And the Award Goes to 'New Institutional Economics'. Why?!
Fri, 2009-10-16 14:32 — chirashree
…there is no account of capital and capitalists. There are no capitalists who have invested finance in productive capacity with a view to employing labour and making profits. There is only a list of quantities of various kinds of available inputs (Robinson 1980:56).
The Nobel Memorial Prize for Economics in 2009 has been awarded to Elinor Ostrom and Oliver Williamson. Their work separately on economic governance and rationale for property right structures is a more sophisticated rationale for capitalism and by extension its reigning-ideology-now-in-crisis - neoliberalism. The works of Coase, North and Williamson are the three pillars on which the ‘sophistication’ of ‘new institutional economics’ that informed the ‘good governance’ agenda of post-Washington neoliberal consensus was built upon. So it is not surprising that the Nobel memorial prize goes to the more 'sophisticated' theorists at a time when the 'crude' version faces a severe crisis of legitimacy.
During the hey day of Keynesianism and ‘structuralism’ in the post Second World War period, the ‘self-regulating market utopia’ (Polanyi) of Walrasian and neoclassical economics had come under scrutiny within neoclassicism. This was the period when the Prebisch-Singer hypothesis held sway, when the role of the state to reduce unemployment in advanced countries using fiscal policy and to accelerate industrialization in developing countries by protecting domestic markets was widely accepted in economic theory. During this period, neoclassical models of the market began to ponder puzzles like ‘why do firms exist?’ in attempts to resolve the contradictions that non-market institutions were necessary in market economies referring back to the work of Coase (1937). These investigations led to the elaboration of a number of concepts that assisted in the development of a more sophisticated kind of counterattack on 'intervention'. The analysis of ‘transaction costs’ was developed to explain why institutions like the firm existed (Coase 1960). This allowed neo-classical economics to begin to develop tools that could be used to challenge the efficiency of non-market institutions. The development of the concept of X-efficiency (Leibenstein 1966) deepened the argument for competition by showing that ‘technical efficiency’ was different from ‘allocative efficiency’. Even if all the conditions for allocative efficiency did not exist, competition could reduce intra-organisational slack, and encourage innovation over time (Vickers 1995). The analysis of rent-seeking and regulatory capture began to develop to explain why state intervention could be much worse than conventional neoclassical economics suspected (Stigler 1971). These concepts along with ‘asymmetrical information’ (Akerlof 1970) and its extensions into ‘adverse selection’ and ‘moral hazard’ (Arnott and Stiglitz 1988; Stiglitz 1990) formed the basis of the supposedly brave new world of microeconomic exploration by various strands of neoclassical economics in the 1980s and 1990s into hitherto unchartered territory of non-market institutions, the work of this year's Nobel Memorial Prize winners being foundational extensions of the 'new tradition'.
However, all of these investigations were starkly different from the concerns of an earlier generation of economists like Joan Robinson whose critique of Walrasian economics was very different. Their concern had not been that Walrasian markets were imperfect but that in the Walrasian market,
…there is no account of capital and capitalists. There are no capitalists who have invested finance in productive capacity with a view to employing labour and making profits. There is only a list of quantities of various kinds of available inputs (Robinson 1980:56).
This critique of the technoeconomic paradigm of the market model has recurred again and again in the writings of a range of academics and intellectuals, but ‘the triumph of capitalism’ with the collapse of the ‘Second World’ made it easy for practitioners of neoclassicism (even if they were dissenters within their own paradigm) to be on the offensive against other paradigms and seldom question their own beyond pursuing and 'solving' the very obvious intellectual inconsistencies.
In these developments within the monoeconomics tradition within microeconomics, economic history became defined as the ‘performance of economies through time’ (North 1994). All this subsequently made up what was termed ‘New institutional economics’. This added a number of propositions to earlier versions of neoclassical theories of growth from the 1960s onwards and began to build on the ‘microfoundations of macroeconomics. Building on these insights, the ‘new institutional economics’ argued that institutions and time matter in economics and that institutions form the ‘incentive structure’ of a society that determines amongst other things, its growth performance over time. In consequence, political and economic institutions are the underlying determinants of economic performance (North 1994).
