Louise Mors on Ambidexterity
| Nicolai Foss |
Margarethe Wiersema interviews my colleague Louise Mors about her forthcoming article in Organization Science on Ambidexterity.
The Origin of Social Norms
| Peter Klein |
Some findings that would not have surprised Carl Menger:
Ode to the sea: Workplace Organizations and Norms of Cooperation
Uri Gneezy, Andreas Leibbrandt, John A. List
NBER Working Paper No. 20234, June 2014The functioning and well-being of any society and organization critically hinges on norms of cooperation that regulate social activities. Empirical evidence on how such norms emerge and in which environments they thrive remains a clear void in the literature. To provide an initial set of insights, we overlay a set of field experiments in a natural setting. Our approach is to compare behavior in Brazilian fishermen societies that differ along one major dimension: the workplace organization. In one society (located by the sea) fishermen are forced to work in groups whereas in the adjacent society (located on a lake) fishing is inherently an individual activity. We report sharp evidence that the sea fishermen trust and cooperate more and have greater ability to coordinate group actions than their lake fishermen counterparts. These findings are consistent with the argument that people internalize social norms that emerge from specific needs and support the idea that socio-ecological factors play a decisive role in the proliferation of pro-social behaviors.
I await comments below about how social norms emerge and persist not because they facilitate cooperation and joint gains, but because they legitimize existing social structures or support exploitation or power or. . . .
Gans on Lepore on Christensen
| Peter Klein |
Josh Gans has some useful remarks on Jill Lepore’s New Yorker essay on Clayton Christensen.
Lepore only deals with the easy marks in her take down of Christensen and one suspects Christensen and his supporters can easily fend those off. It is the fundamental contradiction in taking a positive theory towards prediction that is where this entire ‘disruption industry’ falls down. I’d like to see journalists engaging more on that level so that we can be done with those bridges too far for good.
What Josh means by “fundamental contradiction” is that a disruptive technology, in Christensen’s definition, must not only be behind the cutting edge in some technical dimension, but also satisfy unmet consumer demands. The latter must be uncertain ex ante, otherwise the market leaders would also be developing the disruptive technology. Christensen advises incumbents to “disrupt themselves,” but this assumes they know which technologies will eventually be disruptive. Because they don’t, they must choose among several alternatives, including “do nothing” (i.e., try to exploit late-mover advantage).
The incumbent’s decision, contrary to Christensen’s reasoning, reflects entrepreneurial judgment, which may or may not be correct. There is no formula for managing disruptive technologies.
See also Lynne’s insightful comments.
Knowledge Elites, Inequality, and Economic Growth
| Peter Klein |
An interesting paper from Mara P. Squicciarini and Nico Voigtländer examines the role of “knowledge elites” — individuals at the upper tail of the human capital distribution* — in French economic growth around the time of the Industrial Revolution. Key passage:
To measure the historical presence of knowledge elites, we use city-level subscriptions to the famous Encyclopédie in mid-18th century France. We show that subscriber density is a strong predictor of city growth after 1750, but not before the onset of French industrialization. Alternative measures of development confirm this pattern: soldier height and industrial activity are strongly associated with subscriber density after, but not before, 1750. Literacy, on the other hand, does not predict growth. Finally, by joining data on British patents with a large French firm survey from 1837, we provide evidence for the mechanism: upper tail knowledge raised the productivity in innovative industrial technology.
In other words, growth is driven by the knowledge (and, presumably, skills, preferences, and beliefs) of the elites, not the population at large.
Squicciarini and Voigtländer don’t deal directly with the distribution of income and wealth (they do show that regions with higher Encyclopédie subscriber density had higher per-capita incomes), presumably those individuals in the upper tail of the knowledge distribution were also one-percenters in income or wealth. This brings to mind one of Bertrand de Jouvenel’s arguments about inequality, namely that it spurs technological innovation:
[I]t is a commonplace that things which are now provided inexpensively to the many, say spices or the newspaper, were originally luxuries which could be offered only because some few were willing and able to buy them at high prices. It is difficult to say what the economic development of the West would have been . . . if the productive effort had been aimed at providing more of the things needed by all, to the exclusion of a greater variety of things desired by minorities [i.e., elites]. . . . History shows us that each successive enlargement of the opportunities to consume was linked with unequal distribution of the means to consume.
