Protection costs, transaction costs,and economic theory

Contractual reductionism takes market exchange as the ubiquitous form of economic organization throughout history. Transactions costs are accordingly regarded as the costs of running any economic system in general. This paper explores the nature of protection/aggression costs as specific costs of coordination through coercion which should be distinguished from transaction costs. Protection/aggression costs play a crucial role in deciding the frontiers between the state and firms as well as their alliance and networking. Our study shows that externalization or internalization of the state-type activities of the enterprise hinges upon the amount of protection/aggression costs compared to the sum total of tax plus transaction costs.Protection/aggression costs, Transaction costs, Contractual reductionism, Coordination through coercion, external and internal enforcement

Destructive power, enforcement and institutional change

Institutions are usually defined as rules of the game. But if rules are dead letters without being enforced, then what is the role of destructive power in the genesis of institutions? This is the first question which will be addressed in the present paper. While the importance of incremental or evolutionary changes in informal rules is undeniable, what is the role of destructive power or revolution in politics with regard to institutional change? To what extent is destructive power involved in the change of rules? This is the second question that will be tackled in the present paper. The purpose of this paper is to answer these two questions focusing on a point that current scholarship regarding institutions usually fail to notice, with an emphasis on rules and laws: the power that enforces those rules and laws. The analysis of different forms of power will demonstrate the fact that the capacity to destroy as well as the capacity to produce plays a role in generating and maintaining institutions. I will try to show that the recognition of destructive power sheds new light on at least three major issues: i) the relationship between property rights and sovereignty, ii) the importance of revolution as well as evolution in social change, iii) the emergence of various means of collective expression such as Luddism, universal suffrage, and association.Destructive power; creative power; exit, voice and scream; institutional change; enforcement

Between Social Order and Disorder: The Destructive Mode of Coordination

The concept of ‘mode of coordination’ captures the way economy is embedded in social relationships and influences the integration of society through an ‘instituted process.’ Three main typical or ideal modes of coordination have been identified in the literature, namely the market, the bureaucratic and the ethical (reciprocity) modes of coordination (Polanyi 1944, [1957] 1968, Lindblom 1977, and Kornai, 1984, 1992). Our purpose is to introduce another type of coordination that we name ‘destructive mode of coordination’. It is social organisation through the use of coercive means. This type of coordination has almost been entirely neglected in the literature, although it has existed since ancient times in different forms and varieties. A typical recent illustration is the social order under the Islamic Republic of Iran that will be the focus of the paper.mode of coordination; destructive coordination; contradictory orders; parallel institutions; Islamic Republic of Iran

A Critical Review of Strategic Conflict Theory and Socio-political Instability Models

This paper provides a critical general overview of two strands of recent vast economic literature on social conflicts, namely strategic conflict theory and socio-political instability models. The first strand can be traced back to Haavelmo (1954) and has been further developed in a variety of ways by game theoretical models of rational conflict (Boulding, 1962; Schelling, 1963, Hirshleifer, 2001). Their goal is to understand threat power. A second version of conflict theory has been developed by the founders of the Public Choice School (Olson 1965, 1982; Tullock 1974, 1980; Stringham, 2005, 2007) in order to tackle genuine political violence. The main finding of this paper is that both strands of recent economic literature have not yet come to grips with social conflicts. The application of standard microeconomic assumptions to the field of "social conflicts" has resulted in reducing conflicts either to "rational conflicts"- a threat of conflict without any real clash - or "real self-interested private conflicts". In other words, economic theory has considered social protesters either as looters or lunatics, but never as a group of people struggling for a common cause.Strategic Conflict Theory, Socio-political instability models, Coase theorem, Appropriative activity, Social Conflicts

Appropriation, violent enforcement and transaction costs : a critical survey

In this paper, I focus on the extension of transaction costs to appropriative activity and coercive power in the property rights approach. It has been argued that including the costs of appropriation and violent enforcement in transaction costs is based on the assumption that Coaseian bargaining can be extended to any institutional scenario, i.e., voluntary as well as coercive exchange. However, voluntary transactions cannot capture the logic of coercive power. This means that the assumption of an efficient political market is not valid, and that the "Political Coase Theorem" (PCT) lacks the logical consistency to provide a cornerstone for political theory.Appropriation, Hobbesian state, Political Coase Theorem, Property rights approach, transaction costs, violent enforcement

The Soft Budget Constraint : A Theoretical Clarification

In this paper, we have distinguished three different conceptions of the budget constraint (BC). The first one, introduced by Clower, regards the BC as a universal (unconditional) rational planning postulate. This does not imply market equilibrium or optimality. The second one, advocated by Kornai, considers the BC as a conditional empirical fact regarding the specific behavioural regularity of agents that is determined by particular institutional setups. The third one is implicitly held by a number of endogenous explanations of the SBC notably by the Complete (optimal) Contracts Theory and the Public Choice Theory. It regards the BC as a matter of choice by rational agents. While Clower and Kornai try to understand the BC in the context of disequilibrium or at least independently of equilibrium or optimality conditions, the partisans of the third approach integrate the BC in the process of dynamic optimization. Although Kornai's conception of the BC is irreconcilable with the third approach, it should be noted that Kornai's standpoint is contradictory. In his appraisal of the hard budget constraint (HBC) in case of competitive market economy, Kornai contends that the application of the BC is equivalent to the realization of Walras' Law. He then uses this ideal HBC as a normative reference in order to measure the inefficiencies of the soft budget constraint (SBC). In fact, Kornai's standpoint with regard to the HBC and his efficiency analysis are in tune with the third approach.soft and hard budget constraints, rationality postulate, optimization

