The corner office, with equations

The Org by Ray Fisman and Tim Sullivan, which I reviewed here yesterday (The tough life of the corner office), is aimed at the general reader – and after all, almost all of us do experience working life in an organisation. A parallel book for the expert reader is the new [amazon_link id=”0691132798″ target=”_blank” ]Handbook of Organizational Economics[/amazon_link], edited by Robert Gibbons and John Roberts. This is a technical volume, and normally wouldn’t feature in this blog. But I make an exception because of the calibre of the contributors and range of the book.

The book starts with the theoretical basics. In Chapter 1 Erik Bryjolfsson and Paul Milgrom write about ‘complementarity’ in organisations, the scope for the whole to add up to more than the sum of the parts in this specific kind of collective action context. Robert Gibbons and John Roberts cover incentives in organisations, and there are chapters on property rights and on transaction cost economics (with Oliver Williamson one of the authors). There is a section on different methodologies. Subsequent sections look ‘within’ firms, at individual behaviour and decisions, and at processes and structures (ranging from corporate governance to strategy to innovation); ‘between’ firms, looking at vertical integration, market structure, contracting; and ‘beyond’ firms, looking at corruption, and at delegation in public bureaucracies. Among the roll call of contributors are Josh Lerner, Timothy Bresnahan, Abhijit Banerjee, Luis Garicano, Ed Lazear and many others.

This is not a book anyone would sit down to read cover to cover (all 1232 pages); but pretty much every chapter will be an indispensable starting point for its subject. This handbook is the definition of magisterial.

[amazon_image id=”0691132798″ link=”true” target=”_blank” size=”medium” ]The Handbook of Organizational Economics[/amazon_image]

The tough life of the corner office

[amazon_link id=”0446571598″ target=”_blank” ]The Org[/amazon_link] by Ray Fisman and Tim Sullivan has a subtitle that many people might consider to be a contradiction in terms: The Underlying Logic of The Office. A majority of us work in offices, and we know it isn’t logic so much as emotion or perhaps just habit that drives things. Often, indeed, the emotions of the kindergarten playground.

Nevertheless, Fisman and Sullivan have achieved that rare feat of writing a book about management and organisation that offers genuine new insights, and is a good read as well. I thoroughly enjoyed it.

The key moment of illumination comes early in the book when they write: “Jobs that stay inside the org are the hard ones: hard to measure, hard to define and hard to do. If they were easy, we’d hire contractors to do them for us, and the market, with prices working their magic, would work just fine at getting the job done.” The way to understand orgs – and why so many are so badly run – is that the work people do in them is characterised by information asymmetries and transactions costs.

The book applies the principles of information economics to many examples of organisations ranging from the US Army and the Baltimore Police Department to Apple and Citigroup. It also covers issues such as organisational culture, rocketing executive pay, merger mania, innovation (they recommend the ‘skunkworks’ approach) and the like, bringing in other areas of economics as needed – game theory, economics of ‘superstars’, behavioural psychology.

For example, take the pay spiral. The chapter begins by recounting John Thain’s extravagance – $1,400 for a waste paper basket in an office remodelling that cost $1.2 million. It moves onto Henry Mintzberg and others documenting that what CEO’s do is get interrupted by people who want to talk to them, in between all the meetings. They have little time alone and certainly don’t spend time poring over data and documents to make a rational calculation about the best thing for the business to do. Decisions are based on the CEO’s judgements about information conveyed verbally by a selection of other people. The skill of the CEO is gathering and weighing soft information.

Relatively few do this well. After all, running an org is really difficult, as already described. So slightly greater skill in doing so is amplified into significantly greater pay: a good CEO decision will be really valuable financially to a big company. Just like Hollywood stars, a slight edge makes an individual executive a hot property in the CEO jobs market. The market rewards them correspondingly. Remuneration committees embed this upward spiral because they have interlocking memberships – not necessarily the same individuals, but connected in a social network. Besides, the Remcos believe that their guy is better than average – the Lake Woebegone effect – so deserves better than average CEO pay. And the spiral continues.  So this chapter uses various parts of the economics toolkit to explain the excessive pay phenomenon. CEOs are doing difficult work, are valuable to their orgs – and they’re still overpaid.

For, contrary to popular belief, management is in general a good thing. The authors cite evidence that better managers deliver better outcomes in the public sector, where administrators and managers tend to be reviled  – in terms of exam results in schools or survival rates in hospitals. One of the most striking bits of evidence is the massive increase in productivity in an Indian textiles firm given $250,000 of free consultancy advice by Accenture (49 firms turned down the offer, showing what they thought of management consultants). The key to the improvement was installing systems for tracking inventory and monitoring performance – reducing, in other words, the information asymmetries that had held back the business.

The book is packed with great examples. Fisman is Professor of Social Enterprise at Columbia Business School, and was the co-author of another terrific book, [amazon_link id=”0691144699″ target=”_blank” ]Economic Gangsters[/amazon_link] (with Ted Miguel). Sullivan is editorial director of Harvard Business School Press.

Their bottom line is that managing an organisation is intrinsically difficult. “If there’s one message to take away from this book, it’s that a glass half full may be the best you can hope for.” That is so much more plausible a conclusion than conventional management books that advocate one gimmick or another.

Even with this note of realism, though, the principles and examples set out in The Org will help anybody who manages anything think through the specifics of their own organisation, and maybe improve its management a little. And even small improvements are well worth having.

