Posts filed under ‘Myths and Realities’

More Bad News for Microfinance

| Peter Klein |

Microfinance and microenterprise have been touted as a new model for economic development, a way to encourage investment, innovation, and business creation and raise living standards without having to go through large-scale industrialization. We’ve tended to be skeptical, however, particularly about the most touted microfinance providers such as the Grameen Bank. Theoretically, the kinds of repayment plays that make microfinance feasible (high interest rates, strong peer monitoring) seem to limit its scope; besides, not everyone wants to be a business owner. The empirical evidence has not been encouraging — microfinance may achieve some social goals, like a sense of empowerment among microenterprise owners, but does not seem to have much impact on overall economic activity. It may not be possible to jump from a largely rural, agrarian society to an entrepreneurial capitalist one without going through a period of large-scale industrial development.

These musings are inspired by a new NBER working paper from the J-PAL group which uses a randomized controlled trial to study the effects of microfinance in an urban Indian setting. The results confirm the suspicions above: access to microfinance brings about some changes in behavior, but has no noticeable effect on standards of living or overall economic performance. Here’s the info:

The Miracle of Microfinance? Evidence from a Randomized Evaluation
Esther Duflo, Abhijit Banerjee, Rachel Glennerster, Cynthia G. Kinnan
NBER Working Paper No. 18950, May 2013

This paper reports on the first randomized evaluation of the impact of introducing the standard microcredit group-based lending product in a new market. In 2005, half of 104 slums in Hyderabad, India were randomly selected for opening of a branch of a particular microfinance institution (Spandana) while the remainder were not, although other MFIs were free to enter those slums. Fifteen to 18 months after Spandana began lending in treated areas, households were 8.8 percentage points more likely to have a microcredit loan. They were no more likely to start any new business, although they were more likely to start several at once, and they invested more in their existing businesses. There was no effect on average monthly expenditure per capita. Expenditure on durable goods increased in treated areas, while expenditures on “temptation goods” declined. Three to four years after the initial expansion (after many of the control slums had started getting credit from Spandana and other MFIs ), the probability of borrowing from an MFI in treatment and comparison slums was the same, but on average households in treatment slums had been borrowing for longer and in larger amounts. Consumption was still no different in treatment areas, and the average business was still no more profitable, although we find an increase in profits at the top end. We found no changes in any of the development outcomes that are often believed to be affected by microfinance, including health, education, and women’s empowerment. The results of this study are largely consistent with those of four other evaluations of similar programs in different contexts.

20 May 2013 at 3:01 pm 1 comment

Keynes in the Spotlight

| Peter Klein |

NPG P363(14); John Maynard Keynes, Baron Keynes by Ramsey & MusprattAs the Niall Ferguson kerfuffle begins fading from memory it’s worth revisiting the underlying issue: What kind of person was John Maynard Keynes, and (how) did his social, cultural, moral, and aesthetic views affect his scientific work?

Here are a few recommended readings:

These works are not kind to ole’ John Maynard (I’m posting them, what did you expect?). Rothbard, for example, emphasizes Keynes’s “overweening egotism, which assured him that he could handle all intellectual problems quickly and accurately and led him to scorn any general principles that might curb his unbridled ego,” also referring to Keynes’s “deep hatred and contempt for the values and virtues of the bourgeoisie,” including savings and thrift. It’s hard to imagine that Keynes’s personal views on thrift could be unrelated to the now-ubiquitous, über-Keynesian idea that spending, not savings and capital accumulation, is the driver of economic growth.

On time preference, and its social and cultural causes and consequences, I recommend Time and Public Policy by T. Alexander Smith (University of Tennessee Press, 1988), which unfortunately appears to be out of print. Here is a brief review by Israel Kirzner.

17 May 2013 at 2:07 pm 2 comments

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.

1 April 2013 at 12:05 pm 1 comment

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.

4 March 2013 at 12:13 pm 7 comments

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…)

24 February 2013 at 10:48 pm 20 comments

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?

29 January 2013 at 12:11 am 3 comments

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.

