Introducing Guest Blogger Benito Arruñada
| Peter Klein |
We’re delighted to announce Benito Arruñada as our newest guest blogger. Benito is Professor of Business Organization at Pompeu Fabra University in Barcelona, a former President of ISNIE, and a prolific researcher in the areas of organization, law and economics. Most of his work focuses on the organizational conditions that facilitate impersonal exchange, from property titling or business regulation to moral systems. He has published widely in journals such the Journal of Law and Economics, Industrial & Corporate Change, Harvard Business Review, Journal of Law, Economics, and Organization, Journal of Economic Behavior & Organization, Journal of Comparative Economics, and International Review of Law and Economics.
Benito will be blogging about his new book on property and business formalization, Building Market Institutions: Property Rights, Business Formalization, and Economic Development, coming out next year from the University of Chicago Press, and other topics that strike his fancy. Welcome, Benito!
Government-Made Cars
| Peter Klein |
Former Romanian car czar Ion Mihai Pacepa’s confession in today’s WSJ, and Jeff Tucker’s commentary, reminds me of our Trabant series from a while back (the video link is still among our most popular). Look forward to a future video of a GM (i.e., government) worker putting the finishing touches on the next Nova.
Shop Class as Soulcraft
| Peter Klein |
After hearing Matthew Crawford interviewed this morning on the Diane Rehm show I’ve put his book, Shop Class as Soulcraft: An Inquiry Into the Value of Work, on my summer reading list. After earning a PhD in political philosophy at Chicago and doing a postdoc with the Committee on Social Thought, he worked for a while in a DC policy shop, then gave it up to start a motorcycle-repair business. Fixing bikes, he explains, involves complex analytical reasoning, application of scientific methods, Verstehen, and related cognitive skills far beyond those he used in his white-collar job. He also finds the work much more intellectually and emotionally satisfying than typical desk work. “The trades suffer from low prestige,” writes Crawford (see this excerpt published in last week’s Times), “and I believe this is based on a simple mistake. Because the work is dirty, many people assume it is also stupid. This is not my experience.” By contrast:
As in any learned profession, you just have to know a lot. If the motorcycle is 30 years old, from an obscure maker that went out of business 20 years ago, its tendencies are known mostly through lore. It would probably be impossible to do such work in isolation, without access to a collective historical memory; you have to be embedded in a community of mechanic-antiquarians. These relationships are maintained by telephone, in a network of reciprocal favors that spans the country. My most reliable source, Fred, has such an encyclopedic knowledge of obscure European motorcycles that all I have been able to offer him in exchange is deliveries of obscure European beer.
There is always a risk of introducing new complications when working on old motorcycles, and this enters the diagnostic logic. . . . The attractiveness of any hypothesis is determined in part by physical circumstances that have no logical connection to the diagnostic problem at hand. The mechanic’s proper response to the situation cannot be anticipated by a set of rules or algorithms.”
In the excerpt and in this 2006 essay, on which the book is based, Crawford draws out broader social, political, and personal implications of the joy of working with your hands, not all of which I necessarily buy. But I think I understand where he’s coming from. Personally, I don’t really know how to build stuff (unlike, say, Kevin Murphy), but I do enjoy cooking, and find that creating a wonderful meal is, in some ways, more satisfying than producing a wonderful journal article. (No wisecracks about the half-life of the meal versus the article, please.)
The Hawthorne Effect Revisited
| Peter Klein |
The ever-resourceful Steve Levitt, working with John List, uncovers the original data from the Hawthorne experiments — data long thought to have been lost or destroyed — and finds there actually wasn’t much of a Hawthorne effect:
Our analysis of the newly found data reveals little evidence to support the existence of a Hawthorne effect as commonly described; i.e., there is no systematic evidence that productivity jumped whenever changes in lighting occurred. On the other hand, we do uncover some weak evidence consistent with more subtle manifestations of Hawthorne effects in the data. In particular, output tends to be higher when experimental manipulations are ongoing relative to when there is no experimentation. Also consistent with a Hawthorne effect is that productivity is more responsive to experimenter manipulations of light than naturally-occurring fluctuations. . . . We conclude that the evidence for a Hawthorne effect in the studies that gave the phenomenon its name is far more subtle than has been previously acknowledged.
The short paper, “Was there Really a Hawthorne Effect at the Hawthorne Plant? An Analysis of the Original Illumination Experiments,” is available from NBER. I couldn’t find an ungated copy but the search led me to a large secondary literature, much of it by organizational and industrial psychologists, also questioning the original findings, though apparently without use of the primary data.
