Posts filed under ‘Management Theory’
March & Simon: Early Socialist Calculation Revisionists
| Nicolai Foss |
It is now commonly recognized that the majority of the economics profession for about four decades held an erroneous view of the nature of the “socialist calculation debate.” In particular, the nature of the arguments put forward by Mises and Hayek were misconstrued.
Revisionism took off in the mid 1980s with the work of Peter Murrell (e.g., here) and Don Lavoie (e.g., here). From a mainstream perspective, Murrell argued that the Austrians had developed sophisticated insights in property rights economics and the agency problem and had applied these insights to the problem of socialist calculation. Lavoie highlighted the distintive Austrian knowledge argument in the calculation debate, in particular emphasizing Hayek’s contribution. A bit later, Salerno and others emphasized the distinctiveness of Mises’ contribution. Thus, whereas Mises stressed the need for a distributed process of entrepreneurial judgment in the context of a private ownership economy characterized by uncertainty, Hayek put more of an emphasis on the impossibility under socialism of harnessing and processing massive amounts of knowledge, particularly under dynamic conditions. (more…)
Management by the Really Big Numbers
| Peter Klein |
Management by the numbers may work after all. But what about management by the really big numbers?
Paul Slovic, writing in Foreign Policy about genocide, says we are “numbed by numbers” — really big numbers, that is.
Why do good people ignore mass murder and genocide?
The answer may lie in human psychology. Specifically, it is our inability to comprehend numbers and relate them to mass human tragedy that stifles our ability to act. It’s not that we are insensitive to the suffering of our fellow human beings. In fact, the opposite is true. . . .
The psychological mechanism that may play a role in many, if not all, episodes in which mass murder is neglected involves what’s known as the “dance of affect and reason” in decision-making. Affect is our ability to sense immediately whether something is good or bad. But the problem of numbing arises when these positive and negative feelings combine with reasoned analysis to guide our judgments, decisions, and actions. Psychologists have found that the statistics of mass murder or genocide — no matter how large the numbers — do not convey the true meaning of such atrocities. The numbers fail to trigger the affective emotion or feeling required to motivate action. In other words, we know that genocide in Darfur is real, but we do not “feel” that reality. In fact, not only do we fail to grasp the gravity of the statistics, but the numbers themselves may actually hinder the psychological processes required to prompt action.
Here is a longer version of Slovic’s piece, with references.
Are managers, likewise, unable to extract meaningful information from really big numbers? Is this a cost of centralized decision-making, or a limit to firm size or scope for a given degree of centralization? What would Harold say?
Pomo Periscope X: Foucault Deconstructed
| Peter Klein |
This week’s Times Literary Supplement includes Andrew Scull’s review of a new translation of Foucault’s History of Madness, the book that launched the French philospher’s public career. (HT: A&L Daily.) The first English edition, Scull notes, had the great merit of brevity, if not accuracy.
Madness and Civilization was not just short: it was unhampered by any of the apparatus of modern scholarship. What appeared in 1965 was a truncated text, stripped of several chapters, but also of the thousand and more footnotes that decorated the first French edition. Foucault himself had abbreviated the lengthy volume that constituted his doctoral thesis to produce a small French pocket edition, and it was this version (which contented itself with a small handful of references and a few extra pages from the original text) that appeared in translation. This could be read in a few hours, and if extraordinarily large claims rested on a shaky empirical foundation, this was perhaps not immediately evident. The pleasures of a radical reinterpretation of the place of psychiatry in the modern world (and, by implication, of the whole Enlightenment project to glorify reason) could be absorbed in very little time. Any doubts that might surface about the book’s claims could always be dismissed by gestures towards a French edition far weightier and more solemn — a massive tome that monoglot English readers were highly unlikely, indeed unable, to consult for themselves, even supposing that they could have laid their hands on a copy.
From the extended edition, published now in English for the first time, we learn that Foucault’s primary sources were narrow, outdated, and superficial. (more…)
The Danger of Under-Management
| Peter Klein |
As we’ve noted before, the hype about flatter hierarchies, modular organizational architectures, worker-managed teams, and the like tends to obscure the costs of decentralization or, conversely, the benefits of hierarchy. Sure, we can worry along with Bob Sutton about abusive bosses. But what about bosses who exercise too little authority?
