Grief – chapter 1 notes

Grief – chapter= 1 notes.

Technological features – geographical location, useful knowledge, capital stock.<= /span>

N= on-technological features – laws and enforcement methods, ways of allocating and secur= ing property rights, levels of corruption and trust.

One way of viewing institutions is as these non-technological features.

These institutions im= pact economic outcomes by influencing decisions to: work, save, invest, innovate, prod= uce, and exchange.

Institutions vary acr= oss countries, however. There are multiple ways to address the issues. = What influences the particular form an institution will take in a gi= ven country?

Cultural context,

Religious beliefs,

Social structures,

Wealth distribution,<= o:p>

Political context,

Political traditions,=

Environment at the ti= me of colonization,

Identity of colonial = power,

His approach is to go= beyond identifying the correlation between institutional form and economic outcome. He is trying to get = at the underlying individual incentive structure, how the individuals interact, and how this leads to the outcome in question.= If we understand this, we begin to be able to figure out why a particular form is present in a given context.

Neo-institutionalism identifies economic institutions with politically determined rules- rules a= re the outcome of a political process and are imposed ‘exogenously’ on individuals.

[Note on background:<= span style=3D'mso-spacerun:yes'>

Institutional economi= cs is a term commonly associated with Thorstein Veblen = and John Commons. They began publishing on these iss= ues in the 1890s. The context was ra= pid industrialization, rapid transformation of the political, economic, and soc= ial structures. These two were Mid-westerners, and are often associated with ‘prairie populism’= ;. Institutional economics differs fr= om neoclassical economics in a focus on: evolution, culture, cultural relativity. Evolution in response to Darwin, and focus= ed on the idea that societies and cultures can evolve. A growing awareness of culture as a complex whole including knowledge, belief, art, morals, law, custom,…and that culture was learned. This leads to an understanding that multiple cultures exist and can be compared, hence cultural relativity. Commons emphasized how economic structures were embedded in political and social structures. This differs from neoclassical economics, where markets are viewed as a universal phenomenon. Here, valuat= ion of an object is not inherent, but a reflection of a learned, evolving, and constructed culture.

Anne Mayhew, The Beginnings of Institutionalism, Journal of Economic Issues, 21(3) September 1987, 9. 971-998

New institutional eco= nomics builds on this and also follows on the ‘transaction cost’ economic analysis of Coase. Williamson, with an analysis of th= e firm as a means of reducing transactions costs, follows. North provided the distinction bet= ween institutions (rules of the game, both formal and informal) and organizations (the groups of people and the governance arrangements they devise). Clearly hard t= o tell apart in reality. ]

G= reif points out it is not the rul= es themselves we need to look at, but the motivation to follow the rules.=

One response is fear = of punishment. But as Grief poin= ts out, that just moves the question back one step to then ask, why is the punisher motivated to follow the rule to punish the transgressor?

He is after understan= ding how the motivation to follow particular rules is created. Motivation is endogenous, not exog= enous.

‘Private order’ or= der that prevails in the absence of a third party that enforces.

Another way of lookin= g at it – we can assume the state enforces, and the state has a monopoly over= the legitimate use of force, but then we have to figure out how this happened.<= span style=3D'mso-spacerun:yes'> A functioning state is an outcome – how did it come about? So again, we can assume the state, but at some level we have cut off part of t= he question to focus on another piece of the puzzle, but a fundamental issue remains to be answered.

Greif then brings up = the issue of institutional dynamics – the rules change and evolve. What leads institutions to change = and what is the influence of past institutions on subsequent ones?

In game theory, the r= ules can be viewed as either given or the equilibrium of the game. But that leads to a logical problem – how can this be the case and still allow for rules to evolve? At one level, we can say rules cha= nged, new equilibrium outcome, but that reaches outside the game for the change.<= span style=3D'mso-spacerun:yes'> At another lev= el, the rules as an equilibrium does not allow for change (again, without reaching outside the problem). = He also notes that in game theory, the outcome is conditioned on the informati= on sets of each player. But then= we can turn to the institutional economics literature to find that one reasons institutions exist is to create knowledge among players. So that, again, gets us assuming t= he existence of something that we might want to explain.

A contrast is made be= tween structural and agency (functionalist) views of institutions. Structural views them as immutable cultural features, agency views them are created institutions to serve a function. <= /p>

1.2: Comparative and Historical Institutional Analysis.

= 1)&n= bsp; Departing f= rom the practice of viewing institutions as a monolithic entity. So while they have been seen as ru= les, beliefs, norms, behavioral traits, he is making the case that they institut= ions are an interrelated set of these elements.= These are exogenous to the individual.

= 2)&n= bsp; Trying to c= ombine the structural and agency views. To do this, he is going to focus on the transaction as the basic unit of analysis. More on this in cha= pter two. The mix allows us to foc= us on self-enforcing / endogenous institutions, but also on their evolution. The self enforcing aspect reflects= the agency view. But there is a structural element to understanding the dynamics – institutions are n= ot created anew each time to solve the modified problem, but inherit some of t= he structure from the past as well.

= 3)&n= bsp; Role of game theory. Is game theory an underlying theory of institutional analysis? Is it simply a useful analytical tool? Greif argues the latter= . While game theory is used to arriv= e at institutions as equilibria, he does not believe= that institutions are game theoretic equilibria and = that game theory provides a theory of institutions. Game theory is a tool that is base= d on a set of assumptions. At one le= vel, it is problematic due to these assumptions. At another, it leads to multiple outcomes, making it limited as a predictive tool.

= 4)&n= bsp; Inductive reasoning is not going to do it for us, since it only can identify the observables. Institutions run= on the observables (rules) but also the unobservables (norms and beliefs).

So the overall point = of 3 and 4 is that the deductive approach is limited due to the possibility of multi= ple outcomes for a given set of conditions.&nb= sp; The inductive approach is limited by the fact that part of what determines outcomes is not easily observable. Note that this will play a part la= ter in the course when we look at the cross country regressions. Measures of institutions rely on observed items (secure property rights, rules), but these can not capture t= he norms and beliefs that underlie institutions. Outcomes can vary with the same observables if unobserved norms and beliefs vary (and get us back to another variant of the recurring theme – so why do they vary?).

= 5)&n= bsp; Trying to integrate the “cultural”- institutions as cultural phenomena- a= nd the “institutional”-institutions as rules or contracts. Note that this brings an element o= f the institutional economics of Commons and Veblen noted above back into the mix= . And makes it all rather confusing.=

= 6)&n= bsp; Getting at = the fact that culture influences institutional development, and integrating cultural influences into institutions is a mechanism that leads to their persistence.

1.3 = Commercial expansion in the late Medieval period.

Why focus on this? One, records exist. Tw= o, rapid expansion in economic well being.&n= bsp; Long distance trade “became the driving force of economic progress, and in the end affected every aspect of human activity almost as decisively as the Industrial Revolution changed the modern world.” Three, there was not change in technology or endowments that made this happen- they figured out the institutions. Four, this epoc= h is related to the ‘rise of the West’. Given the difference in living sta= ndards we see in the world today, it is an important question – why did this happen? While at one level the answer may be “the industrial revolution happened there first”,= yet again we have just moved the question back a notch – well then, why t= here first? Greif suggests that the institutions formed to allow trade may be part of the answer.