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 Economics; she 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.

Previous Posts in This Thread:

I’m a big fan of Deirdre McCloskey. She’s become in the past two years one of my favorite intellectuals, alive or dead. At the very least, she’s responsible for introducing me to virtue ethics, my obsession for the past year. So I hate that my first piece for Sweet Talk is rather critical of a recent article of hers.

McCloskey has a new paper titled “Max U vs. Humanonics: A Critique of Neo-Institutionalism” (PDF) appearing in the Journal of Institutional Economics in which she takes the New Institutionalist school to task for failing to account for the influence of words and ideas in economic history, and especially for asserting that the Great Enrichment (the explosion of incomes from roughly 1800 to the present) can be explained without these concepts. The problem is she doesn’t seem to be talking about the same institutional economics that I’m familiar with (loosely, as a rank neophyte in all honesty).

She claims that the neo-institutionalists view institutions as mere rules-of-the-game, and that their attempts to introduce culture and ethics into the mix are tautological.

Norms” are one thing, “rules” are another. The neo-institutionalists turn their arguments into tautologies by melding the two. They end up saying, “Social change depends on society.” One supposes so. “Informal constraints” are not informal if they are constraints, and if they are informal the theory has been reduced to a tautology, because any human action is now by definition brought under the label “institutions.” The neoinstitutionalists have nothing non-tautological to say about ethics, because they have not read the immense literature on ethics since 2000 BCE, including the literature of the humanities turning back to look at the rhetoric of language. Being economist, raised on the childish philosophy that separates positive and normative when most of our scientific lives are spent in their intersection, they are quite unwilling to bring ethics seriously into their history and their economics. As one of them said genially to me, “ethics, schmethics.

But this is not what I have seen. Consider this review article by Alberto Alesina on culture, institutions, and how they interact. Alesina, by the way, is one among several scholars even I’m familiar with in the institutional economics field whom I was puzzled to see absent in McCloskey’s works cited.

Alesina discusses a handful of cultural variables that have been employed in the literature that have obvious ethical correlates. One is “generalized trust”, and it’s studied by survey studies (like the World Values Survey) about how far people feel they can trust others and which kinds of people can be trusted (just family? or people you meet on the street? only white folks?). It’s also measured in behavioral laboratory studies. It’s a component of what various social scientists refer to as social capital, but a Thomist like McCloskey or a McCloskeyan like me might better recognize it as the cardinal virtue, faith. Studying this character trait’s prevalence in populations and across time seems quite apposite of McCloskey’s own project of establishing a place of prominence in explaining the Great Enrichment to newfound dignity for the regular, non-aristocratic, non-privileged person. Bracketed comments are mine:

Trust has been shown to be relevant as an explanatory variable of economic development (Knack and Keefer (1997)) and individual performance (Butler et al. (2013)), financial development, participation in the stock market and trade (see Guiso, Sapienza, and Zingales (2004, 2008a, 2009)) [Faith gives one the hope and courage to participate], innovation (Fukuyama (1995)) [not piling brick upon brick but innovation led to the Great Enrichment] and firm productivity (Bloom, Sadun, and Van Reenen (forthcoming) and La Porta et al. (1997)). For a general review of the impact of trust on various economic outcomes, see the work of Algan and Cahuc (2013).

A closely related subject is “generalized versus particular morality,” which is a measure of how far out from family or other tight social circles should ethical consideration stretch. Does the stranger deserve ethical consideration? A member of a religious/racial/sexual minority? A foreigner? Ethics, schmethics indeed.

Individualism versus collectivism is another trait that is measured, and one can see how an individualism measure might correspond to a concept of dignity. “In individualist societies, the stress is put on personal achievements and individual rights.” These are societies where the individual is accorded dignity, and not merely subsumed into the prerogatives of the State or the Party or the Church or, as a matter of actual fact, the elites who dominate those entities.

The strength and importance of family bonds are measured and their influence on economic outcomes are discussed in the literature, and one can see how this might have similar effects as collectivism, and also be of interest to a humanist scholar of dignity for the individual to formulate and execute his own life plans, relatively free from overbearing illiberal families. This is a trickier trait, admittedly, as the family is important for the individual’s sense of identity (a species of faith, McCloskey might say).

“Attitudes toward work and perception of poverty” are grappled with in this literature. Again, this might be of interest to the author of the Bourgeois Virtues.

There are of course limitations to the research methods employed in this more up-to-date neo-institutional economics. Surveys surely don’t tell the whole story of the human conversation, and laboratory games can be misleading even when they don’t succumb to WEIRD sample problems. These methods can be accompanied and informed by the humanities, even up to the English and Philosophy departments. But this research program and the results it has yielded are better than McCloskey gives them credit for.

I’m decidedly not an expert in this field (I’ve never even taken an economics class!), but it strikes me as not only powerful on its own terms, but also fertile for the kind of rhetorical and ethical investigations McCloskey brings to bear. Alesina’s review discusses the ways culture and institutions influence each other in reciprocally causal ways. Institutions affect the cultural and indeed ethical behavior of individuals. As McCloskey notes, “Once someone is corrupted by life in a communist country, for example, it is hard to reset her ethics. She goes on relying on the “bureau” model of human interaction as against the market.” For sure. But culture influences institutions as well. Cultural traits, the conversation or “conjective” (or the Logos), the virtues as embodied in the people; these all influence the institutions that are formed and how they evolve and eventually fade unto dust.

And there are cultural shocks that can radically change institutions. The Reformation, the Sexual Revolution, Marxism, Christianity, etc. The gay rights revolution is a contemporary example of a rhetoric-ignited cultural shift that is altering institutions right before our eyes. McCloskey’s own thesis embeds nicely within the neo-institutionalist community of rhetoric, if I dare say. The Enlightenment, or certain ideas and conversations therein, acted as a cultural shock whereby the common person began to be seen with a dignity all her own, and this new dignity–and the liberty that accompanied it–encouraged her try out new ideas, to innovate.

My great fear is that McCloskey has not listened, really listened, to the strongest formulations of the ideas she disparages.