WebWorkerDaily is running an open thread on under-management. Notes Anne Zelenka:
Books like The Starfish and The Spider: The Unstoppable Power of Leaderless Organizations promote the idea that decentralized loosely-managed organizations can be more successful than hierarchical traditionally managed organizations. Starfish organizations, so the claim goes, work mainly via flat and collaborative peer networks, not by the practice of top-down leadership or management. This might make you think that management isn’t necessary in the new world of work and business enabled by the web. Yet even so-called starfish organizations like Wikipedia and Craigslist rely on some sort of governance structure and effective leadership to succeed.
Utility Strategy
| Steven Postrel |
Skeleton of a Harvard Business Review article:
How do you get sustainable advantage in a service business today? One approach: Become a new-wave utility. Think about Google or Yahoo, eBay, Amazon, etc. on the Internet; think about UPS or FedEx, Grainger, Ryder, Public Storage in logistics; think about McDonald’s, Starbucks, 7-Eleven, in convenience food consumption. (more…)
New JC Spender Essay
| Nicolai Foss |
JC Spender is one of my favorite management thinkers. I may disagree with him, but he is usually challenging and very often profound (in contrast to some other management thinkers who have been discussed here at O&M). And he writes extremely well. JC has a new essay coming out in Journal of Management Inquiry, “Management as a Regulated Profession.” (It can also be downloaded from JC’s site). Much of the content of the paper is a discussion and diagnosis of the theory-practice gap, including pointing out that this discussion has been going for a very long time: “Redlich (1957) tells of the 19th-century German steel town that, its business failing, pressed the local business school principal to take charge. The business failed anyway, and he was put in jail — where he died — to ponder the gap between rigor and relevance. Deans beware!” (more…)
The Elusive Concept of Corporate Culture
| Peter Klein |
Corporate culture, like pornography, is difficult to define, but perhaps easy to recognize. Attitudes, beliefs, ways of solving problems — “cognitive frames,” if you prefer a fancy term — seem to differ among organizations, and to affect performance and characteristics. But a scientific explanation of corporate culture has proved elusive. Economists, in particular, have not gotten much past the analysis in Kreps’s 1986 paper “Corporate Culture and Economic Theory,” despite important contributions from Crémer (1993), Lazear (1995), and Hermalin (1998). (Ben Hermalin provides a nice summary of the literature here, and George Akerlof and Rachael Kranton provide some related discussion here.) Certainly there has been little empirical work on the economics of corporate culture.
So I was pleased to see this paper by Henrik Cronqvist, Angie Low, and Mattias Nilsson, “Does Corporate Culture Matter for Firm Policies?” The paper takes the Forrest Gump approach (which I’ve advocated elsewhere) that “corporate culture is what corporate culture does.” In other words, rather than try to define it, treat it as a latent concept and look for its effects. From the abstract:
We construct a parent-spinoff firm panel dataset that allows us to identify culture effects in firm policies from behavior that is inherited by a spinoff firm from its parent after the firms split up. We find positive and significant relations between spinoff firms’ and their parents’ choices of investment, financial, and operational policies. Consistent with predictions from economic theories of corporate culture, we find that the culture effects are long-term and stronger for internally grown business units and older firms. Our evidence also suggests that firms preserve their cultures by selecting managers who fit into their cultures. Finally, we find a strong relation between spinoff firms’ and their parents’ profitability, suggesting that corporate culture ultimately also affects economic performance. These results are robust to a series of robustness checks, and cannot be explained by alternatives such as governance or product market links.
This strikes me as a fruitful approach. Culture is treated as a residual, like Solow’s (1957) treatment of technological change. Of course, the drawback is that culture itself remains a black box. But perhaps this is the best economic analysis can do.
Helping Your Kids: It’s Not How Much You Praise, But How
| Peter Klein |
Direct evidence against the Alfie Kohn approach to child-rearing (and, of course, incentive compensation more generally): Praising kids for who they are (e.g., telling them they’re smart) may actually reduce their performance in school, while praising them for what they do (hard work, diligence, effort) makes them perform better. Here’s the link, courtesy of Joshua Gans.
(Apologies to Mike Jensen and Kevin Murphy for my title.)
How to Commercialize Innovation: Sue Everybody
| Peter Klein |
We previously discussed the possibility of turning turn Bell Labs into a profit center. Now it seems that Bell Labs’s new parent, Alcatel-Lucent, has figured out how to commercialize the great Bell innovations of the past: become a patent troll. Here is Michael Perelman, writing at Against Monopoly on Alcatel’s patent-infringement suit against Microsoft:
Bell Labs was once a jewel of American science. After the Justice Department broke up the Bell System, AT&T let Bell Labs deteriorate until it spun them off as part of Lucent. Lucent, in turn, deteriorated until it was bought up by Alcatel, which seems to be now behaving as a patent troll.
