McCloskey’s Representative Foe: The New Institutional Economics

I like to joke that Sweet Talk’s business model is to invite people to write here as though it were a big honor, and then guilt them until they take us up on it. Paul Crider is my latest victim; I invited him on a few months ago and he accepted but hadn’t decided on a topic. His first post came after we were discussing Deirdre McCloskey’s latest paper and he mentioned some concerns he had with it and with her treatment of the subject in Bourgeois Dignity. I said “That would make a great Sweet Talk post.” It was probably the second or third time I’d said that sentence to him; this time I got him to bite.

Since the entire point of Sweet Talk is conversation, I’d like to add to his inaugural post with one of my own.  I’m going to push back against his main claim, while tying it back to a previous thread on the nature of literatures more generally.

Neo-Institutionalism in Economics

Like Paul, I’m not what anyone would call an expert in institutional economics. I generally defer to fellow Sweet Talker Sam Wilson on such matters; I am here obliged to point you to a wonderful series he wrote on the subject over at Euvoluntary Exchange.

However, I did go to GMU to get an MA in economics, and while I was there I took a course on institutional economics taught by John Nye, a founding member of the International Society for the New Institutional Economics. I took the class the year that Oliver Williamson won the Nobel Prize in Economics, and Professor Nye proudly pointed out that, with that, the first three ISNIE presidents all had Nobels. The other two were Ronald Coase and Douglass North.

Professor Nye is one of the smartest, most incisive thinkers I’ve had the honor to meet. Like so many young men in a theoretical field, I was quite confident I knew the answer to everything, and he always had a question ready that forced me to rethink everything from the beginning, more carefully. Mancur Olson seemed to me to present nothing but Revealed Truth, but Professor Nye sketched out three or four contradictory models that could reasonably be said to represent a particular passage in The Rise and Decline of Nations, showing how imprecise Olson could be. I had fun watching as he participated in a discussion with McCloskey, Mokyr, and Boudreaux last year.

So I confess to a guilty amusement at finding him mentioned by McCloskey in her paper, in a highly sarcastic manner:

The less dogmatic of the neo-institutionalists, such as Joel Mokyr and John Nye, seem on odd days of the month to believe in the North-Acemoglu pre-judgment that N -> G. No Ideas present. On even days the lesser-dogmatists calls ideas, D, “culture,” which is the vague way people talk when they have not taken on board the exact and gigantic literature about ideas, rhetoric, ideology, ceremonies, metaphors, stories, and the like since the Greeks or the Talmudists or the Sanskrit grammarians.

McCloskey’s paper finally clarified a confusion I had had since reading Bourgeois Dignity. I understood her point that institutions could not explain the Great Enrichment, because Great Britain had had basically the same institutions for a long time before its onset, and because such (or even better ones) institutions had existed many times in many other places throughout human history. What I did not understand was her point that the Enrichment was not caused by culture. She said instead that it was caused by a change in rhetoric. I did not really understand the distinction—to me, “culture” was simply the word that described everything that filled the gaps left by institutions. To say that the rhetoric about business had changed seemed to me no different from saying that there had been a particular change in the culture.

It’s now clear to me that coming at institutional economics from a GMU perspective is precisely why I had trouble grasping her framework. As she says, culture is often referred to as a sort of black box to explain the residual that was not explained by institutions. And institutions were treated as merely a bundle of incentives and game theoretic rules which guided utility maximizers into outcomes that they would not have arrived at on their own. Culture was expected to be something different, but not different in kind—there was always the implication that some sort of game theoretic guidance was probably going on there, too.

That is what McCloskey takes aim at in her paper, as well as many of the big names in the new institutional economics who don’t even include the hand-waving reference to culture. I think her critique is dead on, and what I like about it is that she really fleshes out the positive case for what institutions, culture, and rhetoric actually are. I was delighted to see her citing John Searle’s institutional ontology, as well as brain scientists, and I have basically been saying the word “conjective” wherever I can get away with it since reading the paper. It makes me even more eager to get my hands on Bourgeois Equality, the last book in here series which should go into this in greater depth, when it comes out.

The Literature? Which Literature Would That Be?

Paul points to an interesting review of a growing literature that makes a concerted effort to stop treating culture as a mere black box. I find this very interesting, because my own experience with the institutionalists lines up much more with McCloskey’s. The character of that literature is an assumption that, as Dan Klein puts it, knowledge is a flat thing that you either have or you don’t, without a place for judgment. Beliefs and ideas don’t enter into it at all, and institutions are just systematic levers of doling out pain and pleasure to achieve particular collective action outcomes.

But the review Paul cites seems to grapple with more dimensions than that. And it has 12 pages of citations; it really draws on a broad base of scholarship.

This brings me back to the discussion that Sam Hammond, Garett Jones, and a few others and I had on the nature of literatures in general. As a literature like institutional economics matures, it gets bigger and develops a lot of sub-literatures. Your perception of the general character of the literature will probably depend a lot on your entry point. For McCloskey from Chicago, and for me from GMU, we see the towering figures who started the field to begin with. I was surprised at the way McCloskey characterized Ronald Coase’s two famous papers in The Rhetoric of Economicsshe emphasized that Coase’s world was filled with talk, which is true. But it seems to me that you could see right in those papers the destiny of the fields that were to be inspired by his work. For if we take the equation that McCloskey gives us:

I get the price theory: price and property, the variables of prudence, price, profit, the Profane as I have called them, move people. But the point here is that they are also moved by the S variables of speech, stories, shame, the Sacred, and by the use of the monopoly of violence by the state, the legal rules of the game and the dance in the courts of law, the L variables. Most behavior, B, is explained by P and S and L, together:

B = α + βP + γS + δL + ε

It seems to me that Coase talked about at most a model where B = P + L. And certainly, P + L is superior to merely P, which characterized most of 20th century economics. And indeed, the fields inspired by Coase—Law and Economics, Institutional Economics, and Industrial Organization, to name but three—all had this character of assuming B = P + L.

Nevertheless, perhaps precisely because Paul is seeking to get up to speed on the latest literature rather than taking a course that provides a broader genealogy of the field, he found something that seems to be consciously trying to work McCloskey’s S into the equation. She commented, saying that she would check the paper out, and adding:

I’m very willing to believe there are others who are more aware of the force of culture (Joel Mokyr, for example, an ally of mine in emphasizing the role of ideas in economic history; Joel and Avner Greif are going to reply to my article). But “culture” is a vague word. I prefer to speak of particular ideas, such as equality of dignity.

I would bet that the people Paul mentions have made valuable contributions, but I’d also bet that McCloskey will be frustrated by their lack of engagement beyond the boundaries of economics or social science in general. Hence her taking to task Nye and Mokyr for not having “taken on board the exact and gigantic literature about ideas, rhetoric, ideology, ceremonies, metaphors, stories, and the like since the Greeks or the Talmudists or the Sanskrit grammarians.”

I wonder whether economics will ever be able to internalize such a broad-minded approach into its practice. Another option is already unfolding: McCloskey and others like her (such as frequent co-author Arjo Klamer) are contributing what is essentially an independent, alternative conversation that has grown into a literature in its own right. Whether that literature one day gains prominence among the big schools of economics is an open question. I’m a short term pessimist on that count, but I am certainly rooting for them.

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