Posts filed under ‘Recommended Reading’
Coase and the Myth of Fisher Body
| Peter Klein |
I vividly recall, at the inaugural meeting of the International Society for New Institutional Economics in 1997, a discussion about the best empirical strategy for that emerging discipline. Harold Demsetz stood up and said “Please, no more papers about Fisher Body and GM!” The Fisher-GM case had become the canonical example of holdup in transaction cost economics and was considered stale and even trite. Ronald Coase, who was at the podium, replied (I’m paraphrasing from memory) “Sorry, Harold, that is exactly the subject of my next paper!”
The GM-Fisher case was introduced into the transaction cost literature by Klein, Crawford, and Alchian in their 1978 paper “Vertical Integration, Appropriable Rents and the Competitive Contracting Process.” They cited the case as a classic example of vertical integration designed to mitigate holdup in the presence of asset specificity. As the story is told, Fisher refused to locate its plants near G.M. assembly plants and to change its production technology in the face of an unanticipated increase in the demand for car bodies. This led G.M. to terminate its existing ten-year supply contract with Fisher and to acquire full ownership of Fisher.
The basic facts of the account, and the interpretation of these facts, were challenged in five independently written papers, all appearing in 2000. Three of the papers, by Coase, Casadesus-Masanell and Spulber, and Freeland, are in the April 2000 Journal of Law and Economics. A fourth paper by Helper, MacDuffie, and Sabel appears in Industiral and Corporate Change and one by Miwa and Ramseyer is in the Michigan Law Review. These papers showed that nearly every detail of the canonical account is wrong. (more…)
Against Freakonomics
| Peter Klein |
We’ve discussed the Freakonomics phenomenon on these pages, but said little about the substance of Levitt and Dubner’s famous book. (Nicolai offered some brief remarks here — scroll down to the 15 August entry — in the dark days before Organizations and Markets.)
Several new critiques are floating around. Gene Epstein’s book Econospinning: How to Read Between the Lines When the Media Manipulate the Numbers challenges the chapters on real-estate agent services and the abortion-crime link. And from Division of Labour I learn that Ariel Rubinstein reviewed the book, quite harshly, for Haaretz. Rubenstein thinks the book is clever and entertaining, but not really economics. He also takes Levitt and Dubner to task for playing fast and loose with the facts. (more…)
Leijonhufvud Papers
| Nicolai Foss |
Here is one more entry in the ongoing O&M Leijonhufvud feuilleton. Leijonhufvud is still alive and kicking, and has a couple of very nice downloadable working papers in the series of the Department of Economics, University of Trento (downloadable here).
In “The Uses of the Past,” a keynote speech to the European Association of the History of Economic Thought, Leijonhufvud takes issue with the
… misconception … that neoclassical economics was always about optimizing and equilibrium. Up at least through the 1950s, neoclassical economists always distinguished between static and dynamic theory. Dynamics referred, on the one hand, to the adaptation of individuals and, on the other, to the market process whereby they collectively groped towards equilibrium. Equilibria were understood as the point attractors of these processes. Static theory dealt with the property of these attractors … What is called dynamic theory today is just the generalization of the old static theory.
More on Leijonhufvud
| Nicolai Foss |
The great economist Axel Leijonhufvud has been the subject of earlier posts here on O&M (here and here). A recent issue of the Cambridge Journal of Economics features an article by Elisabetta de Antoni (a colleague of Leijonhufvud at the University of Trento) on “The Auctioneerless Economics of Axel Leijonhufvud: The “Dark Forces of Time and Ignorance” and the Coordination of Economic Activity.”
The article contains some strange claims — e.g., it claims that “Leijonhufvud has the unquestionable merit of having devised the metaphor of the auctioneer” (p. 2) and this auctioneer is the “personification of the (equally occult) ‘invisible hand’ of the market” (p.3) — but there are many interesting observations and points. Thus, it doesn’t over-concentrate on the 1968 book, and nicely tells the story of how Leijonhufvud became increasingly heterodox, as the econ profession since about the mid-1970s moved towards the intertemporal optimization approach that still holds sway. On the whole, the paper is a reliable and informative guide to the thinking of one of the most fascinating contemporary economists.
More on Artificial States
| Peter Klein |
Greg Mankiw and Amity Shales discuss applications of the Alesina, Easterly, and Matuszeski paper on “Artificial States” to US policies in Afghanistan and Iraq. The paper is fascinating, full of insight and innovative analysis. Of course, you read about it here first (with applications to management).
More on Strategic Factor Markets
| Nicolai Foss |
Jay Barney’s 1986 paper, “Strategic Factor Markets: Expectations, Luck and Business Strategy,” is a classic of recent strategic management literature and one of the key contributions to the resource-based view. It is also one of those papers where the argument — in this case that firms can only gain a competitive advantage if they buy at least some inputs at a price below the net present value of those inputs — seems so irritatingly obvious — that is, after you have read the paper. (more…)
Levels Issues II: Recommended Reading
| Nicolai Foss |
One of the most insightful discussions of what we may mean by “levels of the social” that I know of is a recent and apparently still unpublished paper with the same title by philosopher (and chancellor) Daniel Little. Litte defends micro-foundations, mechanism-based explanation, denies macro-macro causation, and argues that the “molecule” of social phenomena is the socially situated individual in a local context. Although the latter position may be too much to stomach for the die-hard methodological individualist, there is much with which Austrians and other economists can agree. An excellent read!