28 January 2013 at 12:56 am 4 comments

Business and Poetry

| Peter Klein |

Wallace Stevens was one of America’s greatest poets. The author of “The Emperor of Ice-Cream” and “The Idea of Order at Key West” was awarded the Pulitzer Prize for Poetry in 1955 and offered a prestigious faculty position at Harvard University. Stevens turned it down. He didn’t want to give up his position as Vice President of the Hartford Accident and Indemnity Company.

This lyrically inclined insurance executive was far from alone in occupying the intersect of business and poetry. Dana Gioia, a poet, Stanford Business School grad, and former General Foods executive, notes that T.S. Eliot spent a decade at Lloyd’s Bank of London; and many other poets including James Dickey, A.R. Ammons, and Edmund Clarence Stedman navigated stints in business.

Sure, quants rule, but literary types have a role to play in business too. And some of the great literary and artistic figures, such as Dickens, Rubens, and even Shakespeare, were successful business managers. The quoted passage is from John Coleman’s “The Benefits of Poetry for Professionals” in the HBR blog.

29 November 2012 at 7:03 pm 2 comments

Social Justice Quote of the Day

| Peter Klein |

Hayek, interviewed in 1983 by Encounter:

Hayek: “I regard ‘social justice’ as a nonsensical term….”

Interviewer: “But do we have the concept of the ‘social market economy’?”

Hayek: “May I tell you the story of when I last spoke to Dr. Ludwig Erhard? We were alone for a moment, and he turned to me and said, ‘I hope you don’t misunderstand me when I speak of a social market economy (Sozialen Marktwirtschaft). I mean by that that the market economy as such is social, not that it needs to be made social. . . .’ If you had to make the market economy ‘social,’ . . . you can justify every demand that cannot be reconciled with having the market determine prices and incomes. There’s no better way of destroying the market economy than with the concept of ‘social justice.'”

27 October 2012 at 9:10 am 2 comments

First, They Ignore You. . . .

| Peter Klein |

Paul Krugman writes a typically silly column on the Austrian school’s approach to defining the money supply. As usual, his purpose is not to inform, or analyze, or explore, but to ridicule anyone who disagrees with The Paul. A few reactions:

  • The substantive question, do Austrians consider money-market mutual funds as part of the money supply, is easily answered with 30 seconds of research, which is apparently more than Paul could muster up. Paul, use The Google!
  • Krugman frequently mocks ideas he does not understand, so his tone and style here are hardly surprising. But it’s interesting that he finds Ron Paul’s “hard-money” views influential enough to mention.
  • Krugman seems to believe that the Republican Establishment, and Paul Ryan in particular, are in thrall to the economic teachings of the Austrian school, which would be news to everyone in the Republican Establishment and the Austrian school. In his defense, I think Krugman recognizes only Krugman and non-Krugman, so he cannot quite grasp that there may be some diversity among his critics.
  • Krugman dimly recognizes that Austrians have some objections to fractional-reserve banking in connection with government intervention, and sneers that “[t]his is historically wrong, but maybe the actual history of banking is deep enough in the past for that wrongness to get missed.” He also seem to think that Austrians want to ban the use of money-market mutual funds. Of course, Krugman has never read anything written by an Austrian economist, and he offers no citations or quotes, so it’s hard to know where he gets these ideas. To my knowledge. no Austrian has called for banning MMMFs. On fractional-reserve banking, the opinion among Austrian scholars ranges from those who think FRB is inherently unworkable and illegitimate and could not survive apart from government intervention (most Rothbardians) to those who think that private FRB is legitimate and workable but that the current system of government deposit insurance, government fiat currency as the base money, the Fed as the lender of last resort, etc. is inefficient and illegitimate (Larry White, George Selgin). Needless to say, Austrian scholars have written thousands of pages on these issues, including detailed studies of the history of banking. Krugman apparently thinks Austrians are merely journalists or propagandists, as he himself has become.