Alcatel just won an enormous patent suit against Microsoft — $1.52 billion for using Bell Labs work on the MP3 format. The suit manner may or may not hold up, but I presume that Alcatel is now preparing suits against others, finally figuring out how it can commoditize the work of Bell Labs.
Temin on Landes
| Peter Klein |
We reported a while back on David Landes’s book Dynasties: Fortunes and Misfortunes of the World’s Great Family Businesses. Here is a review by the eminent economic historian Peter Temin of MIT. Excerpt:
[Landes] acknowledges the force of Chandler’s emphasis on managerial capitalism, but he argues that family firms have a prior role in economic development. In this claim, he associates himself on the one hand with Marc Bloch, who argued that Europe picked itself up from chaos in the tenth century by relying on the value of family connections. Landes associates himself on the other hand with modern economics and its concerns with asymmetric information and principal-agent problems. Landes argues that the failure of many development programs has been the neglect of the information and loyalty that are qualities of families — in his word, dynasties.
The stories illustrate these points, but Landes’s urge to tell a good story is at gentle odds with this justification for them. Most of the dynasties in this book have ruled over substantial enterprises. These enterprises employed many people other than family members. Normal business practice prevailed once these enterprises became major banks, auto firms, or mining companies. The importance of asymmetric information must have been concentrated in the early years.
Narcissism in Organizations
| Peter Klein |
How do you manage employees who care only about themselves? If you hire new college graduates you better think about it. An AP story reports that “[t]oday’s college students are more narcissistic and self-centered than their predecessors,” citing a study headed by Jean Twenge, author of Generation Me. “We need to stop endlessly repeating ‘You’re special’ and having children repeat that back,” says Twenge. “Kids are self-centered enough already.”
(One of my colleagues told me today that she was recently graded down on a student evaluation because, according to the student, “the teacher’s job is to make me feel good about myself” and my colleague hadn’t done that.)
Update: Here is an AMR paper on narcissism in organizations.
Open-Source Cola
| Peter Klein |
This is what the Linux-heads are drinking these days instead of Coke or Pepsi. No joke. People can download the “source code,” modify it to their liking, and produce their own stuff, under the terms of the GNU General Public License. (Will somebody put the cocaine back in?)
I’ll bet this is Don Tapscott and Anthony Williams’s drink of choice!
CBS Workshop on Knowledge Sharing
| Nicolai Foss |
The Center for Strategic Management and Globalization hosts a workshop on “The Barriers to Intra- and Inter-firm Knowledge Transfer” at the Copenhagen Business School June 15. Keynote Speeches will be given by Linda Argote and Gabriel Szulanski. Paper proposals must be submitted prior to April 10 to the arranger, Dr. Koen Heimeriks at kh.smg@cbs.dk Here is the Call for Papers.
Selling My Wife
| Peter Klein |
Alchian and Demsetz tell me I can fire my grocer. But can I sell my wife?
Here’s the context: Nicolai and I were discussing (via IM — we’re high-tech) my plans to attend an overseas conference. When he asked if I had checked with my wife before committing, I admitted that I hadn’t.
This led (naturally) to a discussion of original and derived judgment. I argued that while my wife has veto power over my travel plans (not to mention most other things), I am really in charge because I have given her this authority. In Foss-Foss-Klein terminology, her decision rights are delegated, or “derived,” while mine are primary, or “original.” (If you just fell off your chair, get back up and play along, just for the sake of argument.)
Nicolai reminded me that some of our colleagues think the original/derived distinction is a distinction without a difference. A de facto right is a right, whether we label it “original” or “derived.” I responded that there is a difference, namely that asset owners possess decision rights that non-owners do not. For example, the owner can sell the asset, while the hired worker, even if possessing a wide range of use rights, cannot. Moreover, the owner can choose — indeed must choose — which decision rights to delegate to subordinates. In general, no matter how “passive” the owner chooses to be, regarding day-to-day activities, the owner possess a kind of “ultimate” authority that cannot be delegated. (In the words of the great Canadian philosopher Geddy Lee, “If you choose not to decide, you still have made a choice.”) As evidence, note that the owner can take away all the subordinate’s decision rights by terminating the employment relationship — “selling” the subordinate, as it were.
We concluded that the original/derived judgment distinction can be applied to the family, but only if I have the right to sell my wife.