Readings on Structural Equations Modeling
| Peter Klein |
I posted a while back on the increasing interest in structural equations modeling (SEM) among economists and management scholars. My PhD student Frayne Olson, an SEM enthusiast (and, incidentally, the nephew of Mancur), sent me some introductory references, which I hereby pass along:
- Rex B. Kline, Principles and Practice of Structural Equation Modeling, 2nd ed. (Guilford Press, 2005). (“A very easy to understand presentation of the SEM concepts and applications.”)
- Ralph O. Mueller, Basic Principles of Structural Equation Modeling: An Introduction to LISREL and EQS (Springer, 1996). (“Uses basic matrix algebra to explain how SEM coefficients are estimated. I have found this to be closer to the typical teaching format used within econometrics textbooks. It may be easier to make the transitions and linkages to traditional regression analysis by reading this book.”)
Addendum: Every good SEM analysis includes a path diagram (like the boxes-and-arrows models filling the pages of the Academy of Management Review). This paper tells you all you could ever want to know, and more, about the theory underlying such diagrams. (Via Technology Ideas for Teachers.) And wouldn’t you much rather see path diagrams like these?
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…)
Essays on Schumpeterian Economics
| Peter Klein |
Mark Frank reviews Arnold Heertje’s Schumpeter on the Economics of Innovation and the Development of Capitalism for EH.Net. The book collects eleven of Heertje’s essays on Schumpeter, offering “a solid introduction into the insights of Schumpeter’s vision, as well as an interesting first-hand account on the evolution of Schumpeter’s influence within economics over the past several decades.”
PS: One of the best biographies you’ve never heard of is Robert Loring Allen’s Opening Doors: the Life and Work of Joseph Schumpeter (Transaction Publishers, 1991).
Four Theories of Profit
| Lasse Lien |
The word equilibrium should perhaps be used sparingly here in this Austrian stronghold. Nevertheless, I shall dare to use it once or twice below. One of the biggest buzzes at the recent Academy of Management meeting in Atlanta was Richard Makadok’s paper, “Four Theories of Profit and Their Interaction.” Makadok’s main point was that we have four main classes of theories/mechanisms explaining positive profits in equilibrium, and that while we know a great deal about each theory individually, we do not know much about their interaction. I certainly agree that studying the interaction between such theories is worthwhile, and there is a lot to like about Makadok’s paper (which I BTW only have an older version of, therfore no link). What I am less sure about is what these basic theories should be, and how independent the four theories suggested by Makadok really are. (more…)
One More Stride Forward in the Struggle Against Collectivism
| Nicolai Foss |
“Individuals and Organizations: Thoughts on a Micro-Foundations Project for Strategic Management and Organizational Analysis” by Teppo Felin and me has just been published in David Ketchen and Donald D Bergh, Research Methodology in Strategy and Management 3. Here is a working paper version. And here is the Abstract:
Making links between micro and macro levels has been problematic in the social sciences, and the literature in strategic management and organization theory is no exception. The purpose of this chapter is to raise theoretical issues in developing micro-foundations for strategic management and organizational analysis. We discuss more general problems with collectivism in the social sciences by focusing on specific problems in extant organizational analysis. We introduce micro-foundations to the literature by explicating the underlying theoretical foundations of the origins of individual action and interaction. We highlight opportunities for future research, specifically emphasizing the need for a rational choice program in management research.
All Firms Are Not Alike
| Peter Klein |
This may come as a shock to regulators, but all firms are not alike. No one-size-fits-all regulatory policy can possibly be effective. Yet, SOX and similar governance codes impose a host of blanket requirements (audit committees, majority of outside directors, etc.) on all companies, large and small, focused and diversified, profitable and unprofitable, and so on. Economically literate regulators must be schooled in industrial-organization models in which the “representative firm” is identical to every other firm.
This new paper by LSE economists Sridhar Arcot and Valentina Giulia Bruno examines heterogeneity among governance choices at UK companies and finds that the best-governed firms are not always those that conform to the “best practices” imposed by regulators.
A [governance] measure which accounts for different choices by companies of corporate governance is significantly associated with performance as against measures based on a tick-box approach, which are not. We find that companies departing from best practice for valid reasons perform exceptionally well and out-perform the fully compliant ones. In contrast, mere compliance with the provisions of the Code does not necessarily result in better performance.
(Via Professor Bainbridge)
Update: Dale Oesterle argues that uniform listing requirements for IPOs are depressing the US IPO market, suggesting that small firms should be allowed to make their IPOS over the Internet, as is allowed in the UK.
New Entrepreneurship Journal
| Nicolai Foss |
I have been hearing the rumours for some time, but now it is an established fact: I just picked up a flyer annoucing the new Strategic Entrepreneurship Journal.
