institutional economics, history, political economy

Aleš Bulíø

English

Research Papers in Economics

169 Finance a úvûr – Czech Journal of Economics and Finance, 53, 2003, ã. 3-4
Economists spent much of the 20th century perfecting models based on nontrivial
simplifications (complete markets, symmetric information, homogenous agents, 
the initial-conditions-do-not-matter assumption, rational expectations, and so on),
only to see their theories fail empirical tests and directed experiments. Perhaps
the major unfulfilled challenge to the economic literature has been the search for
“sufficient” conditions for long-term growth. Accumulation of capital, the “right” mac-
roeconomic policies, privatization, all of these arguably positive and “necessary” ele-
ments failed to ensure growth in some of the countries where they were successfully
implemented. Which sufficient conditions are missing from our textbooks that may
explain these failures?
Douglass C. North received the 1993 Nobel Prize in Economics for highlighting
the role of institutions for economic processes. His work and that of his followers is
commonly known as the New Institutional Economics.1 The importance of institu-
tions is two-fold: First, institutions provide structure on which civilizations are 
built. Second, institutions provide incentives to agents through formal and informal
rules and their enforcement. While informal rules stem from religion and complex
historic developments, formal rules are the work of polities that aggregate choices in
societies. The institutions-rules nexus provides surprisingly rich context for study-
ing economic and social processes. In addition, new institutionalists offer relatively
rare ground for debates between economists and historians.
One example of the institutions-rules nexus is the emergence of trade, or so-cal-
led impersonal exchange, which could not properly develop before effective third-
-party enforcement (courts, police) became available. Another example is the preva-
lence of low US-dollar wage rates in less-developed countries. Professor North and
others link the low level of income in these countries to comparatively high transac-
tion costs that make these countries much less favorable destinations of foreign in-
vestment. This fact has been well known, but the new institutionalists explained why
there are no quick fixes to these problems. For example, the favorite fix of trans-
planting the US or French constitution does not work, primarily because newly im-
posed formal rules conflict with informal rules.
1 New Institutional Economics does not constitute a separate branch of economics because, in
part, it is deeply rooted in neoclassical price theory. Moreover, new “institutionalists” have little
in common with the older institutionalists, whose research goes back to the work of Commons
and Veblen. Chapter I and II of this book provide a fairly good overview of new institutionalists
contribution to economic analysis.
RECENZE
UDC: 330.83; 330.101
JEL classification: B25, N10, P16
Keywords: institutional economics – history – political economy
The Frontiers of New Institutional
Economics
editors:
John N. DROBAK and John V. C. NYE
San Diego, Academic Press, 1997, 374 pagesThis book, edited by John N. Drobak and John V. C. Nye, contains 12 papers by
an assortment of well-known new institutionalists. The papers were originally pre-
sented in 1995 at a Washington University conference to celebrate the Nobel Prize
award to Professor North. The topics covered in the book show the range of interests
of new institutionalists: failed land privatization in Kenya, several economic history
case studies; the role of institutions in explaining violence in the Brazilian Amazon
region; or the testing of rational expectations in computerized experiments.
I will not discuss every paper in this review, some of which deal with fairly esote-
ric topics; the focus will be instead on a few papers addressing some of the issues
that I found relevant for the new millenium.
Philip T. Hoffman and Jean-Laurent Rosenthal, in “The Political Economy of War-
fare and Taxation in Early Modern Europe: Historical Lessons for Economic Deve-
lopment,” neatly integrate warfare, fiscal regimes, property rights, and economic
growth. Economists have known, of course, that parliamentary regimes taxed less
than absolute monarchies and that theformer established more stable property rights.
According to Hoffman and Rosenthal, the motivation for fiscal policies – which were
to a large extent determined by the distribution of taxpayers – was warfare. Military
spending typically accounted for almost one-half of total government spending during
peacetime, rising to around three-quarters thereof during wartime. The authors 
built a model to explain the costs and benefits of going to war for different forms of ru-
ling classes.
Hoffman and Rosenthal find three rather optimistic implications concerning poli-
tical regimes and wars. First, the willingness to engage in warfare declines with
a move from autocracy to absolutism and further so with parliamentary regimes. Se-
cond, although taxes will on average be lower under absolutism than under an au-
tocracy or parliament, because absolute monarchs control only a part of the economy,
distortions caused by marginal tax rates are highest under absolutist systems. Fi-
nally, the net returns of war will be highest under parliamentary regimes, which tend
to commit all needed resources only to wars they consider economically justifiable.
Hence, the model results suggest that representative governments of the western
