Author Archive
Technology and Organization and Firm Size (Re-Redux)
| Dick Langlois |
I blogged a while back about the recent Dosi et al. paper in Capitalism and Society, which basically claims that, since firm size distributions (as they model them) have not changed much over time, it must be the case that recent technological change has not led to greater vertical specialization in industry. My response to this claim, which should be published soon, points out that firm size in the sense of price theory (as measured by output, employees, etc.) tells us nothing at all about firm size in the sense of Coase (number of transactions or stages of production within the firm’s boundaries). Vertical specialization does not imply small size — it may even mean larger firms. A recent NBER paper by four University of Chicago economists sheds light on this point. There is evidence, notably in a well-known paper by Erik Brynjolfsson and coauthors, that, at least before 1994, investment in ICT technology tended to make firms smaller. But there is another way in which ICT, in the form of the Internet, can make firms bigger. As this NBER paper shows, in reducing search costs in areas like new-car sales and bookstores, the Internet tended to increase the average size of the firm by driving the smaller less-efficient firms out of business and increasing the (price theory) size of the more efficient. Note that such an increase in size is not a resurgence of the Chandlerian multi-unit enterprise. Despite its diversification into many different products, even Amazon is still highly specialized vertically.
CSI: Reform
| Dick Langlois |
My old friend Roger Koppl has an interesting article in Slate on reforming the system of forensic analysis and testimony. He and his coauthor argue for such measures a forensic counsel for the indigent; greater independence of experts from the prosecutorial team; more competition among labs; more statistical analysis to uncover anomalous findings; and the masking of evidence from analysts to reduce cognitive bias.
Roger has started something called the Institute for Forensic Science Administration. Check out his website for links to papers and others materials. (The website also declares that Roger’s Erdös number is 6. As Roger and I have written a couple of papers together, my Erdös number must be no greater than 7.)
Rival Teams and Non-Rival Knowledge
| Dick Langlois |
A recent issue of the Journal of Quantitative Analysis in Sports, an all-electronic Bepress journal, carried a piece provocatively titled “Quantifying NFL Coaching: A Proof of New Growth Theory” by Kevin P. Braig. The paper is a rambling mix of sports anecdotes and goofy math. My favorite of the latter is:
| lim f(x) = 1 first down
x→10 |
But the piece is amusing reading and does make some interesting points.
The title is more than a bit fatuous, of course. What the author has in mind is that one can increase output not only by increasing the inputs but by learning to reorganize the way those inputs are combined. This was the growth theory of Smith and Marshall, of Rosenberg and Mokyr. The only contribution of the New Growth Theory has been to cram a diminished and mechanized version of these ideas into the formalism of the production function — and, of course, to receive credit in the popular mind for the very notion that growth is about the search for new “recipes.” Braig is on firmer ground when he associates himself with Carliss Baldwin‘s notion of designs.
What has this got to do with sports? Consider baseball, which is probably the most modular of major (American) sports. In baseball, the only real way to be more successful is to improve the quality of the players, what Braig likes to call their human capital. This is because the way players interact is relatively hard-wired and invariant among teams. Small adjustments are possible — shifts, bunting strategy — but no one ever redefines how to turn a double play. The so-called moneyball approach has been to find better statistical measures of the effectiveness of player human capital — not to reorganize how the players interact. (In testimony to the almost mystical numerology of this article, Braig finds wonder in the fact that average on-base percentage has remained nearly constant over the live-ball era at about 0.331, exactly the ratio one gets by recognizing that “the hitters’ needs (4 bases) exceed their resources (2 outs) by a 2-to-1 margin.” But this presumes that human capital in batting should somehow exactly keep pace with human capital in pitching — even though there is arguably more room for innovation in pitching. I think a closer examination would find that baseball rulemakers have tweaked subtle rules like the size of the strike zone or the height of the mound to keep the ratio constant.) (more…)
Technology and Firm Size and Organization (Redux)
| Dick Langlois |
Peter blogged a while ago about an article by Giovanni Dosi, Alfonso Gambardella, Marco Grazzi, and Luigi Orsenigo in the bepress online journal Capitalism and Society. Both this article and the accompanying discussion by Bill Lazonick take aim at my 2003 article “The Vanishing Hand.” I have now crafted a response, which I propose to submit to the journal as a letter. But readers of O&M can read it right away here.
I should also mention that the same issue of Capitalism and Society has an interesting article on the family firm by Princeton historian Harold James, with a wonderful comment by Randall Morck. I met Morck this past November at a conference in Kyoto, and was extremely impressed.
