New Paper by Mario Rizzo
| Nicolai Foss |
Just back from a loooong vacation in Vietnam, involving plenty of trashy crime novels; what better way is there to recover intellectually than reading a characteristically thoughtful paper by Mario Rizzo?
In “Paternalist Slopes,” Mario and his co-author Glen Whitman take issue with those who use arguments from the “biases” part of the bounded rationality literature to justify interventionism. Here is the abstract:
A growing literature in law and public policy harnesses research in behavioral economics to justify a new form of paternalism. Contributors to this literature typically emphasize the modest, non-intrusive character of their proposals. A distinct literature in law and public policy analyzes the validity of “slippery slope” arguments. Contributors to this literature have identified various mechanisms and processes by which slippery slopes operate, as well as the circumstances in which the threat of such slopes is greatest. The present article sits at the nexus of the new paternalist literature and the slippery slopes literature. We argue that the new paternalism exhibits many characteristics identified by the slopes literature as conducive to slippery slopes. Specifically, the new paternalism exhibits considerable theoretical and empirical vagueness, making it vulnerable to slopes resulting from altered economic incentives, enforcement needs, deference to perceived authority, bias toward simple principles, and reframing of the status quo. These slope processes are especially likely when decisionmakers are subject to cognitive biases – as the new paternalists insist they are. Consequently, soft paternalism can pave the way for harder paternalism. We conclude that policymaking based on new paternalist reasoning should be considered with greater trepidation than its advocates have suggested.
The Business of Weddings
| Peter Klein |
The wedding business is a $70 billion industry in the US. Vicki Howard’s Brides, Inc.: American Weddings And the Business of Tradition (University of Pennsylvania Press, 2006) explains how it got this way. Janice Traflet’s review for EH.Net focuses on the industry’s great marketing achievement:
As Howard expertly highlights, it was no easy task for businesses to supplant certain older wedding practices (which often held religious and ethnic significance) with newer ones that held more profit potential for them. Doing so required the creation of “invented traditions,” to borrow historian Eric Hobsbawm’s phrase. To make new practices (like diamond engagement rings and the groom’s band) acceptable and desirable, the wedding industry needed to make them appear as if they were rooted in ancient customs. At the same time, the industry also sought to subtly encourage the public to jettison practices that were not conducive to growing their businesses — such as the bride wearing an heirloom ring or a handed-down dress.
But the book does not support the Galbraithian image of consumers as hapless dupes. Notes Traflet:
It is interesting to contemplate (as Howard does) the degree to which consumers had the power to accept or reject the wedding industry’s “strategies of enticement,” to borrow William Leach’s term. Howard insists, “Women, who were understood to be the main consumers of wedding-related goods and services, were not mere victims of advertising and merchandising campaigns, nor did they simply accept wedding industry advice uncritically” (p. 5). In one example of a failed “invented tradition,” the male engagement ring never caught on, in part because it was unable to transcend contemporary gender mores. Howard also emphasizes the ways in which women, not just men, historically have been involved in marketing wedding products and services.
Don’t get me started on Galbraith, the celebrity “economist” who didn’t know any economics. As Murray Rothbard aptly observed, “Galbraith’s entire theory of excess affluence rests on this flimsy assertion that consumer wants are artificially created by business itself. It is an allegation backed only by repetitious assertion and by no evidence whatever — except perhaps for Galbraith’s obvious personal dislike for detergents and tailfins.”
Do I Need an (Ideological) Affirmation?
| Steven Postrel |
Arnold Kling has proposed that “libertarian conservatives” form an “Ideological Affirmation Task Force” (IATF) and requested comments on an initial draft of such an affirmation. Borrowing the lingo of Internet governance, he calls this an “IATF RFC.” I loosely qualify to be part of the interested group, so here are a few random thoughts, not a systematic treatise, on his first draft (which is a quick read, so you might want to look at it): (more…)
Entrepreneurship: Ameliorative or Transformative?
| Peter Klein |
Amar Bhide and Carl Schramm take the O&M position on microfinance in a Monday WSJ op-ed. Comparing the views of Nobel Laureates Mohammad Yunus and Edmund Phelps, they write:
Mr. Yunus’s ameliorative entrepreneurship however is very different from the transformative entrepreneurship that Mr. Phelps argues has been central to modern capitalism. . . .
Economic development does wonders for peace, but what does microfinanced entrepreneurship really do for economic development? Can turning more beggars into basket weavers make Bangladesh less of a, well, basket case? A few small port cities or petro-states aside, there is no historical precedent for sustained improvements in living standards without broad-based modernization and widespread improvements in productivity brought about by the dynamic entrepreneurship that Mr. Phelps celebrates.
In principle, microfinance does not preclude modern entrepreneurship. But in practice, we wonder if the romantic charm of the former might distract governments in impoverished countries from undertaking reforms needed to foster the latter.
It’s a nice piece — and how often do you see both F. A. Hayek and Frank Knight lauded in a newspaper editorial?
MBA Recruiters’ No. 1 Pet Peeve: Poor Writing and Speaking Skills
| Peter Klein |
Sure, leadership, team skills, and functional integration are important. But if MBA programs continue to graduate students who can’t write and speak clearly, employers will stop paying the MBA wage premium. The WSJ’s Career Journal quotes Whirlpool’s director of global university relations Chris Aisenbrey:
“It is staggering the frequency of typos, grammatical errors and poorly constructed thoughts we see in emails that serve as letters of introduction,” says Mr. Aisenbrey. “We still see a tremendous amount of email from students who are writing to the recruiter like they are sending a message to a friend asking what they are doing that evening.”
In the WSJ/Harris Interactive survey of corporate recruiters, the top complaint is inferior communication skills.
As part of his interviews with M.B.A. students, Darren Whissen, a financial-services recruiter in California, provides an executive summary of a fictitious company and asks them to write about 500 words recommending whether to invest in the business. At worst, he receives “sub-seventh-grade-level” responses with spelling and grammar errors. “More often than not,” he says, “I find M.B.A. writing samples have a casual tone lacking the professionalism necessary to communicate with sophisticated investors. I have found that many seemingly qualified candidates are unable to write even the simplest of arguments. No matter how strong one’s financial model is, if one cannot write a logical, compelling story, then investors are going to look elsewhere. And in my business, that means death.”
As a university teacher of undergraduates, MBA students, and PhD students, I share the recruiters’ frustration with shockingly bad reading, writing, and speaking skills. However, graduate school may be too late to correct such errors. Grammar should be learned in, well, grammar school. Should universities really be investing resources in teaching remedial English, math, and science? (HT: Craig Newmark)
Ofek on Seabright’s Company of Strangers
| Peter Klein |
Haim Ofek reviews Paul Seabright’s The Company of Strangers: A Natural History of Economic Life (Princeton, 2004) for EH.Net. Some friends have highly recommended the book to me as a grand synthesis of market theory, institutional analysis, economic history, and evolutionary biology. I started reading it last year but my interest waned after a couple of chapters. (I guess I don’t have a taste for evolutionary biology; a lot of it reads like Just So Stories to me.)
Here is a 2005 interview with Seabright in Reason Magazine.
The Dark Side of Open Source: Parenting Edition
| Peter Klein |
The open-source model works well when producers want to encourage collaboration. A potential downside is too much collaboration — sometimes project leaders just want to be left alone.
Who knows this better than parents of small children?
With all due respect to Ward Cunningham, I’d like to take issue, for a moment, with the claim that he is the originator of the wiki. Because anyone who’s had a child can assure you that collective public authorship, collaborative editing, and anonymous generative correction — those wiki hallmarks — have been around since Mrs. Cain first brought Baby Cain over to Uncle Abel’s house dressed only in a too-thin fig-leaf onesie.
That’s Slate’s Dahlia Lithwick reminding us that “babies invented community-based collaborative authorship.” When your kid is sick, all your friends and relatives try to re-write the owner’s manual, whether you want them to or not.
Grad Skool Rulz, #2
| Peter Klein |
The second in Fabio Rojas’s new series. This week’s rule: Know the unspoken rules. E.g.,
- Which courses & workshops are useful.
- How to fulfill requirements in a straightforward and quick manner.
- Certain personalities to approach or avoid.
- How to pass the graduate exams, which topics are on the exams and how to answer them.
- How to get financial and academic support in the program and from other units on campus.
- How to approach professors, as students and possible collaborators.
Capital and Its Structure in PDF
| Peter Klein |
Ludwig Lachmann, a colleague of F. A. Hayek at the LSE in the 1930s and later professor of economics at the University of the Witwatersrand in Johannesburg, made major contributions to the Austrian theory of capital. His most important book, Capital and Its Structure (1956), is now available on the web as a PDF file (courtesy of the Mises Institute, which continues to add to its impressive online book collection).
