Posts filed under ‘Myths and Realities’
Was Coase Right About the Lighthouse?
| Peter Klein |
A few years ago I attended a Liberty Fund conference on the private provision of public goods. In preparation for the conference I re-read Coase’s classic 1974 article, “The Lighthouse in Economics,” for the first time since my graduate-school days. I recall being surprised how much weaker the argument was than the way I had remembered it. Far from showing that British lighthouses were “private” — as the paper is widely thought to have demonstrated — Coase’s analysis shows simply that public goods can be financed through user fees, rather than general tax revenue. But, in the case of the British lighthouses, the user fees were compulsory, government-enforced levies on ship owners, not voluntary market transactions. The British lighthouses were government-granted monopolies, more like the East India Company or a local public utility than “free-enterprise” institutions. (more…)
Further Dissent on Grameen
| Peter Klein |
The econo-blogosphere continues to heap adulation on Nobel Laureate Muhammad Yunus and the Grameen Bank. I keep waiting for someone to join me in expressing reservations. Economists and bloggers alike excel at challenging the conventional wisdom, especially when press coverage of an individual or event is completely one-sided. But so far no takers.
Much of the information circulating about Grameen doesn’t pass the “smell test.” For instance, we’re told that 90 percent of Grameen’s borrowers are women. Yunus says poor Bangladeshi women are better credit risks than poor Bangladeshi men, and that such women are historically underserved by credit institutions. Fair enough, but 90 percent? If that number is accurate, then we’re talking about a political statement, not a development strategy.
The number that puzzles me the most, though, is Grameen’s repayment rate, variously described at 98 or 99 percent. To begin with, this is an odd statistic to tout. Banks do not measure their performance by the repayment rate, but by profitability or the efficiency with which deposits are converted into loans. OK, you say, Grameen is not chasing profits, but broader social objectives. Fine, but then the appropriate performance measure is the number of new businesses created with Grameen credit, the change in the poverty rate, or some other measure of social welfare.
In any case, the point is moot, because the number is bogus. As reported in the October 14 WSJ:
Mr. Yunus often says the bank has a loan-recovery rate as high as 98.5%. Yet that figure ignores the clients who are far behind in their loan payments. The bank reports a loan as overdue only if the borrower has missed 10 or more consecutive payments. And the bank has often provided new loans to allow borrowers to keep current on old ones. The problem came to a head early this decade, when 19% of Grameen loans were at least one year overdue.
The Dismal Science
| David Gordon |
Everyone knows that Thomas Carlyle called economics the “dismal science”, but the context in which he did so is surprising. Sandra Peart and David Levy point out in The “Vanity of the Philosopher”: From Equality to Hierarchy in Postclassical Economics (University of Michigan Press, 2005), that Carlyle thought economics was “dismal” because the classical economists opposed slavery. Adam Smith and his successors supported a broadly utilitarian philosophy in which everyone was taken to be equally capable of happiness. Carlyle and other defenders of hierarchy condemned the economists for what they regarded as dangerous nonsense.
The supporters of hierarchy appealed to the new science of evolutionary biology to support their position. Darwin himself favored the perfection of the race rather than happiness as the standard of ethics; and although he did not reject sympathy for the unfortunate, he feared its malign effects. (Peart and Levy do not mention, though, that Darwin was on the opposite side from Carlyle in the controversy over Governor Eyre’s brutal suppression of a black revolt in Jamaica.) Francis Galton and other supporters of eugenics criticized the classical economists for ignoring the differences in quality among people: the state, in their view, should make efforts to obtain a “better” population. (more…)
Ghoshal on Economics — Cont’d
| Nicolai Foss |
Frequent readers of this blog will know that we have often posted on the bashing of economics that is going on in the management field (e.g., here and here). The bashing has been cumulating lately. A recent high point of management econ-bashing is the conferment of the AoM Prize for best paper in Academy of Management Review to Ferraro, Pfeffer, and Sutton’s adaptation of extreme and unqualified sociology of knowledge arguments in their “Economics Language and Assumptions: How Theories Can Become Self-Fulfilling.” (more…)
Nothing New Under the Sun
| Peter Klein |
Back when the “New Economy” was in vogue I enjoyed challenging the claim that the “new” phenomena were really new. Before the internet, there was the telegraph. Before the Yahoo! directory there was the telephone book. Before the personal computer there was electric service, the refrigerator, the washing machine, the telephone, and the VCR. In short, such breathlessly touted phenomena as network effects, the rapid diffusion of technological innovation, and highly valued intangible assets are nothing new.
