Happy Birthday Dr. Buchanan (October 3rd)

I do not understand hypotheses. I have been learning about hypotheses since the third grade scientific method unit. I did not understand them then. I do not understand them now. Therefore I do not fully understand Kachelmeier and Shehata's “Internal Auditing and Voluntary Cooperation in Firms: A Cross-Cultural Experiment.”

Hypotheses are guesses. Guesses are relevant ex ante, but ex post we do not need guesses. We have real results. So Kachelmeir and Shehata waste a number of pages describing three common sense hypotheses: 1. Asians, especially the Chinese, will cooperate more than Canadians. 2. Because natural cooperation can be expected with Asians, internal audits will be more costly to Asians than to Canadians. 3. Asians will demand fewer audits than Canadians. But all three of these effects will be muted when participants' decisions are highly anonymous.

These hypotheses are a charade. Do the authors think their audience is third graders? Are these hypotheses or stereotypes? Aren't they obvious? I know they do not matter. Because the authors do an experiment. They get real results. I do not care about guesses. Tell me what happened. As in most economic and business research, hypotheses are the common sense part of this paper.(1)

I guess hypotheses fill pages.

Hypotheses are a big joke to make economics look more like a science. (I know the authors are accountants, but academic business research is economics.) Economists study people. Economists study institutions. Most of these institutions just happen. No human plays God and consciously builds institutions. They evolve. From chaos comes order. The amazing thing about markets is they work. Nobody before Adam Smith could hypothesize that markets would work. They still cannot. That is why the market has so many critics.(2)

The authors run public goods experiment. These experiments are common place in economics. The authors' main contribution is to compare how the game was played in different countries. This is an interesting objective. Since they are accountants, they want to say the game relates to divisions of firms and companies' desire for internal audits. Each player represents a division. All players in the group represent the firm. The firm is better off if everyone contributes. The player has incentive to keep some for himself.

The authors describe a management problem. Good managers provide the correct incentives to cooperate. A company should organize itself in the way that maximizes profits. But every company is different. Some companies will use internal audits. Some companies will hire honest managers. Some companies will have leaders whose people skills ensure cooperation. Some companies solve the asymmetric information problem. These solutions might differ between countries. Those who do not fail.

Their results are in line with their hypotheses. Asians behave differently than Canadians. Anonymity matters. Their statistics are simplistic. I doubt if the authors have any idea of the probabilistic reduction approach. Honestly I doubt if they have the mental acumen or courage to fully understand the probabilistic reduction approach. I know I have neither. But I can appreciate the fact that the authors' statistical results are circumspect. I can also appreciate that people from different countries give different amounts which is the important research result.

The authors recognize their limitations. Playing contrived games does not guarantee external validity. [I think the future of experiments will get away from neutrality and become more parallel with reality. ( The authors specifically wanted to look at auditing. Build auditing into your experiment.) Really this has to do with “bias” which is another concept I do not understand, because I do not understand hypotheses.] Students do not necessarily represent a random sample of their population (especially in China). (I cannot tell if they pay students either.) They leave the reader with a politically correct message, “Thus, although cultural studies are useful for identifying general patterns of of societal values, they do not negate the importance of individual differences.” The message is very nice, but every good manager knows to judge a worker by his performance not by the color of his skin. But I doubt if good managers will or need to read this paper.

(1) The idea of maintained hypotheses is important but never highlighted in economics like testable hypotheses. But the beauty of experiments is we can throw many maintained hypotheses out the window and just observe what happened. People cooperated. People traded at a single price where marginal costs equals marginal benefits. The maintained hypotheses that cripple most economic research only come out when external validity is discussed.

(2) Since it is Jim Buchanan's birthday, I am reminded of one of his eight cryptic statements about economics: “Economics has a didactic role.” This paper is full of economic concepts. The game encompasses the economic concepts of prisoners' dilemma, public goods, and incentives. The authors recognize most of these concepts, but I do not know if they understand them. They have a “principles” understanding, but it is superficial. They have never thought about how prisoners' dilemma games depend on payoffs. What if we can change the payoffs? What if the prisoners feel guilty? What if managers change perceived payoffs? Why are there privately supplied “club goods”? How can we justify Virginia Tech's state funding when Roanoke College and Harvard University exist? This lack of understanding bothers me. Economists have to teach better.

But, Buchanan said it best in his “Retrospect and Prospect” epilogue to What Should Economists Do?:

“7. Economics has a didactic role. As a discipline or area of inquiry, economics has a social value in offering an understanding of the principle of order emergent from decentralized processes, of spontaneous coordination. (The market is a classic example.) Such an understanding is necessarily prior to an informed decision on alternative forms of social order, or even on alternative directions of marginal extension. The principle of order that economics teaches is in no way “natural” to the human mind which in innocence, is biased toward simplistic collectivism.”

The real problem is this cryptic statement is not understood by most economists. Experimental economics has taught me and can teach others that society works without central planners, without politicians telling people what they can and cannot do. But will economists let it?