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…)
Introducing Guest Blogger David Gordon
| Peter Klein |
It is a delight to welcome David Gordon, Senior Fellow of the Ludwig von Mises Institute and author of The Mises Review, as our newest guest blogger. David is a philospoher and intellectual historian whose expertise encompasses — well, pretty much everything. He has written extensively on methodology, epistemology, political philosophy, the history of economic thought, and other subjects. His bibliographic knowledge is immense. And he knows (and appreciates) more bad jokes than I do. (Did I mention that he’s also an authority on professional wrestling?)
We look forward to David sharing his wit and wisdom over the next few weeks. Welcome, David!
Tacky Editors
| Nicolai Foss |
Here is one more entry in another O&M feuilleton, namely our “Jerehmiads” on publication in management and related fields (e.g., here and here.) (The term was introduced by Omar at orgtheory.net, who despite being a brand-new assistant professor is also a specialist in the publication game; see his comments here.)
I recently had a paper rejected for one of the top-4 management journals. It is the third time I have been rejected from this particular journal. However, every time something a little weird has happened: 3-4 days after the rejection, the editor has approached me, asking whether I would like to review a paper. I can understand the rationale: Now that I have enjoyed the service of this journal, I need to pay back. But, isn’t it just a little bit tacky? Or am I too wimpy? (or too much like Jeremiah?). Anybody who has had similar experiences?
Structure and Agency: A Response to Felin and Foss
| Nicolai Foss |
In 2005 Strategic Organization published a paper by Teppo Felin and me, “Strategic Organization: A Field in Search of Micro-foundations.” The paper has caused quite a stir, and the editor of SO! told me at the recent Academy Meetings that he had been contacted by several authors and author teams who wanted to write responses. Our argument? The — apparently provocative — one that notions of capabilities, routines, etc. are collective-level constructs that do not have any clear (and clean) micro-foundations (as well as definitions, measures, etc.). (more…)
Quote of the Day
| Peter Klein |
As a regular feature at O&M we will begin sharing our favorite quotations, particularly on days when we have nothing original to say. Today, as a professional educator and amateur cynic, I offer this classic passage from H.L Mencken, describing the condition of American universities, circa 1928:
[T]he great majority of American colleges are so incompetent and vicious that, in any really civilized country, they would be closed by the police. . . . In the typical American state they are staffed by quacks and hag-ridden by fanatics. Everywhere they tend to become, not centers of enlightenment, but simply reservoirs of idiocy. Not one professional pedagogue out of twenty is a man of any genuine intelligence. The profession mainly attracts, not young men of quick minds and force of character, but flabby, feeble fellows who yearn for easy jobs. The childish mumbo-jumbo that passes for technique among them scarcely goes beyond the capacities of a moron. To take a Ph.D. in education, at most American seminaries, is an enterprise that requires no more real acumen or information than taking a degree in window dressing. . . . Their programs of study sound like the fantastic inventions of comedians gone insane. — H.L. Mencken, “The War Upon Intelligence,” Baltimore Evening Sun, December 31, 1928.
I leave it to the reader to assess how much things have changed.
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…)
Youtube.com
| Nicolai Foss |
I became aware of youtube.com through Russ Coff who very effectively used a youtube video in one his presentations at the recent Academy of Management Meetings.
Youtube.com is a bonanza. I quickly found numerous videos with my favorite jazzers, e.g., Django Reinhardt, Tal Farlow, and others, but for you more serious folks, there are great videos of our favorite political economists. For example, here is the great Arnold Schwarzenegger introducing Uncle Milton’s Free to Choose series. And here is Milton himself. Here is one on Ludwig von Mises (produced by the Mises Institute). Of course, there is a clip of Ayn Rand praising the “new intellectual,” and condemning “the dark ages,” “superstitions”, etc. (unfortunately she doesn’t mention that “A is A”), all in less than a minute. Great stuff!!
