Posts filed under ‘Institutions’
General-Purpose Technologies and Long-Term Economic Growth
| Peter Klein |
Another interesting book review from EH.Net, this time by Joel Mokyr on Economic Transformations: General Purpose Technologies and Long-Term Economic Growth by Richard G. Lipsey, Kenneth I. Carlaw, and Clifford T. Bekar.
The book is hard to summarize because it is unusually rich and diverse. It contains long discussions of technological change, its nature, sources, and consequences. Lipsey maintains that technology is at the heart of modern economic growth and asks — once again — what the sources of Western success are. Among other things, the book also treats at length the economics of technological change, the history of science, and population dynamics. It is part grand synthesis, part textbook, part statement of the author’s idiosyncratic views, and throughout an excellent read — informed, curious, unafraid of being unconventional or politically incorrect.
And:
Lipsey joins a large number of economists who, when thinking about the long run, feel that evolutionary models are more appropriate than standard neoclassical ones.
Hopefully, as if responding to Nicolai’s plea, Lipsey et al. also discuss some policy implications of their evolutionary perspective.
Gordon on Private Communities
| Peter Klein |
My favorite urban economist, USC’s Peter Gordon, on private communities:
Robert Nelson has documented the current migration into private communities which now house 55-million Americans. Governance is by homeowners associations (HOAs) and markets are vetting the trade-offs of property rights protections vs rights losses that most property owners look for. The fly-in-the-ointment is an oldie: the problems of democracy are well documented and are real at all levels of government, whether it be federal, state, local or private.
This is why Spencer MacCallum has predicted that HOAs are just a waystation and better forms of governance will replace them. He suggests the hotel as his model, where governance is by contract rather than by democracy.
Bell Labs’s New Mandate: Make Money
| Peter Klein |
AT&T’s legendary Bell Labs — home of the transistor, the laser, UNIX, cellular telephony, and other breakthroughs — is being turned into a profit center.
Each [project] is expected to make back six times what it spends on research. Those with the biggest financial potential get the most funding. Researchers often condense their work into eight-minute PowerPoint presentations. [New head Jeong] Kim also seeks more government research grants and is aiming to speed the transformation of technology into products by seeking corporate partners and venture capital.
In earlier days, Bell Labs’ scientists might have rejected Mr. Kim’s commercial approach to science. Not now.
So reports the W$J on today’s front page. I suspect that advocates of increased public funding for R&D will take this as further evidence of the market’s inability to supply public goods. Terence Kealey demurs.
Update: The University of Illinois, recognizing the growing importance of for-profit universities such as the University of Phoenix, will establish a for-profit subsidiary. (Via Richard Vedder)
Firms, Strategies, and Economic Change
| Peter Klein |
My review of Tony Yu’s Firms, Strategies, and Economic Change: Explorations in Austrian Economics (Edward Elgar, 2005), written for the Quarterly Journal of Austrian Economics, is available for preview here.
All Firms Are Not Alike
| Peter Klein |
This may come as a shock to regulators, but all firms are not alike. No one-size-fits-all regulatory policy can possibly be effective. Yet, SOX and similar governance codes impose a host of blanket requirements (audit committees, majority of outside directors, etc.) on all companies, large and small, focused and diversified, profitable and unprofitable, and so on. Economically literate regulators must be schooled in industrial-organization models in which the “representative firm” is identical to every other firm.
This new paper by LSE economists Sridhar Arcot and Valentina Giulia Bruno examines heterogeneity among governance choices at UK companies and finds that the best-governed firms are not always those that conform to the “best practices” imposed by regulators.
A [governance] measure which accounts for different choices by companies of corporate governance is significantly associated with performance as against measures based on a tick-box approach, which are not. We find that companies departing from best practice for valid reasons perform exceptionally well and out-perform the fully compliant ones. In contrast, mere compliance with the provisions of the Code does not necessarily result in better performance.
(Via Professor Bainbridge)
Update: Dale Oesterle argues that uniform listing requirements for IPOs are depressing the US IPO market, suggesting that small firms should be allowed to make their IPOS over the Internet, as is allowed in the UK.
Does France Have a Silicon Valley?
| Peter Klein |
Jeremy Fain says yes, in southwest Paris. Not quite Silicon Valley, perhaps, but an important innovation cluster nonetheless.
I find this sort of discussion interesting, but am troubled by the “How-can-we-create-another-Silicon-Valley” approach so common in the clustering literature. The assumption is that technology clusters are created, or at least encouraged, by government policy, and that such policies that are in principle replicable. By contrast, if clusters emerge from the bottom up, there is little that policymakers can do, besides removing obstacles to entrepreneurial activity. (See Desrochers and Sautet, “Cluster-Based Economic Strategy, Facilitation Policy and the Market Process.”)
