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.
Interesting Paper on Entrepreneurship and Growth
| Peter Klein |
Does entrepreneurship cause economic growth, or do high growth rates stimulate entrepreneurship? Ed Glaeser, Sari Pekkala Kerr, and William Kerr have an interesting new paper that uses the presence of heavy industry to instrument for the population of potential entrepreneurs (using startups as the proxy for entrepreneurship).
Entrepreneurship and Urban Growth: An Empirical Assessment with Historical Mines
Edward L. Glaeser, Sari Pekkala Kerr, William R. Kerr
NBER Working Paper No. 18333, August 2012Measures of entrepreneurship, such as average establishment size and the prevalence of start-ups, correlate strongly with employment growth across and within metropolitan areas, but the endogeneity of these measures bedevils interpretation. Chinitz (1961) hypothesized that coal mines near Pittsburgh led that city to specialization in industries, like steel, with significant scale economies and that those big firms led to a dearth of entrepreneurial human capital across several generations. We test this idea by looking at the spatial location of past mines across the United States: proximity to historical mining deposits is associated with bigger firms and fewer start-ups in the middle of the 20th century. We use mines as an instrument for our entrepreneurship measures and find a persistent link between entrepreneurship and city employment growth; this connection works primarily through lower employment growth of start-ups in cities that are closer to mines. These effects hold in cold and warm regions alike and in industries that are not directly related to mining, such as trade, finance and services. We use quantile instrumental variable regression techniques and identify mostly homogeneous effects throughout the conditional city growth distribution.
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.
Conference in Honor of Oliver Williamson
| Peter Klein |
The University Paris-Dauphine is awarding an honorary doctorate to Oliver Williamson Friday, 19 October 2012, and organizing a one-day conference to honor his work. The conference is co-sponsored by the European School on New Institutional Economics (ESNIE). Speakers include Carmine Guerriero (U. of Amsterdam), Roger Guesnerie (Collège de France), David Martimort (EHESS & PSE), Marian Moszoro (IESE Business School, Barcelona), Jens Prüfer (Tilburg U.), and Brian Silverman (Rotman Business School, U. of Toronto), and Williamson will give a speech during the formal award ceremony. Registration is required. See the conference website for details.
Now THAT’s a Principal-Agent Problem
| Lasse Lien |
The Swedish secret service has caused quite an uproar recently. Following a difficult year, the Chief of the agency decided to spend 5 million Swedish kroner on a James Bond themed (!) party to boost the morale among its 1,000 employees. That sum amounts to more than 750 USD per agent-slash-employee for one single party. The principals — the Swedish taxpayers — seem to think that this was way over the top, and evidence of imperfect interest alignment and agents acting in their self interest. Jokesters have also pointed out that if they had thrown a STASI or KGB-themed party instead, it would have been a tad less glamorous, but spending could have been more in line with the principals’ interests. I don’t know, but perhaps the Swedes will have to invest more in monitoring their monitors.
More on Obsolete Technologies
| Peter Klein |
Following up an earlier post on the longevity of obsolete technologies, as specialty markets: Francesco Schiavone has a nice paper, “Vintage Innovation: How to Improve the Service Characteristics and Costumer Effectiveness of Products becoming Obsolete,” reviewing the core theory and discussing the case of the analog turntable (little did I know, not being a club DJ, that you can by a “vinyl emulator” to go wacka-wacka-wacka on your MP3s). Francesco’s Vintage Innovation website has more examples. Check it out!
Carpenter’s Strategy Toolbox
| Peter Klein |
Carpenter’s Strategy Toolbox, named for the late Mason Carpenter, is a terrific resource for teachers in strategic management and related fields. Here’s an advertisement from former guest blogger Russ Coff:
Some of you may be familiar with Mason Carpenter’s old teaching toolkit. I have initiated a new site that includes everything from that site plus quite a few additional exercises and videos. Please check it out at:
www.CarpenterStrategyToolbox.com
You can filter by type of tool (exercise, video, etc.) using the tabs at the top or you can filter by topic (entrepreneurship, 5 forces, RBV, global, alliances, etc.) using the categories on the right side. You should find something useful in no time at all.
Here are links to a few exercises and resources that you might find especially useful (to give you a quick feel):
- Egg Drop Auction is an exercise where profit is determined by finding new uses for materials that others did not anticipate.
- Blue Ocean Strategy summary video (plus several related videos like Cirque Du Soliel).
- Tinkertoy exercise for scenario planning or first mover advantage.