In the dominant days of Anglo-American Keynesianism, these debates were often on the political fringe of academic journals. It was only with a radical shift in academic praxis after 1973 following the rise of ‘monetarism’ as the ambit of state policy and the resurrection of the Hayekian concept of a ‘minimalist state’ under the Reagan-Thatcher regimes that the ‘new’ economics started finding legitimacy. The Hayekian theory from the Austrian school set the ‘entrepreneur’ at the centre of the question of economic agency deriving its competition driven ‘equilibrium’ from knowledge and not capital accumulation. The dissociation of these debates from the process of class formation and capital accumulation paved the way for isolating political economy based on a materialist conception of history from economics. Instead, what Hirschman described as ‘monoeconomics’ began to evade the analysis of politics in the form of ‘new political economy’ and ‘new institutional economics’ that combined the assumptions of ‘homoeconomicus’ and ‘methodological individualism’ with cultural relativism, essentialism, idealism and reductionism.
Despite the growing diversity of economic approaches within the dominant school, four assertions were shared by all of them. First, that society is an aggregation of individuals; two, individuals engage in maximizing rational behaviour (even if constrained by bounded rationality); three, this behaviour results in the creation and maintenance of equilibrium (though equilibrium can often only be analyzed at the microeconomic level); four, these behavioural premises imply that markets achieve (constrained) efficiency for all individuals and by aggregation for society. These four propositions reiterated in thousands of economics textbooks published in the last quarter century defined the core principles of ‘economics’. This not-so-subtle omission of other approaches became defined as ‘the method of economics’ in less than two decades.
Deep questions are unavoidable about approaches that see ‘growth’ as inter-temporal utility maximization by individual economic agents designated in their roles as savers, investors and consumers rather than a complex outcome of the interaction of movement in ‘capital accumulation, labour force and technological progress’ (McFarlane 1989). The striking convergence in the different branches of neoclassical economic theory and its particular applications in trade theory based on the ‘standard version’ of the Hecksher-Ohlin models and the newer versions that factored in ‘increasing returns’ through trade in replicating the ‘new growth models’ of Romer, Lucas etc informed the literature spawned by the World Bank arguing that ‘trade liberalization’ was the best bet for growth for ‘developing countries’. This argument informed the influential work of Dollar and Kray. Ocampo and Taylor (2000) and Deraniyagala (2005) have demonstrated that this was based on ‘common sense’ and ‘faith’ irrespective of historical evidence.
Economics as a discipline dominated by monoeconomics at the end of the 20th century began to recognize that ‘history matters’ but subtly replaced complexities of history to ‘path-dependency’ with ‘multiple equilibria’ (David 2000) and reduced the specificity of different modalities of exploitation of labour in a capitalist system to ‘human capital’ drawing on Becker (1964). This reduction of history into what Hobsbawm called ‘retrospective econometrics’ once again ‘deliberately narrowed the ‘new’ economic history’s field of vision to fit the highly restrictive nature of the ‘cliometric’ models (Hobsbawm 1998). Harriss (2001) and Fine (2001) have demonstrated the depoliticisation of the debate on politics of development and social theory respectively with Putnam’s depoliticized versions of ‘social capital’.
