We all know the saying “don’t judge a book by its cover,” but can we judge a book by its first chapter? I have recently had the chance to read the first chapter of Nicolai J. Foss and Peter G. Klein’s forthcoming book “Organizing Entrepreneurial Judgment: A New Approach to the Firm” which is an attempt to combine Entrepreneurial theory with ‘Theory of the firm’.
The premises of the book are simple, Foss and Klein have taken it upon themselves to address, what they consider to be important connections between the theory of entrepreneurship and the theory of the firm. This they do though a Knightian perspective of entrepreneurship. Even though that Frank Hyneman Knight is not considered to be an Austrian economics it is clear form the way the author’s presents their arguments, the list of contents, and from previous work from both scholars that this is a theory strongly founded in an Austrian economical perspective. With the use of ‘the theory of the firm’ Foss and Klein are aiming to advance entrepreneurship research a field, within economical research that has over the last years become a hot topic, especially in all aspects of government, but still with surprisingly little advancement. It is therefore exciting when someone is attacking the thought questions of entrepreneurship and trying to address the questions of why, when, and how. Why do entrepreneurial opportunities arise? When do certain individuals and not others discover and exploit opportunities? And, How different modes of action are used to exploit those opportunities? Foss and Klein are addressing entrepreneurship, not as an abstract concept, but as the results of judgment and actions that are firmly founded in economical uncertainty. Which not only places Frank Knight centre stage, but also departs from more traditional scholars like Joseph Schumpeter and Israel Kirzner. Personally I do believe that the theory of entrepreneurship, will benefit from the lesson ascertain in work done within the theory of the firm. But that the theory of the firm can benefit from the perspectives in the theory of entrepreneurship, I am rather sceptical about. Theory of the firm is focused on controlling uncertainty, typical though governance, theory of entrepreneurship however is about exploiting the very same uncertainties. So, if you can judge a book by its first chapter, it looks like that ‘Organizing Entrepreneurial Judgment: A New Approach to the Firm’ will be an interesting read, not only for those interested in the Austrian school of economics but for anyone that has an interest in understanding entrepreneurship. But do not just take my word for it, you can read the first chapter here, free and legal. ‘Organizing Entrepreneurial Judgment: A New Approach to the Firm’ can be pre-ordered at amazon.com and will be shipped January 2012.
So Christmas is just around the corner, which means that millions of people the world over will be exchanging gifts. This has made me wonder, what constitutes a really good gift? If we look at the good gift from an economical point of view, it seems to me that all good gifts have at least one thing in common: A Good gift is more valuable for the receiver then for the giver of the gift. If person A goes out and buy something, for himself, he would evaluate the price of the product and compare it to his own evaluation of the product. We do this everyday, and it is second nature for most people regarding most products. But, the picture changes immediately after person A is going to find the perfect gift to person B. Now he can’t use his own evaluation of the products value since he now just acts as the middleman in the transaction between the sell and person B. Therefor he is forced to try an anticipate how person B will evaluate the value of the product and if that value is higher or lower than the actual price of the product. Since it is a gift, and the content of gifts are normally intended to be a secret he cannot just ask for the information from person B, so he is left with two options: either he can ask for a wishing list or use his imagination and risk not being able to anticipate the needs of Person B. These two different approaches to the art of gift buying are roughly comparable to two different approaches to how a company does product development. It can either do an existence market research, the wish list, or the company can approach the market as an entrepreneur and look for the gift that is equivalent to the creative destruction of the gift-giving-market. Another perspective, of the perfect gift, is how the gift is a medium in a communication between the giver and the receiver. The gift tells the receiver different things, such as how well the giver knows her. Finding the perfect gift is all about information and market signals. The more information the giver has about the receiver, the greater the chance is that he will be able to find that perfect gift. Creating some common rule for all gift-giving scenarios is of course, imposable but I would suggest that this year everyone should challenge him or herself and ignore the wish list, try something new and look for that perfect gift that will create more value for the receiver then what they paid for it.
