the US is one of the the world’s largest recipient of Foreign Direct Investment and that an auto industry bailout would surely reduce the flow of FDI, at the expense of the US economy. “Ironically, proponents of a bailout say saving Detroit is necessary to protect the U.S. manufacturing base. But too many such bailouts could erode the number of manufacturers willing to invest here.” Bailouts may also spur retaliatory actions by governments in US export markets, doing further damage to free trade. In short, what the Big Three and their supporters want is the most crass form of protectionism, a blunt demand that US taxpayers, consumers, and producers fork over the cash, now and in the future, to prop up an inefficient, failing industry.
NB: In 2001 I was part of a delegation of US officials visiting Singapore in advance of negotiations over a possible bilateral free trade agreement. The issue was Singapore’s Government-Linked Enterprises (GLCs), nominally private firms partially owned by the Singaporean government. Did these links constitute a trade barrier, putting US firms doing business in Singapore at a competitive disadvantage? We interviewed US executives based in Singapore and learned that the government did not seem to offer the GLCs special favors in input or output markets (though they did benefit from a lower cost of capital). Anyway, as I read Slaughter’s piece I imagined myself as a Singaporean official visiting the US, interviewing foreign executives in the financial-services and, perhaps, automobile industries, asking if they thought US companies got special government protection. To ask this question is to answer it.
Entrepreneurship Links
| Peter Klein |
- The World Bank’s 2008 Entrepreneurship Survey and Database. Includes over 100 countries.
- A new RAND report, Enhancing Small-Business Opportunities in the DoD. Our own Cliff Grammich is one of the authors.
- The Call for Papers for the Searle Center’s Second Annual Research Symposium on The Economics and Law of the Entrepreneur (11-12 June 2009). I attended the first one and it was really great.
Bailout Bingo
| Peter Klein |
You’re probably familiar with Buzzword Bingo. Let’s create a version to accompany news reports, editorials, and political speeches on the financial-market and other bailouts. Keep a card with you as you read the newspaper, watch or listen to broadcast news, visit with Barney Frank, or follow the conversation at your next hoity-toity dinner party. Check off each term as you hear or read it and shout “Bingo!” when you have five in a row, vertically, horizontally, or diagonally. Here’s a sample card. Please add suggestions for additional words and phrases in the comments.
| Protecting jobs | Ripple effect | Necessary intervention | Can’t afford to do nothing |
Life blood of the economy |
| Corporate greed | Market failure | Temporary relief | Decisive action | Frozen markets |
| Nonpartisan solution | Maintain competitiveness | F R E E S P A C E |
Sit idly by | Domino effect |
| No fault of their own | Stability | Public investment | Congressional authority | Too big to fail |
| Head in the sand | Conservatorship | Critical industry | Creative solutions | Public-private partnership |
Against Gladwellism
| Peter Klein |
The blogosphere is atwitter over Malcolm Gladwell’s new book, Outliers (#4 on Amazon this morning). Outliers studies high achievers in art, science, business, and other fields, seeking to refute the myth of the self-made man: high achievers “are invariably the beneficiaries of hidden advantages and extraordinary opportunities and cultural legacies that allow them to learn and work hard and make sense of the world in ways others cannot.”
Abbeville (via 3quarks) expresses some reservations, not about Gladwell’s conclusion, but about his approach:
[Gladwell] is a skilled and entertaining writer, exemplifying the modern New Yorker “house style” for journalism with its combination of solid research, amused detachment, and quirky anecdotes in the Ken Burns mold. Tragically, Gladwell is also often very wrong. His work, famous for its forays into sociology, social psychology, market research, and other trendy disciplines, is a testament to both the exciting possibilities and the intellectual limitations of those fields. His penchant for what might be called pop statistical analysis sometimes leads to elegant, well-supported, and counterintuitive conclusions, but just as often recalls the man who couldn’t possibly have drowned in that river because its average depth was five feet. (more…)
Sentences to Ponder
| Peter Klein |
Although it does very well on the share of total jobs created by new firms, America scores highest of all in terms of the percentage of its lost jobs that are destroyed by enterprises’ going out of business. Perhaps, in the spirit of Joseph Schumpeter’s theory of creative destruction, it is the ability for firms to fail — and for the entrepreneurs involved to escape without stigma — that provides the overlooked but crucial part of the American entrepreneurial culture.
That’s from an Economist story on Global Entrepreneurship Week (did you know it started Monday?) that focuses on the Kauffman Foundation’s work on collecting and analyzing global data on startups, firm growth, innovation, bankruptcy, and the like. The story opens with one of the all-time great (and probably apocryphal) Bushisms: “the problem with the French is they don’t have a word for entrepreneur.” (Thanks to Chris Boessen for the pointer.)