A further set of arguments focused on ‘corruption’ and ‘democracy’ to establish the importance of markets and the dangers of state power – all derived from these ‘microfoundations’ of ‘new institutional economics’ . A series of papers established the negative association between ‘corruption’ and investment as well as growth (Mauro 1995) refuting Huntington’s 1968 argument that corruption could be expected in countries experiencing rapid economic growth. Bardhan (1997) formulated a new political economy justification for ‘getting rid of dysfunctional regulation’ by the state based on an evaluation of ‘public institutions’ as the source of corruption. This was in keeping with his earlier work that traced the ‘bureaucracy’ as a separate ‘ruling class’ and the source of the ‘political evils’ related to the ‘control’ regime in India (Bardhan 1990). Similar accounts came from Shleifer and Vishny (1993) in their analysis of corruption that attributed economic problems to the political evils of public enterprise. Thus the rationale for privatization came from the microfoundations of 'new institutional economics' again.
These new political economy/new institutional economics evaluations were often based on a ‘typology of corruption’ that comprised a series of homogenizing assumptions about the source and nature of corruption that one can argue are once again in keeping with the fundamental precepts of ‘monoeconomics’. The theoretical treatment of corruption points out that in the ‘new political economy’ literature, ‘bureaucrats’ who control public sector goods take centre stage. Corrupt behaviour involves the creation of new private property rights over such goods. The solution in neoliberal treatments emerges as deregulation and privatization that is claimed to have the power to destroy the preconditions for corruption.
In spite of a range of literature that pointed out the theoretical fallacy of such propositions and provided evidence of the ‘process of accumulation through market exchange’ and ‘political power’ being closely associated with the specific nature of corruption, the new political economy propositions slowly found their way in to the post-Washington consensus on ‘good governance’. A series of assertions were dressed up in economic jargon and sophisticated modelling, adding a false veneer of ‘high technicality’ and expertise to a flawed intellectual paradigm with ‘lack of historical warrant’ (Byres 1998).
The World Bank now had a new set of tool kits that widened the scope of its programmes and directives based on the ‘good governance’ agenda. In the World Development Report of 1997 published by the World Bank, the debate on the role of the state found a key focus and the focus was now on building ‘effective states’ built on the logic of the market. The clarion call after the East Asian crisis was towards ‘matching the state’s role to its capability’ (World Bank 1997: 3) and to ‘raise state capability by reinvigorating public institutions’ (Word Bank 1997: original emphasis). The analysis of this ‘capability enhancing strategy’ was elaborated:
…This means designing effective rules and restraints, to check arbitrary state actions and combat entrenched corruption. It means subjecting state institutions to greater competition, to increase their efficiency. It means increasing the performance of state institutions, improving pay and incentives. And it means making the state more responsive to people’s needs, bringing government closer to the people through broader participation and decentralization… (World Bank 1997: 3)
The report advocated focusing on fundamental tasks through ‘partnerships with the business community’ and ‘civil society’. The first job for all states was to get the ‘fundamentals’ right. The fundamentals were laid out clearly: establishing a foundation of law, maintaining a ‘nondistortionary’ policy environment including macroeconomic stability, investing in basic social services and infrastructure, protecting the vulnerable and protecting the environment. The way to do this was formulated in terms of a toolkit: harnessing the power of public opinion, making regulations more flexible, applying self-regulatory mechanisms and choosing effective market-based instruments. Thus ‘monoeconomics’ prevailed in the assumptions that the ‘free market’ is the virtuous path towards the eradication of corruption, rent seeking and other political evils that are the prerogative of ‘state’ functionaries.
The ‘good governance’ agenda of the post-Washington Consensus was the new marching song for international financial institutions along with a greater ‘surveillance’ role assigned to the International Monetary Fund (Griffith-Jones 1998) after the East Asian crisis. New political economy approaches informed by the wisdom of the ‘good governance’ agenda spelt out ways in which the market mechanism could introduce transparency, reduce corruption and bring about a fairy-tale ending to all the ‘problems’ of ‘developing countries’ (World Bank 1989, 1996).
