The PowerPoint for the sixth class session is now available

Note that it gets through market failure.  We'll do the stuff on transfer pricing next week.  That means the stuff for next Thursday should be mostly review of intermediate micro.

Also note that partly to simply get the thing done and partly because of the nature of the topic, there is a lot of text in the slides themselves, which is something I normally don't like.  If I have time, I may go back to them and update in my preferred style, where I can.

Update on PowerPoints for the week

I know I've promised to have PowerPoint for Tuesday and Thursday done this evening.  The one for Tuesday is available.  But I'm pooping out now and rather than do something of lower quality, I'll get the Thursday one done by tomorrow morning.  Sorry for the delay.

Professor Arvan

Responding to a blog post

Although you may get an email update from the class blog, please don't reply to that by email.  It would be much better if you went to the blog and made your comment there.  Then the rest of the class can see it.  Save email to me for scheduling an appointment or discussing something else of a personal nature.

Thanks for your cooperation on this.

Professor Arvan

Assessment doc + Where we will begin next Tuesday

There is now a document entitled Proposed Method of Assessment.  It includes what we discussed in classed last Thursday about how students should be evaluated as well as a section on how this translates into letter grades.  Have a look at it at your earliest convenience.  Students are invited to add comments or make modifications to the document.  I will freeze it next Saturday and we'll go with what is there at the time.  

Last class we didn't get through the full Powerpoint for the Fourth Class Session.  We got through slide ten, which is the first on transaction costs.  We concluded class with the nature of transaction costs - the holdup problem.  After each party become locked in with the other, one wants to renegotiate terms in its favor.  

Student Teams

On Tuesday, I'd like to put students into teams, 3 students per.  If there are other class members and you want to be on the same team, we can arrange that without difficulty, given our size.  It's also fine if you simply want me to assign you to a team.

Reactions to the first set of posts

I've now read each post that has been made and commented on every one.  A couple of students have yet to submit.  If they can do that by this evening, I'll comment on those too before class tomorrow.  For the rest of the semester, I hope the reflections come in by Sunday evening (earlier would be even better).  Since we are a small class, students are encouraged to read and react to their classmates' postings.  That will help to make us a community.

Tomorrow in class we'll discuss a hub-and-spokes view of organization.  The reflections of the students  give a similar sort of feel, with each of you as one of the spokes and me as the hub.   I wonder if students see it similarly.  I also wonder how we might make the process more decentralized, so the students have more of the decision power and I have less.  We'll discuss that in class this week, and maybe in subsequent weeks as well.

Here is a general comment about the writing.  In some instances it was bland and lacking specifics.  There was reference to very broad experience rather than to particulars.  There were a couple of exceptions to that, but they were exceptions.  I tried in at least some comments to respond to broad strokes posts with quite specific anecdotes, examples meant to illustrate a broader principle.  I hope in future posting that you too can generate such examples.  It will be more fun to read that way and in the process of coming up with those I believe you'll learn something about the economics.

Many students said they were interested in the class because it seemed an opportunity to learn about entrepreneurship.  Here are some comments about that.

First, nobody talked about an interest in learning management principles, so there is the question whether they meant that when they said entrepreneurship or if they meant something quite different.  On Thursday, we'll briefly discuss the contribution of Ronald Coase, the father or Transaction Costs Economics, and his famous paper The Nature of the Firm. Coase refers to the manager as an entrepreneur.  So the two ideas used to be one and the same.  Nowadays, however, the two are usually viewed differently.  Managers are employees with supervisory responsibility and possible some strategic direction responsibility as well. Entrepreneurs are business owners, risk takers, who start new enterprises and oversee them soon after their gestation.

This second comment is in the spirit of "no surprises," getting bad news out early, something I talked about in class last Thursday.  The course may give you very little in terms of what you want regarding entrepreneurship.  For example, that Coase paper I mentioned in the previous paragraph is concerned with the following question.  The price systems is one way for coordinating economic activity.  The firm is a different way for coordinating economic activity.  Each has its strengths and and weaknesses.  When is it proper for the activity to be coordinated within a firm rather than in a price system?  This is a perfectly interesting economics question and the answer to that question provides good insight.  But that answer may be of little use to an entrepreneur (or to a manager) who focuses on other issues, such as is this a good business opportunity to pursue?.

Put a different way, my impression is that many students want to understand entrepreneurship as an insider understands it.  They want an education in this area to assist them in the doing, after they graduate.  This would be a very practical education.  In contrast, economics of organizations is from the perspective of an outsider, who watches and then tries to come up with principles to explain what is going.  For this to be of any value whatsoever, the principles must be applicable from one organization to the next.  The approach is necessarily theoretical

Not quite seven years ago, when I was the Assistant CIO for Learning Technologies and working in CITES, I wrote a post called Is Economics Worthless?, which you might have a look at because I believe it is relevant today and takes on this subject.  At the time I wrote that, I recall I was expressing frustration about other decision makers in CITES, who seemed to invent criteria to rationalize the decisions they wanted to make, rather than look at the decisions as problem solving, and then evaluating those decisions on how well they addressed the problems that were articulated.  For example, the people who did the Networking had a pricing model for access that I recall was $22 per jack.  It bothered me that demand didn't enter into the pricing.  (Units in the College of Engineering would pay the same price as units in the Humanities.)  Economic theory says demand should matter in a regulated price of this sort, with the more inelastic demand paying a higher price.  But I could never get this point across.   This type of behavior in CITES seemed best explained by B&D's political frame.