Alfie Kohn on Parenting
| Peter Klein |
A new item for our Alfie Kohn archive, courtesy of Joshua Gans.
One comment on the alleged crowding-out effect of extrinsic motivation. As I explain to my students, even when behavior is intrinsically motivated, extrinsic motivation can have powerful effects on the margin. For example, I didn’t go into academia for the money, but because I love research and teaching, I like keeping my own hours, I enjoy walking through leafy quads, and I look right smart in a tweed jacket with elbow patches. However, on the margin, the choice between teaching one more course or one less, attending this conference or that, working on one paper or another, is most definitely affected by monetary and other professional rewards.
Likewise, I want my children to work hard, be kind to others, eat their vegetables, clean their rooms, and so on, not because of rewards and punishments, but because those are the rights thing to do. But do I use extrinsic motivation to elicit marginal changes in behavior, subject to those general rules? You bet your Christmas Wish List I do.
Utrecht Conference on Firm Governance
| Peter Klein |
Utrecht University is sponsoring a conference on “The Governance of the Modern Firm,” 11-13 December 2008, featuring contributions from Paul Davies, Roberta Romano, Bill Lazonick, and many others. (Via Geoff Hodgson.)
Entrepreneurship: Hot and Cold
| Peter Klein |
The current issue of Nature features “The Innovative Brain” by a team of Cambridge researchers, suggesting that that entrepreneurs (defined here as proprietors or founders) excel at “hot” decision making, an emotional, intuitive, under-pressure kind of reasoning familiar to neuroscientists.
Our groups of entrepreneurs and managers showed comparable performance on the Tower of London test of cold processes, with no differences in the number of solutions solved at the first attempt. On the Cambridge Gamble Task, both groups were able to make high-quality decisions, selecting the majority colour at least 95% of the time. The remaining 5% is likely to be accounted for by ‘gambler’s fallacy’ in which subjects try to second guess the computer by choosing the less likely colour. However, when subjects were introduced to the hot components of the task, differences were observed. We found that entrepreneurs behaved in a significantly riskier way, betting a greater percentage of their accrued points (63%) than their managerial counterparts (51%). Both groups adjusted their wagering according to the likelihood of success (dependent on the ratio of red-to-blue boxes). The only performance difference was the amount that was bet.
Interestingly, this risk-taking performance in the entrepreneurs was accompanied by elevated scores on personality impulsiveness measures and superior cognitive-flexibility performance. We conclude that entrepreneurs and managers do equally well when asked to perform cold decision-making tasks, but differences emerge in the context of risky or emotional decisions.
The researchers suggest that entrepreneurship education should perhaps give more attention to emotional, impulsive behavior rather than teach business planning and market research. (But, really, do 18-22 year olds need instruction in this area?) And here’s something to delight your local pharmacist:
These cognitive processes are intimately linked to brain neurochemistry, particularly to the neurotransmitter dopamine. Using single-dose psychostimulants to manipulate dopamine levels, we have seen modulation of risky decision-making on this task. Therefore, it might be possible to enhance entrepreneurship pharmacologically.
The exercise is a bit scientistic for my tastes, but interesting nonetheless. (Thanks to Yiyong Yuan for the pointer.)
All Your Firm Are Belong to Us
| Peter Klein |
Time for a little O&M poll. Which US firms or industries will be bailed out and/or nationalized next? This year we’ve had investment banks, commercial banks, insurance companies, and (coming soon) the automobile industry. Who’s next? Another financial-sector player, like student-loan packagers and resellers? More insurance companies? The steel industry? Food processing? Healthcare? Boatmakers? Perhaps professional service firms? How about Olympics organizers? Take a guess, and feel free to provide additional suggestions too in the poll or in the comments. We’re pretty far down the slippery slope; what do you think the rest of the journey will look like?
Creative Capitalism
| Peter Klein |
The book is coming out in a few weeks, and the blog is back in business. I didn’t follow all the previous discussion but what I read was of high quality and reflected diverse, and interesting, perspectives.
The Impotence of the Economists, Part II
| Peter Klein |
The financial-market bailout is one thing. While most economists, rightly in my view, strongly opposed the Paulson plan, one can at least imagine intelligent arguments for it. The proposed auto-industry bailout is something else entirely. Does any economically literate person support it? Industry bailouts are textbook examples of the fallacy of composition, taught in every Econ 101 class. When I teach it I use exactly this kind of example (bailing out Chrysler in 1980, bailing out the airline and insurance industries after 9/11, etc.). Saving the X industry simply harms the Y and Z industries, while substituting the political process for the market in determining the allocation of resrouces. And yet, here we go.
