Digital Musings

What an Ocean Means: Porto Alegre vs. Davos

Sometimes you wonder where the world is heading. Two World Forums have started, the Social one (Porto Alegre) and the Economic one (Davos): Two adjectives and an ocean between them. Again this year the two crowds won't commingle. Worse most developed countries have decided that Porto Alegre was not worth the trip. The two parts of the world iceberg won't talk to each other (at least face to face, despite what has happened in Asia). Is the situation that bad that they can't?

Let me make a suggestion. What about splitting each crowd in two and having one half of each attending the other Forum. Sun and snow together, sort of. Sometimes symbols yield unexpected outcomes.

And, guess what they could even start a joint blog!

One can always dream....

Peter Drucker on CEOs

Peter Drucker's intellectual production is amazing by any standard. He is a gifted observer of organizations and one of the most prolific writer on management. In a recent issue of the Wall Street Journal (Download Drucker_on_CEOs.pdf), he embraces the task of "Defining the Duties of the American CEO." Tough task indeed as the acronym these days can not only stand for "Chief Executive Officer" but also for "Chief Everything Officer", "Chief Enabling Officer" or "Chief Everything Oracle" etc...

Drucker proposes a definition of the CEO: "The CEO is the link between the Inside, i.e., "the organization", and the Outside -- society, the economy, technology, markets, customers, the media, public opinion." He then procceeds to explain what he means by Inside and Outside. "Inside, there are only costs. Results are only on the Outside." Somehow, and other things being equal, a very Coasian view of the world.

Drucker assigns the CEO the first task of defining the Meaningful Outside, which, he admits, is not an easy one. My pinch of salt here is that Drucker seems to take the set of Outsides as a given among which the CEO has to choose. Nothing in my view is less sure. Indeed, as University of Chicago Luigi Zingales has it, "the boundaries of the firm are in constant flux" (see in_search.pdf ). The economic definition of the firm differs more and more from its legal counterpart. This observation has given rise to a whole literature dealing with the firm as a nexus of contracts, implicit contracts (think of suppliers...) and corporate governance. Even the answer to the "what business are we in?" question is not enough. It is a good start but it does not tell you much about the boundaries of the firm. Drucker's view on the Inside/Outside delineation seems to be very much predicatd on what IMF Raghuram G. Rajan and Luigi Zingales call the "old corporate framework":

• Rigidity: The firm was rigidly defined by the legal ownership of a large set o unique assets,
• Heavy outside ownership: The firm has to rely on outside investors to finance sizeable assets and to bear risks,
• Top-Down Management: Concentration of power at the top and legal claims over assets are the most important source of power.

But, the good old days (were they really?) are over. Now, with the paramount importance of human capital (high mobility) and the financial revolution (easier access to financial means), power has shifted away from the top of the organization. It is thus rather strange that Drucker makes the implicit assumption that the top (CEO) is still the top. Interestingly enough, he does not even mention the board of directors and the role it should or should not play along with the CEO.

On Ronald Coase again...

David Friedman, son of famous Milton's Friedman, has a unique talent to explain subtle economic issues. It shows again when he walks his or her reader through Coase's contributions.

For instance, dealing with Coase's novel way of looking at costs:

"The first step is to realize that an external cost is not simply a cost produced by the pollutor and born by the victim. In almost all cases, the cost is a result of decisions by both parties. I would not be coughing if your steel mill were not pouring out sulfur dioxide. But your steel mill would do no damage to me if I did not happen to live down wind from it. It is the joint decision--yours to pollute and mine to live where you are polluting--that produces the cost."

I'll let you read David Friedman's insightful explanations. Just let me add that his way of articulating things tells you a lot about how economists think: He starts with "nothing works", goes to "everything works" to conclude "it all depends". The last one might be why most people are so uncomfortable with economists.

How Much Should You Charge?

Through Coyote Blog and Cafe Hayek, an interesting reminder on "marginal cost pricing":

When you teach microeconomics, one of the topic students find it hard to convert to is that of marginal cost pricing. Indeed, they usually have a hard time understanding why firms should set their price equal to their marginal cost in order to maximize their profit. They may not be all that wrong after all! In 1946, Ronald Coase, a Nobel Prize Winner, wrote an article which he entitled "The Marginal Cost Controversy". Coase was urging economists to mitigate their absolute faith in marginal cost pricing. His main line of resasoning is the following:

"Economists: loose your devotion to marginal-cost pricing. The best prices are not necessarily those that equal marginal cost. Prices above marginal cost help convey important information – namely, information about the value of the capital invested that makes provision of the good or service possible in the first place. This information, in turn, is important to entrepreneurs searching for profitable places to invest their money and energies. "

Coase's point is even more significant in today's knowledge (inspiration) economies as we have tried to show in two earlier post on this blog (here and here).

May be your best bet next time you teach marginal cost pricing to your students will be to start with cases where it does not apply. Fairly good chances they gonna listen to you carefully especially if you use Kazaa, Napster and intellectual property as examples!

Mandatory Reading for Businessmen, VCs, Economists, Lawyers etc...: More Detail Is Not Always Good!

A friend of mine (and incidentally a co-author of mine) Didier Joos de ter Beerst has drawn my attention to a paper by Tufts University Karen Eggleston, University of Chicago Law School Eric A. Posner and Harvard University Richard Zeckhauser entitled "Simplicity and Complexity in Contracts". Put simply this paper is a gem and a must read! (DownloadHere)

No equation, no scary symbols, just plain English. The main theme of the paper is the following: Why is that literature in the law and economics of contracts advocate "highly complex and fine-tuned contracts" while in practice many contracts are simple? What are the advantages and disadvantages of complexity over simplicity?