And Meet the New Bud Fox
| Peter Klein |
Further to my Wall Street post: There’s another scene in which we learn that Bud Fox, the twenty-something broker played by Charlie Sheen, will be made CEO of Blue Star Airlines during its reorganization if Gordon Gekko’s hostile takeover is successful. We’re supposed to laugh at the absurdity of a baby-faced kid with an Ivy League education but no knowledge of airplanes or management running an airline. But when the federal government does it, it’s all good. (HT: Randy.)
Obama’s Facebook Feed
| Peter Klein |
I admit, it made me laugh. (Thanks to Cliff for the pointer.)
I like pensionbook too.
You Go, Gordon Gekko!
| Peter Klein |
Several folks in my part of the blogosphere have noted John Hasnas’s terrific op-ed in yesterday’s WSJ, “The ‘Unseen’ Deserve Empathy, Too.” Hasnas invokes the great Bastiat to counter President Obama’s call for judges who have compassion, empathy, and understanding of “people’s hopes and struggles.” As Hasnas points out, judges should consider the effects of legal rulings not only on the parties before the bar, but also on the “unseen” whose lives will be affected:
One can have compassion for workers who lose their jobs when a plant closes. They can be seen. One cannot have compassion for unknown persons in other industries who do not receive job offers when a compassionate government subsidizes an unprofitable plant. The potential employees not hired are unseen. . . .
The law consists of abstract rules because we know that, as human beings, judges are unable to foresee all of the long-term consequences of their decisions and may be unduly influenced by the immediate, visible effects of these decisions. The rules of law are designed in part to strike the proper balance between the interests of those who are seen and those who are not seen. The purpose of the rules is to enable judges to resist the emotionally engaging temptation to relieve the plight of those they can see and empathize with, even when doing so would be unfair to those they cannot see.
This was on my mind when, channel surfing last night, I came across Oliver Stone’s 1987 classic “Wall Street,” which I haven’t seen in its entirety in years. To my surprise (perhaps not yours), I found myself rooting for Michael Douglas’s Gordon Gekko, the corporate raider who serves as the movie’s arch-villain. The main sub-plot revolves around Gekko’s attempted buyout of Blue Star Airlines. Bud thinks the buyout can save the struggling airline, where his father still works, and helps convince the pilots’ and flight attendants’ unions to Gekko’s move. Later, Bud discovers Gekko is really planning to break up the company and sell off the pieces and Bud feels betrayed, leading to a climactic confrontation. (The film feels remarkably fresh, despite the glowing green CRT screens and brick-sized cellular phones, and Douglas’s performance is dazzling.) (more…)
How Many Strategists Does It Take to Change a Light Bulb?
| Peter Klein |
More profound musings from Joe Mahoney and Christos Pitelis, with additional contributions from Anita McGahan, Yasemin Kor, and myself (no attribution is given for individual entries, for our own protection). Please add your suggestions in the comments.
How many strategists does it take to change a light bulb?
“Only one, that will be $125, please.” — strategy consultant
“One, and the one who changes it achieves sustained competitive advantage.” — mainstream strategy scholar
“Approximately 1.0000000000000000000.” — one of the small cadre of mathematicians in the strategy field
“The first person who discovers the burned-out light bulb has an opportunity for entrepreneurial gain.” — Kirznerian strategic entrepreneurship scholar
“The old bulb will be swept away by the perennial gale of creative
destruction.” — Schumpeterian strategic entrepreneurship scholar“Light bulbs are social constructs.” — trendy contemporary management scholar
“I can’t answer without first knowing the relevant players, strategy spaces, and preference maps.” — game theorist (more…)
Sociology that We Like
| Nicolai Foss |
Contrary to the conviction perhaps held by the boys over at orgtheory.net, O&M bloggers are not at all hostile to sociology. In fact, we are highly sympathetic to what is sometimes called “analytical sociological theory,” that is, James Coleman, Raymond Boudon, Jon Elster, Peter Abell, Diego Gambetta, Siegwart Lindenberg, Karl-Dieter Opp, and so on. Here is a nice summary of AST, which — we are told — embraces realism and objectivity, is anti-relativist, appreciates formalization and the use of models, is reductionist, eschews bullshit, etc. (Also check out the nice and entirely well taken acerbic treatment of Foucault on p. 7). Now we only need to know: How exactly does AST differ from microeconomics?