I suspect Squicciarini and Voigtländer’s knowledge elites were largely the same as de Jouvenel’s “minorities” (in a robustness check for reverse causation, Squicciarini and Voightländer use membership in scientific societies as a proxy for knowledge elites, and these scientific societies were the primary producers and consumers of scientific instruments, for example). What would Monsieur Piketty say about this, I wonder?
Mark Casson’s The Entrepreneur at 30
| Peter Klein |
2012 marked the 30th anniversary of Mark Casson’s classic work The Entrepreneur: An Economic Theory. Casson was one of the first economists since Frank Knight to elaborate on the role that uncertainty and judgment play in entrepreneurial decisions. Casson’s book offers not only a critique of the theories of competition and the firm offered in neoclassical microeconomics, but also a positive theory of the entrepreneur as a judgmental decision-maker under uncertainty. Casson’s work had a strong influence on the Foss-Klein approach to entrepreneurship, as well as Dick’s work on the theory of the firm.
Sharon Alvarez, Andrew Godley, and Mike Wright have written a nice tribute to The Entrepreneur in the latest edition of the Strategic Entrepreneurship Journal.
Mark Casson’s The Entrepreneur: An Economic Theory (1982) has become one of the most influential books in the field of entrepreneurship. For the first time, this article outlines its origins and summarizes its main themes. The article goes on to show how Casson’s subsequent research has closely followed the research agenda he set for himself in The Entrepreneur and illustrates the continuing challenge his work presents to entrepreneurship scholars. The article is based on an interview the authors conducted with Mark Casson on the thirtieth anniversary of the book’s publication.
As Sharon, Andrew, and Mike note, “Casson’s incorporation of Knightian judgment into a broader economic framework is probably the area where the book has had its greatest impact (albeit mostly among management scholars and not economists).” For Casson — as well as Knight — judgment constitutes decision-making under uncertainty that cannot be captured in a set of formal decision rules, such that “different individuals, sharing similar objectives and acting under similar circumstances, would make different decisions” (Casson, 1982, p. 21). Unfortunately, while judgment continues to play an important role in entrepreneurship research, it has been largely overshadowed (in my reading) by the opportunity-discovery perspective that builds on Kirzner rather than Knight (though that perspective is itself coming under heavy fire).
The paper is gated, unfortunately. But you can access Casson’s own summary of his (and others’) ideas in this EconLib article.
Business Cycles and the Structure of Production
| Peter Klein |
A new paper from former guest blogger Peter Lewin:
A Financial Framework for Macroeconomic Cycles: The Structure of Production is Relevant
Peter Lewin
University of Texas at Dallas – School of Management – Department of Finance & Managerial EconomicsNicolas Cachanosky
Metropolitan State University of DenverA comprehensive understanding business-cycles needs to account not only for the allocation of resources over time, but also for resource allocation across industries at any point in time. Intertemporal disequilibrium has been a common theme of many theories of the business-cycle. But to properly understand how these “time-distortions” take place and how the price-mechanisms that drive them work, a clear and well-defined conceptualization of the “average length” of the structure of production, is required. The insights provided by Macaulay’s duration and Hicks’s Average Period do this. We show that financial duration and related concepts have a direct connection to macroeconomic stability. By doing this we point to important implications for macroeconomic policy. We claim not only that a low interest rate contributes to the creation of asset bubbles, we show also the market mechanism through which the real sector is affected. We argue that to accept that duration matters for resource allocation is to accept the core of the Austrian Theory of the Business Cycle (ABCT) and, therefore, that to reject the ABCT core thesis suggests also rejecting the importance of duration for resource allocation.
Management and entrepreneurship scholars new to business-cycle theory might find this, this, and this to be useful background reading.