- Entrepreneurship and innovation tool page. This is a listing of the resources that are tagged for entrepreneurship content.
Please help make the site more useful:
- Comment on tools you have used (adding tips, etc.)
- Submit new tools so the resource is always growing
- Let me know if you have any questions or suggestions
The Wisdom of Crowds
| Nicolai Foss |
A new special issue of Managerial and Decision Economics on “the wisdom of crowds” has just been published. It deals with issues of emergence in firms and markets, including capability formation, information aggregation and the like. The editor is Orgtheory.net’s Teppo Felin. The SI is genuinely interdisciplinary with contributions from a physicists, sociologists, political scientists and economists, including Austrian economists, Peter Leeson and Christopher Coyne. I haven’t had time to read more than a few of the paper (including Teppo’s characteristically provocative and broad-ranging introduction), but look forward to peruse it. Enjoy!
Do Bosses Matter?
| Peter Klein |
Do bosses matter? Stephen Marglin famously argued that management doesn’t affect productivity, just the share of output appropriated by managers. (I’ll take David Landes instead, thank you very much.) Despite a huge management literature on bosses, economists have not quite known how to answer the question. Ed Lazear, Kathryn Shaw (ironically, a former boss of mine), and Christopher Stanton have an interesting new take on this using detailed microdata, showing substantial effects of supervisor on worker productivity:
The Value of Bosses
Edward P. Lazear, Kathryn L. Shaw, Christopher T. Stanton
NBER Working Paper No. 18317, August 2012Do supervisors enhance productivity? Arguably, the most important relationship in the firm is between worker and supervisor. The supervisor may hire, fire, assign work, instruct, motivate and reward workers. Models of incentives and productivity build at least some subset of these functions in explicitly, but because of lack of data, little work exists that demonstrates the importance of bosses and the channels through which their productivity enhancing effects operate. As more data become available, it is possible to examine the effects of people and practices on productivity. Using a company-based data set on the productivity of technology-based services workers, supervisor effects are estimated and found to be large. Three findings stand out. First, the choice of boss matters. There is substantial variation in boss quality as measured by the effect on worker productivity. Replacing a boss who is in the lower 10% of boss quality with one who is in the upper 10% of boss quality increases a team’s total output by about the same amount as would adding one worker to a nine member team. Using a normalization, this implies that the average boss is about 1.75 times as productive as the average worker. Second, boss’s primary activity is teaching skills that persist. Third, efficient assignment allocates the better bosses to the better workers because good bosses increase the productivity of high quality workers by more than that of low quality workers.
NB: For some reason, my graduate students are circulating this piece from last week’s WSJ.
Journal of Organizational Design
| Nicolai Foss |
Journal of Organizational Design is a newly started open-access journal that should be of considerable potential interest to readers of O&M. While I am generally skeptical of open-access journals in social science — “open access” still largely signals “low quality” — JOD seems likely to become a success story. First, organizational design is making much of a come-back as a research field in management research and in economics organizational economics/the economics of the firm is fundamentally about organizational design issues. However, the established organization studies/theory journals do not seem to publish much organizational design research, and perhaps JOD can partially preempt this niche. Second, the editors (Børge Obel and Charles Snow) are assisted by impressive editorial board members and associate editors. Third, the journal is supported by an organized community. In any case, there is much interesting reading in the first two available issues of the journal, such as John Mathews’ interesting article on supra-firm architectures. Enjoy!
Cooking as Entrepreneurship
| Peter Klein |
To honor Julia Child on her 100th birthday, Lynne Kiesling writes a nice post combining three of my favorite things: cooking, entrepreneurship theory, and Austrian economics. Good cooking is about the combination of heterogeneous resources, it requires experimentation and creativity, and it either works or it doesn’t. Most important:
A system that will yield the most valuable and pleasing combinations of entrepreneurial economic or cooking activities will have low entry barriers (anyone can try to cook!) and a robust feedback-based system of error correction. Low entry barriers facilitate creativity in discovering new useful products from the raw elements, as well as enabling new value creation when some of those raw elements change. Error correction, whether a “yuck, that’s gross!” at home or a lack of profits due to low repeat business at a restaurant, is most effective and valuable when there are feedback loops that can inform the cook-producer about the value that the consumer did or did not get from the dish.
This emphasis on error correction highlights one of my differences with Kirzner’s approach to entrepreneurship. In Kirzner’s system, which emphasizes entrepreneurship as a coordinating agency, the entrepreneur is modeled as “piercing the fog” of uncertainty — hence the familiar metaphor of entrepreneurship as the discovery of preexisting profit opportunities. My approach focuses on action, not discovery, and gives a larger role to uncertainty. What generates coordination, in this approach, is the entrepreneurial selection process, not the “correctness” of entrepreneurial decisions.