Economists Are Not Entrepreneurs
| Peter Klein |
Edwin Cannan, writing in 1902:
I do not mean to argue that a knowledge of economic theory will enable a man to conduct his private business with success. Doubtless many of the particular subjects of study which come under the head of economics are useful in the conduct of business, but I doubt if economic theory itself is. It does not indeed in any way disable a man from successful conduct of business; I have never met a decent economist who was in a position of pecuniary embarrassment, and many good economists have died wealthy. But economic theory does not tell a man the exact moment to leave off the production of one thing and begin that of another; it does not tell him the precise moment when prices have reached the bottom or the top.
This is from Cannan’s Presidental Address to the Royal Economic Society, reprinted in the January 2007 issue of EconJournalWatch. I have spent most of my career teaching economics to business students, and I am always careful to emphasize that knowledge of economic theory, while valuable, is neither necessary nor sufficient for commercial success.
Blogroll for Social-Science Geeks
| Peter Klein |
New items for your blogroll:
- Social Science Statistics Blog
- Causal Analysis in Theory and Practice
- Statistical Modeling, Causal Inference, and Social Science
- Complexity and Social Networks Blog
- Political Science Methods
Wow, the web really does offer something for everyone.
Built to Regress to the Mean
| Peter Klein |
Of 35 “Excellent” companies studied in In Search of Excellence, 30 declined in profitability over the 5 years after the authors’ study ended in 1979. . . . Similarly, of 17 of the 18 “Visionary” companies studied in Built to Last, only 8 outperformed the S&P 500 market average for the 5 years after the authors’ study ended in 1990.
This is from Phil Rosenzweig’s The Halo Effect (Free Press, 2007) (I’m quoting this summary in CFO Magazine). Rosenzweig’s book reads like a primer on research methods for producers (and consumers) of popular management literature. Rosenzweig, a management professor at IMD, explains the problem of selection bias, the difference between correlation and causality, the need to compare rival explanations, the difference between absolute and relative performance, and more.
“Some of what I talk about in The Halo Effect is Research Design 101,” Rosenzweig tells CFO. “You gather your independent variables, independently of the thing you’re trying to explain. You don’t confuse correlation with causality, and you don’t confuse ends with means. You control for other variables. It’s basic stuff.”
But that basic stuff is hard to translate into a BusinessWeek best-seller.
Thanks for the link to Gary Peters, who notes that the book might be good reading for a doctoral seminar on research methods.
Does Sarbanes-Oxley Reduce Innovation?
| Peter Klein |
Thanks to Sarbanes-Oxley, Apple customers can’t take advantage of faster wi-fi cards without paying an extra fee. That’s Apple’s explanation, anyway:
With a quick software update from Apple, customers’ “g” machines would become “n.” Voila, a surprise instant upgrade that means happy customers and good karma for Apple. . . .
According to Apple, however, accounting rules have complicated matters. . . . On the one hand, if it had announced that its computers were shipping with n-capable cards that would be activated later, it would have had to wait to record some of the revenue garnered from each computer until it actually activated the feature. That would have been an accounting nightmare. On the other hand, not having acknowledged the feature when the machines first shipped, Apple can only count it as a valuable feature if it charges users for activation. That way, the original product was “complete,” and accounting rules let Apple count all of the revenue when the machines were sold — the intuitive, straightforward accounting approach that a reasonable observer would expect. . . .
The rule that made Apple’s mess predates Sarbanes-Oxley — but Sarbox’s stiffened penalties may well have changed Apple’s calculus.
This is from a piece in the current issue of American.com. Writer Jerry Brito also quotes Jim Clark’s letter resigning from the board of Shutterfy:
Sarbox dictates that I not Chair any committee due to the size of my holdings, not be on the compensation committee because of the loan I once made to the company, not be on the governance committee, and it even dictates that some other board member must carry out the perfunctory duties of the Chairman. . . . What’s left is liability and constraints on stock transactions, neither of which excite me.
A Good Use of PowerPoint
| Peter Klein |
Make your customer-service complaint come to life. (HT: Fred Tung. And see this for the backstory.)