The ‘good governance’ agenda of the post-Washington Consensus was the new marching song for international financial institutions along with a greater ‘surveillance’ role assigned to the International Monetary Fund (Griffith-Jones 1998) after the East Asian crisis. New political economy approaches informed by the wisdom of the ‘good governance’ agenda spelt out ways in which the market mechanism could introduce transparency, reduce corruption and bring about a fairy-tale ending to all the ‘problems’ of ‘developing countries’ (World Bank 1989, 1996).
'New institutional economics' is the bedrock of the kind of wisdom that informs how to save capitalism from capitalists.
To those who feel a sense of either intellectual or political relief on this year's awards, the outcomes of these economic governance agendas to save capitalism need not be spelt out again and again. This blogger's outrage about Williamson is the same as the outrage that she feels about Friedman or Hayek (even though Hayek in her humble opinion was also a sophisticated and brilliant theorist).
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Comments
capitalism works. how?
capitalism works: it is a social system which support a division of labour of ever increasing complexity producing an ever increasing range of goods on an ever increasing scale. an outrage against the outcomes capitalism generates should not make us ignore this fact.
models of perfectly competitive markets are unable to explain how real capitalism works, since they can produce good outcomes only under very restrictive conditions. nor can they explain the huge variety of institutional arrangements that exist under capitalism. i think williamson and economists like him have shown us one (not by far the only) mechanism through which capitalism works. the scientific background paper which accompanies the nobel announcement cites empirical evidence, primarily from industrial organization settings, that back up williamson's ideas. joan robinson's complaint about theories of capitalism that do not contain any capitalists can be addressed only by looking into the concrete details organization of production under capitalism and i think williamson's work is a step forward from simple neoclassicalism in that direction.
are williamson's contributions significant enough to warrant the top prize in economics? i don't know. but i think that any attempt to address that question must confront head on the merits or otherwise of his work, and to see how much it corresponds to reality. to show that it ignores aspects that we think are important or to show that it is used in ways we do not like is not enough.
in passing, i think 'monoeconomics' is a worthy ideal--one general theory being always better than many special ones. of course whether a particular attempt to achieve that ideal has been successful or not is a question that must be answered by the data.
@jyotirmoy
No doubt that new institutional economics is a sophisticated rationale for capitalism. But I would need a better reason to embrace it than the argument that it is better than crude neoclassicism.
@chirashree. Williamsonism ≠ Marxism. Hence wrong?
Perhaps one of the reasons for the difference between us is that I don't read Williamson's work as a rationale for capitalism. Its starting point, which it takes as given, is a burgeois society of individuals with private property and it goes on from there to study how they can come together to produce. So it cannot possible answer how such a society comes about, whether such a society can survive indefinitely or whether such a society is desirable on any criteria. All it can tell us is that given the constraints of that society, and given profit-seeking individuals, what organizations are likely to emerge in different circumstances. And as Williamson himself admits, it approaches even this limited question in a very one-sided way, looking only at transactions costs.
Given this I see Williamson's ideas as an everyday, 'engineering', type of theory that works within the bounds of capitalist society, . trying to explain a certain part of its functioning, as against the more ambitious Marxism that tries to understand those bounds and their transcendence. For me, the interesting question is whether it succeeds in at least this.
But for the particular questions that Williamson asks regarding the boundaries of firms and the nature of contracts, I don't think Marxism has an answer. Marx showed great insight in identifying the tendencies towards the concentration and centralization of capital. But looking around us we see that concentration is not a one-sided matter. Many industries that were vertically integrated once--say automobiles or telecommunications or airline reservations--are today vertically split. Many industries that were vertically split are now integrated. What drives these changes? Was Microsoft right in claiming that bundling Internet Explorer with Windows was good for the consumer? Do all cases of product tying harm customers? How can a regulator promote innovation in a regulated industry? Why do I have a contract while my neighbour has tenure? Marxism has no answer to these questions. Marxism has no analysis of the detailed working of the large hierarchal organizations that today's firms are. More so when a large part of the workers of these firms are not dispossed proletarians but people who have put in considerable investment in education and workplace relationships.
