max u versus humanomics: a critique of neo …...changing the institution of not being a snitch, not...

Journal of Institutional Economics (2016) 12 1 1ndash27Ccopy Millennium Economics Ltd 2015 doi101017S1744137415000053First published online 23 March 2015

Max U versus Humanomics a critique ofneo-institutionalism

D E I R D R E N A N S E N M c C L O S K E Ylowast

Departments of Economics History English and Communication University of Illinois at Chicago Chicago IL USA

Abstract lsquoInstitutionsrsquo do not mean the same thing to Samuelsonian economists asthey mean to other people Northrsquos lsquorules of gamersquo like chess dominates evenwhen it is claimed that lsquoinformal institutionsrsquo are allowed into the tale The tale isthat institutions were once clotted and then became unclotted and the GreatEnrichment occurred But the enrichment was by a factor of upwards of ahundred which cannot be explained by routine movements to an efficientequilibrium And changes of institutions did not in fact happen much in EnglandEthics changed not laws and procedures For presently poor countries too it willnot suffice as the World Bank and Acemoglu recommend to add institutions andstir Economies rely on ethics which neo-institutionalists being at heartSamuelsonian have not wanted to admit Ideas matter Indeed metaphors andstories matter as in Searlersquos account

Like the old Marxists and the older Christians the neo-institutionalists amongSamuelsonian economists want a theory that would if it were true have allowedthem in 1700 to lay down the future1 They want the story of the GreatEnrichment ndash the utterly strange magnitude of which they of course acknowledgebeing competent economists and economic historians ndash to be a story of what theycall lsquoinstitutionsrsquo

Yet by lsquoinstitutionsrsquo the economists do not mean what other social scientistsmean by institutions such as marriage or the market ndash which is to say thegood or bad dance of human lives full of human meanings and improvisationsAs May West said lsquoI admire the institution of marriage But Irsquom not readyfor an institutionrsquo Norms are ethical persuasions bendable arguable andinterpretable Rules are well rules such as that bribes are illegal in Indiaor that jaywalking is illegal in downtown Evanston The rules of briberyin Sweden are probably the same as in India and the jaywalking rules

lowastEmail deirdre2uicedu1 lsquoSamuelsonianrsquo is historically more accurate than the conventional lsquoneoclassicalrsquo It is the conviction

that economics must be about individuals maximizing subject to constraints what I call below lsquoP-logicrsquolsquoNeoclassicalrsquo by contrast properly includes economists also descended from the revolution of the 1870ssuch as Marshallians and Austrians and even Post-Keynesians (though they are more properly to be viewedas classical than neoclassical) all of whom do not think much of what the excellent P A Samuelson laiddown in his modestly entitled PhD dissertation in 1947 as correct method

1

httpswwwcambridgeorgcoreterms httpsdoiorg101017S1744137415000053Downloaded from httpswwwcambridgeorgcore IP address 5439106173 on 27 Nov 2020 at 192015 subject to the Cambridge Core terms of use available at

2 D E I R D R E N M c CLOSKEY

in Germany are the same as in Evanston The difference is ethics TheEnglish novelist and essayist Parks who has taught at university in Italysince 1981 notes that lsquoit is extraordinary how regularly Italy creates areas of uncertainty How is the law [of say train travel with a validticket] to be appliedrsquo The lsquoculture of ambiguous rulesrsquo seems lsquoto serve thepurpose of drawing you into a mindset of vendetta and resentment You become a member of [Italian] society insofar as you feel hard doneby [playing in] a gaudy theatre of mimed tribal conflictrsquo He gives theexample of il furbo the crafty one who jumps the queue to buy a ticket at thetrain station in a way that would get him assaulted by grandmothers in Germanyand by handgun licensees in the United States The law-abiding Italians groanbut do not act effectively to protect the public good of queues They wouldrather be resentful and therefore be justified in taking advantage sometime oftheir own acts of furbismo2

