Sunday, January 23, 2011

very good paragraph

From A. Allen Schmid's Conflict and Cooperation: Institutional and Behavioral Economics:

When the recipe for production of a good or service is written, it does not contain institutions in addition to land, labor, and capital goods. Physical things are produced by physical things. Institutions and organizations are mental constructs. They influence what things humans put together to produce physical things, but they are not some magical extra ingredient. Some years ago, economists were baffled by the fact that their measures of changes in physical inputs could not explain observed changes in physical outputs. Many tried to add a residual variable and called it technology. But this was a name for our ignorance rather than an identification of an input. The technology can be represented in a sub-function explaining the inputs to produce a specific technology. But it would be double counting to include the new machine and the research expenditures to produce it in the same function.

1 comment:

  1. Is not an institution as purely a mental construct also ignorant? At very least a dangerous over-simplification?