17 September 2012 at 3:21 pm 11 comments

The Wrong Way to Measure Returns to Public Science Funding

| Peter Klein |

A new Milken Institute report purports to show that “[t]he benefit from every dollar invested by National Institutes of Health (NIH) outweighs the cost by many times. When we consider the economic benefits realized as a result of decrease in mortality and morbidity of all other diseases, the direct and indirect effects (such as increases in work-related productivity) are phenomenal.” There are so many problems with the study I hardly know where to begin. For instance:

1. The authors measure long-term benefit to society as real GDP for the bioscience industries. This is a strange proxy. It is well-known that one of the major impact of public science funding is higher wages for science workers. It is hardly surprising that NIH funding results in higher wages and profits for those in the bioscience industry. Moreover, even if industry activity were the variable of interest, don’t we care about the composition of that activity, not the amount? Which projects were stimulated by NIH funding, and were they the right ones?

2. The results are based on a panel regression of the following equation:

Real GDP for the bioscience industries = f (employment in bioscience industry, labor skill, capital stock, real NIH funding, Industrial R&D in all industries) + state fixed effects + error term.

They interpret the coefficient on NIH funding as the causal effect of NIH funding on bioscience performance. E.g.: “Preliminary results show that the long-term effect of a $1.00 increase in NIH funding will increase the size (output) of the bioscience industry by at least $1.70.” But all the right-hand-side variables are potentially endogenous. For instance, the positive correlation between the dependent variable and NIH funding could reflect winner-picking: the NIH funds projects that are likely to be successful, with or without NIH funding. (The authors briefly mention endogeneity but dismiss it as unimportant.)

This is a version of the basic methodological flaw I attributed to the the political scientists lobbying for NSF money. The issue in question — even assuming the dependent variable is a reasonable measure of social benefit — is what bioscience industry output would have been in the absence of NIH funding. (And, even more important, what would have been the direction of that activity.) Public funding could crowd out private funding, and almost certainly changes the direction of research activity, for good or ill.

3. There are a host of econometric problems, aside from endogeneity — no year fixed effects, no interactions between federal and private funds, the imposition of linear relationships, etc.

If I’m being unfair to the authors, I hope readers will correct me. But this looks to me like another example of special pleading, not careful analysis.

9 September 2012 at 9:49 pm 3 comments

Obama on Small Business

| Peter Klein |

President Obama’s gaffe about business creation — “If you’ve got a business, you didn’t build that. Somebody else made that happen” — has been met with the usual reactions. Defenders claim he simply used infelicitous language to describe the vital role of government in providing essential goods, while critics point out, for instance, that he didn’t even get it right on the Golden Gate Bridge (which received no federal money). I actually feel sorry for the guy. It was an pretty dumb thing to say, politically, and may end up hurting him more than Romney’s role in “exporting American jobs” (gag) hurts the challenger.

The idea that no one builds a business on his own, without help from other people, is in once sense trivially true, as Leonard Read never tired of explaining. No one person knows how to make a pencil, let alone a microprocessor. As a defense of government spending on infrastructure (not only roads and bridges, but things like the internet), it falls completely flat. Of course some entrepreneurs profit from government spending on infrastructure — not just directly (e.g., road contractors, engineering companies hired by ARPA, etc.) but indirectly (from lower transportation or transmission cost, net of tax payments). But such anecdotes do not at all “justify” the expenditures. As I once wrote about the internet:

[E]nthusiasts tend to forget the fallacy of the broken window. We see the internet. We see its uses. We see the benefits it brings. We surf the web and check our email and download our music. But we will never see the technologies that weren’t developed because the resources that would have been used to develop them were confiscated by the Defense Department and given to Stanford engineers. Likewise, I may admire the majesty and grandeur of an Egyptian pyramid, a TVA dam, or a Saturn V rocket, but it doesn’t follow that I think they should have been created, let alone at taxpayer expense.

A gross benefit to particular entrepreneurs from a government program does not, by itself, demonstrate net benefits to the taxpaying community. Vague references to spillovers and multipliers may sound good in a press conference, but are no substitute for serious analysis.