This paper is a genuine "tour de force". If you were not  yet convinced that simplicity is what comes after you have gone through  the ins and outs of complexity, what follows should convert you.  Great lesson too for academic researchers who more often than not tend to propose "mechanistic" views of the world.

You Enjoy Google Scholar? You Gonna Love SmealSearch!

There has been a lot of hype around Google Scholar. This is indeed a useful tool for students and researchers. To put it in a nutshell, here is what Google has to say about it:

" Google Scholar enables you to search specifically for scholarly literature, including peer-reviewed papers, theses, books, preprints, abstracts and technical reports from all broad areas of research. Use Google Scholar to find articles from a wide variety of academic publishers, professional societies, preprint repositories and universities, as well as scholarly articles available across the web."

To give my personal example, I was able to track papers of mine for which, sadly enough, I did not have copies left over.

Now here is some great news: SmealSearch, a service from the Smeal College of Business at Pennsylvania State University. From what I have seen playing with it, it is  even better than Google Scholar. Here is what people involved in the SmealSearch Project have to say about it:

" SMEALSearch is a niche search engine that searches the web and catalogs academic articles as well as commercially produced articles and reports that address any branch of Business. The search engine crawls websites of universities, commercial organizations, research institutes and government departments to retrieve academic articles, working papers, white papers, consulting reports, magazine articles, and published statistics and facts. For certain documents, the database only stores the hyperlinks to those documents. SMEALSearch performs a citation analysis of all the academic articles accessed and lists them in order of their citation rates in academic papers (the most cited articles are listed first). Articles available through the SMEALSearch engine can be downloaded (for fair use) without any charges. However, some articles may have only the abstracts listed, and may have to be purchased directly from the appropriate sources."

Congratulations! This is a great tool. You can locate the papers, identify related articles, citations. You can rate the papers, post comments etc... You can even search for business schools. Lucky PhD students! It was a lot more difficult in my days (yes, there were less papers too!).

PS: I am sure Jim Mahar gonna be very proud of his alma mater!

Business Schools Rankings: The Seen and the Unseen

The ranking of business schools is both at the same time a hot business and a hot potato. Hot business if you consider the sheer number of newspapers and magazines that publish their own exclusive ranking. Hot potato when you look at the equally sheer number of "letters to the editor" most of the time complaining about the unfairness or the lack of statistical rigor of the ranking.

These rankings may act as a kind of yearly mark-to-market. Indeed, accreditations delivered by bodies such as AACSB and EFMD are the result of a lengthy process and are not, unlike Moody's or S&P corporate ratings, subject to regular "negative" or "positive outlooks".

Now, a new study (entitled "Comment mesurer les impacts des investissements immatériels?", "How to measure the impact of investing in intangible assets?") by Professor Razafinimaro, a faculty member at ESC Bretagne Brest and Director of the MS Finance de Marché et Gestion de Patrimoine, is sheding new light to this rather controversial topic. Razafinimaro takes a bold and innovative approach to assess what he calls "the performance of the business school managers". In a nutshell, he views a B-school as a portfolio of intangible assets (pedagogy, faculty, research, etc... ) that is assembled by the B-school managers and whose composition makes it more or less sensible to the labour market movements. According to Razafinimaro, B-school managers attempt to build an attractive portfolio to convince students to apply and enroll.

Using a methodology initially crafted for financial assets portfolios by Robert C. Merton and Roy Henriksson (1981), Razafinimaro generates risk adjusted-performance measures and (labour) market timing abilities for a sample of 29 French business schools from 1997 to 2004. I am sure that Table 4 in the paper will raise a lot of (angry?) comments.

Razafinimaro acknowledges that his research is still at an infant stage (so don't be angry at him too fast!) and needs to be nurtured by more detailed data which he is trying to collect. In any case, this is a research effort that tries to renew the way we think about rankings. Whether it will make the traditional ways of B-school ranking obsolete or not is the real pending issue!

 

Gérard Debreu has passed away

From Jim Mahar:

"At the Marginal Revolution, George Mason's Tyler Cowan informs us of the very sad news that Nobel Prize Winner Gerard Debreu has died. Dr. Debreu will be most remember for his ground breaking work on equilibrium in markets and on utility theories."

Although I never met Professor Debreu in person, I do remember the hours spent on his little red book "The Theory of Value" as a PhD student. Short but incredibly dense book. I still have it on my shelves.

It is always sad when you get news like this one. Time flies and sometimes we tend to "fly" too. Slowing down the pace and looking around is more than useful: It is a necessity.

Weightless-Priceless Knowledge

I am currently reading an insightful book by Serge Soudoplatoff entitled "Avec Internet où allons nous?" (Editions Le Pommier, 2004). This is a refreshing promenade through the history of Internet, of its players, of their mistakes, of their successes and challenges. If you wonder why the convergence praised for instance by Jean-Marie Messier or AOL-Time Warner did not occur, why the UMTS is seriously challenged by WiFi, WiMax and so on and so forth, read it: The account is very pedagogical.

One table in the book drew my attention and it is related to an earlier post in this blog. This is a table drawn from Fortune Magazine (p 112 in the book). Here is what it says:

So much for perspiration! You better be inspired!

Blogs: Not there yet but...

For those who are interested in where blogs are heading and who is using them, here is an interesting memo by Lee Rainie at the Pew Internet and American Life Project : PIP_blogging_data.pdf .