The Paradox of the New Economic History
| Peter Klein |
MIT’s Peter Temin on the “paradox of the New Economic History,” from his keynote speech to the BETA-Workshop in Historical Economics (published as an NBER working paper):
New economic historians have turned their back on traditional historians and sought their place among economists. This has provided good jobs for many scholars, but the acceptance by economists is still incomplete. We therefore have two challenges ahead of ourselves. The first is to argue that economic development can only be fully understood if we understand the divergent histories of high-wage and low-wage economies. And the other big challenge is to translate our economic findings into historical lessons that historians will want to read. These challenges come from our place between economics and history, and both are important for the future of the New Economic History.
His broader claim is that the disciplines of economic history and economic development should be more closely integrated. “Both subfields study economic development; the difference is that economic history focuses on high-wage countries while economic development focuses on low-wage economies.”
The Piketty Code
| Dick Langlois |
I was trying to avoid jumping into the fray about Capital in the Twenty-First Century so as not to participate in the mania, as if throwing one more tiny ember into a wildfire would cause measurable additional damage. But I couldn’t resist after seeing an article entitled “How Thomas Piketty Explains American Sports.” Written by someone called Kevin Lincoln in a left-wing mag called Pacific Standard, the article discusses the NBA’s proposal to raise the minimum roster age from 19 to 20, thus reducing the number of one-and-done college players and depriving John Calipari of his livelihood. (Did I forget to mention that UConn won both men’s and women’s national championships this year?) Lincoln correctly points out that such a change is in the interest not only of the D-1 colleges, who get to keep their stars longer, but also of the NBA, since it offloads more player development to the colleges. Sounds perfectly reasonable – exactly the kind of analysis you would expect from, say, a free-market public-choice economist. What on earth does this have to do with Piketty?
The concept of “over-accumulation” was coined by economist David Hershey, and with the ascent of Thomas Piketty’s Capital in the Twenty-First Century into bestsellerdom, it’s something that anyone with even a passing interest in economics is probably familiar with. In our current economy, actors who have gathered large amounts of capital tend to invest it in the creation of further capital for themselves rather than funneling it back into production. In turn, the economy stagnates, with the world’s financial resources concentrating in the hands of the rich with no money left over to raise wages for the working class.
Yes, this scheme will probably raise the wealth (a little) of NBA owners. But it doesn’t have anything to do with the accumulation of capital. For both owners and players, the NBA is all about people getting wealthy from entrepreneurial insight and scarce valuable skills — exactly contrary to Piketty’s predictions.
The author is obviously economically illiterate — how exactly can people “create further capital for themselves” without somehow “funneling it back into production”? Yet the fact that someone smart enough to write a free-lance article would connect the NBA to Piketty speaks, it seems to me, to what the Piketty phenomenon is all about. In my view, we should not be comparing Piketty with Marx or Keynes. We should be comparing him with Dan Brown. Like the Da Vinci Code, Capital is an otherwise unremarkable book that managed to put together a volatile mix of elements. Both books captured some kind of zeitgeist, of course, but they did so in a remarkably precise way. They rely on similar elements: a theory of how the world works that doesn’t stand up to minimal scrutiny but is easy to understand, seems to explain the mysterious and ineffable, and, most importantly, confirms the gut prejudices of its readers. Capital is not as much a conspiracy theory as the Da Vinci Code; it’s a nineteenth-century story about aggregate income shares. But it is also an empty-enough vessel into which readers (especially those who haven’t actually read it) can pour their own conspiracy theories. The NBA is the Opus Dei of capitalist sports.
While we’re on the subject, I also want to mention that, to my mild surprise, the best review of Piketty I have run across is by Larry Summers. He gathers together all the technical criticisms in many other reviews and then adds a few of his own. While he pats Piketty on the back for his wonderful interest in inequality, he leaves the theoretical claims in a tattered pile on the floor.
Friday Fun: The Market Value of Research Topics
[A guest post from Peter St. Onge, Assistant Professor of Marketing at Feng Chia University in Taiwan.]
Is academia the epitome of mankind’s quest for knowledge? Is it an adjunct to the productive forces that drive us ever-closer to a utopia of plenty? Or is it a self-licking ice cream cone? Here are a few data points.
