What Does “Zero Transaction Costs” Mean, Epistemically?
| Nicolai Foss |
What does the Coase Theorem require epistemically? To put it less mysteriously, what are the assumptions concerning agents’ knowledge that must be made for the Coase theorem to hold? Or, to rephrase it somewhat, what does zero transaction costs mean in terms of agents’ knowledge (an inquiry started by Carl Dahlman in this paper)?
In his retrospective (1988) discussion and assessment of the debate on the theorem, “Notes on the Problem of Social Cost,” Coase seems to imply that the Theorem requires omniscience. I think that Barzel makes the same inference in his Economic Analysis of Property Rights. In other words, the Coase Theorem holds iff all resource uses, current as well as future ones, are known by everyone.
Not all writers seem to agree with this interpretation, however. (more…)
Jewish Economic Theory
| Peter Klein |
Five principles of Jewish economic theory, as described in Judaism, Markets, and Capitalism: Separating Myths from Reality by Corinne Sauer and Robert M. Sauer (forthcoming from the Acton Institute):
- Work, creative activity, and innovation are the avenues through which the divine image is expressed.
- Private property rights are essential and must be protected.
- The accumulation of wealth is a virtue not a vice.
- Man has an obligation to care for the needy through charitable giving.
- Government is inefficient and concentrated power is dangerous.
Sauer and Sauer compare this passage in 1 Samuel to Hayek’s warnings in The Road to Serfdom: (more…)
Conference on Austrian Economics and the Firm
| Peter Klein |
Last week I attended an interesting discussion conference sponsored by the Atlas Foundation, “Austrian Market-Based Approaches to the Theory and Operation of the Business Firm.” Former O&M guest blogger Dick Langlois was there, as were Pete Boettke and Fred Sautet of The Austrian Economists, Tony Woodlief of the Market-Based Management Institute, Saras Sarasvathy, Peter Lewin, Ivan Pongracic, Anthony Evans, and several others. (A selection of papers, written for the conference, will appear in the Review of Austrian Economics.)
The participants clearly believe the Austrian tradition has something of value for researchers and teachers in business administration. There may also be Austrian lessons for practitioners, though there was less consensus on exactly what these lessons are and how they should be communicated. One theme that emerged clearly from the discussions was the depth and variety of the Austrian approach. Despite a shared commitment to the general framework of the Austrian school there were many disagreements about core theoretical issues and much uncertainty about what these ideas imply for firm boundaries, strategy, entrepreneurship, and public policy. (more…)
Great Economists’ Autographs
| Nicolai Foss |
If you are into collecting autographs and admire Nobel Prize winning economists, ebay is (of course) the place for you. Here is Ronald Coase’s autograph — with a buy-it-now price of 10 USD; here is Nash’s — a bit more fancy (First Day Cover), and (therefore?) with a buy-it-now price of 85 USD; here is Uncle Milton at 34 USD, and one more Nash at 24 USD. The latter Nash autograph, the Friedman and the Coase ones are all on 3×5 unlined index cards. Still, there is a heavy disparity in terms of the asked price. The market values Friedman more than Nash who is valued more than Coase.
Quote of the Day: Poetry About Prices
| Peter Klein |
One of my favorite quotes about the beauty of the price mechanism:
[The market price] synthesizes a number of factors, so that there is difficulty in identifying them and even more in forecasting them: quantities, qualities, possibilities, calculations of interest, memories, fears, hopes. A price is not only the result of statistical figures. It includes all the vibrations of man’s thoughts and soul, since ever they have exercised an influence on the market. (Louis Baudin, La Monnaie et la Formation des Prix, 1836, quoted in Hoff, Economic Calculation in the Socialist Society, p. 299.)
Foss & Foss Paper on Opportunity Discovery and the RBV
| Nicolai Foss |
With my frequent co-author, Kirsten Foss, I have written “New Value Creation in the Resource-based View: How Knowledge and Transaction Costs Shape Opportunity Discovery.” (more…)
Pioneers of Industrial Organization
| Nicolai Foss |
Pioneers of Industrial Organization: How the Economics of Competition and Monopoly Took Shape is the title of a new volume edited by Henk de Jong to be published next month by Edward Elgar. My CBS colleague Peter Møllgaard and I have contributed a chapter on early (meaning pre-1980) IO research in the Scandinavian countries. (more…)
Barzel on Property Rights
| Nicolai Foss |
This is how Yoram Barzel — arguably the most creative current exponent of property rights economics — defines (economic) property rights (in this paper, p. 394):
… an individual’s net valuation, in expected terms, of the ability to directly consume the services of the asset, or to consume it indirectly through exchange. A key word is ability: The definition is concerned not with what people are legally entitled to do but with what they believe they can do.