Sounds familiar? Not surprising, as this is launched as a sister journal to the Strategic Management Journal (the flyer displays the frontpages of both journals) with overlapping editors (Dan Schendel and Michael Hitt are the co-editors, the senior advisory board consists of Howard Aldrich, Arnold Cooper, Morton Kamien, Robert Strom and Michael Tushman). The launch of the new journal is so recent that it doesn’t even have a homepage with the publisher (Wiley).
Technological Development and the Boundaries of the Firm
| Nicolai Foss |
Increasingly, my favorite journal is Management Science (along with Organization Science). It seems to me to feature more research that is truly at the frontier than, say, Strategic Management Journal and the Academy of Management Journal, and one will certainly not encounter the silly pomo exercises that too often feature in the pages of the Academy of Management Review.
Of course, a journal is made great by the great articles that are published in it. Case in point: Jeffrey T Macher’s “Technological Development and the Boundaries of the Firm: A Knowledge-based Examination in Semiconductor Manufacturing” in the June issue. (more…)
Theories of the State
| Richard Langlois |
I was interested to see Peter’s post about the agency theory of the state — and glad to have the reference. I was actually just about to write about something related.
One of my favorite courses to teach is European Economic History. When I talk about the origin and development of the state, I rely on Meir Kohn’s distinction between territorial government and associational government. Territorial governments are the predatory states of Douglass North and Mancur Olson; associational governments arose in the interstices of territorial ones, typically as guilds of guilds in medieval cities, for the purpose of providing public (club) goods. Associational governments had existed in places like Athens and Rome, of course, again as clubs of wealthy merchants and land owners to provide public goods. But the interesting story is how territorial governments came to take on associational features — so that they could also be “owned” by their citizens — while, as we and Rozeff would agree, they retained a predatory dimension because of agency costs.
Meir Kohn is an interesting economist at Dartmouth whom I met a couple of years ago when we were involved in one of Axel Leijonhufvud’s summer schools in Trento. He is writing a textbook on European economic history, which is available online in manuscript. The aspect I was originally going to write about is Meir’s interesting claim that war was a far more important restraint on economic growth than Malthusian population factors in the pre-modern period. He proposes a cyclical account: the monarch taxes the population to finance war, which, along with the physical devastation of the war, reduces the population to subsistence; war eventually exhausts the treasury, forcing the monarch to wage peace for a while; this allows economic growth to spring up again, which leads to another round of taxation and war. Bob Higgs has written in the American context about the negative effects of war on growth. Does anyone know of anyone else who’s talked about this in the European context? This strikes me as a fertile area for cliometricians.
Strategizing, Disequilibrium, and Profit
| Nicolai Foss |
Stanford University Press has just published John A. Matthews’ Strategizing, Disequilibrium, and Profit. A 14-page sample is available here.
Matthews, who holds the Chair of Strategic Management at Macquarie Graduate School of Management, Sydney, has contributed for many years to what is sometimes called “industrial dynamics,” that is, the strongly empirically oriented intersection between process approaches to economics (evolutionary and Austrian views) and strategic management (mainly the capabilities and resource-based views). Accordingly, the main sources of inspiration for the current book are Schumpeter, who provides the overall dynamic view of the economy as an evolving system; Knight, who contributes a theory of profits, and Penrose who contributes a theory of the firm.
The book may be read as a frontal attack on strategic management’s dominant perspective, the resource-based view. (more…)
An Agency-Theoretic Analysis of the State
| Peter Klein |
Tim Swanson recommends this series by Michael Rozeff, “The State as an Organization” (part 1, part 2, part 3). Rozeff is a Rochester-trained financial economist (currently Louis M. Jacobs Chair of Financial Planning and Control at the University at Buffalo) and not surprisingly, his analysis is an agency-theoretic one. The main point is that the mechanisms that mitigate agency problems in firms — competition in the product market, the market for corporate control, discipline from suppliers of capital, the market for managers, etc. — are largely absent in governments. Writes Rozeff:
States are organizations whose composition, aims and methods depend on the institutions the society uses to control agency costs. The classical liberal vision was of a contractual state cleverly arranged so as to keep agency costs low. The ideal contractual state is an organization that, like a corporation, is owned by its principals, who are the citizens. Commissioned by them, the state’s aims are to dispense law and justice which includes protecting the resources or property of its owners. . . .
With weaker controls over agency costs, we observe instead varieties of the predatory state. Here the state moves toward becoming an autonomous organization, more like a company owned and operated by one person or a small group of persons but without outside stockholders. Its residual claimants are its members. They are the owners. Citizens do not own the predatory state. They are the prey.
The Enterprise of Law
| Peter Klein |
Bruce Benson’s terrific 1990 book The Enterprise of Law: Justice Without the State is back in print, courtesy of the Mises Institute.
See also his article archives at the Journal of Libertarian studies and the Independent Review.
Other useful books in this genre: Robert Ellickson’s Order Without Law, Benson’s To Serve and Protect, and David Beito’s From Mutual Aid to the Welfare State.
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…)
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