Incidentally, Saras Sarasvathy often uses cooking to illustrate her “effectual” approach to entrepreneurial decision-making (i.e., cooks don’t always follow a recipe to produce a known dish, but use the ingredients they have in a sequential, experimental process). And for more on food, see here and here.
Live Blogging Organizing Entrepreneurial Judgment
| Peter Klein |
Have you been dying to read Organizing Entrepreneurial Judgment but haven’t quite found the time? Are you a busy executive waiting for the Summary version? Hoping for an HBO Special? Not to worry, the good folks at HansEconomics are live-blogging the book, and the first chapter is up today. Thanks to John Dellape for doing this.
Bonus: Tom Snyder is preparing an abridged version of my 2010 book The Capitalist and the Entrepreneur.
Management Scholars and the Media
| Peter Klein |
Reporting today from the Academy of Management meetingin Boston. Too many interesting sessions to list them all. Today I attended a very good Professional Development Workshop on the opportunity-discovery perspective in entrepreneurship studies, organized by Henrik Berglund, Steffen Korsgaard, and Kåre Moberg and featuring Bill Gartner, Per Davidsson, and others. Lots of discussion of “discovery opportunities” and “creation opportunities,” and even my own case for dropping the concept of opportunities altogether.
Then, a PDW session called “Engaging the Media: Equipping Management Faculty to Share Their Knowledge More Effectively” featuring me, Jay Barney, Ron Mitchell, Maria Minniti, Mike Lenox, and Scott Kirsner, an ambassador from the world of journalism. I gave the blogger’s perspective, arguing for this medium as an effective way of sharing research results and informed opinion with students, journalists, policymakers, and the lay public. I also shared some practical tips borrowed from Mike Munger.
During the session there was a lot of discussion of economics, and how economists have been much more successful than management scholars at engaging the media. I argued that this has less to do with technique than with substance — economists have a long history of involvement with key social and policy issues of interest to journalists. But there are pitfalls to such a cozy relationship. The desire for relevance and influence can lead to compromise on rigor and and a loss of independence (Exhibit A). Management scholarship is already prone to faddishness and buzzwords, and a closer engagement with the media could exacerbate those unfortunate trends.
But, a question near and dear to our hearts here at O&M: Why are there so few academic blogs devoted to management and organizational scholarship? Economics and law have many influential academic blogs. Management has just a handful (most linked from our sidebar). When I talk to management colleagues about blogging, manyt are reluctant. Will I have something to say? How much time will it take? Will it hurt my academic reputation? Economists don’t seem too worried about these. In part, the difference may be due to core theories and approaches. A little economic theory goes a long way in addressing social and policy issues, and most economists feel comfortable talking about current events without deep knowledge of the specifics. “It involves a price control? Well, let me tell you how that will play out…” Management scholarship is far more eclectic and often calls for deeper knowledge of the concrete phenomena at hand. Is this the most important difference? Or are there other reasons why management scholars don’t blog?
Coase-Theorem Behavior Actually Does Happen
| Dick Langlois |
I often find it hard to persuade students that the Coase Theorem actually “works” – that one party really will bribe another party to give up a right when transaction costs are low. So I was pleased to find this example on the Atlantic Monthly website. An author called Patrick Wensink ripped off the trademarked Jack Daniel’s label for the cover of a novel called Broken Piano for President, whose principal (perhaps only) interesting characteristic is that it was published by a press called Lazy Fascist. Clearly this is a conflict over the use of a property right, and the author is enjoying uncompensated benefits. One would think that, as Jack Daniel’s clearly owns the property right, the company could force the author to change the cover. Apparently, however, the transaction costs of doing that are high, so the attorney for Jack Daniel’s wrote the author a charming cease-and-desist letter that actually offered to bribe the author to change the cover right away. This is a general point, I suppose, now that I think about it: as the transaction costs rise of using official legal institutions to resolve externality conflicts, the de facto owner of the right can effectively switch, even in a world in which the transaction costs we usually talk about – those of finding and negotiating with the conflicting users of the property – remain small enough to allow Coasean bargaining.
