Posts filed under ‘– Klein –’
The Future of Publishing
| Peter Klein |
The current issue of Nature features a special section on “The Future of Publishing” (thanks to Jason for the tip). The lead editorial discusses the results of a survey of scientists which shows, perhaps surprisingly, that support for online, open-access publishing is lukewarm. It’s not just the commercial publishers who want to maintain the paywalls. The entire issue is filled with interesting stuff, so check it out.
New Frontiers in Marketing
| Peter Klein |
“Not only do we manufacture here at home, we also economize on bounded rationality while simultaneously safeguarding transactions against the hazards of opportunism!”
Blanchard on Fed Independence
| Peter Klein |
I’ve argued before (1, 2) that the usual arguments for central bank independence aren’t very strong, particularly in the current environment where Bernanke has interpreted the “unusual and exigent circumstances” provision to mean “I will do whatever I want.” (This was a major point in my Congressional testimony about the Fed.) So it was nice to see Olivier Blanchard express similar reservations in an interview published in today’s WSJ (I assume it’s not an April Fool’s Day prank):
One of the major achievements of the last 20 years is that most central banks have become independent of elected governments. Independence was given because the mandate and the tools were very clear. The mandate was primarily inflation, which can be observed over time. The tool was some short-term interest rate that could be used by the central bank to try to achieve the inflation target. In this case, you can give some independence to the institution in charge of this because the objective is perfectly well defined, and everybody can basically observe how well the central bank does..
If you think now of central banks as having a much larger set of responsibilities and a much larger set of tools, then the issue of central bank independence becomes much more difficult. Do you actually want to give the central bank the independence to choose loan-to-value ratios without any supervision from the political process. Isn’t this going to lead to a democratic deficit in a way in which the central bank becomes too powerful? I’m sure there are ways out. Perhaps there could be independence with respect to some dimensions of monetary policy - the traditional ones — and some supervision for the rest or some interaction with a political process.
More on Blogs and Social Media
| Peter Klein |
Nicolai was kind enough to mention my Facebook page but neglected to add that he has one too, and that O&M itself is on Facebook and Twitter. You can read, like, share, and comment on O&M posts at those sites as well as the main site. Which raises the interesting issue, is the blog format obsolete? We started O&M in 2006, an eon ago in Internet time. Since then, Twitter, Facebook, Google Plus, LinkedIn, and other social media platforms have appeared, and they duplicate most functions of the old-fashioned blog. They usually allow cross-posting and let you compose on one and push to the others. So, are blogging platforms like WordPress (which we use) on the way out? Google’s unfortunate decision to kill Google Reader has some people suggesting that RSS itself is dead. What should we do, to stay on the cutting edge? What’s the future of structured online group discussion? Should we create the first MOOOB (Massively Open Online Organizations Blog)?
Klein Fan Page on Facebook
| Nicolai Foss |
Our Moral Leader at O&M has his own fan page on Facebook. He mixes entertaining libertarian outbursts with info on new conferences and links to cool new papers, articles, and so on–in other words, O&M en miniature. Pay a visit and like Peter’s page.
Coasean Bargaining Opportunity
| Peter Klein |
Forget Wrigley Field: here’s a colorful example for classroom discussions of property rights, external costs, bargaining, and the Coase Theorem. Literally colorful. (Via Bob Subrick.)
Incomplete Contracts and the Internal Organization of Firms
| Peter Klein |
That’s the title of a new NBER paper by Philippe Aghion, Nicholas Bloom, and John Van Reenen, indicating that organization design, from the perspective of incomplete-contracting theory, continues to be a hot topic among the top economists. Like all NBER papers this one is gated, but intrepid readers may be able to locate a freebie.
Incomplete Contracts and the Internal Organization of Firms
Philippe Aghion, Nicholas Bloom, John Van ReenenNBER Working Paper No. 18842, February 2013
We survey the theoretical and empirical literature on decentralization within firms. We first discuss how the concept of incomplete contracts shapes our views about the organization of decision-making within firms. We then overview the empirical evidence on the determinants of decentralization and on the effects of decentralization on firm performance. A number of factors highlighted in the theory are shown to be important in accounting for delegation, such as heterogeneity and congruence of preferences as proxied by trust. Empirically, competition, human capital and IT also appear to foster decentralization. There are substantial gaps between theoretical and empirical work and we suggest avenues for future research in bridging this gap.
