Posts filed under ‘– Klein –’
Words of Wisdom from Williamson’s Banquet Speech
| Peter Klein |
The transcript is here. My favorite bit, which can be read as a response to the econ-bashers:
Being hard-headed means that we aspire to tell it like it is — be it good news or bad. Although we take no joy in the downside, it is our duty candidly to confront all circumstances whatsoever. Our abiding concern is with improving the condition of mankind. Myopia, denial, and obfuscation are the enemy.
Only as we admit to and, of even greater importance, come to understand the problems that confront us — be they current or impending, obvious or obscure, real or imagined — by identifying and explicating the mechanisms that are responsible for these problems, can we expect to make informed decisions. Since, moreover, things that we do not understand at the outset sometimes have redeeming purposes, such efforts to get at the essence will often uncover real or latent benefits. Altogether, our capacity to work in the service of mankind increases as complex contract and economic and political organization become more susceptible to analysis.
Tuesday’s Prize lecture, in case you missed my earlier link, is here. I don’t see a video of the banquet speech on the Nobel site, but maybe that’s coming later. (Thank goodness they found time to post the seating chart!)
One tiny nit-pick: Williamson quotes Carlyle’s famous “dismal science” line, implicitly equating “dismal” with “mean-spirited,” but of course Carlyle’s barb had nothing to do with Malthus or scarcity or trade-offs, but with the classical economists’ opposition to slavery, which Carlyle, Dickens, Ruskin, and other literary critics of capitalism strongly supported (1, 2).
Boeing and the Higgs Effect
| Peter Klein |
In their calls for greatly expanding the Federal Reserve System’s and Treasury Department’s roles in the economy, Chairman Bernanke, Secretaries Paulson and Geithner, and their academic enablers have repeatedly emphasized the temporary nature of these “emergency” measures. “History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs. In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation,” said Bernanke in September. Yeah, no kidding. But, we are assured, the basic structure of our “free-enterprise” system remains soundly in place.
However, as Bob Higgs has taught us, “temporary,” “emergency” government measures are never that. Indeed, virtually all the major, permanent expansions of US government in the twentieth-century resulted from supposedly temporary measures adapted during war, recession, or some other “crisis,” real or imaginary. Cousin Naomi’s “disaster capitalism” thesis is exactly backward: it is socialism, or interventionism, that thrives during the crisis, and Washington, DC never looks back. I mean, does anyone seriously believe that the Fed will deny, or give back, the authority to purchase whatever financial assets it wishes at some future date when it deems the crisis officially “over”? Will the Treasury credibly commit never again to purchase equity or guarantee debt or otherwise protect some major industrial or financial firm after the economy returns to “normal”? Not a chance. Everything the authorities have done in the last two years to deal with this “emergency” will become part of the federal government’s permanent tool kit.
Today’s WSJ has a good example of Higgs’s ratchet effect, a front-pager on Boeing’s dependence on export loan guarantees from the Export-Import Bank, a federal government agency created in — you guessed it — 1934, as a temporary agency to deal with the Great Depression. “No company has deeper relations with Ex-Im Bank than Chicago-based Boeing. Without Ex-Im, aviation officials say, Boeing this year could have been forced to slash production, endangering hundreds of U.S. suppliers, thousands of skilled American jobs and billions of dollars in export contracts.” Bank official Bob Morin is described as “Ex-Im Bank’s rainmaker. His Boeing deals accounted for almost 40% of the bank’s $21 billion in business last year. To help Boeing through the credit crunch, his team has spent the past year developing government-backed bonds that promise to raise billions.” So, a massive industrial-planning apparatus, supposedly born during a temporary crisis, lives on as the lifeblood of a huge, politically connected US company.
Thank goodness all that money flowing to Goldman Sachs is only temporary!
Update: Here’s a short Higgs piece from 2000 on the Ex-Im Bank, appropriately titled “Unmitigated Mercantilism.”
Mechanism Design and the Office Holiday Party
| Peter Klein |
Holiday office parties, far from being a waste of time (and booze), can be effective screening mechanisms, according to information forwarded by Doug French:
The Banc Investment Group’s “Banc Investment Daily” email report from December 6, 2005, urged its banker readers to turn the troops loose at the holiday season, because “the holiday party serves an important professional purpose — Darwinian selection.”