Airlines Go Medieval
| Dick Langlois |
Like me, you’ve probably received more than one email today from U. S. air carriers, signed by the CEOs of all the major players, blaming the increase in fuel prices on — you guessed it — speculators. They direct you to a website at which you can send a pre-fab letter to your legislator. Here’s what the site says:
The oil price bubble is unfairly taxing American families and restricting our nation’s economic potential. While everyone is aware that supply and demand constraints contribute to price increases, there’s another force at work that, like gravity, is invisible yet powerful. This force is rampant speculation.
Every time you buy products such as food or gas, you are impacted by unregulated, secretive and often foreign commodities futures markets. Speculators in these markets are increasingly buying and selling commodities such as oil even though they have no intention of using the product. As unregulated speculators pocket billions of dollars at your expense, the price of commodities has increased out of proportion to marketplace demands.
Apparently, fear of secretive foreigners plays as well in the age of The Da Vinci Code as it did in the age of da Vinci. I invite you to do what I did: use their system to send a message contrary to what the airlines wish you to say. Here is what I said. Feel free to cut and paste.
The airlines are bombarding you with letters about the depredations of speculators. Because speculation seems arcane and mysterious to those untrained in economics, it has been an easy target since ancient times. Economists understand — and I imagine the airlines actually do as well — that speculation is in fact an efficient response to uncertainty. High fuel prices result from real supply and demand shocks as well as from uncertainty about the future of oil supply and demand. That uncertainty is a real economic phenomenon, and it can’t be wished away. By asking you to “stop” speculation, the airlines are really just asking you to transfer income to them and away from others. I find it particularly ironic that among the signatories of the letter was the chairman of Southwest Airlines, which for years has successfully speculated in fuel prices. Southwest never asked you to intervene when they benefited from long-term fuel contracts at below-spot-market prices. Don’t listen to them now.
Stop Using Military Buzzwords Too
| Dick Langlois |
It seems that, like the British Local Government Association, the US military is keen to get its people to stop using buzzwords, at least according to this February 2007 “Army Doctrine Update” I happened to see posted on a bulletin board in the Brazilian military academy where the Schumpeter Society Conference was meeting. Here are some highlights.
- Know the difference between maneuver and movement (we don’t maneuver networks; we move them).
- Battlespace is no longer a joint or Army term. Use “operational environment.”
- Use “civil considerations” (the C in METT-TC), not “human terrain.”
- Don’t use “red zone” at all; the term is “close combat.”
- Do not use “kinetic” and “nonkinetic” to describe operations, actions, activities, tasks, or targets. Use “lethal” and “nonlethal.”
Or perhaps the point is that they want people to use the right buzzwords.
Notes from the Schumpeter Society Conference
| Dick Langlois |
I’m in Rio De Janeiro, where the biennial conference of the International Joseph A. Schumpeter Society has just finished up. I was involved in, among other things, a plenary session on the first day with Dick Nelson and Carliss Baldwin on “Varieties of Knowledge in the Economy.” The session was organized by Peter Murmann, who promises to post the slides and notes eventually on his very interesting website.
At the conference banquet last night — in the elegant Copacabana Palace Hotel — the Schumpeter Prize was split among three recipients. One was Tom McCraw for Prophet of Innovation, his biography of Schumpeter, which Peter blogged about some time ago. (See also my review.) Another was Martin Fransman for The New ICT Ecosystem: Implications for Europe, the latest of Martin’s many interesting books on ICT industry structure and government policy. In his acceptance remarks, Martin mentioned the picture of Schumpeter that had adorned the office wall of his first (and perhaps most influential) economics teacher, Ludwig Lachmann, at the University of the Witwatersrand in South Africa. The third recipient(s) were Mario Amendola and Jean-Luc Gaffard for a book I’ve have not yet seen.
The conference was set in a beautiful part of Rio called Urca, right on the water and surrounded by giant jutting granite hills. The area houses not only some older parts of the Federal University of Rio but also a compound of military facilities and academies. There is also an edifice called the Instituto Benjamin Constant, a school for the blind, which is apparently not named, however, for the eighteenth-century Swiss liberal thinker but for a nineteenth-century army officer who was the leading Brazilian adherent to the positivism of Auguste Comte.