Notice how different this is from other (older) economic conceptions (e.g., Furubotn & Pejovich, Alchian, Demsetz et al.) which have typically categorized property rights into usus, usus fructus and abusus rights (and the right to sell these rights), often keeping a legalistic connotation. (more…)
The Religion of Economists
| Peter Klein |
The relationship between economics and religion has attracted increasing attention in recent years. There is the positivist approach, represented by Larry Iannaccone and ERel, which applies standard economic analysis to religious activity and institutions; there are groups like the Acton Institute that try to improve economic literacy among the clergy; and some have even attempted to analyze economics itself as a kind of secular religion.
A new paper by Dan Hammond takes a more straightforward approach, analyzing the religious views of John Nef, Frank Knight, and Milton Friedman, placing this in context of the twentieth century’s general move toward embracing the secular over the sacred. (more…)
HBS Case on Wikipedia
| Peter Klein |
Karim Lakhani and Andrew Mcafee have written a Harvard Business School Case on Wikipedia. Unlike normal Harvard case, it’s available free online. (But you can’t edit it!)
Keynes on the Entrepreneur
| Peter Klein |
Robert Solow, in his review of Thomas McCraw’s Shumpeter biography, emphasizes the contrast between Schumpeter and Keynes. Schumpter’s Business Cycles (1939) was long, detailed, convoluted, and mostly ignored. Keynes’s General Theory (1936) was — at least as interpreted by Meade, Hicks, Hansen, etc. — short, straightforward, operational, and hugely popular. (The book itself is a tough read.) Not surprisingly, Solow’s sympathies lie with Keynes. Schumpeter, he writes,
seemed not to understand what Keyensian economics was about, or why it won over the younger [i.e., Solow’s] generation. For example, he described Keynes as the apostle of consumer spending (in contrast to his own emphasis on innovational investment). But in fact consumer spending is passive in Keynes’s General Theory. The driving force of the aggregate economy is actually investment spending; and Keynes put great causal weight on “animal spirits” and “the state of long-run expectations,” both of which are much more akin to entrepreneurial drive.
It’s been a while since I’ve read Keynes carefully (and hopefully will be a while before I do so again), but this can’t be right. To be sure, “entrepreneurial behavior,” meaning aggregate investment, is critially important in the Keyensian system. However, it is precisely because entrepreneurs are guided not by reasonable conjectures, but by animal spirits — i.e., because investment is so unstable — that all the action lies with consumption. Central planners have no choice but to manipulate aggregate demand; there is little they can do about (highly volatile) aggregate investment.
More generally, Keyes’s investment theory has little to do with any systematic account of the entrepreneur and his function. Am I wrong?
What Would Genghis Do?
| Peter Klein |
After reading Jack Weatherford’s book on Genghis Kahn last year I imagined writing a business bestseller, “Genghis Kahn on Leadership,” or maybe “Genghis Kahn: Five Lessons for Managers.” Unfortunately I’ve been beaten to the punch (1, 2). (Thanks to Tommy Sallee for the links.)
Varieties of Institutionalism
| Peter Klein |
The new institutional economists have not been kind to their “old institutional” predecessors. Coase’s dismissal of J. R. Commons, Wesley Clair Mitchell, Thorstein Veblen, Clarence Ayres, and their associates is typical: “Without a theory they had nothing to pass on except a mass of descriptive material waiting for a theory, or a fire.” Like its older counterpart, the new institutional economics is interested in the social, economic and political institutions that govern everyday life. However, the new institutional economics eschews the holism of the older school, adopting strict methodological individualism and some kind of rational choice framework. (See former guest blogger Dick Langlois’s 1989 paper, “What Was Wrong with the ‘Old’ Institutional Economics? (And What Is Still Wrong with the ‘New’?),” for a more sophisticated treatment of these differences.)
Among political scientists there is a similar distinction: “historical institutionalism” versus “rational choice institutionalism.” The differences, as discussed in Preferences and Situations, edited by Ira Katznelson and Barry Weingast (Sage, 2005), revolve mainly around the concept of preference. Rational choice institutionalists — like mainstream economists — take preferences as given, while historical institutionalists take preferences as endogenously determined by historical circumstance, rendering attempts to understand historical phenomena in methodologically individualistic terms impossible.
The historical approach has many problems, however. Mike Munger objects to its relativism: It tends “to presume that theory — any general theory — is wrongheaded: everything is different in various ways from one case to another. The central thesis of much of the work reported in Preferences and Situations seems to be that it is difficult to say anything interesting about persuasion, and the authors go on to demonstrate this claim persuasively.” (Jean Baudrillard, call your office!) More generally, is historical institutionalism, in its modern variant, much of an advance over the crude historicism smacked down in prior generations by the likes of Mises and Popper?