It turns out that people do and say the darnedest things while under the influence. Christmas party incidents are relived over and over for years at the office. Banc Investment points out that those employees who make the holiday party highlight film, “tend to do the same things at the office, but co-workers don’t notice as much.” . . .
Holiday parties are “effective at highlighting trouble makers,” according to Banc Investment Daily. “Now while we admit that one banker’s inappropriate behavior is another’s entertainment, knowing where your trouble spots are is a gift worth opening every year.”
Of course, there’s also the entertainment value for the rank-and-file: “For us, the appeal of the holiday bank party is the same as watching NASCAR. We know the bulk of the time will be a total snooze, but you have to go to see the outfits and the spectacular crashes.”
Rejecta Mathematica
| Peter Klein |
Rejecta Mathematica is an open-access journal featuring papers rejected by peer-reviewed mathematics journals. Each article includes an author’s statement describing the peer-review experience and explaining why the paper shouldn’t have been rejected. Great concept! (Link from Sheen Levine via Konstantina Kiousis.)
I eagerly await the first issues of Rejecta Economica and Rejecta Stratetgica.
Williamson Nobel Lecture Is Streaming Now
| Peter Klein |
Watch it here.
Money quotes so far:
- After questioning the design of the Department of Homeland Security: “The US has a Council of Economic Advisers; I look forward to the day when there’s also a Council of Organizational Advisers” [paraphrase].
- “That brings us to the ‘remediableness’ criterion. That word doesn’t exactly roll of the tongue. But my students have learned to say it after much repetition.”
Update: The stream is over, I’ll post a link to the archived file when I find it. Note that the ceremony is December 10, to be streamed here.
Update II: Via the ever-reliable Per Bylund, the archive link is here.
Becker and Posner on Williamson and Organizational Economics
| Peter Klein |
Ruminations on the field of organizational economics from Becker and Posner. Both are inspired by Williamson’s Nobel but neither discusses his contributions very directly. Posner’s comment, the longer of the two, describes some of his own work (with Luis Garicano) on public organizations.
PS: I’ve been looking for some time for an electronic copy of the 1993 Journal of Institutional and Theoretical Economics exchange between Posner, Coase, and Williamson. If anyone has it, can you email me a copy?
Internal and External Corporate Governance
| Peter Klein |
Most of the corporate governance literature focuses on external mechanisms for limiting managerial discretion: competition in product and factor markets; discipline from banks, institutional investors, and other large capital suppliers; and, of course, the market for corporate control. Firms have access to internal control mechanisms as well — performance-based pay, internal audits, a strong Board, competition among the top-management team, adoption of the M-form structure, and so on — but these are usually considered weaker, less effective instruments.
Viral Acharya, Stewart Myers, and Raghu Rajan have a new theory paper, “The Internal Governance of Firms,” on internal control mechanisms, focusing on dividend policy as a means of satisfying both internal and external constituents. NBER version here, ungated version here, older SSRN version here. Abstract:
We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors. Internal governance works best when both top management and subordinates are important in generating cash flow. External governance, even if crude and uninformed, can complement internal governance and improve efficiency. This leads to a theory of investment and dividend policy, where dividends are paid by self-interested CEOs to maintain a balance between internal and external control. Our paper can explain why firms with limited external oversight, and firms in countries with poor external governance, can have substantial value.
The WSJ on Vertical Integration
| Peter Klein |
It’s not as bad as this 2006 piece from Slate, but Monday’s WSJ front-pager, “Companies More Prone to Go ‘Vertical,'” is underwhelming at best. It shares a few interesting anecdotes about recent vertical mergers, but falls flat on two major grounds. First, like the Slate piece, it assumes that the advances in IT over the last few decades led to some sort of tectonic shift away from vertical integration, against which firms are now reacting by “rediscovering” the benefits of vertical coordination. Actually there’s little evidence for such a shift. Second, and more
important, the article doesn’t bother to mention any theories about what vertical integration is and does. There are vague references to commodity-price volatility and the need to “control” the supply chain, but no recognition that risk-management and control over inputs can be achieved through contract as well as integration. Given that one of this year’s Nobel Laureates won the prize for his work on precisely this problem, you’d think some reference to transaction costs might be appropriate. Old Media, R.I.P.