[amazon_image id=”0446571598″ link=”true” target=”_blank” size=”medium” ]The Org: The Underlying Logic of the Office[/amazon_image]

What to read in 2013, part 1

A quick browse through some of the publishers’ catalogues reveals plenty of enticing new books due out this winter and spring. I’ll start with a selection from some of the university presses.

From my own publisher Princeton University Press, a lot of economics and finance titles coming out. One I’ve read in proof and will be reviewing is [amazon_link id=”0691158681″ target=”_blank” ]The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy[/amazon_link] by Michael Pettis, an outstanding book. Others that look enticing are [amazon_link id=”0691057761″ target=”_blank” ]Tesla: Inventor of the Electrical Age [/amazon_link]by W. Bernard Carlson; [amazon_link id=”0691155674″ target=”_blank” ]Worldly Philosopher: The Odyssey of Albert O. Hirschman[/amazon_link] by Jeremy Adelman; and [amazon_link id=”0691149097″ target=”_blank” ]The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order[/amazon_link] by Benn Steil.

[amazon_image id=”0691158681″ link=”true” target=”_blank” size=”medium” ]The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy[/amazon_image]

Yale University Press will be bringing out Stephen King’s [amazon_link id=”0300190522″ target=”_blank” ]When The Money Runs Out: The End of Western Affluence[/amazon_link]; and at the same time (May) Timothy Beardson’s [amazon_link id=”0300165420″ target=”_blank” ]Stumbling Giant: The Threats to China’s Future[/amazon_link]. Sounds like they need to be read as a pair. I also like the look of Emma Griffin’s [amazon_link id=”0300151802″ target=”_blank” ]Liberty’s Dawn: A People’s History of the Industrial Revolution.[/amazon_link]

[amazon_image id=”0300190522″ link=”true” target=”_blank” size=”medium” ]When the Money Runs Out: The End of Western Affluence[/amazon_image]

Oxford University Press has forthcoming books looking at a couple of very important issues, global governance and corporate governance. [amazon_link id=”0199693900″ target=”_blank” ]There’s Divided Nations: Why global governance is failing, and what we can do about it[/amazon_link] by Ian Goldin; and [amazon_link id=”0199669937″ target=”_blank” ]Firm Commitment Why the corporation is failing us and how to restore trust in it[/amazon_link] by Colin Mayer.

[amazon_image id=”0199693900″ link=”true” target=”_blank” size=”medium” ]Divided Nations: Why global governance is failing, and what we can do about it[/amazon_image]

At Cambridge University Press, the range of titles includes quite a few that intrigue me: [amazon_link id=”1107609623″ target=”_blank” ]Outsourcing Economics: Global Value Chains in Capitalist Development[/amazon_link] by William Milberg and Deborah Winkler; [amazon_link id=”1107678943″ target=”_blank” ]An Economic Theory of Greed, Love, Groups and Networks [/amazon_link]by Paul Frijters and Gigi Foster; and [amazon_link id=”B00ADP734S” target=”_blank” ]Wall Street Values: Business Ethics and the Global Financial Crisis[/amazon_link] by Michael A. Santoro and Ronald J. Strauss are among them.

[amazon_image id=”1107678943″ link=”true” target=”_blank” size=”medium” ]An Economic Theory of Greed, Love, Groups, and Networks[/amazon_image]

In the spring, the University of Chicago Press is bringing out a new book by the excellent science writer Philip Ball, [amazon_link id=”1847921728″ target=”_blank” ]Curiosity: How Science Became Interested in Everything[/amazon_link]. I’m very interested in [amazon_link id=”0226256618″ target=”_blank” ]Political Arithmetic: Simon Kuznets and the Empirical Tradition in Economics[/amazon_link] by Robert Fogel; and somewhat interested in both [amazon_link id=”022603772X” target=”_blank” ]The Rise of the Public Authority: Statebuilding and Economic Development in Twentieth-Century America[/amazon_link] by Gail Radford; and [amazon_link id=”0226066959″ target=”_blank” ]The Great Inflation: The Rebirth of Modern Central Banking[/amazon_link] by Michael D. Bordo.

[amazon_image id=”0226256618″ link=”true” target=”_blank” size=”medium” ]Political Arithmetic: Simon Kuznets and the Empirical Tradition in Economics (National Bureau of Economic Research Series on Long-Term Factors in Economic Development)[/amazon_image]

Out any time now from MIT Press is [amazon_link id=”026201842X” target=”_blank” ]Banking the World: Empirical Foundations of Financial Inclusion[/amazon_link], edited by Robert Cull, Asli Demirgüç-Kunt and Jonathan Morduch. Given the interest economists have in robots at present, maybe we should all read [amazon_link id=”0262018624″ target=”_blank” ]Robot Futures[/amazon_link] by roboticist Illah Reza Nourbakhsh. I like the look of [amazon_link id=”0262018713″ target=”_blank” ]America’s Assembly Line[/amazon_link] by David E Nye and James Heckman’s [amazon_link id=”0262019132″ target=”_blank” ]Giving Kids a Fair Chance (A Strategy that Works)[/amazon_link] – Heckman being one of the first economists to identify the importance of early years upbringing and education for both private and social outcomes.
[amazon_image id=”0262018713″ link=”true” target=”_blank” size=”medium” ]America’s Assembly Line[/amazon_image]
Of course, this isn’t an exhaustive list of either academic publishers or their titles, and other suggestions will be welcome. I’ll report on what’s in the catalogues of some of the general publishers another time.