Sid Winter and Alice Rivlin on the Current Crisis

10 June 2009 at 8:16 am Nicolai Foss 9 comments

| Nicolai Foss |

Sidney G. Winter is a towering figure in management research, essentially being the current thought leader in the strategic management field as it pertains to issues of capabilities, routines, knowledge assets, etc. Most of his work in strategic management is founded on his earlier work in evolutionary economics (notably this seminal volume). Winter is married to Alice Rivlin, a long-time critic of Reagan-era economic policies and a high-ranking bureaucrat under Johnson and Clinton.

Here is Winter and Rivlin on “fixing the global financial system.” Winter thinks that business schools are partly to blame, but is not very concrete in his critique (at least he doesn’t blame agency theory). And here is Winter answering the question, “Is capitalism dead?” Note his comments about “people on the extreme right.” Neither Winter nor Rivlin leave much doubt about where they stand politically.

UPDATE: There is more Winter on YouTube: “Inflation or Deflation,” “Economic Cassandras,” and “The Price of Oil.” They are all very recent and done under the auspices of the Australian School of Business.

Entry filed under: - Foss -, Bailout / Financial Crisis, Financial Markets.

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9 Comments Add your own

1. Russ Coff | 10 June 2009 at 8:46 am

Politics aside, most of the clip is about fighting the last battle. From a “routines” perspective (that Sid should know best), regulators were caught with their pants down because they were faced with situations that were outside of established experience. Winter and Rivlin propose some additional regulatory routines to apply to mortgage and other markets so this won’t happen again.

However, I think this may be a moot point. Actors will probably recognize the patterns associated with this type of crisis should they emerge again. Unfortunately, I anticipate that the next crisis (and there will be one) will come from a completely different direction and, once again, regulators will be caught off guard. Can a government have a dynamic capability? If not, we cannot rely on regulations very heavily to avoid such crises. Of course, sensible regulation is needed but we need to realistic about what it can and can’t accomplish.
2. Fabrizio Ferraro | 10 June 2009 at 11:14 am

Russ,
I am not sure we can keep politics aside, and while I agree with you that regulation should not be fighting the last battle, we might want to accept that “ideological resistance” to any kind of regulation might have been part of the problem (as Alice Rivlin suggests in the video). I don’t believe that this resistance might purely follow party lines, but whether ideology played a role is indeed an interesting question which should be explored more.
3. Peter Klein | 10 June 2009 at 11:23 am

Fabrizio, I think such an argument would have to document “ideological resistance to any kind of regulation” to carry much weight. As noted before, nobody’s bothered to do this yet.
4. Fabrizio Ferraro | 10 June 2009 at 12:00 pm

Peter,
I agree that much more empirical work will be needed to properly assess the role regulation played. I don’t think there is any doubt that regulation played a role. This role could go from being the only cause of this crisis to having basically nothing to do with it. I believe that both extremes are not plausible, but what I wanted to stress was that regardless of the regulatory regime, ideological worldviews might limit the regulators willingness to intervene and use whatever power of intervention they might have at the time.
The fact that ideology affects technical judgement is reasonably well established in social psychology (the work of Phil Tetlock for instance: http://www.jstor.org/stable/2667073), and there is good reason to believe that these “biases” affect regulators as well.
5. Russ Coff | 10 June 2009 at 12:48 pm

Ok, so it appears I cannot set politics aside ;-).

Ideology clearly matters. This is one reason that we should not lump all attitudes about regulation into one basket (e.g., a general resistance to regulation). It is clear that government involvement actually precipitated the crisis in many ways. For example, the regulatory provisions designed to encourage lending to disadvantaged groups were clearly ideologically based and did play a role.

My point is that markets and individuals will innovate in the future. Largely this is a good thing. There was a lot of criticism about junk bonds in the 80s but markets learned to price them appropriately and they remain valuable financial tools today. I expect that future innovations will similarly add value but they will also pose regulatory challenges to a rigid bureaucracy.

To re-frame it in terms of some of Peter’s current work (with Anita McGahan, Joe Mahoney & Christos Pitelis), I was focused on the question of “public entrepreneurship” as it relates to regulation. How do we prepare for the next challenge?
6. Is Capitalism Dead? « orgtheory.net | 10 June 2009 at 1:45 pm

[…] a comment » Over at Organizations and Markets, Nicolai Foss posted links to a series of videos by Sidney Winter, a leading figure in […]
7. Warren Miller | 10 June 2009 at 8:03 pm

Thank you for your cogent comments, Russ. Folks on the Left always think that (a) there is never enough regulation and (b) any problem can be solved with more of it. As you rightly point out, the problem originated on Capitol Hill with pressure on banks to make loans to, in essence, people who couldn’t pay their rent. The Hacks on the Hill (almost all of them Democrats, especially the Congressional Black Caucus), then leaned on their hack buddies at Fannie and Freddie to buy the bad paper. Greenspan slumbered off and left rates far too low for far too long. “Irrational exuberance” was going on right under his bed for several years, and he never noticed. Then Wall Street forgot everything it ever knew about portfolio diversification. Factor in human nature, and you have a bubble. If anything, regulatory action, not inaction, enabled this fiasco to occur.
8. srp | 10 June 2009 at 9:42 pm

Russ makes a good point, and I think we can go a little farther.

There is a real institutional/policy conundrum in the connections between monetary policy, financial innovation, and systemic risk control. I can eliminate the risk of meltdowns like the most recent if you let me prohibit leverage or fractional reserve banking. This would be like curing a headache by blowing your brains out, but it would “work.” I can stamp out asset bubbles if you let me engage in massive monetary contractions as soon as any class of assets looks like it is appreciating more quickly than I think it “should.” Again, the bad side effects of this nostrum would swamp the benefits.

I tend to think that policy should not be set up to prevent endogenous bubbles and their popping (although it would be nice not to exacerbate them or promote them), but rather to make the system more resilient to their consequences. Better ways of unwinding counterparty-failure cascades, better ways of giving people incentives not to participate in bank runs and similar phenomena, better ways to resolve conflicting claims over insolvent debtors, etc., would be a heck of a lot more useful than new regulations.
9. Peter Klein | 13 June 2009 at 8:29 am

And here’s some new Rumelt audio on the crisis: