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Institutional Economics and the Relation between

Institutions and Development Basilia Aguirre

Arnoldshain Seminar XI“Migration, Development, and Demographic Change:

Problems, Consequences and Solutions”June 25 – 28, 2013

University of Antwerp, Belgium

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Introduction

Objective

To discuss how far theory has

gone to explain the

relationship between

institutions and development

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IntroductionPresentation Plan

Critics to Institutional Economics

Alternative views on institutional economics

Basic features of modeling Institutional

Economics

Potential to deal with problems of development

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Critics to IE

Empirical difficulties

Problems with

definitions

Theoretical perspective

Institutional Economics

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Most of the authors that criticize

Institutional Economics agree that institutions are

important to understand development

Critics to IE

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Pande and Udry (2005)

Measures are flaw, scarce and urban

Voit (2013)

Definitions neglects important aspects of institutions

Chang (2011)

Theoretical attitudes x theories

Voluntarism or fatalism

Critics to IE

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Three basic questions:Is it possible to identify an institutional

theory?What is institutional economics?

What do the various institutional approaches have in common?

The importance of

institutions

The purpose of explaining institutional

change

Alternative views

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DiMaggio and Powel (1997)

Organization theory, Political Science, Public Choice, history and sociology

Common skepticism about the place of social processes’ atomistic conception

Shared conviction on the importance of institutional mechanisms

Alternative views

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Nevertheless there are authors

that see more convergence

than divergence

Alternative views

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Williamson (2000)Alternative views

Years

102 to 103

10 to 102

1 to 10

Continous

Institutional environmentFormal rules of the game (polity,

judiciary, bureaucracy)

EmbeddednessInformal institutions,

customs, tradition

Level Purpose

GovernancePlay the game, esp. contracts

Resource allocation and employment

Incentives alignment

Get the marginal conditions right

Get the governance structure right

Get the institutional environment right

Often non calculative, spontaneous

Social Theory

Positive political economy

Transactions costs economy

Neo classical economy

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Hodgson (1998)1. Emphasis on institutional and cultural factors2. Analysis is openly interdisciplinary3. No recourse to the model of the rational utility-

maximizing agent4. Mathematical and statistical techniques are

recognized as the servants of economic theory5. The analysis starts from stylized facts and

theoretical conjectures concerning causal mechanisms

6. Extensive use is made of historical and comparative empirical material

Alternative views

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Richter (2001)

NES and NIE have a common object: social action.

Both deal with social structures or organizations

(“institutions”).

Where most of them still differ are their models of

man: various motives of human actions (including

rational choice) on the one side, individual

rationality (pure or bounded) on the other.

Alternative views

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Modeling institutions

North (2005)“Human environment is a human construct

of rules, norms, conventions, and ways of doing things that define the framework of human interaction.” (pp. 11)

Scientists divided the environment in many disciplines

“Our analytical frameworks must integrate insights derived from these artificially separated disciplines if we are to understand the process of change.” (pp.11)

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Ostron (2007)

“To model a human-interaction as a game, the theorist must decide

which components to use from a set of seven working parts of an

interaction as well as how the individuals who are interacting will be

modeled.” (pp. 7)

Modeling institutions

Modeling individuals

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Modeling individuals

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Modeling individuals

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Modeling individuals

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Attempts towards an conjoint theory

Besides the common characteristics pointed by Hodson (1998)

and Richter (2000) there are tree more:

Uncertainty

Conflict

Methodological individualism

Some of then are going toward the building of a unified

theory.

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Attempts towards an conjoint theory

Hodgson (2006)

“However, while rules are not in the DNA, it would be a

mistake to go to the other extreme and regard rule

following as something entirely deliberative.” (p.4)

“However, as Commons hinted and Veblen (1909, 628–30)

argued in more depth, behavioral habit and

institutional structure are mutually entwined and

mutually reinforcing: both aspects are relevant to

the full picture.” (p.8)20

Attempts towards an conjoint theory

Ostrom (2000)

Proposal:

Indirect evolutionary approach

Rigorous theoretical approach

Helps understanding how preferences, including those

associate to social norms, evolve and adapt

Learning by adapting

Through experience

Learn trust, fairness21

Attempts towards an conjoint theory

North (2005)

“In contrast to Darwinian evolutionary theory, the key to human evolutionary change is the intentionality of the players. The selection mechanism in Darwinian evolutionary theory are not informed by beliefs about the eventual consequences.” (p.viii)

“Part of the scaffolding humans erect is an evolutionary consequence of successful mutations and is therefore a part of genetic architecture of humans such innate cooperation within small interacting groups; part is a consequence of cultural evolution such as the development of institutions to favor larger group cooperation.” (p. ix)

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Attempts towards an conjoint theory

North (2005)

Scaffolds and beliefs

How do we acquire then?

“Much of learning comes from absorbing and adjusting to subtle

events that have an impact on our lives, incrementally

modifying our behavior ever so slightly. Implicit knowledge

evolves without ever being reasoned out.” (p.26)

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Institutions and development

Two main promising contributions to the understanding of relation between institutions and development.

Ostrom (2007)

North, Wallis and Weingast (2009)

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Institutions and developmentOstrom

Irrigation systems studies

Understanding the process of change in multiple specific setting

Method of displaying rule inventory and follow changes in that inventory over time.

Identification of the dynamics of rule change in the specific contexts

Interaction between formal and informal rules

Understanding of the choices people did along their history concerning the design of irrigation systems 25

Institutions and development

North, Wallis and Weingast

Social order:

Limited access order – LAO

Open access order – OAO

Transition

Impersonal transactions

Perpetual organization

Control of violence

Rule of law

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Institutions and development

North, Wallis and Weingast

Change is a product of elites

intentional acts

Consistent with their interest

Not necessarily with their

intentions

The idea of inclusion and capabilities27

Institutions and development

Contributions

Development as a historical process

Integration between formal and

informal rules

Self-interest and rules

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Thank you!