My Naïveté
| Peter Klein |
I hoped Christy Romer would be a voice of reason within Obama’s economic team. What was I thinking? If yesterday’s WSJ op-ed is any indication, her role has been reduced to that of cheerleader for the President’s preposterous “stimulus” program. The editorial is a string of banalities, unsupported by argument or evidence, about the wonderful effects of stimulus and the need to “confront the challenges” that remain. For example, noting that real GDP increased slightly in the third quarter of 2009, after a sharp fall in the first quarter, she says that the “vast majority of professional forecasters attribute much of this dramatic turnaround to the fiscal stimulus.” Professional forecasters? Of course, we have no idea what GDP would have been in the absence of stimulus. And what of the secondary consequences, both short- and long-term? What of the unseen? She even praises the cash-for-clunkers program, recently skewered by my old friend John Chapman.
She knows all this. As Christy’s teaching assistant at Berkeley I saw her explain, patiently and carefully, how government programs have side effects, often unintended (she specifically used the airplane-child-safety-seat example of the Peltzman effect). All forgotten now. Some version of Lord Acton’s dictum, I guess.
The Lazy Manager Theory
| Peter Klein |
Good ideas from John Wilkins, who earned a PhD in (I think) evolutionary biology while working as a full-time manager (via Randy). Sample elements of the Lazy Manager Theory:
- Never do any piece of paperwork when the person who asked for it isn’t there and holding it when they make the request. If they don’t care enough to come see you, they probably don’t need it done. Also, you put faces to names and develop a good personal relationship with those who come to see you, so it’s win-win.
- If any piece of paper falls off your desk for any reason, throw it away. This is God’s way of telling you it is unimportant.
- Always sit on the left side of the table, at the far end from the secretary if you aren’t that person. This way when tasks are being handed out, you are less likely to be volunteered, as you are not in the immediate line of sight of either the chair or the secretary.
If you prefer meatier fare, try this paper from Philippe Aghion, John Van Reenen, and Luigi Zingales, “Innovation and Institutional Ownership,” which examines a version of the lazy-manager hypothesis:
We find that institutional ownership in publicly traded companies is associated with more innovation (measured by cite-weighted patents). To explore the mechanism through which this link arises, we build a model that nests the lazy-manager hypothesis with career-concerns, where institutional owners increase managerial incentives to innovate by reducing the career risk of risky projects. The data supports the career concerns model. First, whereas the lazy manager hypothesis predicts a substitution effect between institutional ownership and product market competition (and managerial entrenchment generally), the career-concern model allows for complementarity. Empirically, we reject substitution effects. Second, CEOs are less likely to be fired in the face of profit downturns when institutional ownership is higher. Finally, using instrumental variables, policy changes and disaggregating by type of owner we find that the effect of institutions on innovation does not appear to be due to endogenous selection.
Israel Strategy Conference
| Peter Klein |
This year’s Israel Strategy Conference has an impressive lineup, featuring Jay Barney on “The Missing Conversation in Strategic Management,” Mike Hitt on “Strategic Management: Taking Stock and Looking Forward,” Anita McGahan on “The Agenda for Strategic Management: Implications of the Economic Crisis,” and Harbir Singh on “Creating Competitive Advantage across Firm Boundaries.” There are also paper sessions, interactive sessions, and a doctoral consortium. Info at the link above.
Nirvana Fallacy Alert, #2,535 in a Series
| Peter Klein |
Another mistake in John Cassidy’s ditty on externalities is the claim that Pigou “was reacting against laissez faire — the hands-off approach to policy that free market economists, from Adam Smith onwards, had recommended. Such thinkers had tended to view the market economy as a perfectly balanced, self-regulating machine.” Forget that the British Classicals, Adam Smith in particular, were far from “hands-off” types. Note instead that Cassidy provides no textual evidence of unnamed “free-market economists” viewing the market system as a “perfectly balanced, self-regulating machine.” How could he, when no sensible economist ever wrote or thought such a thing? The free-market economists — actually, virtually all sound economists — have maintained that the market economy works remarkably well, given the limits of human knowledge, our devious character, the brutality of nature, and so on. Paris gets fed, as Bastiat noted, and that is a miracle. Government intervention into markets inevitably makes things worse, the economists argued, not because the market system is “perfect,” whatever that means, but because men are fallible, and giving coercive power to fallible men is — to borrow P. J. O’Rourke’s metaphor — like giving whiskey and car keys to teenage boys. Cassidy’s caricature shows how little he understands what free-market economics is actually all about.