Entrepreneurship Exemplars Conference
| Dick Langlois |
The Center for Entrepreneurship and Innovation at the UConn business school is sponsoring an “exemplars” conference in conjunction with the Entrepreneurship Division of the Academy of Management. The idea of the conference is to help young scholars by providing “exemplars” of good scholarship. Editors from the top management and entrepreneurship journals are here (including frequent O&M participant Joe Mahoney) to comment on these exemplar papers and provide advice.
The conference started last night with a keynote by Venkat Venkataraman and continues through Saturday. You can actually participate in the conference online: register here. I am about to wander over (physically, not electronically) to hear Jay Barney’s keynote at 10:50 EDT.
The Book (Value) of Revelations
| Dick Langlois |
Here’s the abstract of the day:
Irrational Exuberance in the U.S. Housing Market: Were Evangelicals Left Behind?
Christopher W. Crowe
Summary: The recent housing bust has reignited interest in psychological theories of speculative excess (Shiller, 2007). I investigate this issue by identifying a segment of the U.S. population — evangelical protestants — that may be less prone to speculative motives, and uncover a significant negative relationship between their population share and house price volatility. Evangelicals’ focus on Biblical prophecy could account for this difference, since it may enable them to interpret otherwise negative events as containing positive news, dampening the response of house prices to shocks. I provide evidence for this channel using a popular internet measure of “prophetic activity” and a 9/11 event study. I also analyze survey data covering religious beliefs and asset holding, and find that ‘end times’ beliefs are associated with a one-third decline in net worth, consistent with these beliefs providing a form of psychic insurance (Scheve and Stasavage, 2006a and 2006b) that reduces asset demand.
Interestingly, the author is with the International Monetary Fund. When I googled to find where I had seen this abstract, the search returned several links pointing out that many Evangelicals consider the IMF (and the World Bank) to be the work of the Devil. (Not a few economists feel this way as well, of course, but wouldn’t put it in quite the same terms.) If you believe the end times are imminent, why would you bother to hold assets at all?
The Industrious Revolution
| Peter Klein |
Hans-Joachim Voth calls Jan de Vries’s new book on household behavior during the early modern period “staggeringly erudite, insightful, stimulating, and on all the main points, convincing.” The book, The Industrious Revolution: Consumer Behavior and the Household Economy, 1650 to the Present (Cambridge, 2008) builds on de Vries’s earlier concept of an Industrious Revolution, the two centuries before the Industrial Revolution in which consumers increased their production of marketable goods, largely at the expense of leisure time. “The industrious revolution was a household-level change with important demand-side features that preceded the Industrial Revolution, a supply-side phenomenon” (De Vries, 1994). Adds Voth:
The sheer amount of hard work that went into every aspect of these chapters is hard to convey. Surveying the rise of consumer items through the prism of probate inventories shows the author confidently mastering the abundant historical literature in four or five languages. De Vries’ reconstruction of Europeans’ increasing consumption of “colonial luxuries” — sugar, tea, and coffee — alone is going to be useful for all scholars working in the area.
This book may be of interest not only to economic and business historians, but also to management scholars in marketing and consumer behavior.
Way to Go Curtis
| Peter Klein |
A teacher’s greatest accomplishment is seeing his students go where he himself has never gone. So it was with great delight that I saw that one of my former undergraduate students, Curtis Melvin, got his picture on the front page of last Friday’s Wall Street Journal. Larry White and Radley Balko have already written on the substance of the story, which profiles Curtis’s activities as a North Korea sleuth. Way to go, Curtis!
PAL Team on Microfinance
| Peter Klein |
As a microfinance skeptic I was particularly interested in the new paper from the J-PAL team of Banerjee, Duflo, Glennerster, and Kinnan, “The Miracle of Microfinance? Evidence from a Randomized Evaluation.” Despite the pedestrian abstract, the findings are pretty significant:
To date there have been no randomized trials examining the impact of microcredit. Using such a design, 52 of 104 slums in Hyderabad, India were randomly selected for opening of an MFI branch while the remainder were not. We show that the intervention increased total MFI borrowing, and study the effects on new business starts, investment, and consumption. Households with an existing business at the time of the program invest in durable goods, and their profi ts increase. Households with high propensity to become business owners see a decrease in nondurable consumption, consistent with the need to pay a fixed cost to enter entrepreneurship. Households with low propensity to become business owners see nondurable spending increase. We find no impact on measures of health, education, or women’s decision-making.