I, Coke Can
| Peter Klein |
Via Craig Newmark, a modern riff on Leonard Read’s classic:
The number of individuals who know how to make a can of Coke is zero. The number of individual nations that could produce a can of Coke is zero. This famously American product is not American at all. Invention and creation is something we are all in together. Modern tool chains are so long and complex that they bind us into one people and one planet. They are not only chains of tools, they are also chains of minds: local and foreign, ancient and modern, living and dead — the result of disparate invention and intelligence distributed over time and space. Coca-Cola did not teach the world to sing, no matter what its commercials suggest, yet every can of Coke contains humanity’s choir.
No surprises here to students of open innovation, but a vivid illustration nonetheless.
The First Modern Organizational Chart
| Peter Klein |
It was designed in 1854 for the New York and Erie Railroad and reflects a highly decentralized structure, with operational decisions concentrated at the local level. McKinsey’s Caitlin Rosenthal describes it as an early attempt to grapple with “big data,” one of today’s favored buzzwords. See her article, “Big Data in the Age of the Telegraph,” for a fascinating discussion. And remember, there’s little new under the sun (1, 2, 3).
Sequestration and the Death of Mainstream Journalism
| Peter Klein |
Much virtual ink has been spilled over the decline of the mainstream media, measured by circulation, advertising revenue, or a general sense of irrelevance. Usual explanations relate to the changing economics of news gathering and publication, the growth of social media, demographic and cultural shifts, and the like. These are all important but the main issue, I believe, is the characteristics of the product itself. Specifically, news consumers increasingly recognize that the mainstream media outlets are basically public relations services for government agencies, large companies, and other influential organizations. Journalists do very little actual journalism — independent investigation, analysis, reporting. They are told what stories are “important” and, for each story, there is an official Narrative, explaining the key issues and acceptable opinions on these issues. Journalists’ primary sources are off-the-record, anonymous briefings by government officials or other insiders, who provide the Narrative. A news outlet that deviates from the Narrative by doing its own investigation or offering its own interpretation risks being cut off from the flow of anonymous briefings (and, potentially, excluded from the White House Press Corps and similar groups), which means a loss of prestige and a lower status. Basically, the mainstream news outlets offer their readers a neatly packaged summary of the politically correct positions on various issues. In exchange for sticking to the Narrative, they get access to official sources. Give up one, you lose the other. Readers are beginning to recognize this, and they don’t want to pay.
Nowhere is this situation more apparent than the mainstream reporting on budget sequestration. The Narrative is that sequestration imposes large and dangerous cuts — $85 billion, a Really Big Number! — to essential government services, and that the public reaction should be outrage at the President and Congress (mostly Congressional Republicans) for failing to “cut a deal.” You can picture the reporters and editors grabbing their thesauruses to find the right words to describe the cuts — “sweeping,” “drastic,” “draconian,” “devastating.” In virtually none of these stories will you find any basic facts about the budget, which are easily found on the CBO’s website, e.g.:
- Sequestration reduces the rate of increase in federal spending. It does not cut a penny of actual (nominal) spending.
- The CBO’s estimate of the reduction in increased spending between 2012 and 2013 is $43 billion, not $85 billion.
- Total federal spending in 2012 was $3.53 trillion. The President’s budget request for 2013 was $3.59 trillion, an increase of $68 billion (about 2%). Under sequestration, total federal spending in 2013 will be $3.55 trillion, an increase of only $25 billion (a little less than 1%).
- Did you catch that? Under sequestration, total federal spending goes up, just by less than it would have gone up without sequestration. This is what the Narrative calls a “cut” in spending! It’s as if you asked your boss for a 10% raise, and got only a 5% raise, then told your friends you got a 5% pay cut.