More on Austrian Capital Theory
| Nicolai Foss |
The Mises Institute kindly invited me to give this year’s Hayek Memorial Lecture at their Austrian Scholars Conference on March 8. I chose Austrian Capital Theory as my subject, arguing that it is productive to consider it as a theory of production and not just as part of the theory of distribution and interest. The lecture has now appeared in print. Here it is on YouTube (complete with thick Euro-accent and all). And here is a characteristically fine recent paper by Peter Lewin that makes the point (which nicely converges with my Hayek Lecture) that capital theory was absolutely key to the evolution of Hayek and Lachmann’s thought. Peter cites Lachmann’s extremely acute critique of Keynes (which Peter Klein and I would have cited had we known it in this paper):
The modern theory of investment, set forth by Lord Keynes in The General Theory, has had its many triumphs these last twelve years, but it still has a number of gaps. Conceiving of investment as simple growth of a stock of homogeneous capital, it is ill-equipped to cope with situations in which the immobility of heterogeneous capital resources imposes a strain of the economic system. In particular, it can tell us little about the ‘inducement to invest’ in a world where scarcity of some capital resources co-exists with abundance of others. (Lachmann 1948: 131
Hierarchy, French Style
| Peter Klein |
The French love hierarchy, right? Well, yes, but all hierarchies are not alike. Here’s a comoprehensive study of French manufacturing firms:
The Anatomy of French Production Hierarchies
Lorenzo Caliendo, Ferdinando Monte, Esteban Rossi-Hansberg
NBER Working Paper No. 18259, July 2012We use a comprehensive dataset of French manufacturing firms to study their internal organization. We first divide the employees of each firm into `layers’ using occupational categories. Layers are hierarchical in that the typical worker in a higher layer earns more, and the typical firm occupies less of them. In addition, the probability of adding (dropping) a layer is very positively (negatively) correlated with value added. We then explore the changes in the wages and number of employees that accompany expansions in layers, output, or markets (by becoming exporters). The empirical results indicate that reorganization, through changes in layers, is key to understand how firms expand and contract. For example, we find that firms that expand substantially add layers and pay lower average wages in all pre-existing layers. In contrast, firms that expand little and do not reorganize pay higher average wages in all pre-existing layers.
Conference Honoring Larry Ribstein
| Peter Klein |
I only met Larry Ribstein a few times but was deeply impressed with his erudition and insight. He is best known for his work on unincorporated businesses but was an expert in a number of areas of business law (as well as music and cinema).
This November the GMU Law School is hosting a conference in his honor, “Unlocking the Law: Building on the Work of Professor Larry Ribstein.” Speakers include Henry Manne, Richard Epstein, Gillian Hatfield, Todd Henderson, Cliff Whinston, and many others. Hit the link above for the details.
Macroeconomics QOTD
| Peter Klein |
Courtesy of David Stockman (via Dennis):
[T]he clamoring and clattering that you hear from the Keynesians . . . that austerity is bad forgets the fact that austerity isn’t an elective course. Austerity is something that happens to you when you’re broke.
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.
Summer Readings
| Nicolai Foss |
OK, my eleven weeks, Euro-style, full-tax-payer-paid, summer vacation starts today. In the time-honored tradition of narcissistic academic bloggers, here is what I plan to (hope to) read while frolicking on the beaches of the Riviera and relaxing in those small Spanish villages:
- Jonathan Haidt: The Righteous Mind. This will be a re-read. I read Haidt’s book 2 months ago and loved most of it, although I thought it was rather weak towards to the end. The whole argument is basically founded on the notion of group selection, and while group selection has made a huge comeback in terms of scientific respectability, perhaps Haidt is overdoing it?
- Mark Pagel: Wired for Culture. Interest in group selection is also why I will read Pagel’s book, which seems to be all about human group selection, written by a leading British expert on human evolution. A reason why I take an interest in group selection stems from my interest in Hayek’s work on cultural evolution which is basically a group selection story — and which has been strongly criticized for exactly this reason.
- Ezequiel Morsella, John A Bargh and Peter M. Gollwitzer: Oxford Handbook on Human Action. No, this is not a commentary on Mises, but a collection of essays that” … brings together the current thinking of eminent researchers in the domains of motor control, behavioral and cognitive neuroscience, psycholinguistics, biology, as well as cognitive, developmental, social, and motivational psychology. It represents a determined multidisciplinary effort, spanning across various areas of science as well as national boundaries.” Great and accessible reading for anyone with an interest in human action and behavior that goes beyond simplistic economics treatments.
- Steven Pinker: The Better Angels of Our Nature: Why Violence Has Declined. Pinker is always worth a read!
Organizations and Markets 
Recent Comments