North on Ostrom and Williamson
| Peter Klein |
Douglass North welcomes fellow new institutionalists Elinor Ostrom and Oliver Williamson to the Nobel Club (via Jeffrey Huang):
Opening Lines I Wish I’d Written
| Peter Klein |
Last week was tough for Shakespeare scholars who wear tweed jackets with leather elbow patches and sip sherry in the faculty lounge. You know, the people otherwise known as Saab drivers.
That’s from a Friday WSJ piece on GM’s attempt to dump its Saab subsidiary. Readers outside the US may not get the joke. Trust me, it’s funny.
The article is actually pretty interesting, an illustration of Williamson’s “impossibility-of-selective-intervention” thesis. “The Saab saga also demonstrates how hard it is for a boutique company to retain its special appeal after being bought by a corporate goliath. GM did make some good Saabs over the years (the midsize 9-5 model of a decade ago was one), but they didn’t seem as special as the pre-GM Saabs, even though the key stayed in the floor.” Maybe, but it isn’t obvious why the mismanagement of the Saab brand (in the US) was GM’s fault, rather than that of Saab’s division heads. Saab may have tanked anyway. Anyway, I did learn a good line from Sir John Egan, the last independent CEO of Jaguar before its acquisition by Ford, that I’ll use the next time I’m teaching about selective intervention: “When an elephant gets in bed with a mouse, the mouse gets killed and the elephant doesn’t have much fun.” Oh, and the article ends well too: “As for those sherry-sipping profs, maybe they should consider buying Chevy Silverado pickups with all the trimmings: Mars lights, gun racks and monster-truck tires. Iconoclasm can take different forms, and the talk in the faculty lounge will never be the same.”
Bonus: That same issue of the Journal also contained a strange piece by John Cassidy praising Pigou, on the grounds that Pigou’s analysis of externalities gives us unique insight into the financial crisis. “Thus, for example, a blow-up in a relatively obscure part of the credit markets—the subprime mortgage industry—can undermine the entire banking system, which, in turn, can drag the entire economy into a recession, as banks refuse to lend.” Um, duh. “Externalities” are ubiquitous, and the idea of the general interdependence of markets has been discussed since, well, Bastiat, if not the Scholastics. Certainly Pigou didn’t offer any special insight into the interdependencies across financial markets or between financial markets and product markets. Writes Cassidy: “Economics textbooks have long contained sections on how free markets fail to deal with negative spillovers such as pollution, traffic congestion and the like. Since August 2007, however, we have learned that negative spillovers occur in other sectors of the economy, especially banking.” Since August 2007? Gee, before that, we all thought banking was an isolated sector of the economy with no connection to anything.
Bebchuk-Weisbach Survey of Corporate Governance
| Peter Klein |
It’s the introduction to a special issue of the Review of Financial Studies:
The special issue features seven papers on corporate governance that were presented in a meeting of the NBER’s corporate governance project. Each of the papers represents state-of-the-art research in an important area of corporate governance research. For each of these areas, we discuss the importance of the area and the questions it focuses on, how the paper in the special issue makes a significant contribution to this area, and what we do and do not know about the area. We discuss in turn work on shareholders and shareholder activism, directors, executives and their compensation, controlling shareholders, comparative corporate governance, cross-border investments in global capital markets, and the political economy of corporate governance.
Here it is on the NBER site; I couldn’t find an ungated version.
More Graduate Student Humor
| Peter Klein |
Found this posted on a classroom wall in our building. Not quite as witty as this one, but then again, we keep them heavily sedated:
On a more serious note, here’s a conference celebrating the 50th anniversary of Coase’s landmark 1959 and 1960 papers, with an all-star lineup.
Modest, Slow, Molecular, Definitive
| Peter Klein |
In an oft-cited passage from The Mechanisms of Governance (1996), Williamson describes the research program of transaction cost economics this way:
Transaction cost economics (1) eschews intuitive notions of complexity and asks what the dimensions are on which transactions differ that present differential hazards. It further (2) asks what the attributes are on which governance structures differ that have hazard mitigation consequences. And it (3) asks what main purposes are served by economic organization. Because, moreover, contracting takes place over time, transaction cost economics (4) inquires into the intertemporal transformations that contracts and organization undergo. Also, in order to establish better why governance structures differ in discrete structural ways, it (5) asks why one form of organization (e.g., hierarchy) is unable to replicate the mechanisms found to be efficacious in another (e.g., the market). The object is to implement this microanalytic program, this interdisciplinary joinder of law, economics, and organization, in a “modest, slow, molecular, definitive” way.