… That is the question, or at least it should be. Last Friday most of the member of the EU-member stats signed a declaration of intent to follow the new and “improved” euro plus pact. And calling the new version of the Euro plus pact an improvement is really a stretch. What could have been the chance to redraw the Euro plus agreement and fix some of the dilemma inherent in the monetary union. Ended as not being the version 2.0 that everyone where hoping for, but in reality just a small patch. Instead of going back to the drawing board what the European heads of stats finished with an accordant that now limits the member states budget deficit to 0.5% instead of the earlier 3%. I am not pretending to know what would be the right solution to the current crises. But, if we look at how the market has reacted to the solutions that the different European institutions have come up with doing the last year, well they are not impressed. And to quote Mr Rahm Emanuel: “One should never let a good crisis go to waist.“ Meaning that this would have been the perfect situation for the European member stats to show their votes, and the market, that they are being serious about solving not only the current crises but also the inherent political problems within the monetary union. The dilemma is not an economical problem but a political problem. In a welfare state the politicians survives by reallocate funds in a way such as it satisfies as many voters as possible. Reallocating more funds to some voters, would normally mean that other voters would get less but with the lack of real sanctions in the Euro plus pact it has become opportune for politicians to borrow the money from outside of the economy, and this has not chance with the latest patch. Especially since that United Kingdom already have declared that they are not willing to sign the declaration presented last Friday, with effectively makes it impossible for the rest of European member stats to use the EU court or other EU Institution, should the want to actually utilizes any sanctions. Let me be clear, I am not advocating at stronger political union, and should the question about Denmark’s position regarding this “new” euro plus pact be put through a referendum, I would properly want Denmark to join the UK and vote no. But on the other side, every European economy is depended the economical development of the other European economies; therefor we all need the European Monetary Union to be fixed, and it properly needs to be fixed in a big way. Let me end with a video with one of my personal heroes Nigel Farage, and a link (in Danish sorry) to a paper written by Torben Mark Pedersen that does present such a solution that Mr. Farage is point to.
CSR is, like so many other things, a good idea that becomes a really bad one immediately after it is politicized. Basically, the concept of CSR - Corporate Social Responsibility, is a really simple one: Costumers, both in B2B and B2C settings, do have ethical consideration in their buying decision process. Some costumers don’t want to buy a given product that is produced with the use of child labor, or with production processes that are pollution intensive. Since CSR is a part of the consumers buying decision process it then becomes a part of the demands for “ethically” correct produced goods. I am placing ethically in quotation marks here because it is first of all up to the individual consumer what they consider to be ethical, and therefore it is not possible to address this in a normative, universal manner. But that is the beauty of the market, we don’t have to address the ethical dilemmas in a universal manner, as long as it are part of the demands that the consumers have, then the market will adjust accordingly. Secondly, the problems that CSR are dealing with will overtime be less and less important, why? Because the world generally becoming more and wealthier.A wealth that is created, based on an effective use of the resources (such as time, labor, and technology), and increasedinternational trade. And the wealthier the world gets, the more complex the buying decision process becomes, the more demands of ethical nature do the consumer have to the products.But, if the market responses to the consumers demand, and if the consumers focus on the ethical production, then why don’t we just all embrace CSR? Because, as adverted to earlier, CSR have been come politicized. In a democracy the politicians are tasked with the job of regulating society, and unfortunately also the market. I do not intent that this post should become a rant against market regulations, but if we can’t determine the universal “ethically” correct way to produce any given product, then why do we believe that we can create regulation that in the end is a moral judgment of what is right and wrong. It seems to me that what should have been a concept that could explain why wealthier consumers have started to demand more “ethically” correct produced goods, have been high jacked by politicians as a way to regulate et market in a more indirect way. By naming and shaming companies, all in the name of Social Responsibility, they are blurring the lines between their moral position as lawmakers and the individual ethical perspective any individual in the civic society has.In the act of blurring the lines between the ethical and moral, the politician is placing him in neither position and finishes in the vacuum in between, from where it no longer is possible for him to proclaim a superior position. In the end, what we end up with is the devaluation of what could have been a great concept of market self-regulation to a more ethical living.
A few days ago Chancellor Angela Merkel and President Nicolas Sarkozy announced that they would be seeking a new treaty for the EU/the Eurozone. The specifics of this treaty have not yet been discussed public and would of course also depend on whether the treaty would be for the whole of EU or only the Eurozone.