For each keyword or phrase-in-quotes, the first column measures google searches (average ttm, in thousands, reported 5/15/14 on Google Adwords Keyword Planner). The second column measures academic papers on Google scholar between 2012-2013 (as of 5/15/14). The third column measures the ratio of academic papers divided by monthly searches. And the fourth column gives Google Adwords’ “suggested bid” — this suggests what an advertiser might offer for a “click” when somebody enters the search term or phrase, so is roughly the market value of a visitor searching for that term.
These measures are roughly intended to capture popular interest (the quest for knowledge) and market value (adjunct to production) compared to academic interest.
First, some general business terms, with “gender identity” thrown in for fun, ranked by papers-to-search ratios:
| Google Scholar | Google monthly searches (k) | Papers 12-13 (k) | Papers/ searches | Suggested Bid |
| management | 40.5 | 785 | 19.4 | $5.25 |
| “gender identity” | 8.1 | 146 | 18.0 | $1.99 |
| “Corporate Strategy” | 1.9 | 20.9 | 11.0 | $10.83 |
| accounting | 40.5 | 343 | 8.5 | $7.66 |
| marketing | 60.5 | 342 | 5.7 | $6.45 |
| entrepreneurship | 33.1 | 80.1 | 2.4 | $4.58 |
| finance | 823.0 | 301 | 0.4 | $8.22 |
The highest ratio of academic vs popular interest? Management. Beating even “gender identity.” And the lowest? Finance, followed by entrepreneurship. The people demand more finance and entrepreneurship papers. Perhaps because they want to learn how to invest and start businesses, but this is conjecture.
What else jumps out here is the overwhelming interest among the public in finance. Indeed, there are more than 4 times more searches for the word finance than all the other terms together. “Finance” is 20 times more popular than accounting or management, and 15 times more than marketing. Perhaps business schools are misallocating their resources unless their departments aren’t at least 80% finance? (more…)
The New Empirical Economics of Management
| Peter Klein |
That’s the title of a new review paper by Nicholas Bloom, Renata Lemos, Raffaella Sadun, Daniela Scur, and John Van Reenen, summarizing the recent large-sample empirical literature on management practices using the World Management Survey (modeled on the older World Values Survey). Here’s the NBER version and here’s an ungated version from the LSE’s Centre for Economic Performance.
This literature has been rightly criticized for its somewhat coarse, survey-based measures of management practices, but its measures are probably the most precise that can be reliably extracted from a large sample of firms across many countries. In that sense it is on par with the Global Entrepreneurship Monitor, the Economic Freedom Index, and other databases that attempt to capture subtle and ultimately subjective characteristics across a broad sample.
Here’s the abstract of the Bloom et al. paper:
Over the last decade the World Management Survey (WMS) has collected firm-level management practices data across multiple sectors and countries. We developed the survey to try to explain the large and persistent TFP differences across firms and countries. This review paper discusses what has been learned empirically and theoretically from the WMS and other recent work on management practices. Our preliminary results suggest that about a quarter of cross-country and within-country TFP gaps can be accounted for by management practices. Management seems to matter both qualitatively and quantitatively. Competition, governance, human capital and informational frictions help account for the variation in management.
It provides a nice overview for those new to this literature. An earlier review paper by Bloom, Genakos, Sadun, and Van Reenen, “Management Practices Across Firms and Countries,” appeared in the Academy of Management Perspectives in 2011, along with some critical comments by David Waldman, Mary Sully de Luque, and Danni Wang.
Is Human Capital Theory Compatible with the Strategy Literature?
[Another Becker-themed guest post, this one from former guest blogger Russ Coff, a leader in the emerging field of Strategic Human Capital.]
| Russ Coff |
Human capital theory (HCT) has brought a lot to the strategy literature. It has also held it back as scholars import logic that is inconsistent with core assumptions of the literature.
Before I launch into my heretical rant, let me acknowledge, as others have said so eloquently, Gary Becker was a truly innovative thinker. The most unique part was that, while he was firmly grounded in economic logic, he did not hesitate to venture into new terrain. Though he is most known for his work in HCT, his thoughtful explorations of marriage, discrimination, crime, and many other topics demonstrate the breadth and depth of his intellect.