Now comes an interesting paper in the current issue of Economic History Review by Jochen Streb, Jörg Baten, and Shuxi Yin, “Technological and Geographical Knowledge Spillover in the German Empire 1877-1918.” The authors use patent and geographic data to identify four distinct technological waves during this period, drive by innovation in railways, dyes, chemicals, and electrical engineering, respectively. The general claim is that “inter-industry knowledge spillovers between technologically, economically, and geographically related industries were a major source for innovative activities during German industrialization,” and that “technological change affected the geographical distribution of innovative regions.” A nice application of the modern literature on clusters, innovation, and knowledge spillovers to the recent past. Perhaps Ecclesiastes was right after all.
14 September 2006 at 10:44 am Peter G. Klein Leave a comment
Foucault and Economics
| Nicolai Foss |
Catallaxy has a post on “Foucault at the Sydney Institute.” More precisely, the post is about a presentation on Foucault by Foucault scholar, Clare O’Farrell:
She noted that Foucault’s ideas are rapidly growing in popularity and influence in a wide range of fields including the social sciences and the humanities, also nursing, health administration and education. Unfortunately this list coincides with a list of problem areas in my humble opinion, though I would not be rash enough to blame Foucault’s influence alone.
O’Farrell is then ” .. asked about Foucault’s economics … The reply did not address the specific issues but it seems that late in his life Foucault wrote a book (in French) on the rises of neoliberalism.” (more…)
Wal-Mart — Cont’d
| Nicolai Foss |
My co-blogger has recently drawn attention to how Wal-Mart contributes to reducing global poverty. On my recent visit to Atlanta, Georgia, he also arranged a trip to Alabama that in addition to a visit to the Ludwig von Mises Institute was also supposed to include a touristic visit to a Super Wal-Mart, no less (I shall not comment on why the latter visit never materialized, but Peter’s knowledge of the Georgia and Alabama roads may have played a role here).
Apropos of Wal-Mart, the latest issue of the Academy of Management Perspectives (formerly the Academy of Management Executive) features an excerpt from Charles Fishman’s The Wal-Mart Effect: How the World’s Most Powerful Company Really Works — and How It Is Transforming the American Economy. R. Edward Freeman contributes a commentary which predictably concludes that Wal-Mart “… can’t do much right, simply because it is trying to tell its story in the narrow economic mode” (p.40), and therefore sacrifices a number of relevant stakeholder interests. (more…)
Scarcity without Prices
| Richard Langlois |
Yesterday’s New York Times carried an op-ed by Stephen L. Sass, a professor of materials science at Cornell. Writing in the context of high oil prices, Sass makes the point that scarcity of materials has long driven humans to find and make use of alternative materials. He argues that a scarcity of tin led denizens of the Bronze Age to figure out how to smelt iron, just as a scarcity of charcoal impelled the British to figure out how to use coal to make steel. I read the piece eagerly, thinking I might use it in my upcoming introductory economics course — until I got to the last paragraph. Here Sass draws the implication that we need a Manhattan Project to develop alternatives to oil. (more…)
News on Socialism
| Nicolai Foss |
Here is an interesting site — a must-read for any Austrian — which proves that “the labour theory of value is a scientific theory in the strongest sense of the empirical sciences”, “labor values are closely correlated with prices” (i.e., competition works!), etc. An author-less paper (“Against Mises“) posted on the same site demonstrates that Mises was wrong: It is perfectly possible to calculate using labor values.
An Even Brighter Side of Global Warming?
| Richard Langlois |
I remain agnostic about whether global warming is taking place and, if so, whether it is being caused by human behavior. In part, my skepticism comes from some familiarity with large mathematical models in my graduate student days — and my recollection of how sensitive they are to the assumptions fed in. I certainly agree with Peter about what the issues are.
