Institutions and Economic Theory

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Institutions and Economic Theory

• Jiang jian-qiang
• China Center for Economic Studies
• Fudan University

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Resources

• http//www.coase.org
• Readings suggestion
• ???,????,2000,?????????
• Furubotn, Eirik G. and Rudolf Richter,
  Institutions and Economic Theory The
  Contribution of the New Institutional Economics,
  Ann Arbor The University of Michigan Press, 1997
• Eggertsson, Thrainn, Economic Behavior and
  Institutions, Cambridge Cambridge University
  Press, 1990.

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Introduction

• Objectives
• A preliminary introduction of the New
  Institutional Economics (NIE).
• What are the differences between the NIE and the
  Neo-classical economics

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What is the NIE all about?

• The NIE
• Is to understand and explain the institutions of
  social, political and commercial life.
• the language is economics.
• The NIE can be thought of as the outcome of the 
  Chicago Schools economic imperialism.
• What is the Economic imperialism?
• using Neoclassical economics to explain areas of
  human society normally considered outside them. 

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What is the NIE all about?

• The branches of NIE
• The Law and Economics
• The Public Choice School
• The New Social Economics
• The New Economic History

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Terminology

• Institutions
• are regularities in repetitive interactions among
  individuals, and also the humanly devised
  constraints that structure human interaction. 
• Formal constitutions, law, rules (market,
  property rights, contract, firm, marriage, etc)
• Informal norms of behavior, self-imposed codes
  of conduct, conventions,
• Or, simply, the rules of the game

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Terminology

• Scarcity
• Goods, Price (Sacrifice)
• Private choices
• Competition
• Society more than one man
• Social choices
• The rule of the game
• The property rights

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Terminology

• Institutions define and limit the set of choices
  of individuals.
• Institutions are the constraints which stipulate
  both what individuals are prohibited from doing
  and, under what conditions some individuals are
  permitted to undertake certain activities

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Terminology

• Transaction costs
• The costs of resources used to facilitate the
  transaction.
• The costs of resources utilized for the creation,
  maintenance, use, and change of institutions and
  organizations.
• They may include
• The costs of defining resources
• The costs of measuring resources
• The costs of information
• The costs of negotiation
• The costs of enforcing the rights specified

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Terminology

• Property rights
• economic property rights
• (1) the right to use an asset,
• (2) the right to earn income from an asset and
  contract over the terms with other individuals,
  and
• (3) the right to transfer ownership rights
  permanently to another party.
• legal property rights.
• The legal property rights are the property rights
  that are recognized and enforced by the
  government.

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Postulate

• Individualism
• It is the individual, not the collective
  entities, such as society, the state and the
  firm, etc., who makes the decisions.
• The methodological individualism is the
  convention in the economics.
• Any scientific theory of social phenomena must
  start with and base its explanations on the views
  of the individual whose action give rise to the
  phenomena being studied.

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Postulate

• Individual rationality
• Smith (1776 ) not born to be selfish, but forced
  to.
• Alchian (1950) selfish as a result of evolution
  of survival of the fittest.
• Dawkins (1976) The Selfish Gene.
• Selfish as a postulate.
• Unorthodoxy
• Bounded rationality
• intentionally rational, but within limits
  (Simon, 1957)
• Opportunism
• Selfish-seeking with guile (Williamson, 1975)

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Criterion to be scientific

• Refutable by facts
• To be scientific, a theory must have testable
  implication that can be refuted by facts.
• If a theory is not refuted by facts, it is
  validated temporally, but not forever.
• The progress of scientific discovery is not that
  of the false theory substituted by the right one,
  but that of the more generalized substituted by
  the less generalized.
• Tautology and ad hoc theory

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NIE and Neo-classical Economics

• NIE vs. OIE
• Old Institutional Economics Thorstein Veblen,
  John Commons, Wesley Mitchell
• (1) a focus on collective rather than individual
  action
• (2) a preference for an evolutionary rather
  than mechanistic approach
• (3)an emphasis on empirical observation over
  deductive reasoning.

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NIE and Neo-classical Economics

• NIE vs. OIE
• Coases comment on OIE
• Without a theory they had nothing to pass on
  except a mass of descriptive material waiting for
  a theory, or a fire.
• Coase, 1984 p230

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NIE and Neo-classical Economics

• NIE vs. OIE
• In contrast to the many earlier attempts to
  overturn or replace neo-classical theory, the NIE
  builds on, modifies, and extends neo-classical
  theory to permit it to come to grips and deal
  with an entire range of issues heretofore beyond
  its ken.
• The NIE is an attempt to incorporate a theory of
  institutions into economics.

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NIE and Neo-classical Economics

• Constraints
• Positive transaction costs
• Choice set
• Traditional economics two dimensional - price
  and quantities
• NIE multi dimensional also take various things
  into account, such as quality of products and
  performance of factors, etc.

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NIE and Neo-classical Economics

• Approach to analysis
• Mainstream economics
• Nirvana approach (Demsetz, 1969)
• To compare real world outcomes (existing
  imperfect institutional arrangement) with the
  hypothetical benchmark of perfectly competitive
  general equilibrium.

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NIE and Neo-classical Economics

• Approach to analysis
• NIE
• Comparative institution approach (Coase, 1964)
• The relevant choice is between alternative real
  institutional arrangements.
• Comparative institution approach tends to
  transform the economic analysis from the
  normative into the positive.

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NIE and Neo-classical Economics

• Approach to analysis
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• (???,2000,?2?,?158?)
• Example buffet dinner
• The transaction costs are saved more than the
  wastes.

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NIE and Neo-classical Economics

• The area of analysis
• Price behavior
• Non-price behavior and institutions.
• Three steps
• (1) The nature, and structure of competitive
  institutional constraints
• (2) The effects of a particular institution on
  the behavior of human beings
• (3) Explain the existence and evolution of
  institutions.

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