V for von Mises
| Dick Langlois |
My Father’s Day present this year was something unusual: issue number 11 (Winter 1998) of something called The Batman Chronicles. (My sons are both into comics and graphic novels, though it was apparently my wife who stumbled onto this on the web.) The issue is a slim comic book featuring “The Berlin Batman,” wherein the story of Batman is reimagined as having taken place in pre-war Nazi Germany. The hero is Baruch Wane, wealthy Jewish socialite and decadent cubist painter, who becomes Batman by night after his parents are killed not by a robber but by anti-Semitic violence. His mission, of course, is to fight the tyranny of Nazism, which in this issue involves — and here’s the punch line — trying (in the end without success) to save the papers of Ludwig von Mises, which have been confiscated by the Nazis. The episode goes into great detail about why the work of von Mises was a threat to the Nazis and to authoritarians of all stripe.
This comic may be old news to many readers, but I found it amusing. The author, Paul Pope, is apparently well respected in comics/graphic novel circles for, among other things, a more elaborate reimagining of Batman in a totalitarian future.
Notes from DRUID
| Dick Langlois |
I am in Copenhagen for the DRUID 25th Celebration Conference, which finished up yesterday. It’s called the 25th Celebration because it’s the 25th DRUID conference -– there have been generally two a year since the organization started in 1995. This conference represents a transition for DRUID, which has grown considerably over the years. One indication of transition is that the old scientific advisory board, of which I had been a member since 1996, has been dissolved and a new one reconstituted. The new board is made up of a number of smart and interesting people, but it tends more toward management and economic geography and away from the theory of the firm and industry as represented by the likes of Bo Carlson, Brian Loasby, and George Richardson (and me). It was perhaps fitting that Brian was asked to press the button that touched off the fireworks over the harbor after last night’s conference dinner.
Some highlights.
Steven Klepper presented the first keynote, a further development of his long-term research program on industry structure and the birth and death of firms. (I missed the very beginning of the talk because I was having breakfast with Nicolai; fortunately, the paper is available here.) What Klepper does is essentially top-flight quantitative economic history. In this paper he takes on the conventional wisdom (A) that Silicon Valley is unique because of the rate of spinoffs it engendered and (B) that universities are crucial to the spinoff process. It turns out that the early auto industry in Detroit and the early tire industry in Akron had almost identical spinoff patterns, both sans university. (In fact, there were more spinoffs than in Silicon Valley.) In Klepper’s account -– notably different from most accounts –- clusters arise when new profit opportunities get seized by defection of key personnel rather than through internal diversification. In all cases, the cluster tend to consist of successful spinoffs from already successful firms. Genuine new entrants and spinoffs from less-successful firms seldom prosper. Defections have to do in large part with the dysfunctionality of the parent company, involving a problem either with expectations (as when the soon-to-be defectors couldn’t convince management of the value of their ideas) or of incentives (read: inadequate stock options). There is an interesting connection here with the Penrose/Chandler theory of the growth of the firm. Penrose seems to assume, and Chandler more than assumes, that firms always build internal capabilities and then use their excess resources to diversify internally into profitable related areas. Klepper shows that those opportunities often result in the formation of new firms. (more…)
More on Agricultural Adaptation: Johnny Appleseed
| Dick Langlois |
The abstract of a new paper called “Alertness, Local Knowledge, and Johnny Appleseed” recently crossed my computer screen. By a grad student at George Mason called David Skarbek, the paper applies a Kirznerian account of entrepreneurship to the case of Johnny Appleseed, aka John Chapman (1774-1845). The entrepreneurial part will no doubt be of interest to many readers, including my estimable co-bloggers. But I’m more interested in the historical and institutional angle.
Skarbek points out that, contrary to the Disney-fueled myth, Johnny Appleseed didn’t scatter apple seeds randomly throughout Appalachia and the midwestern frontier. He planted clearly defined apple groves, totaling some 1,200 acres by the time of his death. This turned out to be crucial for homesteading, since under American state law the planting of fruit trees was one way to create a property right (in Lockean fashion) out of unowned land. Chapman was thus an institutional entrepreneur.
What Skarbek doens’t say, however, is something I learned at the NBER conference I wrote about earlier. In addition to having what we would nowadays call mental health issues, Chapman was also an evangelical Swedenborgian who shared with Thoreau the view that apples should aways be grown from seeds. (For documentation, see for example here.) In fact, apple trees grown from seeds are good for only one thing — cider — and, indeed, the Johnny Appleseed legend got a boost in Appalachia during Prohibition as the fruits (as it were) of his efforts were used for hard cider. Apple cultivation normally requires grafting, a form of hybridization known for centuries and practiced in Appleseed’s lifetime by the likes of Thomas Jefferson. The point is that Chapman saw hybridization as unnatural and immoral, and his quest was animated as much or more by this religious view as by environmentalist zeal or entrepreneurial insight. As the mention of Thoreau suggests, however, distaste for “unnatural” breeding methods is not exclusive to religious fundamentalists, and indeed today it is followers of Thoreau not (generally) Christian evangelicals who object to genetically modified organisms.