Indeed, one of the reasons we are reading the B&D book in addition to M&R is to give some practical ideas about organizations, even if they aren't economics.  We'll definitely spend at least one class session, maybe more, talking about conflict - dealing with somebody who is hard to get along with, who is manipulating, etc.   That's not economics.  But it is super important and you probably won't get that elsewhere.

There is a further issue at root here, which is the ability to apply rather abstract economic ideas to very concrete situations, and being comfortable doing so.  If you can do that, then the economics may be quite useful.  But that sort of thing takes a lot of practice.  Think about how many laps Michael Phelps had to swim to become an Olympic Champion.  Metaphorically speaking, in this class we're at best dipping a toe into the water.

Nevertheless, I hope you are not too disappointed with this response.  It's pretty standard fare that students want a practical approach to a subject while the instructor prefers a theoretical orientation.  Knowing that at the start of the semester, perhaps each of us can get some of what we want.  

Starting With Textbook Content On Tuesday

Relative to the original schedule I posted last week, we are behind by one class session now.  We will be doing M&R chapter 1 and B&D chapter 1 this Tuesday.

I will update the calendar entries in the next day or so to reflect where we are and what we will cover in the next few class sessions.

Since our course is not a pre-requisite for any other undergraduate course here, I feel no obligation to cover a pre-specified amount of material.  We'll let our discussions dictate the pace in class.

More on Darwin this time on economies of networks

I'm ignorant on issues of human physiology, so I don't really know if this is true or not, but the story is that we each have an appendix that is a vestigial organ.  This means that at some time in our evolutionary history the appendix was functional, but the need that it satisfied disappeared while the organ did not.  Vestigial organs are a feature of the evolutionary approach.  It's not possible to explain them from an efficiency perspective.  (And do note that with the appendix it is possible for it to become seriously inflamed, at which time the person has an appendectomy.  So, even if it doesn't do good, it is possible for the appendix to do harm.)

This idea ha an economic analog which is called "lock in" and is a rather important concept.  Lock in belies a sense of dynamic efficiency.  The most well known example is the QWERTY keyboard.  I wrote a post about that a while back that has links to other very good references on the subject.  By the way, subsequent to writing that post I learned that Colorado College is a place that does have students take one course at a time and focus on that.  I don't know other residential colleges that do this, but it is fairly common with executive education and online learning.

Subscribe by email

There is now a subscribe by email gadget in the left sidebar.  I believe it offers a daily update.  You get all the posts in the last 24 hours in one message.  Please let me know if that's not how it works.

Looking at the Penn State situation through the lens of our class

There is a fascinating piece in the New York Times this morning, about the Penn State Board of Trustees operation in the wake of the scandal.  Of particular interest is how information did not flow as they expected it would and the consequences of that.  We will be talking in class today about lack of incentives to communicate properly.

Sometimes circumstances can be so dire that no incentive could make it so that the person would communicate the truth.  If the person does communicate the truth then it is for reasons of obligation rather than for personal gain.  We'd use the expression - it's the right thing to do.  Normally we don't associate doing the right thing with incentives.

Reconciling The Rationality/Efficiency View With Making Bonehead plays

Econ students are taught about Adam Smith and his notion "the invisible hand" that guides the privately good behavior to produce socially efficient outcomes.  Biology students are taught about a different sort of competition - Darwin's Survival of the Fittest.  Individual "behavior" is genetically determined.  But genes can mutate.  Some mutations produce advantage and those that do tend to propagate.

In the last several years, some economists have been trying to apply Darwin's approach to economic competition.  There are a few reasons for doing do and one is given by the title of this post.  Behavior can be based on traditional belief, which is very much like behavior being determined by genes.  But sometimes we try new things, which is like having a mutation.  When the new thing seems better than the old thing we call it an innovation. One doesn't need full rationality to explain innovations. All it takes is a search for doing better than at present and then learning by experience from the experiment in trying.  Often that learning suggests the next experiment to try.  This view may be somewhat more realistic - humans learn but aren't fully rational.  I find that an appealing approach.

There is a different reason for economists to emulate Darwin.  Robert Frank, an economist in the Business School at Cornell, has been writing about this idea.  This is a very interesting read and won't take you long to get to the gist.  Competition is about individual advantage.  Individual advantage that propagates often also creates advantage for the species. Once in a while, however, traits that create individual advantage can actually be harmful to the species.  In the linked piece, Frank says the latter can happen when the advantage is relative only. The metaphor is that the overall pie is smaller but the individual gets so much bigger a slice that the individual is better off.  So there can be individually good but socially destructive innovation.  This is meant as an argument for some regulation and against laissez-faire.

Follow Up On Today's Class

It occurred to me after class that I may not have motivated the practice of writing weekly reflections particularly well.  It's something I've tried in other courses.  I had particular success with it in an honors seminar, so it seemed like a good thing to do.  Also, I tend to write reflections quite a bit.  Here is one on that seminar class written after the course concluded.  It might give a much better idea of what I'm trying for.

Beware of the typos!  That piece has a fair number of them.

Student Blogs Items

The gadget for Student Blogs in the left sidebar has, for the time being, my blogs, simply so I could get the thing started and verify the feeds work.  Once students make their own blogs I'll add them to the list and then delete mine.

A second post

e pluribus unum.
e pluribus unum.
e pluribus unum.
e pluribus unum.
e pluribus unum.

Just to get the site started

Here is a first post so I can see the look of the site and modify it for the class.