Update: Austan Goolsbee says investing in universities is not likely to produce the next Silicon Valley.
NYU Journal of Law and Liberty
| Peter Klein |
The NYU Journal of Law and Liberty is a new journal focusing on classical liberal legal scholarship. Volume 1, Number 1 revisits Lochner v. New York, the landmark 1905 case that defended the freedom of contract and became, to its critics, a hated symbol of heartless, dog-eat-dog capitalism. (During the New Deal the word “Lochner” meant about what “Enron” means today.) Volume 1, Number 2 contains an interesting piece by Mario Rizzo, “The Problem of Moral Dirigisme: A New Argument Against Moralistic Legislation,” which opens thusly:
This Article applies a theory of rational choice to moral decision making. In this theory, agents act primarily on local and personal knowledge to instantiate moral principles, virtues, and moral goods. The State may seek to prevent them from acting as they independently determine by prescribing or proscribing certain conduct by formal legal means. If its purpose is to ensure that people act morally or become better persons, we call this “moral dirigisme.” Our thesis is that the need to use decentralized knowledge to determine the moral status of an act makes the task of the moral dirigiste well-nigh impossible.
Joel Klein, Monopolist
| Peter Klein |
Joel Klein does not have a well-developed sense of irony. As Clinton Administration antitrust czar, he became a household name with his relentless pursuit of Microsoft, a $40 billion company with 70,000 employees in 100 countries. Today Klein heads the New York City public school system, a conglomeration of 1,450 schools with 136,000 employees, 1.1 million students, and a $15 billion operating budget. Oh, did I mention that it’s a monopoly? Not a private company with a large market share, but an actual monopoly, an organization protected from competition by an exclusive government franchise.
Klein was Distinguished Executive Speaker at tonight’s Academy of Management Convocation, which I attended. The speech was disappointing — not because of Klein’s political philosophy, which I don’t share — but because it was a shallow, fluffy talk about “leadership,” “accountability,” “change agents,” and the like. (I did enjoy his voice, however, a smoother version of Jimmy Durante’s.) (more…)
Private and Public Investment in R&D, Crime-Prevention Division
| Peter Klein |
Further to Nicolai’s post on terrorists and cops: Government security officials have attenuated incentives not only for effort, but also for innovation. Just yesterday I read about the new Volvo S80, which has a special key fob that beeps when someone is hiding in the locked car (using a heartbeat sensor). Can you imagine the police coming up with that?
More generally, Bruce Benson offers compelling evidence, in his 1998 book To Serve and Protect, that the reduction in crime in the US over the last decade and a half owes little to improved police protection, but is due instead to increased investments in private security. (See also Benson’s short piece “Why Crime Declines.”)
Why Are Terrorists More Inventive Than Cops?
| Nicolai Foss |
National Review Online has an interesting symposium, “Plans Destroyed,” on yesterday’s terror plot (which caused me to spend 3 hours in the airport here in Atlanta; well, perhaps not the worst way to spend your time in Atlanta ;-)). Daniel Pipes offers his reflections, arguing that
Airplanes represent an outdated target because passenger screening techniques quickly adapt to threats. As soon as terrorists implement new techniques (box-cutters, shoe-bombs, liquid components), security promptly blocks them … Conversely, trains, subways, and buses, as shown by attacks in Madrid, London, and Bombay, offer far richer opportunities for terrorists, for access to them can never be so strictly controlled as to aircraft.
Indeed; but as he points out himself terrorists do target planes, and “One cannot but wonder, however, why creatively, cops invariably lag behind criminals.” Pipes is surely not the first to make this observation; however, as far as I know nobody has tried to seriously answer it.
One answer may be that criminals are smarter than cops. For petty criminals that is probably very far from the truth. For terrorists it may come a bit closer to the truth: Many of today’s terrorists are likely to be better educated than many, perhaps most, cops. Still, intelligence agencies have, of course, highly educated experts employed.
Rather than a capability explanation, the explanation may turn on incentives/property rights. Intelligence officers are government bureaucrats with twarthed incentives to think ahead of highly motivated terrorists (even if their motivation is wholly derived from the expectation of other-worldly rewards). Career ladders may, perhaps, provide incentives, but these are extremely blunt. May this be an argument for privatizing intelligence services?
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…)
Greif and Hayek on Institutions
| Peter Klein |
The EH.Net review of Avner Greif’s new book provoked this testy exchange on a history of of economic thought mailing list:
Professor A: This doesn’t sound very profound or “pathbreaking,” just mathed-up Hayek with a soupçon of history.
Professor B: Avner Grief’s work is not “mathed-up” Hayek. His use of game theory allows him, inter alia, to examine the multiple equilibria in “spontaneous orders,” if you like, something to which Hayek paid very little attention.