18 July 2012 at 9:57 am 5 comments

Hardware Matters

| Peter Klein |

Joe Salerno’s post at Circle Bastiat, “There’s No Such Thing as a Free Cloud,” could have been an entry in our nothing new under the sun series. Joe highlights a recent HBR blog piece on the physical footprint and energy requirements of server farms, showing that success in the digital age depends, for some players, on access to tangible capital assets and energy. There are important implications:

The notion of a world without scarcity is thus usually propagated by leftist social theorists–but not always. There were some libertarian futurists around in the early 1970s. But lately many libertarians are among the vanguard of those who, dazzled by the marvels of the Digital Age, argue that many goods have become costlessly and, therefore, infinitely producible. Without government interference, they contend, humankind will be able to satisfy more and more of their wants using the resources freely available inside the Cloud.

Our Post-Scarcity libertarians should tell this to the owners of the 500,000 data centers, which contain the hundreds of millions of servers worldwide that constitute the real and indispensable infrastructure of the Cloud.

There are also the wires, cables, switches, cell towers, and client machines (PCs, smartphones, tablets, etc., not to mention smart refrigerators, cars with OnStar, thermostats, and more) that give us access to the cloud. To be sure, Moore’s law allows us to consume this hardware as never before. But software without hardware is like, hmmmm, peanut butter without jelly, Sonny without Cher, a Tim Burton movie without Johnny Depp. Notes Joe: “Once again, common sense observation of the real world reveals the ceaseless struggle of human actors to economize on the use of resources and vindicates the old and true economics of scarcity.”

11 July 2012 at 10:45 am Leave a comment

Entrepreneurship and the Auteur Theory

| Peter Klein |

I’ve been reading Jack Mathews’ The Battle of Brazil: Terry Gilliam v. Universal Pictures in the Fight to the Final Cut, a fascinating — if absurdly one-sided — look at director Terry Gilliam’s struggle to get his 1985 film Brazil distributed in the US. Mathews tells the story as a noble crusade by a brilliant, iconoclastic, visionary filmmaker against the evil studio system, run by corporate toadies who care only about making money, even if it means destroying the artistic unity of the filmmaker’s creative vision. Gilliam had “final cut” rights for a version released in Europe, but his US distributor, Universal, demanded substantial edits, which Gilliam refused to make. Universal, led by Sid Sheinberg (who comes across heroically in documentaries about Steven Spielberg’s Jaws), was completely within its contractual rights to insist on these changes, but the result was a very different film that has been lampooned by critics. (The Sheinberg version was canned and an alternate Gilliam version eventually shown in the US after a long, ugly, public battle between Gilliam and the studio.)

It’s great reading for those interested in movies and the business of making movies. But there’s an interesting entrepreneurship angle as well. Most film critics, including author Mathews, accept the auteur theory of cinema, which sees movies as the highly personal products of a director’s creative vision. The studio approach, which treats moviemaking as a collaborative enterprise designed to make money, is anathema to the auteurs. The case is usually made with familiar anecdotes: 24-year-old Orson Welles had final control over Citizen Kane and created one of the medium’s great masterpieces, while RKO destroyed the follow-up Magnificent Ambersons (and all Welles’s subsequent films). The studios thought Star Wars would flop, and after George Lucas made his zillions he decided to finance and produce his subsequent films on his own, without studio interference — the dream of every auteur. American art-house darlings like Robert Altman, Peter Bogdonavich, Quentin Tarantino, Jim Jarmusch, etc. are always portrayed as fighting to keep Hollywood from turning their edgy, original films into bland, corporate drivel pitched at suburban soccer moms.

As Paul Cantor and others have explained, however, the auteur theory is bunk. Moviemaking is, in fact, a collaborative venture, and many of the best films are studio pictures created by large teams — the best example being Casablanca, which was essentially written by committee. Or, as Cantor puts it: “Just three words: Francis Ford Coppola.” (The Godfather films were studio pictures; virtually everything Coppola did since, with the partial exception of Apocalypse Now, has been a disaster.) And take George Lucas: Does anybody think the problem with the prequel trilogy was too many people standing around saying, “George, you can’t do that”?

Consider the parallels with entrepreneurship. (more…)

6 July 2012 at 1:44 pm 9 comments

“Give Me Money!”

| Peter Klein |

I’ve received quite a few emails from various academic organizations asking me to help defeat the Flake Amendment, which would eliminate National Science Foundation funding for political science research. The American Political Science Association is all over this, even publishing a virtual special issue of APSR highlighting NSF-funded research results.