Along these lines, here are some sentences to ponder from David Yermack, writing in today’s WSJ:
In 1993, the legendary economist Michael Jensen gave his presidential address to the American Finance Association. Mr. Jensen’s presentation included a ranking of which U.S. companies had made the most money-losing investments during the decade of the 1980s. The top two companies on his list were General Motors and Ford, which between them had destroyed $110 billion in capital between 1980 and 1990, according to Mr. Jensen’s calculations.
I was a student in Mr. Jensen’s business-school class around that time, and one day he put those rankings on the board and shouted “J’accuse!” He wanted his students to understand that when a company makes money-losing investments, the cost falls upon all of society. Investment capital represents our limited stock of national savings, and when companies spend it badly, our future well-being is compromised. Mr. Jensen made his presentation more than 15 years ago, and even then it seemed obvious that the right strategy for GM would be to exit the car business, because many other companies made better vehicles at lower cost. . . .
Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s.
See also: Lynne Kiesling.
What Deregulation?
| Peter Klein |
We noted previously a major flaw in the “deregulation-caused-the-financial-crisis” meme spreading rapidly throughout the MSM: namely, there wasn’t any. If I can quote from the comment section of another blog, here’s Jerry O’Driscoll making the same point:
[T]here has been no deregulation of the financial markets since 1999 (Gramm-Bliley Leach). And that act did not repeal the Glass Steagall Act of 1933, . . . but amended it (Sections 20 and 32 of GS being repealed), and some other banking statutes. Mostly the act legitimized financial market developments already in place, and provided a new regulatory structure (so much for deregulation).
I recognize that policy lags are long and variable, but Sandy [Ikeda] cites events from 1992, 1997 and 1999 [as drivers of the crisis]. He can’t cite any later because there weren’t any. Affordable housing goals go back to the 1930s and, in contemporary form to 1968-70. Again, those are really long policy lags. . . .
Finanical services remains one of the most highly regulated indsutries, perhaps second only to health care. Non-existent deregulation can’t explain the current crisis.
The policy change that occurred in the relevant time frame was the easing of monetary policy by the Greenspan Fed. From a high of 6.5% in May 2000, the Fed Funds rate was cut down to 2% in Nov. 2001 and remained there or below for 3 years. For one full year, it was at 1%. The real rate was negative for approx. 3 years. Negative real interest rates are inevitably inflationary, often causing asset bubbles.
Group Blog of the NYU Austrian Economics Colloquium
| Peter Klein |
It’s ThinkMarkets, written by the members of the NYU Austrian colloquium (formerly currently known as the Colloquium on Market Institutions and Economic Processes). The group includes Mario Rizzo, Bill Butos, Gene Callahan, Young Back Choi, Sandy Ikeda, Roger Koppl, Chidem Kurdas, and Joe Salerno. The colloquium was established in the 1980s by Israel Kirzner, who is still an occasional participant.
A Silver Lining
| Peter Klein |
As I mentioned in a recent talk, one good thing to come out of the bailout disaster is the diminished reputation of St. Alan the Wise. It was fun watching the same Congressional clowns who months earlier praised the “Maestro” as the greatest Fed chair in history slap him down for failing to prevent the housing bubble. Of course, Greenspan, like these clowns, ignored the issue of credit expansion, expressing regret only that he had put “too much trust” in market forces. Ha!
Now Paulson, never too popular in the first place, is suffering a similar fate, as he abandons the Troubled Asset Relief Program — the rationale for the bailout itself — and praises Congress for giving him the broad authority to do, well, whatever the hell he wants. Oh, please, let Bernanke be next!
BTW, Bob Higgs continues to offer some of the best commentary on the disaster — the political, journalistic, and educational disaster, I mean, not the supposed economic disaster. I hope his term, “Bailout of Abominations,” catches on.
Update: The Economist puts it this way: “One of the most humbling features of the financial crisis is its ability to humiliate policymakers who, thinking that they have a bazooka in their closet, soon discover that it is a mere popgun.”
Bill Shughart’s Review of Prophet of Innovation
| Peter Klein |
It’s in the December 2008 issue of Managerial and Decision Economics. Excerpt:
Many readers, as I did, will close Prophet of Innovation with a feeling of dissatisfaction. On the plus side, McCraw’s life of Joseph Alois Schumpeter is not as dauntingly long as it seems: Nearly 30% of the volume is devoted to notes and other end matter, and so the text runs to a more digestible 506 pages. Generous line spacing and a respectable number of archival photographs speed the pace of reading.