Climate (Change) and Agricultural Adaptation
| Dick Langlois |
Just for the fun of it, I drove up to Cambridge on Friday to take in one day of an interesting NBER conference on Climate Change: Past and Present. The conference was organized by Gary Libecap, whom I’ve known for years, and Richard Steckel, whose work I have always read with interest. Steckel is one of the people who have pioneered the use of archaeological techniques in economic history, notably measuring the heights of skeletons for evidence on nutrition in historical populations. This time he talked about using tree rings in historical research involving climate.
There were several excellent papers, which are available at the conference website. The two I liked the best have a flavor of evolutionary economics as well as evolutionary biology. Richard Sutch talked about the history of hybrid corn in the U. S. An important figure in the story is Henry Wallace, who founded one of the earliest hybrid-corn seed companies and, as Secretary of Agriculture, evangelized for hybrid corn and higher corn yields at the same time he was implementing pro-cyclical New Deal farm policies that restricted agricultural output in other commodities. But the main story is one of evolutionary learning. The major midwestern droughts of 1934 and 1936 accidentally revealed the (unintended) benefits of one kind of hybrid corn that was resistant to drought, thus changing the perceived payoffs to farmers of adopting the new technology, whose primary benefit was ultimately increasing yields. (more…)
Architecture
| Richard Langlois |
I too am at the Academy of Management meeting in Atlanta. And I have already run into Peter and Nicolai more than once.
It occurred to me that I ought to write about whatever important new idea I’ve picked up here. I now think that I see such an idea, and it would come under the heading of architecture. (more…)
Scarcity without Prices
| Richard Langlois |
Yesterday’s New York Times carried an op-ed by Stephen L. Sass, a professor of materials science at Cornell. Writing in the context of high oil prices, Sass makes the point that scarcity of materials has long driven humans to find and make use of alternative materials. He argues that a scarcity of tin led denizens of the Bronze Age to figure out how to smelt iron, just as a scarcity of charcoal impelled the British to figure out how to use coal to make steel. I read the piece eagerly, thinking I might use it in my upcoming introductory economics course — until I got to the last paragraph. Here Sass draws the implication that we need a Manhattan Project to develop alternatives to oil. (more…)
Theories of the State
| Richard Langlois |
I was interested to see Peter’s post about the agency theory of the state — and glad to have the reference. I was actually just about to write about something related.
One of my favorite courses to teach is European Economic History. When I talk about the origin and development of the state, I rely on Meir Kohn’s distinction between territorial government and associational government. Territorial governments are the predatory states of Douglass North and Mancur Olson; associational governments arose in the interstices of territorial ones, typically as guilds of guilds in medieval cities, for the purpose of providing public (club) goods. Associational governments had existed in places like Athens and Rome, of course, again as clubs of wealthy merchants and land owners to provide public goods. But the interesting story is how territorial governments came to take on associational features — so that they could also be “owned” by their citizens — while, as we and Rozeff would agree, they retained a predatory dimension because of agency costs.
Meir Kohn is an interesting economist at Dartmouth whom I met a couple of years ago when we were involved in one of Axel Leijonhufvud’s summer schools in Trento. He is writing a textbook on European economic history, which is available online in manuscript. The aspect I was originally going to write about is Meir’s interesting claim that war was a far more important restraint on economic growth than Malthusian population factors in the pre-modern period. He proposes a cyclical account: the monarch taxes the population to finance war, which, along with the physical devastation of the war, reduces the population to subsistence; war eventually exhausts the treasury, forcing the monarch to wage peace for a while; this allows economic growth to spring up again, which leads to another round of taxation and war. Bob Higgs has written in the American context about the negative effects of war on growth. Does anyone know of anyone else who’s talked about this in the European context? This strikes me as a fertile area for cliometricians.
Assets versus Activities
| Richard Langlois |
At the risk of injecting some substance into my posts, let me raise an issue in the economics of organization that I have been thinking about recently.