Ironically, none of the arguments I’ve seen for preserving public funding of social science research makes an argument consistent with, well, social-science research. All take the form: “Government funding has supported the following important research findings, which have had the following social benefits.” This argument receives three Fs for research design. First, there is no counterfactual. The point isn’t whether government-funded research result X is good, but whether it’s better than Y, the research result that would have obtained in the absence of government funding. Government funding doesn’t simply increase the quantity of research, it shapes the direction of research. How do we know NSF-funded work isn’t crowding out even more valuable work?

Second, there is no attempt at causal identification. Where are the natural experiments, the randomized controlled trials, the valid instruments? We already know that a main effect of government funding of hard science is to increase the wages of scientists, not the quality or quantity of research. Even if NSF funds good political science research, how do we know the funding is the cause, not the consequence, of the research?

Third, there is no cost-benefit analysis. The lobbying statements simply list purported benefits. Well, sure, the government could give me hundreds of millions of dollars and I’d do some good with it too. Would those benefits exceed the costs? “Political science research has wide-spread effects beyond specific projects,” say the APSA’s talking points. Maybe so, but what about the effects of those goods and services that would have been produced with the taxpayer dollars that went to NSF? Has nobody at the Monkey Cage read Bastiat?

Put differently, I’m certain the APSR would desk-reject an empirical paper with the logical structure of this argument for funding!

My advice to social scientists seeking government funding is to start by acting like social scientists, not K Streeters.

25 May 2012 at 9:53 am 7 comments

The Bizarro World of Professor Sen

| Peter Klein |

Here is another of those head-scratchers, this one from Amartya Sen, about how neoclassical economics is partly responsible for the financial crisis because neoclassical economists believe that markets work “perfectly”:

Since the crisis broke out the economics profession in general and mainstream economics in particular have been severely criticised. Do you think this is justified?

The criticism of mainstream economics is justified to a limited extent. It is certainly true that the focus of attention in mainstream economics has tended to be on assuming the market to be working perfectly and there being no need for regulation. However, while this view has been a very dominant part of mainstream economics, you have to bear in mind that mainstream economics is not all centered around one unified theme. I don’t think all of mainstream economics should be held responsible.

Do you think that neoclassical macro economists should bear the brunt of the blame?

This would be an oversimplification. Neoclassical economics has many different paths. There are mainstream neoclassical economists who have been very critical of the complete reliance on the markets.

I’ve been around neoclassical economists since my undergraduate days and I can’t think of a single neoclassical economist who says that markets work “perfectly” and favoring “complete reliance on the markets.” David Friedman comes to mind, but even his arguments for anarchism are not based on the belief that markets are somehow “perfect,” but that they are less imperfect than regulation. The truth, of course, is that virtually all neoclassical economists favor a substantial amount of economic regulation — government production of law and order, government control of the monetary system, competition policy, and other government actions to combat purported market failures.

Statements like Sen’s make sense only as a rhetorical ploy to fool the reader. If the mainstream thinks, say, that government should control 25% of the economy, and you think government should control 75%, you describe the mainstream as “extremists” who believe in “no government,” thus making your position seem like a reasonable middle ground.  Krugman of course employs the same rhetorical strategy. Sen is obviously too intelligent to mean what he says literally, so I can only assume mendacity. Am I missing something?

26 April 2012 at 10:12 am 2 comments

No Best Practice for Best Practice

| Lasse Lien |

An important selling point for the consulting industry is that consultants can presumably help a firm identify and implement “best practice.” Surely the consulting industry is an important channel for disseminating knowledge of better ways of doing things, but identifying what constitutes best practice for a given firm in a given situation is no trivial task, and even if the best practice could be identified, transferring it will be a significant challenge.

This begs the question of whether there is a best practice for identification and transfer of best practices, and whether the consulting industry has identified and adopted such a practice. According to this paper Benjamin Wellstein and Alfred Kieser, the consulting industry in Germany is nowhere near a best practice for best practice. This goes for for both inter- and intra-industry transfer. I’ll bet my hat that this finding holds everywhere.