However, strategy represents new terrain that is often inconsistent with the logic of HCT. In this sense, I think Becker would have relished the opportunity to examine this context as a new problem. Human capital challenges the strategy literature in the most fundamental ways possible – if we go beyond a cursory integration with Becker’s world. Here are some examples:
How much does firm-specific human capital (FSHC) matter? Drawing on HCT, scholars often assume firm specificity is important since it hinders mobility and allows the firm to capture rent. However, recent work suggests that this effect may be overstated. It requires strong information about human capital as opposed to the coarse signals that employers often rely upon. Thus, a worker moving from a successful firm may have ample opportunities as the firm’s success serves as a signal of the worker’s capabilities – FSHC investments are ignored. Even with strong information, individuals who invest in FSHC may be in demand by firms seeking employees who are willing and able to make such investments. When we consider such market imperfections (at the core of strategy theory), some of the classical HCT logic breaks down.
General human capital as a source of competitive advantage? Recent work in economics (Lazear’s skill-weights model) and the literature on stars focuses on workers who have skills that are valuable across firms. Both literatures point out how valuable and rare such skills can be (at very high levels). The scarcity and imperfect markets suggest that general human capital can be a source of advantage. Such people may be much more scarce and much less mobile than is assumed in classical HCT. Practitioners focus extensively on this type of knowledge. Can it lead to an advantage?
What is competitive advantage? From this, we might ask some more fundamental questions about competitive advantage, firms, and ownership. Most scholars implicitly adopt an agency theoretic view where shareholders are the only residual claimant and competitive advantage is therefore rent that flows to shareholders. Any value that flows to employees is considered not to have been captured by the firm. Joe Mahoney points out that shareholders would be the sole residual claimants if all factors are traded in perfectly competitive markets (e.g., wage = MRP). For this to be true, firms would have to be homogeneous and human capital would need to be a commodity. As such, this logic assumes away the possibility of competitive advantage altogether. If firms are heterogeneous and there are factor market failures, shareholders would not generally be sole residual claimants. What, then, is competitive advantage? (more…)
A Note on “Human Capital”
| Peter Klein |
Like Peter Lewin, Walter Block, Mario Rizzo, and Peter Boettke, I greatly admire the late Gary Becker, a pioneer in many areas of economics and sociology, a strong proponent of economic and personal freedom, and by all accounts a terrific teacher, mentor, and colleague. But I confess that I have always had qualms about the concept of “human capital,” along with the analogous constructs of social capital, knowledge capital, reputation capital, and so on. These are metaphors for capital in the narrow sense, and I worry that the widespread use of “capital” to denote anything valuable and long-lived obscures important issues about actual, physical capital that can be divided up, measured, priced, and exchanged. Witness the confusion over “capital” as Thomas Piketty uses the term. Here is something I wrote before:
[O]ne of my pet peeves [is] the expansive use of “capital” to describe any ill-defined substance that accumulates and has value. Hence knowledge, experience, and skills become “human capital” or “knowledge capital”; relationships become “social capital”; brand names become “reputation capital”; and so on. I fear this terminology obfuscates more than it clarifies.
I don’t mind using these terms in a loose, colloquial sense: By going to school I’m investing in human capital or diversifying my stock of human capital; if this gets me a high-paying job I’m earning a good return on my human capital; as I get old I forget new things, so my human capital is depreciating rapidly; and so on.
But we shouldn’t take these metaphors too literally. In economic theory capital refers either to financial capital or to a stock of heterogeneous alienable assets, goods that can be exchanged in markets and analyzed using price theory. Their rental prices are determined by marginal revenue products and their purchase prices are given by the present discounted value of these future rents. Knowledge is not, strictly speaking, capital, because it is not traded in markets does not have a rental or purchase price. What markets trade and price is labor services, and it is impossible to decompose the payments to labor (wages) into separate “effort” and “rental return on human capital” components. Some labor services command a higher market price than others because they have a higher marginal revenue product. Some of this wage premium may be due to intelligence or experience, some due to complementarities with other human or nonhuman assets, some due to hard work, and so on. But these are all determinants of the MRP, and hence the wage, not different kinds of factor returns.