Craft Production Is Fun
| Peter Klein |
Thank goodness for the factory system and mass production, which makes us wealthy enough to do things by hand. Naturally I thought of Budweiser’s critics when reading this piece in The Onion, “Grueling Household Tasks Of 19th Century Enjoyed By Suburban Woman.” (They forgot to include knitting, the latest craze among wealthy suburbanites.) Craft production sure is fun — unless you have to do it to survive, of course. (HT: Ryan McMaken.)
Economizing and Strategizing
| Nicolai Foss |
In a much-cited 1991 paper in the Strategic Management Journal, “Strategizing, Economizing, and Economic Organization,” Oliver Williamson introduced the distinction alluded to in the title of the paper between “economizing,” that is, economizing with transaction costs, and “strategizing,” that is, the exercise of market power (in the standard sense of setting p above mc and imposing a deadweight welfare loss on society). Whereas strategizing is only available to relatively few, large players, Williamson argued, any firm can engage in economizing. Thus, “… economy is the best strategy. That is not to say that strategizing efforts to deter or defeat rivals with clever ploys and positioning are unimportant. In the long run, however, the best strategy is to organize and operate efficiently.”
However, in a certain sense, economizing and strategizing are made of the same stuff, and the distinction may, for this reason, be somewhat overdrawn. (more…)
Random Post Link
| Peter Klein |
Got a few hours to kill? Try the O&M Random Post Link, which takes you to one of our many interesting archived posts. I don’t know about you, but I could spend all day doing this!
Schumpeter the Teacher
| Peter Klein |
Robert Solow took Joseph Schumpeter’s courses on Advanced Economic Theory and the History of Economic Thought at Harvard in the late 1940s. Not surprisingly, Schumpeter dazzled, but mostly confused:
The theory lectures bordered on incoherent; they alluded to everything but analyzed nothing. He would say: “Of course you know about X or Y, so I do not have to go into detail.” But we didn’t know about X or Y, as he must have realized. The history lectures were also disappointing. I do not remember where they began, but at the end of the term they had barely reached Adam Smith. The course felt like a stage display of multilingual erudition.
This is from Solow’s review of Thomas McCraw’s new Schumpeter biography in the May 25 New Republic (gated, unfortunately). (NB: Schumpeter’s rehabilitation of economic thought before Adam Smith is perhaps disappointing only to those who believe economics was created in 1776.) Solow likes the book but thinks McCraw underappreciates Schumpeter’s Theory of Economic Development (1911), probably his most important work, and overemphasizes Capitalism, Socialism, and Democracy (1942), which Solow doesn’t care for. (more…)
e-Clips
| Peter Klein |
Check out e-Clips, a digital media archive provided by Cornell University’s Department of Applied Economics and Management. Lots of material for entrepreneurship and management courses. What professor can resist this pitch:
Wake up your students! Ever have a moment in class where it seems students are zoning out? Or feel like you are reading an assignment written by a zombie? Help is on the way. Welcome to e-Clips, the world’s largest collection of digital video clips on entrepreneurship, business and leadership.
New Accounting Rules?
| Peter Klein |
Conventional accounting practices have their critics and problems, but reports of their death have been greatly exaggerated. Perhaps you caught the front-page item in last Saturday’s WSJ, “Profit as We Know It Could Be Lost With New Accouting Standards.” The lead-in features this remarkable statement:
In coming months, accounting-rule makers are planning to unveil a draft plan to rework financial statements, the bedrock data that millions of investors use every day when deciding whether to buy or sell stocks, bonds and other financial instruments. One possible result: the elimination of what today is known as net income or net profit, the bottom-line figure showing what is left after expenses have been met and taxes paid. . . .
Another possible radical change in the works: assets and liabilities may no longer be separate categories on the balance sheet, or fall to the left and right side in the classic format taught in introductory accounting classes.
This revision “could mark one of the most drastic changes to accounting and financial reporting since the start of the Industrial Revolution in the 19th century.”
At first I thought this was a conspiracy by accounting professors to sell a new generation of textbooks. But I asked around and discovered, to my relief, that it is much ado about nothing. Financial professionals have long been aware that net income isn’t the only, or even the best, measure of overall corporate performance; they have offered a host of alternatives (even before Stern-Stewart began pushing EVA). My University of Georgia colleague Denny Beresford, a former Chairman of FASB, tells me that FASB has been working on this project for over a decade and that we should not expect major changes any time soon. “It must have been a very slow news day at the Journal.”
Interactive Maps
| Peter Klein |
Those of you into maps will enjoy Social Explorer, a neat tool that generates detailed maps using US census data from 1940 to 2000. (Thanks to Cliff for the pointer.)
My colleagues at the Center for Agricultural, Resource, and Environmental Systems (CARES), just down the hall from my office, also produce some amazing maps. (I keep waiting for them to take on a joint project with the World Health Organization, to be titled WHO-CARES.)
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