- Of course, these are nominal figures. In real terms, expenditures could go down, depending on the rate of inflation. Even so, the cuts would be tiny — 1 or 2%.
- The news media also talk a lot about “debt reduction,” but what they mean is a reduction in the rate at which the debt increases. Even with sequestration, there is a projected budget deficit — the government will spend more than it takes in — during every year until 2023, the last year of the CBO estimates. The Narrative grudgingly admits that sequestration might be necessary to reduce the national debt, but sequestration doesn’t even do that. It’s as if you went on a “dramatic” weight-loss plan by gaining 5 pounds every year instead of 10.
This is all public information, easily accessible from the usual places. But mainstream news reporters can’t be bothered to look is up, and don’t feel any need to, because they have the Narrative, which tells them what to say. Seriously, have you read anything in the New York Times, Washington Post, or Wall Street Journal or heard anything on CNN or MSNBC clarifying that the “cuts” are reductions in the rate of increase? Even Wikipedia, much maligned by the establishment media, gets it right: ” sequestration refers to across the board reductions to the planned increases in federal spending that began on March 1, 2013.” If we have Wikipedia, why on earth would we pay for expensive government PR firms?
NB: See also earlier comments on the mainstream media here and here.
Russian Summer School on Institutional Analysis
| Peter Klein |
The Center for Institutional Studies at Russia’s Higher School of Economics sponsors an annual summer school “aimed at creating and supporting the academic network of young researchers from all regions of Russia as well as from CIS and other countries, who work in the field of New Institutional Economics.” This year’s conference is 29 June – 5 July in Moscow, and the faculty includes former O&M guest blogger Scott Masten along with John Nye, Russell Pittman, Garrett Jones, and many others. The full program, along with registration and other info, is available at the conference site.
My Response to Shane (2012)
| Peter Klein |
Peter Lewin blogged earlier on the ten-year retrospectives by Scott Shane and Venkataraman et al. on the influential 2000 Shane and Venkataraman paper, “The Promise of Entrepreneurship as a Field of Research.” As Peter mentioned, Shane acknowledges critics of the opportunity construct such as Sharon Alvarez, Jay Barney, Per Davidsson, and me, but dismisses our concerns as trivial or irrelevant.
The January 2013 issue of AMR includes a formal response by Alvarez and Barney, as well as rejoinders by Shane (with Jon Eckhardt) and Venkataraman (with Saras Sarasvathy, Nick Dew, and William Forster). The dialogue is well worth reading. I didn’t participate in the symposium but do have a brief response to Shane.
My critique of Shane’s work, and the opportunity-discovery perspective more generally, is that the scientific understanding of entrepreneurship has been held back by the focus on opportunities. The basic idea is simple: “opportunities” do not exist objectively, but are only only subjective images, or conjectures, about future possibilities. They exist in the mind of the entrepreneur, who takes actions to try to bring them about. The very concept of opportunity makes sense only ex post, after actions have been taken and future outcomes realized, leading to realized profits and losses. Under uncertainty, there are no opportunities, only entrepreneurial forecasts, which may turn out to be correct or incorrect. (My critique is slightly different from that of Alvarez and Barney, who argue that some opportunities are “discovered,” but others are “created.” My position is that the whole idea of opportunity is at best redundant, and at worst misleading and harmful.) I maintain that the unit of analysis in entrepreneurship research should be action (investment) under uncertainty, not the discovery (or creation) of profit opportunities.
These arguments are laid out in my 2008 SEJ article and in the Foss-Klein 2012 book. They also came to the fore in a recent exchange with Israel Kirzner, the intellectual father of the opportunity construct. (more…)
Doug Allen on Alchian
| Peter Klein |
A remembrance from our friend Doug Allen:
I only met Armen once, but his influence on me was profound. In the fall of 1980 I was taking intermediate micro economics to fulfill a Business Degree requirement. The course was taught by the great Art DeVany, who had been a student of Armen’s at UCLA. Naturally he used “Exchange and Production” as his text. I remember vividly the day — it was a Thursday, late on a cloudy afternoon — when I entered a corner of a large hallway on campus. I was thinking about the concept covered in class that week: “prices are not determined by costs.” I went into that corner thinking like an accountant, and when I came out the other side I was thinking like an economist. It was an epiphany. I came out thinking “of course prices are not determined by costs!”