Professor C: Quote from Greif: “Yet this private order was not, as advocates such as Friedrich A. von Hayek and Milton Friedman would have us believe, a result of ‘spontaneous order’ among economic agents. Rather, it was a product of intentional and coordinated efforts by many individuals […].” Greif (2006: 389)
I agree with Professor B. that Greif does more than simply put a modern gloss on Hayek’s (actually Menger’s) pioneering studies of institutions. But Greif misunderstands Hayek by reading “spontaneous” as “not planned or intended by anybody.” Hayek’s concept of spontaneous order obviously allows for individual purpose and intent, even if individuals’ actions help establish an order that was itself undesigned. (Hayek’s emphasis on rule-following behavior or instinct — OK, to be fair, behavior “between instinct and reason” — perhaps lends itself to Greif’s misunderstanding, however.)
For more on this see Dan Klein’s “The Two Coordinations.”
Voting Isn’t Rational; Is Digging?
| Peter Klein |
Teppo Felin, reflecting on Wikipedia, notes that the entries in his own area of expertise are weak, but that he doesn’t bother to correct them — “as a firm believer in the ‘market,’ I am sure it will provide.” I feel the same way. Unless my knowledge is highly idiosyncratic, it is likely that someone else will make the necessary improvements before too long. Why contribute when you can free ride?
The same applies, a fortiori, to Digg.com, a hot new service that allows readers to vote on their favorite news items (from mainstream media outlets, alternative sources, blogs, or whatever) and lists them in descending order of popularity. My friend Stephen Carson urges libertarian subversives like myself to Digg our favorite stories and push them to the top. But the top articles on Digg.com typically have several hundred votes per day; on the margin, will my vote make a difference? (more…)
Hoffman on Greif on Institutions
| Peter Klein |
Philip T. Hoffman reviews Avner Greif’s Institutions and the Path to the Modern Economy: Lessons from Medieval Trade (Cambridge University Press, 2006) for EH.Net. Hoffman says the book “represents the cutting edge when it comes to the study of institutions.”
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.
An Agency-Theoretic Analysis of the State
| Peter Klein |
Tim Swanson recommends this series by Michael Rozeff, “The State as an Organization” (part 1, part 2, part 3). Rozeff is a Rochester-trained financial economist (currently Louis M. Jacobs Chair of Financial Planning and Control at the University at Buffalo) and not surprisingly, his analysis is an agency-theoretic one. The main point is that the mechanisms that mitigate agency problems in firms — competition in the product market, the market for corporate control, discipline from suppliers of capital, the market for managers, etc. — are largely absent in governments. Writes Rozeff:
States are organizations whose composition, aims and methods depend on the institutions the society uses to control agency costs. The classical liberal vision was of a contractual state cleverly arranged so as to keep agency costs low. The ideal contractual state is an organization that, like a corporation, is owned by its principals, who are the citizens. Commissioned by them, the state’s aims are to dispense law and justice which includes protecting the resources or property of its owners. . . .
With weaker controls over agency costs, we observe instead varieties of the predatory state. Here the state moves toward becoming an autonomous organization, more like a company owned and operated by one person or a small group of persons but without outside stockholders. Its residual claimants are its members. They are the owners. Citizens do not own the predatory state. They are the prey.
Greif on Jones on Culture
| Peter Klein|
Avner Greif reviews Eric Jones’s Cultures Merging: A Historical and Economic Critique of Culture (Princeton University Press, 2006), for EH.Net:
For some scholars, a society’s culture determines its economic destiny. For others, culture is malleable reflecting deeper political and economic variables and hence is epiphenomenal to economic outcomes. In this interesting book, Eric Jones (author of The European Miracle among other publications, a Professorial Fellow at Melbourne Business School, University of Melbourne and an Emeritus Professor at La Trobe) provides a useful survey of this debate and argues for a middle ground.
Law and Entrepreneurship
| Peter Klein |
Gordon Smith attempts to define this new field:
While legislatures, regulators, and courts sometimes tailor rules to small or emerging businesses, law typically is not organized according to whether the regulated actor is an entrepreneur. . . . “Law and entrepreneurship” is, at root, the study of the legal structure of organizations. This study includes the contracts, statutes/regulations, and common law doctrines that apply to the formation, governance, and termination of organizations.
Sounds encouraging, with the caveat that Gordon is focusing on what I call the “occupational” or “structural” concepts of entrepreneurship, rather than the broader “functional” concept emphasized in many of these papers.
The Enterprise of Law
| Peter Klein |
Bruce Benson’s terrific 1990 book The Enterprise of Law: Justice Without the State is back in print, courtesy of the Mises Institute.
See also his article archives at the Journal of Libertarian studies and the Independent Review.
Other useful books in this genre: Robert Ellickson’s Order Without Law, Benson’s To Serve and Protect, and David Beito’s From Mutual Aid to the Welfare State.
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…)
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