Sunday, November 21, 2010

ideas on the theory institutional economics, written for various (important) purposes

I can still remember what my initial reaction was when I was first exposed to institutional economics as an undergraduate. Basically, what attracted me to it was my realization of just how fundamental were the questions being asked, essentially what was at stake, in those views. For whatever reason, I've always been drawn to these big questions in my studies -- economics, math or whatever. I have this obsession with understanding what's at the core of any one particular idea or event. In institutional economics, I was struck by the discussion of the fundamental rules shaping economic activity in whatever capacity, and also how variations in those rules can explain variations in economic performance.

Surprisingly enough (given where I ended up on the political spectrum), that first exposure to institutional economics was from some work by Douglass North, the Nobel Prize-winning institutionalist and economic historian. Still, there is a lot of at stake in some of these views, in particular the idea that the West developed so quickly in part because of its institutions of private property, free markets, and so on.

Nevertheless, regardless of the politics involved, the combination of a "big question" approach and a set of tools and conclusions privy to the majority of the mainstream's political agenda (look no further than the Washington Consensus) made this type of institutionalism highly applicable to economics and economic theory in particular. In other words, Douglass North and others in the new institutionalist tradition were able to answer a very important, if under-appreciated question at the time in a very attractive way (to the neoclassical paradigm):

Why should economists care about institutions? What kind of primary explanatory power can economists give to institutions?


Fast-forward to graduate school, roughly 4 years later, and I am sitting here at my desk with a stack of books on legal and social history of all kinds, written in academic fields where such a question, "why should we care about institutions?" is not even entertained. Obviously, social history is all about how different cultural, political, and economic institutions develop through (and in turn shape) the course of history. Staring at them now, my mind dips in and out of the ideas captured in them, searching for the reasons why I'm in an economics department... My question is, why should economists care about that stuff? For example, why should economists care about the cultural or economic reasons why women might or might not have become some of the earliest workers in the textile mills?

Of course, I've tried to answer some of these questions here on this blog. But aside from using the social history to point out mistakes in economists' explanations, sort of an ad hoc critical style, I haven't gone far enough. Certainly this kind of approach lacks the analytics to form a powerful critique of new institutionalism, or of economics in general. In other words, in the abstract, why ought economists to be concerned with the writings of Alice Kessler-Harris, Christopher Tomlins, and other social or legal historians?

Just as the nature of institutional economics is "big" and "fundamental" in and of itself, so is the answer to this question. And I don't pretend to know all the answers. But what follows is a suggested way of thinking about the issue.

The way in which historians and social scientists conceive of the path that institutions take, including where they arrive, has important effects on how we should see economic agents' behavior in those institutions, either over time (e.g., historically, the transition from feudalism to capitalism) or in a particular phenomenon (e.g., socially, racial discrimination). The job of the theoretician is of course to separate out analytically the processes deemed most crucial to understanding economic behavior, and this is partly a political decision. But still, to the extent that a phenomenon is subjected to rigorous economic analysis, that phenomenon is embedded in institutions, and we can therefore see the historians and social scientists as doing the necessary "legwork" for the economist by enriching his understanding of that context. The point is then to understand economic behavior in that context.

The kind of rigorous economic analysis to which I refer above is not immediately evident in some of the older works in the new institutionalist tradition, which I think was highly influenced by the very political project of neoclassical economic theory. There is more evidence for it in more recent work. We still have far to go.


Looking ahead, the kind of institutional analysis that works best for economists is the work on the social, i.e. the ground-up work being done by various scholars in other social sciences. Also, any close analysis of how political structures have evolved over time, which would give us a better idea of the ordering of power and the economic interests of those vested in different orderings, can be a powerful explanatory factor for understanding the behavior of economic agents. Such pressing questions and controversies over the nature and origin of the political institutions of capitalism, I would contend, shed light on the economic behavior of agents during the rise of a market economy.

Such matters are certainly not to be left, for example, to the political rhetoric of "private property" and "freedom of contract". The other social scientists have gotten us too far for us to turn around and be so sloppy.

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