I quickly changed majors, decided to postpone law school for a detour in graduate economics, and have never looked back. Fortunately for me my advanced undergraduate theory class was taught by Chris Hall, an intellectual grandson of Armen’s via Steve Cheung. His text for the course was “Economic Forces at Work.” I loved Armen’s writing, his style, and his ease in making life a big puzzle to solve.
I mentioned that I have only met the great man once. It was at a PERC conference in the early 1990s. The small group sat around tables in alphabetical order, and so Alchian was first and (Doug) Allen was second. I jokingly said “ah, Alchain and Allen, together again.” I thought it was quite witty, but Armen ignored the remark. I made some other comments that he was similarly impressed with. So, remembering that “even a fool is counted wise when he keeps his mouth shut,” I just sat back and listened. It was a great treat, and Armen didn’t seem to mind having me tag along for the weekend. My favorite recollection was a long discussion we had over how Rockefeller actually made money.
As I think about his passing, the one thought that strikes me is “where is the Armen Alchain for today?” Where is the economist’s economist? I suppose there just never will be another AAA.
Armen Alchian (1914-2013)
| Peter Klein |
Armen Alchian passed away this morning at 98. We’ll have more to write soon, but note for now that Alchian is one of the most-often discussed scholars here at O&M. A father of the “UCLA” property-rights tradition and a pioneer in the theory of the firm, Alchian wrote on a dizzying variety of topics and was consistently insightful and original.
Alchian was very intellectually curious, always pushing in new directions and looking for new understandings, without much concern for his reputation or legacy. One personal story: I once asked him, as a naive and somewhat cocky junior scholar, how he reconciled the team-production theory of the firm in Alchian and Demsetz (1972) with the holdup theory in Klein, Crawford, and Alchian (1978). Aren’t these inconsistent? He replied — politely masking the irritation he must have felt — “Well, Harold came to me with this interesting problem to solve, and we worked up an explanation, and then, a few years later, Ben was working on a different problem, and we started talking about it….” In other words, he wasn’t thinking of developing and branding an “Alchian Theory of the Firm.” He was just trying to do interesting work.
Updates: Comments, remembrances, resources, links, etc.:
- Robert Higgs
- David Henderson (1, 2)
- Jerry O’Driscoll
- Alex Tabarrok
- Doug Allen
- Dan Benjamin
- A 1996 Alchian symposium (gated)
- Alchian and Woodward’s review of Williamson (1985): “The Firm Is Dead, Long Live the Firm”
Hayek and Organizational Studies
| Peter Klein |
That’s the title of a new review paper by Nicolai and me for the forthcoming Oxford Handbook of Sociology, Social Theory, and Organizational Studies, edited by Paul Adler, Paul du Gay, Glenn Morgan, and Mike Reed (Oxford University Press, 2013). No, we haven’t gone over to the Dark Side (I mean, the good side), we just think Hayek’s work deserves to be better known among all scholars of organization, not only economists. Unlike many treatments of Hayek, we don’t focus exclusively, or even primarily, on tacit knowledge, but on capital theory, procedural rules, and other aspects of Hayek’s “Austrian” thinking.
You can download the paper at SSRN. Here’s the abstract:
We briefly survey Hayek’s work and argue for its increasing relevance for organizational scholars. Hayek’s work inspired aspects of the transaction cost approach to the firm as well as knowledge management and knowledge-based view of the firm. But Hayek is usually seen within organizational scholarship as a narrow, technical economist. We hope to change that perception here by pointing to his work on rules, evolution, entrepreneurship and other aspects of his wide-ranging oeuvre with substantive implications for organizational theory.