Moreover, the entrepreneur needs cardinal numbers to compute the value of his capital stock, to know if it is increasing or decreasing in value, and so on. I can’t measure my stock of human capital, I don’t know for sure if it is increasing or decreasing over time, I can’t calculate the ROI of a specific human-capital investment, etc., because there are no prices and no measurable units. Knowledge may be “like capital,” in the sense that it lasts, that you can add to it, that you benefit from it, etc., but it isn’t literally a capital good like a machine or a refrigerator.
If we think going to school is valuable and increases lifetime earnings, why don’t we just say, “going to school is valuable and increases lifetime earnings,” rather than, “there is a positive return on investments in human capital”? Is there a good reason to prefer the latter, besides scientism?
Corporate Governance in the 19th Century
| Peter Klein |
A new NBER paper on 19th-century manufacturing firms in Massachusetts finds that incorporation rates, ownership concentration, and and managerial ownership varied systematically with technology (factory versus artisanal production, use of unskilled labor, etc.). In other words, governance forms were not determined primarily by the legal or regulatory environment, social and cultural issues, the desire for legitimacy, or other noneconomic factors, but by standard agency considerations.
Corporate Governance and the Development of Manufacturing Enterprises in Nineteenth-Century Massachusetts
Eric Hilt
NBER Working Paper No. 20096, May 2014This paper analyzes the use of the corporate form among nineteenth-century manufacturing firms in Massachusetts, from newly collected data from 1875. An analysis of incorporation rates across industries reveals that corporations were formed at higher rates among industries in which firm size was larger. But conditional on firm size, the industries in which production was conducted in factories, rather than artisanal shops, saw more frequent use of the corporate form. On average, the ownership of the corporations was quite concentrated, with the directors holding 45 percent of the shares. However, the corporations whose shares were quoted on the Boston Stock Exchange were ‘widely held’ at rates comparable to modern American public companies. The production methods utilized in in different industries also influenced firms’ ownership structures. In many early factories, steam power was combined with unskilled labor, and managers likely performed a complex supervisory role that was critical to the success of the firm. Consistent with the notion that monitoring management was especially important among such firms, corporations in industries that made greater use of steam power and unskilled labor had more concentrated ownership, higher levels of managerial ownership, and smaller boards of directors.
Gary Becker: A Personal Appreciation
[The following is from former guest blogger Peter Lewin, who wrote his PhD under Gary Becker at Chicago.]
| Peter Lewin |
Professor Gary Becker died yesterday at the age of 83. At the time of his death, he was arguably the most highly respected living economics scholar.
The blogosphere will soon be flooded with obituaries, appreciations, and evaluations of his work by people better placed than I to offer them. Given, however, that I was privileged to have been able to study with him for a short period of time as a graduate student at the University of Chicago, and that he acted as the chairman of my Ph.D. dissertation committee, I would like on the occasion of his passing to offer a few words of personal appreciation.
Becker will be remembered mostly for his work on human capital and the economics of the family. It is hard to overstate the influence of his contributions to these fields. Indeed, he pretty much created them — though one must not minimize the contributions of others early scholars like Simon Polacheck, and especially the independent and complementary work of Jacob Mincer.
By his own account, Becker came to these subjects through the influence of his mentor Milton Friedman whose approach led him to see economics as the study of people “in the ordinary business of life” (as Alfred Marshall would have it). But his first foray beyond the traditional borders of the subject was not in those subjects (human capital or the economics of the family) but rather in the economics of discrimination, a very volatile subject at the time. He literally wrote the book on The Economics of Discrimination (see also here). It seemed to him at the time that the conversation on civil rights and segregation was hopelessly confused by the lack of an understand of the social processes at work, an understanding that was accessible using the eternal principles of economics to investigate how people act on their preferences, whatever they are and whatever we may think of them. So he quite controversially investigated the likely results of economic processes in which people had given (race or gender) preferences and showed quite simply that, as long as people were free to act in open markets as employers, workers, or consumers, the act of discrimination would carry a price. For example, discriminator-employers who indulged their preferences who be outcompeted by those who hired the most qualified person for the job, and, in this way, open competition would tend to erode discriminatory outcomes (if not discriminatory attitudes). (more…)
Gary S. Becker, 1930-2014
| Peter Klein |
Gary Becker died yesterday at the age of 83. Becker was a living legend of the Chicago school, and an active scholar, even chairing a current dissertation committee. Hayek called Becker “one of the most gifted men of the Chicago school” and “theoretically a more sophisticated thinker” than Milton Friedman or George Stigler.