Ryan Hahn puts it this way: The verdict is in on microfinance. . . . And it’s not pretty.” He means that microfinance does appear to have a positive marginal effect on business formation and expansion, but the effect is modest and does not (at least within a 15-18-month timeframe) have any discernible effect on well-being.
Research Workshop on Institutions and Organizations
| Peter Klein |
The IV Research Workshop on Institutions and Organizations takes place at Insper (formerly Ibmec) São Paulo 5-6 October 2009. Lee Alston and David Stark are keynoting. There are panels on “Judicial Norms and Development,” “New Theories of the Firm,” and “Social Capital and Organization.” There’s an open call for papers, with abstracts due 20 July.
I attended the 2007 version and enjoyed it very much.
More “New Economy” Hyperbole
| Peter Klein |
Wired’s Chris Anderson drinks the New Economy Kool-Aid. It’s the same old argument — information technology reduces transaction costs, leading to a radical disaggregation of industry and society — still supported by little more than a few colorful anecdotes, not any kind of systematic analysis. The new twist is the financial crisis, described by Anderson as “not just the trough of a cycle but the end of an era.”
What we have discovered over the past nine months are growing diseconomies of scale. Bigger firms are harder to run on cash flow alone, so they need more debt (oops!). Bigger companies have to place bigger bets but have less and less control over distribution and competition in an increasingly diverse marketplace. . . . The result is that the next new economy, the one rising from the ashes of this latest meltdown, will favor the small.
Nonsense. The major banks, the Chrysler corporation, and whoever is next to fail have not become nimbler and smaller, but larger; they have become part of the Federal government. Fannie and Freddie have swollen and taken on additional responsibilities. The financial crisis, as argued repeatedly on these pages, was spawned by a credit bubble brought about by loose monetary policy and massive government subsidization of the home mortgage market. It has nothing to do with firms being too large or somehow failing to take advantage of the Next Big Thing in social networking or cloud computing. I mean, seriously, is there anything here that couldn’t have been written ten years ago?
To all the usual reasons why small companies have an advantage, from nimbleness to risk-taking, add these new ones: The rise of cloud computing means that young firms no longer have to buy their own IT equipment, which helps them avoid having to raise money or take on debt. Likewise, the webification of the supply chain in many industries, from electronics to apparel, means that even the tiniest companies can now order globally, just like the giants. In the same way a musician with just a laptop and some gumption can accomplish most of what a record label does, an ambitious engineer can invent and produce a gadget with little more than that same laptop.
Bah. Humbug.
Economists or Catherine Zeta-Jones?
| Peter Klein |
Who would you rather spend time with? I mean, come on, really?
Ferguson on Financial History and the Crash
| Dick Langlois |
I too loved the Ferguson piece in the New York Times. More sound bites: “In the months ahead,” he predicts, “the world will reverberate to the sound of stable doors being shut long after the horses have bolted, and history suggests that many of the new measures will do more harm than good. The classic example is the legislation passed during the British South-Sea Bubble to restrict the formation of joint-stock companies. The so-called Bubble Act of 1720 remained a needless handicap on the British economy for more than a century.”
Deregulation and the Financial Crisis
| Peter Klein |
Niall Ferguson joins Charles Calomiris, Jerry O’Driscoll, Arnold Kling, and many others in questioning the supposed link between “deregulation” and the financial crisis. As Ferguson emphasizes, the timing is all wrong; there is no time-series correlation between specific patterns of regulation and deregulation and particular financial or economic outcomes. The relaxation of Glass-Steagall restrictions on universal banking is an oft-cited example, but, as these writers point out, no one has offered any specific mechanism by which universal banking contributed to the problem (indeed, the opposite is likely to be true). The “laissez-faire caused the crisis” meme may be pithy, but is there any systematic theoretical or empirical evidence for it?
Ferguson has the best line (suggested by Luke): “It is indeed impressive how rapidly the economists who failed to predict this crisis . . . have been able to produce such a satisfying story about its origins.”
Elfenbein and Zenger on Social Capital
| Peter Klein |
Congratulations to Dan Elfenbein and Todd Zenger for winning the ACAC Best Paper Award for “The Economics of Social Capital in De-Socialized Exchange.” Their paper addresses one of my pet peeves, 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. (more…)
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