type can survive and prosper when surrounded by warlike neighbors, both for eco-
nomic and military reasons. This is certainly encouraging for some of the new de-
mocracies in the Third World.
Avner Greif, in “On the Interrelations and Economic Implications of Economic, So-
cial, Political, and Normative Factors: Reflections from Two Late Medieval Societies”,
compares developments in two trading societies, in that of Jewish Maghribi traders
who operated in the Muslim Mediterranean during the 11th century,2 and among
the Genoese traders of the 12th and 13th century, who were a part of the Latin world.
The Maghribis, despite having access to both the Muslim legal system and the Je-
wish legal system of the Fatimid Caliphate, entered contracts and attempted to re-
solve disputes informally. The Maghribis created a “collectivist” society with econo-
mic, self-enforcing collective punishment and with a weak government. In contrast,
Genoa was incorporated as an independent city-state where society was “individua-
listic” with a strong, coercive government. The Genoese relied on second-party en-
forcement institutions, especially courts and city authorities.
The paper finds that the collectivist system is more efficient in supporting intra-
economy agency relations and requires less costly formal organizations, yet it re-
stricts efficient intereconomy agency relations and limits individual initiative. In con-
trast, the individualistic system does not restrict intereconomy agency relations and
does promote anonymous exchange; however, the system is costly and is less likely
to have effective social enforcement mechanisms.
170 Finance a úvûr – Czech Journal of Economics and Finance, 53, 2003, ã. 3-4
2 By the end of the 12th century the Maghribis were forced by the ruler of Egypt to cease trading
and eventually vanished as a distinct social group.John V. C. Nye, in “Thinking about the State: Property Rights, Trade, and Chan-
ging Contractual Arrangements in a World with Coercion”, debates some cases
of the rational-actor theory of state. First, slavery can exist only in a society with in-
complete markets (otherwise the slave would buy his freedom by paying more than
he can produce as a slave) and high costs of monitoring, control, and rent extraction
(otherwise the slave would end up producing the same output as a free man but with-
out the cost of slavery). Second, Nye provides a positive explanation of why the form
of government in Britain and France diverged so sharply between 1600 and 1800. It
appears that the French paid for greater short-run control both by higher dead-
-weight costs of restrictions and regulations but surrendered long-term control and
flexibility in their administrative apparatus.
Jean Ensminger, in “Changing Property Rights: Reconciling Formal and Informal
Rights to Land in Africa”, confronts an intriguing puzzle: even though many African
societies are becoming more individualistic, an increasing number of them are back-
ing away from a government-sponsored formal system of freehold land tenure (Ke-
nya, Tanzania, Ghana). Interestingly, the absence of individual title to land has been
widely recognized among Africans and aid agencies alike as one of the main road-
blocks to food security and credit availability (in western societies, “immovable” land
traditionally served as the safest credit collateral). Jean Ensminger identifies many
pitfalls of land privatization in Africa: creation of new property rights that conflict
with informal (and indeed sometimes formal) rules; high cost of re-titling; the con-
flict between land consolidation and split holdings as a form of insurance; and so on.
The remaining and equally interesting chapters are written by Stanley L. En-
german (“Cultural Values, Ideological Beliefs, and Changing Labor Institutions: No-
tes on Their Interactions”); Lee J. Alston, Gary D. Libecap, and Bernardo Mueller
(“Violence and the Development of Property Rights to Land in the Brazilian Ama-
zon”); Robert H. Bates and Kenneth A. Shepsle (“Intertemporal Institutions”); Barry
R. Weingast (“The Political Foundations of Limited Government: Parliament and So-
vereign Debt in the 17th- and 18th-Century England”); John N. Drobak (“Credible
Commitment in the United States: Substantive and Structural Limits on the Avoi-
dance of Public Debt”); Andy Clark (“Economic Reason: The Interplay of Individual
Learning and External Structure”); W. Brian Arthur (“Beyond Rational Expectati-
ons: Indeterminacy in Economic and Financial Markets”); and Paul A. David and
Warren C. Sanderson (“Making Use of Treacherous Advice: Cognitive Process, Bay-
esian Adaptation, and the Tenacity of Unreliable Knowledge”).
*  *  *
In summary, the book’s editors, J. N. Drobak and V. C. Nye, have collected 12 fas-
cinating papers covering issues ranging from economic history to computerized ex-
periments with “rationality”. Most of the papers are inter-connected through the in-
spiration provided by Professor North, whose writings are heavily cited. This is abook
for both economists and historians, and indeed will be enjoyed by all those who ap-
preciate the historical, social, and political dimensions of economic processes.
Ale‰ BULÍ¤*
171 Finance a úvûr – Czech Journal of Economics and Finance, 53, 2003, ã. 3-4
* International Monetary Fund, Washington, D.C. (abulir@imf.org)

The Frontiers of New Institutional Economics (Eds.: John N. Drobak and John V. C. Nye) (in English)

http://journal.fsv.cuni.cz/storage/930_05_169-171.pdf

The Frontiers of New Institutional Economics (Eds.: John N. Drobak and John V. C. Nye) (in English)

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