What’s in a Name? Property Rights, Legal Rights, and Economic Rights
| Nicolai Foss |
I tend to find the property rights approach associated with such economists as Coase, Demsetz, Alchian, and perhaps particularly Yoram Barzel extremely useful, informative, and insightful. (I also find their approaches more generally useful than the more recent property rights approach associated with Oliver Hart and his colleagues and students; on the differences between the “old” and the “new” property rights approaches, see this paper). It spans multiple level of analysis, and its explanatory reach seems to me to be huge. Most of my papers over the last few years utilize property rights notions in one way or another.
However, I have found that there are some basic difficulties of communicating property rights economics. It is not so much a matter of too many people (still) arguing that the Coase theorem “doesn’t hold” (usually the same types who argue that PD games are “wrong”). (more…)
Wikis Are Great, But. . . .
| Peter Klein |
Like Mike Giberson, I’m high on wikis. Of course, as with any open-source product wikis have both strengths and weaknesses compared with conventional, more hierarchical production methods. For many applications, though, the wiki model seems to work remarkably well.
But should students write their own textbooks? My former colleague Rick Watson thinks so. Here is the website of his Global Text Project, an attempt to create free, open-source textbooks for students in the developing world. Great tagline: Engaging many for the benefit of many more. (You expect clever verbiage from a guy who came up with the acronym CISL — go on, say it out loud — for his center.) Here is the projects’s blog. Here is a press release. (Via Dorai Thodla)
“Coase and Simon Got It Right, Alchian and Demsetz Got It Wrong”
| Peter Klein |
A reader asks: “In a response to a prominent economist who asked ‘what have we learned about . . . organizations,’ you provided a list that began with ‘Organizations can have market-like features, but are inherently different from markets. I.e., authority is real — Coase and Simon got it right, Alchian and Demsetz got it wrong.’ What are the major papers that led to this conclusion?”
I have in mind the Alchian-Demsetz notion that the firm is a legal fiction, a convenient label for a nexus of contracts. (Recall the famous passage in their 1972 paper about “firing the grocer.”) Classic formulations of the opposite view — that the firm does, in fact, have some power of fiat — come from the two Olivers, Williamson and Hart. (more…)
Sometimes I Wish I Were a Professor of “Critical Studies”
| Peter Klein |
Then I could write sentences like this:
Gang of Four locate their Marxist theory in the Althusserian notion of expressing resistance through the contradictions inherent in the Ideological State Apparatuses (ISA) of the corporate-controlled rock music industry, and the way in which Gang of Four express their theory of Marxist thought is by inducing in the listener an alternative consciousness achieved through contradictions and disorientations that serve to mirror the very sense of disorientation and contradiction that capitalistic consciousness creates.
The reference is to the pop group group Gang of Four, not this Gang of Four (or, for that matter, this one). I suppose the analysis is deep, in a critical studies kind of way. (Crooked Timber has all the gory details.)
Shifting or Rotating Demand?
| Lasse Lien |
For O&M readers interested in competitive strategy, I would like to recommend a recent paper in AER by Johnson and Myatt: “On the Simple Economics of Advertising, Marketing, and Product Design” (vol 96, no. 3). The authors analyze a weirdly understudied topic in economics, namely rotations of the demand curve. This means that firms by their choice of advertsing, marketing and product design can influence the dispersion of customers valuations for a product. Take for instance product design. A universally attractive new feature will simply shift the demand curve outward, while a new feature that pleases some customers and displeases others will lead to an increased dispersion of customers valuation, that is, to a rotation of the demand curve. (more…)
Infotopia
| Peter Klein |
From Knowledge Problem I learn of Cass Sunstein’s new book Infotopia: How Many Minds Produce Knowledge. Mike Giberson reflects on the obvious Hayekian parallels. And see these thoughtful remarks by Lynne Kiesling. (Here are some less insightful comments on Wikis and Digg.)