Economists call ethics often by another name lsquoenforcementrsquo The new wordwith its whiff of third-party intervention somehow made legitimate howeverdoes not make it any less about the ethical convictions with which a groupoperates lsquoNormsrsquo are one thing lsquorulesrsquo are another The neo-institutionaliststurn their arguments into tautologies by melding the two They end up sayinglsquoSocial change depends on societyrsquo One supposes so lsquoInformal constraintsrsquo arenot informal if they are constraints and if they are informal the theory hasbeen reduced to a tautology because any human action is now by definitionbrought under the label lsquoinstitutionsrsquo The neo-institutionalists have nothingnon-tautological to say about ethics because they have not read the immenseliterature on ethics since 2000 BCE including the literature of the humanitiesturning back to look at the rhetoric of language Being economist raised onthe childish philosophy that separates positive and normative when most of ourscientific lives are spent in their intersection they are quite unwilling to bringethics seriously into their history and their economics As one of them saidgenially to me lsquoethics schmethicsrsquo

The historian of the medieval English economy Davis concludes on thecontrary that lsquowithout a proper understanding of the morality and socialconventions of the marketplace the historian cannot understand the influenceof formal institutionsrsquo such as the assize of bread or the rules of guilds lsquoInmedieval Englandrsquo Davis writes a lsquopragmatic moral economy was not asimple efficient alignment of institutions and cultural beliefs but rather a headyand complex mixture of vested interests pragmatism and idealism that variedaccording to the prevailing circumstancesrsquo ranging from the pressures of themarket to the preachments of the pulpit3 One reason that bankers in Florencefinanced the explosion of sacred art and architecture in the quattrocento is that

2 Parks (2013) pp 8ndash9 18 143ndash1443 Davis (2012) pp 453ndash455


Max U versus Humanomics a critique of neo-institutionalism 3

the preachers were telling them they would go to hell for the sin of usury and hadonly one chance to prevent it The political economists Rossi and Spagano haveargued plausibly that evolved custom can work pretty well in contexts withoutthe printing press but that black-letter law gives all parties public knowledgeand leads to efficiencies4 The argument is surely correct And yet as Rossi andSpagano would perhaps concede it leaves a gigantic area in an economy forcustom or ethics or play not write-down-able And indeed black letters nevercome with their own interpretation a point that for example the literary criticand public intellectual Fish makes about legal documents and Miltonrsquos poetryHe points out that interpretive communities give the meaning of a law or apoem5 And those communities can be called ethical (which includes bad as wellas good customs) Yes sometimes writing down the customsethics is a clarifyingimprovement in just the way Rossi and Spagano propose A parallel point is theold and conservative one arguing for the educational function of written lawYet Fishrsquos point remains Law is a conversation

Or I say a dance The economists want to narrow the word lsquoinstitutionrsquo to fittheir conception that a dance can be reduced to formulaic steps maximizationunder constraints rigid rules of the game known to all the constraints beingthe institutions That is economists want formulaic public incentives to be themain story One two three ball change brush brush side essence riffle Trueparts of routines by Bill Robinson or Fred Astaire can be described after the factin such a formula But without Robinson or Astaire itrsquos rubbish It donrsquot mean athing if it ainrsquot got that swing

What is deeply superficial so to speak about the neo-institutional notion oflsquorules of the gamersquo ndash that is constraints ndash is that in the actual economy whatndash is-to-be-done is continuously under discussion yet the neo-institutionalistsignore the discussion People in the Hood for example hold that you shouldnot talk to coppers The police devote great effort some of it rhetorical tochanging the institution of not being a snitch not cooperating with The Mannot getting involved in someone elsersquos business The Broken Windows tacticrecommended by Kelling and Wilson (1982) Wilson for example is often heldup as an example of incentives and constraints No it isnrsquot Itrsquos an example oftrying to change the conversation changing what people say to themselves whencontemplating mugging the woman walking down the street lsquoHmm This placeis pretty fancy Must be heavily patrolledrsquo or lsquoGoshrsquo Things are so nice aroundhere I better do what Mom said and be nicersquo As Kelling and Wilson (1982) putit lsquovandalism can occur anywhere once communal barriers ndash the sense of mutualregard and the obligations of civility ndash are lowered by actions that seem to signalthat ldquono one caresrdquo rsquo