The Soft Budget Constraint: A Theoretical Clarification

In this paper, we have distinguished three different conceptions of the budget constraint (BC). The first one, introduced by Clower, regards the BC as a universal (unconditional) rational planning postulate. This does not imply market equilibrium or optimality. The second one, advocated by Kornai, considers the BC as a conditional empirical fact regarding the specific behavioural regularity of agents that is determined by particular institutional setups. The third one is implicitly held by a number of endogenous explanations of the SBC notably by the Complete (optimal) Contracts Theory and the Public Choice Theory. It regards the BC as a matter of choice by rational agents. While Clower and Kornai try to understand the BC in the context of disequilibrium or at least independently of equilibrium or optimality conditions, the partisans of the third approach integrate the BC in the process of dynamic optimization. Although Kornai's conception of the BC is irreconcilable with the third approach, it should be noted that Kornai's standpoint is contradictory. In his appraisal of the hard budget constraint (HBC) in case of competitive market economy, Kornai contends that the application of the BC is equivalent to the realization of Walras' Law. He then uses this ideal HBC as a normative reference in order to measure the inefficiencies of the soft budget constraint (SBC). In fact, Kornai's standpoint with regard to the HBC and his efficiency analysis are in tune with the third approach.soft and hard budget constraints, Say's Principle, Walras's Law

The Relevance of the Marshallian Concept of Normality in Interior and in Inertial Dynamics as Revisited by G. SHACKLE and J. KORNAI

This study endeavours to explicate the relevance of the Marshallian concept of normal in the evolution of supply curves and the price mechanism in time. This concept is based on the contradictory or at least ambiguous combination of an ex ante perspective of expectation formation and an ex post inertial dynamics. We first explore the ex ante side of the contradiction by drawing upon the writings of G. Shackle. Subsequently, we examine J. Kornai's conception of the normal state as system-specific. We identify the relationship between normality and the co-ordination mechanism in Kornai's ex post approach which may be regarded as an alternative to Shackle's solution. Finally, the pertinence of the Marshallian concept of normal will be demonstrated as will its divergent developments by Shackle and Kornai. This leads us to the conclusion that a further development of the concept is required in order to reconcile both ex ante and ex post approaches which might be based on recent evolutionary analysis.Marshallian concept of normality, inertial dynamics, Shackle's interior dynamics, Kornai's normal state

An Introduction to Destructive Coordination

Polanyi (1944, [1957] 1968) has distinguished three 'patterns of social integration,' namely 'reciprocity', 'redistribution' and 'exchange.' This triad has provided the starting point for most subsequent discussion. Our purpose is to introduce a further type of coordination, the 'destructive mode of coordination'. This mode achieves coordination by intimidation, threat, and the use of non-institutionalized coercive means. Resources and human efforts are allocated in order to appropriate what other people produce. Two simple examples provide an introductory illustration, traffic circles (roundabouts) and prisons. Appropriation through pirating provides a further example of destructive coordination. More specifically, biopiracy (blood patenting) is discussed in order to clarify the relationship between destructive coordination and the institutionalization of property rights. Finally, we focus on the role of destructive coordination as a transitional mechanism that is supported by the institutional vacuum ultimately yielding to other modes of coordination.mode of coordination, destructive coordination, institutional vacuum, biopiracy, indeterminate property rights

Islamic republic of Iran and Its Opposition

This paper takes a stylized paradoxical fact of Iranian politics under the Islamic Republic of Iran as its starting point: the stark confusion between the position and a good portion of the opposition. Such a blurred frontier between 'position' and 'opposition' did not exist during the Shah's regime. Without the decisive support of non-Islamic organizations, secular intellectuals, and political forces on the ground, the creation of a theocratic regime in Iran and its consolidation could not be realized. Now in the thirtieth anniversary of the Islamic Republic, the open opposition of many influential clergies towards the way in which government is run under the present Supreme Leader and President Ahmadinejad, provides a new episode of 'opposition' within the theocrats' circles. To put this paradoxical fact differently, it should be emphasized that no regime in Iran's modern history has produced so much 'opposition' within its own ranks and enjoyed the loyalty of its 'oppositions' at the same time. How could this paradox be explained? Our paper tackles this issue by describing the peculiar type of social order under the Republic Islamic of Iran as ordered anarchy or "destructive coordination". Analysing the sources of this type of coordination, we proceed in two steps. The first is to question whether there has ever been a laic or secular movement in the recent Iranian history. The second consists in defining the institutional setup and recent dynamics of the Islamic Republic of Iran as a strange, if not unique, mutant of Huntington's Praetorian state, led by 'priests' and armed religious militants.secularism, destructive coordination, contradictory orders, parallel institutions, Islamic Republic of Iran