The Treatment of Frequency in Transaction Cost Economics
| Peter Klein |
Every schoolboy knows that transactions are characterized by asset specificity, uncertainty, and frequency. (Every schoolboy schooled in transaction cost economics that is.) Yet, while asset specificity and uncertainty have been treated exhaustively in the literature, frequency has become the red-headed stepchild of the transaction cost triple.
As I read the TCE literature, frequency shows up in at least three distinct forms, not all of them compatible. (more…)
Swimming with the Stingrays
| Peter Klein |
Daniel Larison takes National Review’s Cliff May to task using Steve Irwin’s unfortunate death to score political points. “Poor Steve Irwin. He not only died in a horrible accident, but something far worse has happened to him: his death has become a kind of cautionary tale for neoconservative foreign policy. Leave the poor man alone, for goodness’ sake!”
It made me wonder: How long before someone makes Irwin’s death into a cheesy management metaphor? You know what I’m talking about. The competition is like a giant stingray, seemingly docile and minding its own businesses, but ready to lash out with its barbed tail when threatened. Or: Technology entrepreneurs, like the late Steve Irwin, think they have things under control, while danger lurks right under their feet. Spare us, please!
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.
Economic Literacy in Fiction
| Peter Klein |
I blogged previously about the silly and boring political economy of the Star Trek universe (quoting Tim Cavanaugh’s brilliant line about Captain Kirk as “an interstellar Gen. Tommy Franks”). For those nerdy, libertarian sci-fi fans out there I offer now this analysis of the economic organization of Star Trek: Deep Space 9.
Speaking of high culture, what about that community in M. Night Shyamalan’s The Village? It’s a small town in the wilderness, completely cut off from the social division of labor, and yet the inhabitants have decent (19th-century) technology — buildings, tools, clothing, etc. (If you’ve seen the film, you know that the inhabitants actually have more advanced technological knowledge than they pretend to have, but still….) There is specialization within the village, and a little private property, but no evidence of money, prices, or exchange. How do they survive? Don’t these villagers know that trade is better than autarky? How do they solve the calculation problem? I can willingly suspend my disbelief only so far.
More on Methodological Individualism and Subjectivism
| Nicolai Foss |
In an earlier post, I argued that methodological individualism involves “… almost with necessity some kind of subjectivist methodology.” David Gordon made the comment that methodological individualism does not have “… to involve a commitment to a subjectivist methodology. The sociologist George Caspar Homans combined methodological individualism with behaviorism.” I didn’t have the time to respond to Gordon then, so the following is a somewhat belated response of sorts (or perhaps just some further reflections prompted by Gordon’s comment). (more…)
Industrial Entrepreneurship in Early Modern China
| Peter Klein |
Coase, Williamson, and others have long called for comparative institutional analysis across countries and across time. How do various institutional arrangements perform under alternative institutional environments? We are only beginning to understand this question. (Important contributors to the literature include Witold Henisz, Tarun Khanna, Masahiko Aoki, and various members of the Centre ATOM, among others.) Can changes in the institutional environment be regarded as exogenous “shift parameters,” as Williamson has articulated the problem, or is there a more subtle, complex co-evolution among institutions and organizational form?
These issues are raised in Madeleine Zelin’s The Merchants of Zigong: Industrial Entrepreneurship in Early Modern China (Columbia University Press, 2006), reviewed here by Carol Shiue for EH.Net. Zelin’s new book traces the history of the salt merchants of western Sichuan province, who created one of the first, vertically integrated industrial enterprises in modern China. Though not explicitly a comparative study, Zelin’s volume provides a useful companion to the landmark studies by Chandler and others of the history of modern enterprise in the West. As Shiue observes, “A recurrent theme of the book is that the business arrangements seen in the Chinese salt industry belie not only previous perceptions about the predatory influence of the ‘feudal’ state on entrepreneurial incentives in China, but also the purported uniqueness of Western business practice.”
See also Shiue’s earlier review of Zelin, Ocko, and Gardella, eds., Contract and Property in Early Modern China (Stanford University Press, 2004).
Organizations and Markets 
Recent Comments