Here are past O&M references to Becker, including Becker’s comments on organization theory in light of Williamson’s Nobel Prize. And here’s a short paper by me on T.W. Schultz’s human-capital approach to entrepreneurship, about which Becker showed little interest, despite his development of Schultz’s human-capital construct. Brian Loasby has a nice chapter on “Human Capital, Entrepreneurship, and the Theory of the Firm” in the Oxford Handbook of Human Capital, edited by Alan Burton‐Jones and our friend J.‐C. Spender (Becker’s foreword is online).
I attended the 1992 meeting of the Mont Pèlerin Society, when Becker was president. Someone arranged for Becker to meet with me and the other graduate students. The sense among the student attendees was that MPS was becoming, under Becker’s leadership, too mainstream, respectable, and tame. Where were the radical libertarians, Austrians, and other free thinkers? As I recall, poor Becker was bombarded with a bunch of questions along these lines, which he handled kindly and gracefully. He had nothing but good things to say about Mises, Hayek, Hazlitt, and the other MPS founders. A fine gentleman.
A friend of mine was at Chicago in the 1990s when Becker was in his mid-60s and already a Nobel Laureate. Like most economists in the department, my friend went to the office and worked Saturdays and Sundays. Becker was usually the first to arrive and the last to leave. “He’s not only the smartest person here,” I was told, “but the hardest worker!”
Essentialism in Economics and Art
| Peter Klein |
Carl Menger’s methodology has been described as essentialist. Rather than building artificial models that mimic some attributes or outcomes of an economic process, Menger sought to understand the essential characteristics of phenomena like value, price, and exchange. As Menger explained to his contemporary Léon Walras, Menger and his colleagues “do not simply study quantitative relationships but also the nature [or essence] of economic phenomena.” Abstract models that miss these essential features — even if useful for prediction — do not give the insight needed to understand how economies work, what entrepreneurs do, how government intervention affects outcomes, and so on.
I was reminded of the contrast between Menger and Walras when reading about Henri Matisse and Pablo Picasso, the great twentieth-century pioneers of abstract art. Both painters sought to go beyond traditional, representational forms of visual art, but they tackled the problem in different ways. As Jack D. Flam writes in his 2003 book Matisse and Picasso: The Story of Their Rivalry and Friendship:
Picasso characterized the arbitrariness of representation in his Cubist paintings as resulting from his desire for “a greater plasticity.” Rendering an object as a square or a cube, he said, was not a negation, for “reality was no longer in the object. Reality was in the painting. When the Cubist painter said to himself, ‘I will paint a bowl,’ he set out to do it with the full realization that a bowl in a painting has nothing to do with a bowl in real life.” Matisse, too, was making a distinction between real things and painted things, and fully understood that the two could not be confused. But for Matisse, a painting should evoke the essence of the things it was representing, rather than substitute a completely new and different reality for them. In contract to Picasso’s monochromatic, geometric, and difficult-to-read pictures, Matisse’s paintings were brightly colored, based on organic rhythms, and clearly legible. For all their expressive distortions, they did not have to be “read” in terms of some special language or code.
Menger’s essentialism is concisely described in Larry White’s monograph The Methodology of the Austrian School Economists and treated more fully in Menger’s 1883 book Investigations Into the Method of the Social Sciences. For more on economics and art, see Paul Cantor’s insightful lecture series, “Commerce and Culture” (here and here).
[An earlier version of this post appeared at Circle Bastiat.]