But I recently saw a review by Bob Whaples on EH.net (the economic history website and list-serve) of a book called Plows, Plagues and Petroleum: How Humans Took Control of Climate by William F. Ruddiman. According to the review, the earth for the last 900,000 years or so has experienced cycles in which massive glaciation lasting on the order of 100,000 years has alternated with comparatively brief (10,000 year) “interglacials.” (more…)
Fraudulent Management Books
| Peter Klein |
Be careful when purchasing management books in China:
As Chinese economy and private business grow rapidly, books on western company management and leadership strategies have been on the list of top sellers in many bookstores. However, it is discovered recently that a lot of the best-sellers are bogus books.
Execution Ability, a popular series of seven books written by “famous Harvard professor Paul Thomas”, turned out to be bogus. “This professor and his books are now very famous in China,” said Jiang Ruxiang, general manager of Beijing Zion Consulting Co., Ltd. Jiang discovered that there is no such a professor Paul Thomas at all.
Another example is a book titled “No excuse”, with fake American writer and fake New York Times review as “The most perfect reading for company employee training”. It was the best-selling management book in 2004 with sales of 2 million copies. . . .
Examples of [fake] “honors” include “2003 No. 1 sales on Amazon”; “Endorsed by U.S. Land, Navy and Air Forces.”; “Every U.S. government employee has a copy”, etc.
HT: JC Spender.
Does Creativity Harm Innovation?
| Peter Klein |
The always-interesting Robin Hansen argues in Business Week that creativity may harm, not help, innovation.
[M]uch of the hoopla over creativity is a crock. Why? Because we are already up to our eyeballs in it. Make no mistake: Innovation matters. Nothing is more essential for long-term economic growth. But to get more innovation we may want less, not more, creativity.
The sobering truth is that the dramatic artistic creations or intellectual insights we most admire for their striking "creativity" matter little for economic growth. . . . Instead, the innovations that matter most are the millions of small changes we constantly make to our billions of daily procedures and arrangements. Such changes do not require free-spirited self-expression. Instead, people quite naturally think of changes as they go about their routine business and social lives. . . .
Has Corporate Corruption Increased?
| Peter Klein |
Teppo Felin asks an important question: has corporate malfeasance — earnings manipulation, information distortion, and outright fraud — increased systematically in recent decades, or are Enron, WorldCom, Global Crossing, and their ilk just a few bad apples?
Despite all the sound and fury over this question, the evidence appears to be surprisingly thin. First, there is the obvious methodological problem that we don't observe corruption per se, but only responses to alleged or actual corrpution. We know when firms restate their earnings, but not when firms should have restated their earnings and didn't. We observe SEC investigations and enforcement actions, but not the (presumably many) instances of Type I or II error.
Second, the time-series evidence on even these proxies is slim. Several descriptive studies document an increase in earnings restatements over the past 20 years (especially the last 5-7 years), though as far as I know there are no studies looking at longer time periods. (more…)
Was Taylor a Taylorite?
| Peter Klein |
Speaking of scientific management, one of Frederick W. Taylor's biographers tells us that Taylor himself was no Taylorite. Yesterday I was looking for an article by Gavin Wright and stumbled upon Wright's review of Daniel Nelson's 1980 book Frederick W. Taylor and the Rise of Scientific Management. (JSTOR subscribers can read the review here.) According to Nelson, Taylor was primarily an engineer — a very creative and successful one — with little interest in labor management. His inventions revolutionized the machine-tool industry, and he later ventured into "popular" management writing as a PR gimmick, to enhance his personal reputation and build his consulting practice. (We also learn that Taylor was a champion lawn tennis player, inventor of a spoon-shaped tennis racket and a two-handled golf club that was later banned, and the son of a radical feminist and abolitionist mother.)
Wicksteed on “Economic Man”
| Peter Klein |
As an economist, I'm continually frustrated by complaints from my fellow social scientists that economics falsely conceives human beings as narrow, selfish, greedy materialists — a canard refuted in even the most elementary textbooks. Economics is a theory of preference and action; it assumes nothing whatsoever about the content of people's preferences, whether they be noble or base, pure or vile, or whatever.
The proper conception of economics as a general theory of action has been around for, I don't know, about a hundred years, at least. I recently came across this nice statement from Lionel Robbins, introducing the 1933 edition of Philip Wicksteed's Common Sense of Political Economy (1910).
Before Wicksteed wrote, it was still possible for intelligent men to give countenance to the belief that the whole structure of Economics depends upon the assumption of a world of economic men, each actuated by egocentric or hedonistic motives. For anyone who has read the Common Sense, the expression of such a view is no longer consistent with intellectual honesty. Wicksteed shattered this misconception once and for all. . . .