Recording to Bloomberg one element that they will seek to implement would be automatic sanctions averse to any country that violates the 3% national defect-rule. It is a directive that already is a part of the Eurozone, but famously has not been effectively enforced. That in it self is not really big news, if it where not for the comments made by the European Central Bank President Mr Mario Draghi, where he hinted the idea of a more Fiscal compacted European Union, or the first real step towards the for many dreaded ‘United States of Europe’.The two many areas of politics a country has to control is economy is the Monterey policies and Fiscal policies. With the creation of the Eurozone most countries in the EU forfeited the option of adjusting the economy with the help of Monterey policies. What they where left with where the ability to adjust the taxation, and expedites of the state. If the proposed treaty does contain elements of a more compact fiscal Union, this would mean that the nation government in realty also would lose the ability to control the national economies via fiscal policies.It is difficult to predict what the effects would be form this consolidation move, but it does not require must fantasy to imagine how this could reduce the competitiveness of Europe. When the EU member stats are facing increasingly bigger and bigger liabilities and what they are left with is the option of increasing taxes. What we will see is a Europe that in the end will end up strangling its industries and in the end it self. It is either that or that the European politicians by a miracle suddenly can reform all the economies in Europe.In realty when you have a monetary union you also need to have a fiscal union, we just have to look to the graveyards of the failed monetary unions history is filled with, both inside, and outside Europe. The common lecture of the failed unions seems to be that in the end it always falls apart when countries with different political cultures and systems tries to harmonize its monetary and fiscal policies, in realty we should by now have ascertained the lesion: What works is a free trade area and not politically motivated monetary unions.Personally I cannot shake the mental image of a EU that is drowning and simultaneously trying really hard to tie a really big stone to its own legs.
Doing this weekend I went with a friend of mine and watched Andrew Niccol latest movie In Time. In Time is a sci-fi story set in a world where the saying ‘time is money’ is meant literally. When time literally is used as the currency, it puts a really interesting perspective on economics and how it would affect the monetary system. When you flip the perspective of economy like that, it therefore becomes interesting to investigate the economy if In Time. The premise of the movie, and therefor the economy, is that everyone in the movie is genetic modified to only be able to live for ‘free’ for 25 years. On there 25th birthday everyone receives additional 1 years, which then simulant is used as a currency in the economy and is consumed how time normally would be consumed. When you are buying goods, like a cup of coffee, you pay with time. To earn time you would naturally need a job, where you can earn a wage, which also is paid out in minutes, hours, and so on. But now it becomes interesting. In real world economy it is never clear what part of the wage is value adding, or it is never easy to objectively say how much value a given task have added, this is of course, because that in the real world the value of a minute is subjective. Now in In Time, the value of a Minutes would still be subjective, but since you are spending time just by being alive, and paid at the end of the day X amount of hours, it now becomes clear how much value a given work have created, or at least how much that the given work is being valued by the company. Another example on how perceptive on the economy changes where time is the currency is in regards to hotel rooms. Where you pay, with time, you gain access to the room, and then you are spending time, the currency, for every second that you are using that room. So even if the transaction between consumer and the hotel still is a flat fee for renting the room; the aggregate cost of renting the room varies with how long the costumer uses the room. But generally is In Time dealing with the subject of the central bank, and inflation. Without giving to much away clearly the bad guys in the movie are the central banks that controls the distribution of the currency in society, an especially how inflation is a tax on money. Regarding the central bank being the bad guy in this movie is made explicit several times in the movie, especially when we are shown that the bad guy in the movie is the owner of a, what seems to be the only bank in the movie, in other words that the bad guy seems to hold a monopoly on the creation of time. The issue of inflation is portrayed in two ways in the movie, first we see how the central bank continuously increases the expeditions as a reaction to the actions of the movies heroes, and inflation is aseptically clear after the big event in at the end of the movie, where the reward for the capture of the movies heroes are increased form 10 to 100, again as a reaction to the actions of our heroes. So in the end, if it where not for the movie Atlas Shrugged then I would consider In Time to be an elucidate contester for the libertarian movie of the year.