You argue, and I agree, that Marx and Williamson see the world very differently. That by itself does not tell us anything. It may very well be the case that Marx is wrong. Or perhaps Williamson is wrong, but on points that are not essential to his task. The proof of the pudding has to be in the eating. If you give me many instances where Williamson's theory, on questions of contracts or industrial organization, gives wrong predictions, or if you can point me to a theory which gives more right predictions than Williamson on these questions, then I am willing to abandon him. I do not find such instances in your article or your comment. [I have only glanced at Bowles-Gintis. Will try to catch up on that. Do you think they will meet the criteria above?]
For I do belive that data is sacrosanct. Only empiricism can distinguish science from opinion. If someday we meet with theories that are so incommensurate that data cannot be brought to bear to judge among them, then we will have to admit that the project of knowledge has reached a stalemate. I believe that is yet not the case in social science. But in my earlier comment I only claimed that data can be the judge of whether a "worthy ideal" has been achieved. "Worthiness" itself is a value judgement. I think monoeconomics a worthy ideal on non-empirical grounds. It seems to be that parsimony is an essential part of understanding. If our theory does not have fewer entities than our observations, then have we explained anything?
[I would argue that the issue of productivity and productivity growth that you mention in your comment is not answered by either Marxism or Williamson. Williamson only shows how institutional arrangements more efficient than markets can exist under capitalism. But that does not tell us why the efficient frontier itself is being pushed outward at a fantastic rate. Marxism too does not have an answer. I think you suggest that competition between capitalists is Marxism's answer. But feudal lords were also constantly at war with one another and having a higher productivity would have meant an ability to support a larger army and therefore greater competitive success. Why didn't this strife prove as effective as capitalist competition?]
Williamsonism is not wrong. It is myopic. So says Williamson
The particular way in which Wiliamson frames the question on the boundaries of firms and the nature of contracts stems from the limits of the theoretical paradigm within which he operates. While it might suffice instrumentalist approaches to intellectual jig-saws, there are endless questions through which one could critically examine Williamson:
justified outrage
the blogger is bang on target. after awarding the prize to paul krugman last year, this year's nobel prize in economics has been driven by two motives: (i) signalling the resilience against a resurrection of Keynesian and political economy analysis (ii) trying to popularise more sophisticated but less understood defenses of free market capitalism. but the question of what dominates as economic theory is intricately linked to the fate of capitalism itself. the experience of the crisis and its aftermath shows that we have to live with free market capitalism for some time to come.
elinor ostrom's work needs to
elinor ostrom's work needs to be differentiated from that of williamson. the nobel committee's press release about ostrom's work says: "Elinor Ostrom has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories. She observes that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes." justifying the managerial superiority of common property or commons is certainly not a defence of monopoly capitalism. in fact it is quite subversive.
on elinor ostrom's work
I do not know whether the commentator above has concluded that ostrom's work is 'subversive' after just reading the citation in the press release or whether it is based on an assessment of her work.
In 'Governing the Commons', Ostrom states quite clearly that her interest is not in 'explanatory theories' but her concern is 'effective management of common property resources'. From Swiss pastures to Japanese forests, for 'common pool resources', she sets out 'design principles' for governance: defined boundaries, monitoring who are the resource users and who are accountable to them, graduated sanctions, and mechanisms dominated by the users themselves to resolve conflicts and to alter the rules. The challenge, she observes, is to foster contingent self-commitment among the members: "I will commit myself to follow the set of rules we have devised in all instances except dire emergencies if the rest of those affected make a similar commitment and act accordingly."
And the policy outcome: The Third Way.
She suggests the design of durable cooperative institutions that are organized and governed by the resource users themselves.
Monopoly capitalism has existed and accomodated such institutions as exception necessary for the dominant rule for more than two centuries now. Hardly any noticeable 'subversion' here.
It is a foundational extension of the 'trust/commitment' literature in new institutional economics.