A Classroom Experiment in Organizational Economics
| Peter Klein |
I don’t do classroom experiments, but some of my colleagues find them effective. Here’s an experiment that might appeal to the O&M readership:
We present a simple classroom principal-agent experiment that can effectively be used as a teaching device to introduce important concepts of organizational economics and contracting. In a first part, students take the role of a principal and design a contract that consists of a fixed payment and an incentive component. In the second part, students take the role of agents and decide on an effort level. The experiment can be used to introduce students to the concepts of efficiency, incentive compatibility, outside options and participation constraints, the Coase theorem, and fairness and reciprocity in contracting.
See Simon Gaechter and Manfred Königstein’s paper “Design a Contract! A Simple Principal-Agent Problem as a Classroom Experiment,” available on SSRN.
Risk, Uncertainty, and Baseball
| Peter Klein |
Frank Knight meets Abner Doubleday in this this item from the Hardball Times.
When we try to predict the outcome of a baseball season, whether as fans or pretend-general managers, there’s a whole lot of stuff we just don’t know. In fact, if you want certainty, we don’t know anything: any player in major league baseball could blow out his arm, crash into a teammate, or just plain lose the skills necessary to hit a slider.
Of course, most of those things won’t happen. When guessing the outcome of a team’s season, it’s a safe bet that somebody will get hurt, some players will underperform expectations, and others will overperform. One mark of a good general manager is identifying the situations in which those are most likely to happen, and then providing the best insurance he can.
Invoking the Knightian distinction between risk and uncertainty, baseball analyst Jeff Sackmann continues:
In a game of Strat-O-Matic, baseball is risky — you could calculate the likelihood of every event before you roll the dice. In real life, baseball is uncertain — no number of dice (or spreadsheet) is going to tell you Chris Snelling’s 2007 OPS. However, when it comes to the game on the field, there’s a continuum between risk and uncertainty, and that’s what I’m interested in. [Links added by PK for the benefit of our non-baseballophilic readers.]
Returning to Steve Postrel’s thoughts on the value added of management, one can perhaps conceive the problem in Knightian terms. In a world of probabilistic risk, “management” is, in principle, a simple problem of contract design. Nor would there be a reason for entrepreneurs to own assets. In a world of Knightian uncertainty, however, there is a role for managerial skill and for entrepreneurial judgment. Indeed, as Sackman notes, baseball “statheads don’t always agree with general managers” on personnel matters.
NB: If you think this is a rather silly example, you haven’t been keeping up with the literature. The academic analysis of sports is a rapidly growing field. Check out the Journal of Sports Economics, for example. Here is a short sportometric piece by yours truly.
Toyota at the Crossroads
| Steven Postrel |
The recent NYT article (not the Sunday Magazine story but an earlier business sectiion piece by Martin Fackler) describing Toyota’s struggle to transmit its methods and culture to large numbers of foreign workers, in the face of unprecedented recalls and quality problems, provokes a number of thoughts about the company’s past successes and its current problems. (more…)
Chip and Dan Heath on NPR
| Peter Klein |
The Made to Stick guys were interviewed on today’s NPR’s Morning Edition.
In other book news, check out this USA Today review of Phil Rosenzweig’s excellent The Halo Effect, which we blogged about earlier.
Why the Strong May Be Late
| Nicolai Foss |
One of the favorite cases of technology strategy classes is the innovation of the CAT scanner. The first such commercially viable scanner was introduced in 1972 by EMI, by no means a major player in the diagnostic-imaging market. The EMI scanner was leapfrogged by General Electric in 1977. GE dominates the market today along with Siemens. EMI exited already in 1979.
Why was EMI the first to commercialize CAT scanners and not the more established players with the relevant core competencies? Typical explanations of this kind of pattern where strong players avoid pioneering a market involve “stupidity” (because of various biases the strong do not see it coming) or “lock-in” (for various reasons, the strong cannot respond effectively). (more…)
The Dark Side of Charisma
| Peter Klein |
Entrepreneurship has been described as charismatic leadership or charistmatic authority. But what exactly is charisma?
The WSJ’s Saturday edition reviews Philip Rieff’s posthumously published Charisma: The Gift of Grace, and How It Has Been Taken Away from Us. Rieff, the distinguished cultural sociologist who taught at Brandeis, Berkeley, Harvard, and Penn, began the book in the late 1960s but went on to other projects, completing it just before his death earlier this year. Reviewer Adam Wolfson describes the book as a jeremiad against popular culture, much like Allan Bloom’s Closing of the American Mind. (more…)
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