“Age Heaping,” Numeracy, and Human Capital
| Peter Klein |
Important economic and managerial concepts like social capital and human capital, as latent variables, are difficult to discern in aggregate or historical data. My very clever friend (and occasional O&M commenter) Brian A’Hearn suggests that “age-heaping” — rounding up or down one’s self-reported age to the nearest five or zero — may be a good proxy for human capital. From Brian’s paper with Jörg Baten and Dorothee Crayen, “Quantifying Quantitative Literacy: Age Heaping and the History of Human Capital”:
As signature ability can proxy for literacy, so accuracy of age awareness can proxy for numeracy, and for human capital more generally. A society in which individuals know their age only approximately is a society in which life is governed not by the calendar and the clock but by the seasonal cycle, in which birth dates are not recorded by families or authorities, in which numerical age is not a criterion for access to privileges (e.g. voting, office-holding, marriage, holy orders) or for the imposition of responsibilities (such as military service or taxation), in which individuals who know their birth year have difficulty accurately calculating their age from the current year. Within a society, the least educated and those with the least interaction with state, religious, or other administrative bureaucracies will be least likely to know their age accurately. Age awareness thus tells us something about both the individual and he society he or she inhabits. Approximation in age awareness manifests itself in the phenomenon of age heaping in self-reported age data. Individuals lacking certain knowledge of their age rarely state this openly, but choose instead a figure they deem plausible. They do not choose randomly, but have a systematic tendency to prefer “attractive” numbers, such as those ending in 5 or 0, or even numbers, or in some societies numbers with other specific terminal digits. Age heaping can be assessed from any sufficiently numerous source of age data: census returns, tombstones, necrologies, muster lists, legal records, or tax data, for example. While care must be exercised in ascertaining possible biases, such data are in principle available much more widely than signature rates and other proxies for human capital.
Brian and his coauthors use age-heaping data to generate estimates of human capital in Europe over a long period of time, finding substantial increases in human capital just before the Industrial Revolution.
Peter Abell’s Organization Theory Textbook
| Peter Klein |
Peter Abell’s textbook Organisation Theory: An Interdisciplinary Approach is available on the web for free. (Technically it’s not a textbook, but a London School of Economics “subject guide.”) Congratulations to Peter for his fine work. (HT: Teppo)
Our Scientistic Age
| Peter Klein |
Maxwell Gross at Right Reason points us to an AP story linking teen promiscuity to raunchy pop music. (Here is the study referred to in the news item.) Notes Max: “A sure sign of the scientism of our age is the presence of those who will not believe a blindingly obvious truism unless preceded by the phrase, ‘studies show. . . .'”
Schumpeterian Competition and Economic Growth
| Peter Klein |
Nobel Laureate Michael Spence writes about sustained high growth in today’s (gated) WSJ. Focusing on Botswana, China, Hong Kong, Indonesia, Korea, Malaysia, Malta, Oman, Singapore, Taiwan, and Thailand, Spence notes:
While each instance of sustained high growth is to some extent idiosyncratic, they share certain features. In all cases, there is a functioning market economy with its price signals, incentives, decentralization and enough definition of private property ownership to enable investment. All attempts to circumvent this necessary condition through central planning have met with major misallocations of resources and failure.
Isn’t it wonderful that the Austrian and public-choice critiques of central planning are so well-known that invoking them seems almost, well, trite?
A key feature of sustained high growth, Spence adds, is resource mobility:
Contrary to the image that sometimes comes from a macroeconomic overview, productivity growth at these rates is not achieved by having everyone do what they were doing before, but a little bit more efficiently. The portfolio mix of economic activity changes very rapidly. This is what Schumpeter called “creative destruction” and Paul Romer calls “churn.” . . . This movement of people geographically and across sectors is not an ancillary side effect of the growth process, but rather the essence of it.
Incidentally, Schumpeterian competition is not always easily discernible at a microeconomic level. Paul Vaaler and Gerry McNamara find mixed evidence for increasingly “dynamic competition” in the US technology sector. (See also the essays in Paul’s book with Lee W. McKnight and Raul L. Katz.)
Carl Schramm on Ethics
| Peter Klein |
Kauffman Foundation president Carl Schramm doesn’t like legislative solutions to business-ethics problems:
The emergence of statutory standards of ethical commercial behavior reflects a belief that fundamental human behavior in the marketplace can be better ordered by government than by honoring and enforcing absolute ethical, shared standards as reflected in the common law. In fact, the substitution of statute and regulations for self-imposed absolute standards may invite further corrupt behavior as statute and regulations tend to parse broad ethical concepts into the minutiae of elements of violations and to articulate the lowest standard of acceptable conduct, if not explicitly, then by means of obfuscatory language.
This from Schramm’s “The High Price of Low Ethics: How Corruption Imperils American Entrepreneurship and Democracy” in the current issue of the Journal of Markets and Morality. (The journal’s site is gated, but a pre-publication version is available here.)
Workshop on (Old) Institutional Economics
| Peter Klein |
Geoff Hodgson’s 9th International Workshop on Institutional Economics takes place 21-22 June 2007 at the University of Hertfordshire. The theme is “Property, Money, and Firms: The Forgotten Role of Law and the State.” (Um, “forgotten”?)
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