[Modern value theory has] thrown the whole corpus of economic science into an entirely new light — a light in which Economics is seen to be a discussion not of the nature of certain kinds of behavior arbitrarily separated off from all others, but of a certain aspect of behavior viewed as a whole. . . . [W]hen [the] final history [of modern economics] comes to be written, I think it will be found that Wicksteed's exhaustive examination of the "economic relationship," and his insistence that there can be no logical dividing line between the operations of the market and other forms of rational action, are by no means among the least important or least original." (pp. xxi-xxii)
I wonder how much of the current contretemps over economic methods in organization and management is simply a re-hash of controversies already covered by Wicksteed, Clark (1, 2), Robbins, etc.
Those Right-Wing Economists
| Peter Klein |
Several posts below allude to arguments by Jeffrey Pfeffer, Sumantra Ghoshal, and others that economic models and concepts (agency problems, transaction costs, opportunism, and the like) are taking management theory in the wrong direction and are harmful to management practice. A subtext of these arguments is that economists are ideologically biased toward the free market, against community and informal social ties, and toward cynical, atomistic, and even “reactionary” views of human nature. (Even if we’re not actually dismal.)
Surveys of economists’ political preferences reveal a more complex picture, however. A forthcoming article in Public Choice by Daniel Klein and Charlotta Stern analyzes a 2003 American Economic Association member survey:
The responses show that most economists are supporters of safety regulations, gun control, redistribution, public schooling, and anti-discrimination laws. They are evenly mixed on personal choice issues, military action, and the minimum wage. Most economists oppose tighter immigration controls, government ownership of enterprise and tariffs. In voting, the Democratic:Republican ratio is 2.5:1.
A Democratic-to-Republican ratio of only 2.5 to 1 may seem shockingly low to our colleagues in sociology or cultural studies, but hardly seems to indicate pervasive “right-wing” bias.
Myths and Fallacies in Strategic Management – Part II
| Nicolai Foss |
Why has the notion of firm-level “capabilities” become so incredibly popular in strategic management research during the last 10-15 years?
This is a puzzle because — as Teppo Felin and I have argued in a series of recent papers (most of which can be accessed from www.nicolaifoss.com) — firm-level capabilities is a highly problematic concept. Thus, there are no theories of the emergence or origin of capabilities and the connection between the level of capabilities and the level of individual agents is at best unclear and perhaps more realistically non-existent. Partly because of these difficulties, there simply aren’t any clean definitions of capabilities around. (more…)
Myths and Fallacies in Strategic Management — Part I
| Nicolai Foss |
Here is the beginning of what may become a regularly occurring post on http://www.organizationsandmarkets.com: An identification of common myths, mistakes, fallacies, non sequiturs, etc. in the strategic management field (I am sure my co-blogger will be happy to participate). Most of them have been picked up from conversations with colleagues, from listening to presentations in seminars and at the Strategic Management Society Meeting, and so on. Most relate to the resource-based view (i.e., Wernerfelt, Barney, Rumelt, Peteraf, etc.). OK, here goes: (more…)
Malthus and the “Dismal Science”
| Peter Klein |
I too imagine that Williamson's critics will be delighted by the association with Malthus.
As a footnote, David Levy and Sandra Peart have done interesting revisionist work claiming that Malthus actually wasn't the target of Carlyle's famous quip.
Everyone knows that economics is the dismal science. And almost everyone knows that it was given this description by Thomas Carlyle, who was inspired to coin the phrase by T. R. Malthus's gloomy prediction that population would always grow faster than food, dooming mankind to unending poverty and hardship.
While this story is well-known, it is also wrong, so wrong that it is hard to imagine a story that is farther from the truth. At the most trivial level, Carlyle's target was not Malthus, but economists such as John Stuart Mill, who argued that it was institutions, not race, that explained why some nations were rich and others poor. Carlyle attacked Mill, not for supporting Malthus's predictions about the dire consequences of population growth, but for supporting the emancipation of slaves. It was this fact — that economics assumed that people were basically all the same, and thus all entitled to liberty — that led Carlyle to label economics "the dismal science."
See the full thing here. And take that, economist-bashers!
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