In an article published last Monday, Bloomberg where able to lift the veil on how severe the 2007 financial crisis really where. They could disclose that doing the period from 2007 to 2009 the US Central Bank, the Federal Reserve, lent banks from throughout the world an aggregate 7.77 trillion US$. Since this where a loan, and since most of the money where paid back the Federal Reserve made a profit of around 13 billion US$ from the 190 financial institutions that to advantage of the below-market rates that the Federal Reserve offered, rates that in December 2008 whereas low as 0.01, basically what would be considered to be free money. One of those 190 institutions that took advantage of these opportune loans where the Danish bank ‘Danske Bank’, they paid 17.5M US$ in interests on loans from the US Federal Reserve. The dilemma with these ambiguous programs, is not so much that the Federal Reserve did not tell the lawmakers about the lending program, or that the interest that the different financial institutions have paid on the loans, even though that personally I am happy to not be a costumer or a shareholder in Danske Bank, since they are the two groups that in the end is paying the bill. No the dilemma is that the program where hidden from everyone. Information is a basic necessity in any market economy. The more information that there is available the better the market will function because the better the individual actor in the market can evaluate and estimate risk, and ultimately make the best possible decisions. But if there is, or just the risk of they're being a hole of 7.77 trillion US$ that are an extreme relevant information that the market needs. If that information isn’t brought to the market, then entrepreneurs, costumers, and investors will be taking some unnecessary risk that in the end will require more security to ensure ‘the system’. Secrecy then becomes a self-sustaining element within the financial system, an element that will reduce the effectiveness which the market functions. But, what I personally see as the biggest dilemma would be that when the Federal Reserve is covering up the risk that the financial institutions are facing, and then there the most likely reactions form society will be a call for more regulation of the financial institution as a means to mediate the risk that is inherent in the financial institution. That is a dilemma I would argue that the more regulation there is the more risk seeking the financial institution becomes, and the more unaware of the risk then entrepreneurs, costumers, and investors become. Meaning that in the end the risk that we where trying to avoid or at least manage then become a latent part of a less effective market system. In the end, the price of doing business with the financial institution should reflect the risk of that business, but for that to happen the financial institutions needs to be more transparent so that the risk can be evaluated and price, accordingly.
It is Christmas time, which means that, in Danish politics, it is again time to debate poverty. It is a topic that seems to be returning year after year. Denmark where in 2010 the 17th riches country in the world, according to the International Monetary Fund measured in GDP per capita, so does it even make sense to debate the dilemma of poverty? When making a normative judgment on poverty, the judgment on whether someone should be considered to be poor or not. These kinds of judgments imply a normative measurement of either a moral position on ‘the quality of life’ or on the economical measurement of wealth.If we deliberate this form an economical perspective there is traditional to ways to measure poverty, we can either deliberate given wealth gap within a given society or we can Concord on a minimum income someone should have before they no longer are considered to be poor. Both measurements present their own economical problems. Since economical actions, and thereby human actions, is a tradeoff between two or more options. And because the decision that a given individual makes in a given situation depends on that his or hers preferences, the situation where the decision is presented to the individual, the information that is available, and the different alternatives that the individual is choosing from, we will never be able to make a normative judgment on the act of deciding. This means that a normative judgment on the effects of the economical judgments becomes equally impossible, and thereby also the normative judgment on whether someone is poor.If we are contemplating poverty as a moral question, then it becomes a question about quality of life, what constitutes ‘the good economical life’? A moral judgment can either be a universal judgment that guide human action in any given situation, or it is a relative judgment that depends on external factors. A universal moral judgment on what constitutes ‘the good economical life’ would require that society restrict the individual’s liberty in deciding in a given economical decision. This would not only violate the principles of private property rights, but also imply that there is a universal economical preference that is moral superior to the individual’s preferences. What we then are left with is then the relative moral judgment, which means that we no long have a ‘golden standard’ from where we can define ‘the good economical life’, which forces us to constantly debate the definition itself.So if we can’t find any normative judgment on poverty does it then follow that the debate about poverty is meaningless? I would argue that debating who is or is not poor is meaningless and would never come to a satisfied conclusion. However, the debate about what society can do to ensure that every individual has the possibilities to realize his or hers idea of ‘the good economical life’, is a more relevant and plausible debate both form a philosophical and economical perspective.