Well, I guess as long as the consulting industry keeps finding better practices for transferring better practices, we shouldn’t be too disappointed that there is no best practice for best practice. (HT: E.S. Knudsen)

20 April 2012 at 4:56 am 4 comments

Dilbert on Jim Collins

| Peter Klein |

Looks like Scott Adams has been reading O&M!

12 April 2012 at 9:16 am Leave a comment

Why I Avoid Bourdieu: #2,538 in a Series

| Peter Klein |

I have little to add to this press release, summarizing a call by sociologists to treat the individual and social disease of failing to take climate change seriously:

LONDON — (March 26, 2012) — Resistance at individual and societal levels must be recognized and treated before real action can be taken to effectively address threats facing the planet from human-caused contributions to climate change.

That’s the message to this week’s Planet Under Pressure Conference by a group of speakers led by Kari Marie Norgaard, professor of sociology and environmental studies at the University of Oregon. . . .

“We find a profound misfit between dire scientific predictions of ongoing and future climate changes and scientific assessments of needed emissions reductions on the one hand, and weak political, social or policy response on the other,” Norgaard said. Serious discussions about solutions, she added, are mired in cultural inertia “that exists across spheres of the individual, social interaction, culture and institutions.”

“Climate change poses a massive threat to our present social, economic and political order. From a sociological perspective, resistance to change is to be expected,” she said. “People are individually and collectively habituated to the ways we act and think. This habituation must be recognized and simultaneously addressed at the individual, cultural and societal level — how we think the world works and how we think it should work.”

In their paper, Norgaard and co-authors Robert Brulle of Drexel University in Philadelphia and Randolph Haluza-DeLay of The King’s University College in Canada draw from the work of French sociologist Pierre Bourdieu (1930-2002) to describe social mechanisms that maintain social stability or cultural inertia in the face of climate change at the three levels. . . .

I note that the lead author recently published Living in Denial: Climate Change, Emotions, and Everyday Life (MIT Press, 2011), which sounds like a reasonable, balanced, and objective look at the climate-change debate.

1 April 2012 at 12:13 am 13 comments

Economists, (Hard) Data, and (Soft) Data

| Nicolai Foss |

Economists have typically been suspicious of data generated by (mail, telephone) surveys and interviews, and have idolized register data. The former are soft and mushy data, the latter are hard and serious ones. I have always been a bit sceptical regarding whether the traditional economist’s suspicion of soft data is really that well-founded; after all, the statistical agencies of the world and other government institutions that are in the business of data collection are populated by fallible individuals and respondents are the same ones that respond to, say, a mail survey conducted by Prof. N. J. Foss, PhD. (Having recently conducted a major data collection effort with a public statistical agency, my skepticism has dramatically increased!)

The argument is sometimes made that there may be a legal duty to respond to the queries of a government agency and this means a high response rate and accurate reporting. However, it appears that we know rather little about the accuracy of data generated in this way, and it is quite conceivable that measurement error is high, exactly because the provision of data is “forced” (those anarcho-capitalist types out there may delight in providing errorneous data!). The serious content of the traditional economist’s prejudice is rather, I think, that surveys often have respondents reacting to subjective scales rather than providing absolute numbers. This is a warranted concern, but not a critique of surveys and interviews per se, because these methods do not imply commitment to subjective scales per se.

As a rule register data are not available that can be used to address numerous interesting issues in organizational economics, labor economics, productivity research and so on. Scholars working on these issues have to resort to those softy surveys and interviews that have been the workhorses of business school faculty for decades. This is a new recognition in economics. Case in point: A recent paper by Nicholas Bloom and John Van Reenen, “New approaches to surveying organizations.”  There is absolutely nothing, I submit, in this short, well-written paper that would surprise virtually any empirically oriented business school professor (i.e., virtually all bschool professors) to whom this would not be anything “new” at all, but rather old hat.

This is not a critique of Profs. Bloom and Van Reenen at all (on the contrary, it is excellent that they educate their economist colleagues in this way). It is just striking and a little bit amusing, however, that we have had to wait until 2010 until empirical approaches that have been mainstream in management research for decades reach the pages of the American Economic Review.

17 March 2012 at 10:51 am 6 comments

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

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