On the minus side, Prophet of Innovation pales in comparison with the recent and far more penetrating biographies of John D. Rockefeller, Sr. by Ron Chernow, of J. P. Morgan by Jean Strouse, and of Andrew Mellon by David Cannadine. In the end, one doesn’t know Joseph Schumpeter quite as fully as one now knows those titans of industry. And we certainly don’t know him as well as we know Robert Skidelsky’s John Maynard Keynes, who was born the same year (1863). Something is missing from Prophet of Innovation, perhaps because McCraw chose not to be “concerned with Schumpeter’s economic thinking, narrowly construed” (p. xi). That choice, in my judgment, fatally compromises any attempt to tell the story of a man who lived and breathed economics over a distinguished, remarkably productive academic career that spanned four decades, taking him from the classrooms of the University of Vienna, where he (and Ludwig von Mises) studied under Eugen von Böhm-Bawerk, to Harvard Square.
New Blogs of Interest
| Peter Klein |
- Campus Entrepreneurship by David J. Miller
- Evolution and Complexity in the Social Sciences by Eliana Santanatoglia
- Anything Peaceful by the staff at FEE
Historical Origins of “Open Science”
| Peter Klein |
An interesting piece on science and patronage by Paul David, with a comment by Ken Arrow:
The Historical Origins of “Open Science”: An Essay on Patronage, Reputation and Common Agency Contracting in the Scientific Revolution
Paul A. David, Stanford University & The University of Oxford
This essay examines the economics of patronage in the production of knowledge and its influence upon the historical formation of key elements in the ethos and organizational structure of publicly funded “open science.” The emergence during the late sixteenth and early seventeenth centuries of the idea and practice of “open science” was a distinctive and vital organizational aspect of the Scientific Revolution. It represented a break from the previously dominant ethos of secrecy in the pursuit of Nature’s Secrets, to a new set of norms, incentives, and organizational structures that reinforced scientific researchers’ commitments to rapid disclosure of new knowledge. The rise of “cooperative rivalries” in the revelation of new knowledge, is seen as a functional response to heightened asymmetric information problems posed for the Renaissance system of court-patronage of the arts and sciences; pre-existing informational asymmetries had been exacerbated by the claims of mathematicians and the increasing practical reliance upon new mathematical techniques in a variety of “contexts of application.” Reputational competition among Europe’s noble patrons motivated much of their efforts to attract to their courts the most prestigious natural philosophers, was no less crucial in the workings of that system than was the concern among their would-be clients to raise their peer-based reputational status. In late Renaissance Europe, the feudal legacy of fragmented political authority had resulted in relations between noble patrons and their savant-clients that resembled the situation modern economists describe as “common agency contracting in substitutes” — competition among incompletely informed principals for the dedicated services of multiple agents. These conditions tended to result in contract terms (especially with regard to autonomy and financial support) that left agent client members of the nascent scientific communities better positioned to retain larger information rents on their specialized knowledge. This encouraged entry into their emerging disciplines, and enabled them collectively to develop a stronger degree of professional autonomy for their programs of inquiry within the increasingly specialized and formal scientific academies (such the Académie royale des Sciences and the Royal Society) that had attracted the patronage of rival absolutist States of Western Europe during the latter part of the seventeenth century. The institutionalization of “open science” that took place within those settings is shown to have continuities with the use by scientists of the earlier humanist academies, and with the logic of regal patronage, rather than being driven by the material requirements of new observational and experimental techniques.
See also this and this on science funding. And of course Hayek’s Counter-Revolution of Science (free full text!) should be consulted.
B-School Naming Rights Up to $300 million
| Peter Klein |
At Chicago, anyway, now home to the Booth School of Business.
Here’s an interesting (if slightly dated) Business Week story on B-school naming rights. Wisconsin has taken the most innovative approach, announcing earlier this year that in exchange for $85 million it would pledge not to name the school for 20 years.
Here at Organizations and Markets we are committed to honest and open inquiry, free from restrictions imposed by corporate or individual sponsors. However, if you’d like to have this blog named after yourself, we’ll toss those principles right out the window. Send all inquiries to naming-rights@organizationsandmarkets.com.
Price Gouging: The Latest Victims
| Peter Klein |
Please join me in support for poor, beleaguered gas station owners, the victims of unconscionable price gouging by ruthless consumers who are taking advantage of market conditions to reduce their demand for gasoline, driving down the price by nearly $2 per gallon over the last four months. Fortunately, governments are swinging into action. Georgia governor Sonny Perdue issued this statement: “The financial crisis has disrupted the consumption of gasoline, which will have an effect on prices. However, we expect the prices that Georgian gasoline station owners receive at the pump to be in line with changes in consumers’ incomes and the prices of substitutes and complements. We will not tolerate consumers taking advantage of Georgian business owners during a time of emergency.”
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