4 Rossi and Spagano (2014)5 Fish (1980) throughout and Fish (2001) again throughout for example pp 47 57 92



Itrsquos hard to get through to economists on the point so enamored are they of theMax-U story of budget lines and incentives which they have learned since boy-hood (I choose the gender carefully) is a complete theory of choice They have notread with understanding the opening pages of Aristotlersquos Nichomachean Ethicsfor example or the Exodus of the Jews or the Mahabharata of the Hindus allof which exhibit choice as a painful exercise in identity as against the snappydeterminism of a so-called consumer facing so-called budget lines At a con-ference in 2010 praising Northrsquos contributions Mokyr wrote lsquoinstitutions areessentially incentives and constraints [there it is institutions as budget lines] thatsociety puts up on individual behavior Institutions are in a way much like pricesin a competitive market [what did I tell you] individuals can respond to themdifferently but they must take the parametrically and cannot change themrsquo6

Neat He then in a footnote instructs me on price theory I get the price theoryprice and property the variables of prudence price profit the Profane as I havecalled them move people7 But the point here is that they are also moved by theS variables of speech stories shame the Sacred and by the use of the monopolyof violence by the state the legal rules of the game and the dance in the courtsof law the L variables Most behavior B is explained by P S and L together

B = α + βP + γ S + δL + ε

The equation is not wishy-washy or unprincipled or unscientific The Sand L variables are the conditions under which the P variables work andthe P variables modify the effects of the S and L variables Of course Forexample the conservative argument that laws serve as education would connectL causally to S by a separate equation Or again when the price the HudsonBay Company offered Indians in Canada for beaver pelts was high enough thebeaver population was depleted in line with P-logic But S-logic was crucialtoo making the P-logic relevant As Carlos and Lewis (1999) explain lsquoIndiancustom regarding the right to hunt for food and other aspects of their lsquoGoodSamaritanrsquo principle mitigated against the emergence of strong trespass laws andproperty rights in fur-bearing animals conflict in the areas around the HudsonBay hinterland contributed to an environment that was not conducive to securetenure and attitudes towards generosity and even a belief in reincarnation mayhave played a rolersquo in running against better P-logic rules that would havepreserved the beaver stock8 The institutionalist Adams speaks of the market asan lsquoinstituted processrsquo which is correct9 The institution is the S the process the Pand the legal limits L Or sometimes the other ways around Anyway often all

6 Mokyr (2010) p 17 McCloskey (1998 2008) And while wersquore speaking of price theory (McCloskey 1985) available

at deirdremccloskeyorg8 Carlos and Lewis (1999) p 7269 Adams (1994)



You can get as technical as you want about it For example econometricallyspeaking if the P S and L variables are not orthogonal which is to say ifthey are not entirely independent or alternatively if there is reason to believethat a combined variable such as PS has its own influence then an estimate ofthe coefficients that ignore S (or PS or PL) will give biased results The bias isimportant if the S variables are important If laws adjust to markets to giveanother example then L is affected by P and an attribution of an exogenouseffect of L would be biased ndash as it has been often

lowastlowastlowast

A story goes with it Once upon a time the neo-institutionalists claim Europedid not face the lsquorightrsquo incentives Property rights it is said were by comparisonwith modern times imperfect There is to be sure little evidence for such anassertion Land and husbands and eternal salvation were eagerly bought andsold in the European middle ages and other non-European societies often hadbetter not worse property rights than Europe did But for the sake of charitablescientific discussion set aside that factual problem

Then in the neo-institutionalist story the incentives righted themselves andthe result was a very large increase of real income per person There is also littleevidence of such a consequence of righted incentives since often the incentiveswere already in place Hardin (1968) for example made famous a lsquotragedyof commonsrsquo ndash in aid it should be remembered of a policy of compulsorysterilization of women in poor countries ndash by ignoring the easily availableevidence that medieval people recognized the problem and solved it on the spotwith stinting of grazing rights But in charity again set aside that factual problem

Yet a third factual problem remains which cannot even in charity be set asideIt is that the righting of incentives cannot possibly explain what it sets out toexplain the Great Enrichment and the modern world Not so long ago a countrylike Britain or Japan was $ 3-a-day poor Real income per person has by nowincreased to roughly $ 100 a day10 That is even when measured conventionallythe increase of income per head in real terms since 1800 has been on the orderof a factor of 20 or 30 Allowing for radical improvements in the quality or costof most goods (lamps writing instruments) and some services (medicine travel)not well captured in conventional price indices it has been upwards of a factorof 10011 These are not controversial figures not in their orders of magnitudeWhat economists chiefly need to do ndash and the neo-institutionalists claim to do ndashis to explain such a Great Enrichment at a factor since 1800 in real terms perperson of 20 30 100