There has been much discussion in the literature about the differences between the transaction-cost and capabilities views of organization, something that Nicolai and I, among many others, have written about. But another division might be between asset theories and activity theories. Asset theories are of course the province of the mainstream economics of organization. In this literature, one typically defines vertical integration as joint ownership of productive assets, and integration typically arises because of hazards from cooperating without joint ownership. Activity theories come from the literatures on product design and modularity. Here the issue is how tasks (or activities) ought to be designed given the structure of the production process. In this literature, the logic of integrality versus modularity provides clues to which activities out to be “outsourced.” Perhaps the best example of this kind of thinking is by Baldwin and Clark. I have also tried to think about the issues in a paper that will be coming out in Organization Studies. In many ways, this approach harkens back to Adam Smith. (more…)
An Even Brighter Side of Global Warming?
| Richard Langlois |
I remain agnostic about whether global warming is taking place and, if so, whether it is being caused by human behavior. In part, my skepticism comes from some familiarity with large mathematical models in my graduate student days — and my recollection of how sensitive they are to the assumptions fed in. I certainly agree with Peter about what the issues are.
But I recently saw a review by Bob Whaples on EH.net (the economic history website and list-serve) of a book called Plows, Plagues and Petroleum: How Humans Took Control of Climate by William F. Ruddiman. According to the review, the earth for the last 900,000 years or so has experienced cycles in which massive glaciation lasting on the order of 100,000 years has alternated with comparatively brief (10,000 year) “interglacials.” (more…)
Theories of Religion
| Richard Langlois |
My previous post was in part a comment on Nicolai’s Bastille Day post. While I’m at it, I thought I might comment on another aspect of that post, namely Armstrong’s theory of religions of the “Axial Age.” I haven’t read the book (of course), but I’m skeptical, since most of human history until recently (and still now in much of the world) was a time of “violence, political disruption and extreme intolerance.” Another theory of religion that readers of this blog might find interesting is that suggested by Burton Mack in “Who Wrote the New Testament?” (which I actually have read). He argues — perhaps reflecting a generally accepted view among secular biblical scholars — that Christianity was the product of ancient “globalization.” Judaism was (or at least grew out of) an ethnic temple-state religion, and its innovation of monotheism was useful in helping to bind together an ethnic community. (We have been chosen by the one true God.) By contrast, as Morris Silver has argued, Greek religion was a congeries of local gods assembled from the various peoples the Greeks and later Romans had conquered — and thus a useful kind of religion for empire-builders, since you could just add the local god to the pantheon to make the locals happy. (The Jews never bought into that, of course, and suffered for it.) (more…)
Capitalism, Socialism, and the Cote d’Azur
| Richard Langlois |
Thanks to Nicolai and Peter for inviting me to join in on the fun.
I trust that Nicolai and family are enjoying their vacation in Antibes, soaking up the sun and t
he local communist ideology. As it happens, I was in that part of the world about a month ago. On a free day while exploring Nice, I headed up to Nice Castle in search of some medieval ambience. Instead I found the annual local fete of the French Communist Party. The experience was surreal in that the event reminded me of nothing so much as the small-town agricultural fairs here in New England. The main difference seemed to be that the booths offering grilled sausages were staffed not by the Columbia Lions Club but by the Pablo Picasso Cell. (I must admit, however, that, even though the towns near me have names like Hebron and Lebanon, none of them would have had a pro-Palestinian anti-Israeli booth.) Adding to the surreal experience, the sound system kept pumping out Steely Dan’s “Cousin Dupree” over and over, apparently as a way of checking the settings.
I was in Nice — actually Sophia Antipolis, which is closer to Antibes — for the biennial meeting of the International Joseph A. Schumpeter Society. This was a rather more capitalistic experience, at least from my point of view. For one thing, the conference dinner, which featured the award of the Schumpeter Prize, took place at a former Rothschild Villa overlooking the sea. As a certain modicum of self promotion is apparently de rigeur in blogs, I suppose I should admit that one of the winners of the Schumpeter Prize was, well, me. The manuscript in question, called The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy, started out as the Graz Schumpeter Lectures in 2004. (In this respect I followed in the footsteps of Brian Loasby, whose 1996 Graz Lectures won the 2000 Schumpeter Prize.) The book (which Routledge is to publish) mixes intellectual history and economic history, tracing the (remarkably similar) Weberian accounts of Schumpeter and Chandler, who see the large managerial corporation as the apotheosis of “rational” economic organization, and confronting those accounts with the rather contrary evidence of the last quarter century — what I call the Vanishing Hand thesis. At least until I sign the rights over to Routledge, the manuscript is available here.
More substance next time.
Organizations and Markets 
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