Creativity and Property Rights
| Peter Klein |
I haven’t been following the Cato Unbound debate on US copyright law, but Adam Mossoff directs me to Mark Schultz’s post, “Where are the Creators? Consider Creators in Copyright Reform.” Mark thinks current debates over copyright law neglect the role of creativity: “Too often, the modern copyright debate overlooks the fact that copyright concerns creative works made by real people, and that the creation and commercialization of these works requires entrepreneurial risk taking. A debate that overlooks these facts is factually, morally, and economically deficient. Any reform that arises from such a context is likely to be both unjust and economically harmful.” Adam thinks Mark’s position “calls out the cramped, reductionist view of copyright policy that leads some libertarians and conservatives to castigate this property right as ‘regulation’ or as ‘monopoly.'”
As one of those libertarians critical of copyright law, but also an enthusiast for the fundamental creativity of the entrepreneurial act, let me respond briefly. Mark is certainly right that creative works are created by individuals (not, “discovered,” as some of the entrepreneurship literature might lead you to believe). But I don’t see the implications for copyright law. The legal issue is not the ontology of creative works, but the legal rights of others to use their own justly owned property in relation to these creative works. Copyright law is, after all, about delineating property rights, and whether legal protection should be extended to X does not follow directly from the fact that X was “created” instead of “discovered.”
Mark uses the language of entrepreneurship, and I think this argues against his conclusion. Property law protects the property of the entrepreneur, and the ventures he creates, not the stream of income accruing to those ventures. Suppose Mark has the brilliant insight to open a Brooklyn-style deli on a street corner here in Columbia, Missouri, makes lots of money, and then I open a similar shop across the street, cutting into his revenues. No one would argue that I’ve violated Mark’s property rights; the law rightly protects the physical integrity of Mark’s shop, such that I can’t break in and steal his equipment, but doesn’t protect him against pecuniary externalities. The fact that Mark’s restaurant wouldn’t have existed if he hadn’t created it — that “real people make this stuff,” as he puts it — has no bearing on the legality of my opening up a competing restaurant, even though this harms him economically.
Does Boeing Have an Outsourcing Problem?
| Peter Klein |
Jim Surowiecki is a good business writer (and my college classmate) and I always learn from his essays (and his 2004 book The Wisdom of Crowds). But I think he gets it wrong on the Boeing 787 case. Jim echoes what is becoming the conventional management wisdom on the Dreamliner, namely that it’s long list of woes (the current battery problem being only the most recent) results from the decision to outsource most of the plane’s production. “The Dreamliner was supposed to become famous for its revolutionary design. Instead, it’s become an object lesson in how not to build an airplane.” Specifically:
[T]he Dreamliner’s advocates came up with a development strategy that was supposed to be cheaper and quicker than the traditional approach: outsourcing. And Boeing didn’t outsource just the manufacturing of parts; it turned over the design, the engineering, and the manufacture of entire sections of the plane to some fifty “strategic partners.” Boeing itself ended up building less than forty per cent of the plane.
This strategy was trumpeted as a reinvention of manufacturing. But while the finance guys loved it — since it meant that Boeing had to put up less money — it was a huge headache for the engineers. . . . The more complex a supply chain, the more chances there are for something to go wrong, and Boeing had far less control than it would have if more of the operation had been in-house.
The assumption here is that vertical integration is better for quality control and for coordinating complex production systems. But that assumption is just plain wrong. As the property-rights approach to the firm has emphasized, control and coordination problems occur in internal as well as external contracting. As Thomas Hubbard points out,
The more modern thinking about procurement emphasizes that this problem appears — albeit in different forms — both when a company procures internally and when it subcontracts. The problem of getting procurement incentives right does not disappear when you produce internally rather than subcontract; it just changes. Companies struggle to get their subcontractors to produce what they want at low cost; they also struggle to get their own divisions to do so.
In other words, Boeing might have had the same problems with in-house production. “It is certainly possible that the Dreamliner’s current problems are derived from its design — it relies far more on electrical systems than Boeing’s previous planes — and that these problems would have been just as significant (and worse on the cost front) had Boeing sourced more sub-assemblies internally.” Hubbard’s essay includes a number of additional insights derived from modern theories of the firm, such as the Williamsonian idea that adaptation is the central issue distinguishing markets from hierarchies.