Notes on Inequality
| Peter Klein |
Everyone’s talking about inequality. I confess don’t find inequality terribly interesting, intrinsically. Of course, inequality that results from special government privilege — the incomes of top executives at Lockheed Martin or Goldman Sachs, the speaking fees earned by Hillary Clinton, the wealth of US sugar farmers — should be analyzed and criticized, and those privileges removed. Firm policies that result in pay differentials — pay-for-performance schemes, for example — are important and interesting, not because they generate inequality per se, but because they have systematic and significant effects on firm behavior and performance. Of course, inequality may have important long-run social and cultural effects, but these are highly speculative and not obviously actionable.
I haven’t yet read Thomas Piketty’s new book but am aware of — and amazed by — the buzz it’s generating. I suspect most of the excitement reflects confirmation bias: people who think inequality is the major issue of our time naturally think this is the most important economics book of the decade, probably before reading it. (Naturally, I’d love to exploit that formula in marketing my own books.)
I do have a few thoughts on how the discussion is framed, in light of Piketty’s work. First, Piketty and his admirers define “capital” as a homogeneous, liquid pool of funds, not a heterogeneous stock of capital assets. This is not merely a terminological issue, as those familiar with the debates on capital theory from the 1930s and 1940s are well aware. Piketty’s approach focuses on the quantity of capital and, more importantly, the rate of return on capital. But these concepts make little sense from the perspective of Austrian capital theory, which emphasizes the complexity, variety, and quality of the economy’s capital structure. There is no way to measure the quantity of capital, nor would such a number be meaningful. The value of heterogeneous capital goods depends on their place in an entrepreneur’s subjective production plan. Production is fraught with uncertainty. Entrepreneurs acquire, deploy, combine, and recombine capital goods in anticipation of profit, but there is no such thing as a “rate of return on invested capital.” (more…)
Spender on Strategy
| Dick Langlois |
The always-interesting J.-C. Spender has kindly sent me a copy of his new book from Oxford, Business Strategy: Managing Uncertainty, Opportunity, and Enterprise. Not surprisingly, this very much the kind of book readers of this blog will find interesting. In addition to covering (and interpreting) standard practitioner and academic models of strategy, the book spends considerable time on language, persuasion, and rhetoric. Those of you who teach strategy should definitely have a look.
New ISNIE Awards
| Peter Klein |
The International Society for New Institutional Economics has established four new awards, named after the pioneers of new institutional social science: the Ronald Coase Best Dissertation Award, Oliver Williamson Best Conference Paper Award, Douglass North Best Paper or Book Award, and Elinor Ostrom Lifetime Achievement Award. Details on the awards, and a call for nominations for the Coase, North, and Ostrom awards, are on the ISNIE site. (Sadly, my suggestion for a Best Organizational and Institutional Economics Blog Award was not heeded.)
Firm Boundaries Matter
| Peter Klein |
Do firm boundaries — defined as ownership of the relevant capital goods — affect firm behavior and performance? Or is the firm best understood as a nexus of contracts, in which ownership boundaries represent arbitrary legal distinctions? Coase, Williamson, Hart, and Foss and Klein take the former position, while Alchian (sometimes), Demsetz, Jensen, and Meckling lean toward the latter.
A very interesting paper from Amit Seru, “Firm Boundaries Matter: Evidence from Conglomerates and R&D Activity,” offers some empirical evidence on the effects of boundary choices on innovation, finding significant and important effects.
This paper examines the impact of the conglomerate form on the scale and novelty of corporate R&D activity. I exploit a quasi-experiment involving failed mergers to generate exogenous variation in acquisition outcomes of target firms. A difference-in-difference estimation reveals that, relative to failed targets, firms acquired in a diversifying mergers produce both a smaller number of innovations and also less novel innovations, where innovations are measured using patent-based metrics. The treatment effect is amplified if the acquiring conglomerate operates a more active internal capital market and is largely driven by inventors becoming less productive after the merger rather than inventor exits. Concurrently, acquirers move R&D activity outside the boundary of the firm via the use of strategic alliances and joint-ventures. There is complementary evidence that conglomerates with more novel R&D tend to operate with decentralized R&D budgets. These findings suggests that conglomerate organizational form affects the allocation and productivity of resources.
Here is a longer, less technical write-up on the Corporate Governance and Financial Regulation blog.
Organizations and Markets 
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