A footnote explains the origins of the phrase “modest, slow, molecular, definitive,” tracing them to a (secondhand) quotation from Charles Péguy. Here’s the footnote:
The full quotation (source unknown) reads:
“The longer I live, citizen. . .” — this is the way the great passage in Peguy begins, words I once loved to say (I had them almost memorized) — “The longer I live, citizen, the less I believe in the efficiency of sudden illuminations that are not accompanied or supported by serious work, the less I believe in the efficiency of conversion, extraordinary, sudden and serious, in the efficiency of sudden passions, and the more I believe in the efficiency of modest, slow, molecular, definitive work. The longer I ive the less I believe in the efficiency of an extraordinary sudden social revolution, improvised, marvelous, with or without guns and impersonal dictatorship — and the more I believe in the efficiency of modest, slow, molecular, definitive work.”
Well, we are nothing if not pedantic here at O&M, and in that spirit, I share (with permission) a note from my colleague and former guest blogger Randy Westgren, written to Williamson in January 2007, explaining that the anonymous source has botched the Péguy quotation. Here’s Randy:
After a long search, I found the quote from Péguy that you cite in footnote nine of the Prologue of The Mechanisms of Governance and noted again in footnote eleven of the first chapter. I was not able to find the secondary quote that is printed in the footnote, but I did find the original passage from Péguy. I have been searching for this since The Mechanisms was published, because I could not fathom how Charles Péguy could have denounced sudden, wondrous conversion and sudden, extraordinary social revolution when he was (1) a famously devout Catholic; a mystic whose poetry includes an exceptional hommage to Joan of Arc, and (2) a famously ardent socialist who believed strongly in the overthrow of the bourgeoisie. In fact, after giving up on the Catholicism of his youth while at the École Normale Supérieure, he returned to his faith in the middle of the first decade of the century, when he was in his early 30s. He was slain in the first battle of the Marne in 1914 at the age of 41. (more…)
Financing Constraints and Entrepreneurship
| Peter Klein |
Speaking of banks, here’s a very good survey of the entrepreneurship literature on financing constraints by William Kerr and Ramana Nanda, just out from NBER. From the introduction:
The first research stream considers the impact of financial market development on entrepreneurship. These papers usually employ variations across regions to examine how differences in observable characteristics of financial sectors (e.g., the level of competition among banks, the depth of credit markets) relate to entrepreneurs’ access to finance and realized rates of firm formation. The second stream employs variations across individuals to examine how propensities to start new businesses relate to personal wealth or recent changes therein. The notion behind this second line of research is that an association of individual wealth and propensity for self-employment or firm creation should be observed only if financial constraints for entrepreneurship exist.
These two streams of research have remained mostly separate literatures within economics, driven in large part by the different levels of analysis. Historically their general results have been mostly complementary. More recently, however, empirical research using individual-level variation has questioned the extent to which financing constraints are important for entrepreneurship in advanced economies. This new work argues that the strong associations between the financial resources of individuals and entrepreneurship observed in previous studies are driven to large extents by unobserved heterogeneity rather than substantive financing constraints. These contrarian studies have led to renewed interest and debate in how financing environments impact entrepreneurship in product markets.
Things Professors Don’t Know
| Peter Klein |
Useful information for undergraduate instructors, provided by students, from the Chronicle (via Ross Emmett). Sample:
There is no need to put those “just for fun” optional readings on the syllabus. We will never read them. If I even see the word “optional” my eyes glaze over and I will go back to thinking of something pointless, like how many grapes I can possibly stick in my mouth without suffocating. There’s a better chance of me shimmying into class followed by a conga line of maroon pandas than actually reading your optional paper.
And this: “seeing you in a place outside of the academic setting is one of the most awkward moments ever. When you’re done with class everyday we like to think that you disappear, surfacing at random moments to check your email, and then slinking back into oblivion.” When you live in a small college town, as I do, and occasionally do crazy stuff like go out to eat or go to the movies, this can be a problem.
Peter Bernstein Interview
| Peter Klein |
Speaking of Peters, the McKinsey Quarterly site has a video interview with the late Peter Bernstein on risk. Bernstein was a deep thinker and an excellent writer. I once found myself on a plane next to an investment banker who was reading Bernstein’s Against the Gods. I mentioned that I too was a fan, and he told me he re-read the book at least once each year, out of professional obligation.
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