So, the next time you read that firms should vertically integrate to maintain quality, as yourself, are employees always easier to control than subcontractors?
The Myth of the Flattening Hierarchy
| Peter Klein |
We’ve written many posts on the popular belief that information technology, globalization, deregulation, and the like have rendered the corporate hierarchy obsolete, or at least led to a substantial “flattening” of the modern corporation (see the links here). The theory is all wrong — these environmental changes affect the costs of both internal and external governance, and the net effect on firm size and structure are ambiguous — and the data don’t support a general trend toward smaller and flatter firms.
Julie Wulf has a paper in the Fall 2012 California Management Review summarizing her careful and detailed empirical work on the shape of corporate hierarchies. (The published version is paywalled, but here is a free version.) Writes Julie:
I set out to investigate the flattening phenomenon using a variety of methods, including quantitative analysis of large datasets and more qualitative research in the field involving executive interviews and a survey on executive time use. . . .
We discovered that flattening has occurred, but it is not what it is widely assumed to be. In line with the conventional view of flattening, we find that CEOs eliminated layers in the management ranks, broadened their spans of control, and changed pay structures in ways suggesting some decisions were in fact delegated to lower levels. But, using multiple methods of analysis, we find other evidence sharply at odds with the prevailing view of flattening. In fact, flattened firms exhibited more control and decision-making at the top. Not only did CEOs centralize more functions, such that a greater number of functional managers (e.g., CFO, Chief Human Resource Officer, CIO) reported directly to them; firms also paid lower-level division managers less when functional managers joined the top team, suggesting more decisions at the top. Furthermore, CEOs report in interviews that they flattened to “get closer to the businesses” and become more involved, not less, in internal operations. Finally, our analysis of CEO time use indicates that CEOs of flattened firms allocate more time to internal interactions. Taken together, the evidence suggests that flattening transferred some decision rights from lower-level division managers to functional managers at the top. And flattening is associated with increased CEO involvement with direct reports —the second level of top management—suggesting a more hands-on CEO at the pinnacle of the hierarchy.
As they say, read the whole thing.
Handbook of Organizational Economics
| Peter Klein |
It’s edited by Bob Gibbons and John Roberts, just published by Princeton, and you can read about it here, including the table of contents and the introduction. As Gibbons and Roberts note:
Organizational economics involves the use of economic logic and methods to understand the existence, nature, design, and performance of organizations, especially managed ones. As this handbook documents, economists working on organizational issues have now generated a large volume of exciting research, both theoretical and empirical. However, organizational economics is not yet a fully recognized field in economics — for example, it has no Journal of Economic Literature classification number, and few doctoral programs offer courses in it. The intent of this handbook is to make the existing research in organizational economics more accessible to economists and thereby to promote further research and teaching in the field.
This is a fair assessment, though some O&M readers may find the editors’ definition of the field too narrow. The volume covers a wide variety of issues, topics, and applications but nearly all from the perspective of modern neoclassical economics (there’s a chapter on TCE by Williamson and Steve Tadelis, but nothing on “old” property rights theory, capabilities, the knowledge-based view, etc.). Still, it appears to be an excellent collection of state-of-the-art papers. Besides the usual topics like incentives, authority, complementarity, innovation, ownership, vertical integration, and the like, there’s also an interesting methodological section featuring “Clinical Papers in Organizational Economics” by George Baker and Ricard Gil, “Experimental Organizational Economics” by Colin Camerer and RobertoWeber, and “Insider Econometrics by Casey Ichniowski and Kathy Shaw. Check it out.
Searle Center Conference Innovation and Entrepreneurship:
| Peter Klein |
Northwestern’s Searle Center, headed by Dan Spulber, is holding its sixth annual conference on innovation and entrepreneurship 6-7 June 2013. I have attended before and the papers and discussion are typically very high quality. Proposals are due 15 February. The full call for papers is here and below the fold. (more…)
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