10 Maddison (2007)11 The factor of 100 is argued in McCloskey (2010) pp 54ndash59 using Nordhaus on lighting and his

suggested extrapolations (Nordhaus 1996) Fouquet and Pearson (2011) confirm Nordhaus on lighting



An economistrsquos tale of increased efficiency canrsquot do it For one thing if theslight improvements of incentives that are imagined were so efficacious theywould have been so on the many other occasions in which societies improveda bit doubling per person real income say such as Song China or ImperialRome For another if mere incentives were all that stood in the way of correctallocation then a reallocation paying off routinely predictably with given tastesand technologies in Samuelsonian fashion ndash no Schumpeter or Hayek about itndash 100 to 1 would presumably have happened and even would have consciouslyoccurred to someone in the previous millennia sometime somewhere It wouldhave been a $ 100 bill lying on the floor of a $ 1-or-$ 3-or-$ 6-a-day society Theunique magnitude of the Great Enrichment that is tells against the economistrsquosreliance on routine incentives Surely what had to be the cause was somethinghighly peculiar (for a while) to northwestern Europe not a reallocation of theold things prevalent in most civilizations such as private property rule of lawliteracy cheap exchange and predictable investment

Postulate in charity once more though the partial failure of incentives ndash asneo-institutional theories based solely on a P-logic do It is I repeat high charityto do so virtues other than prudence matter too Ideology rhetoric a publicsphere public opinion mattered greatly As the Christian economist Zamagniputs it lsquoModern economic development did not occur due to the adoption ofstronger incentives or better institutional arrangements but mainly becauseof the creation of a new culturersquo12 Or as the Indian businessman and publicintellectual Das puts it lsquoSocial scientists [under the influence of Max-U thinkingamong economists] think of governance failures as a problem of institutionsand the solution they say lies in changing the structure of incentives to enhanceaccountability True but these failings also have a moral dimensionrsquo13 It is nosurprise that an Italian and an Indian make such an anti-institutional pointfrom countries as corrupt as the United States was in the nineteenth centuryand as Illinois and Louisiana still are They have seen fresh institutions suchas the Italian insertion of a level of government between the national and thecommune or the Indian regulation in detail of every aspect of economic life failmiserably

The economic point against the neo-institutional story of how we got richcan be made with any of the numerous supply-and-demand diagrams that litterelementary texts in economics14 Take for example a nationlsquos supply of anddemand for labor Suppose that the opportunity cost of labor is upward-slopingmeasuring the value of the next hour of labor in activities alternative to workingin sat Britain such as working abroad or taking onersquos ease Now add intothe diagram the demand curve for British labor which of course is downward

12 Zamagni (2010) p 6313 Das (2009) p xxxiii-xxxiv14 For detailed justifications for what follows see McCloskey (1985) Chps 22ndash25



Figure 1 Institutional change of a static sort cannot explain modern economicgrowth

sloping because any extra labor gets employed in less urgent employments Sucha marginal product of labor curve as labeled in Figure 1 is the market value ofthe product of the last hour demanded

If there is no misallocation of labor the nation will be led by market forcesto employ labor up to the point at which the two curves cross At that pointnational income will be as large as it can be considering the existing marginalproduct and opportunity cost of labor (To speak more technically total incomeobviously is up to a constant of integration the integral under the marginalcurve ndash that is to say the area under the partial derivative curve known to us asthe marginal product of labor)

And it will be good for the society as a whole to be at such a point ofefficiency lsquoEfficiencyrsquo after all is that the last hour of work gets in goods justwhat it sacrifices in say taking ones ease It is what you individually want to doin allocating your own hours between labor and leisure So too the nation If bymisallocation it happens that too little labor is employed putting the economyat the vertical line to the left the line of too little labor there would be a gainforegone of national income the triangle labeled Gain (Technical remark Whydoes the gain not include the trapezoid below Gain Because the trapezoid is thevalue of the opportunity costs of labor ndash taking ones ease or working abroad ndashof the work not employed at home and is not a gain to the workers enjoying itThe inefficiency of foregone Gain by contrast is a gain to no one)

A government can impose policies that make quite large the foregone Gaincompared to the income at the efficient point North Korea for example is good



at this But in the other direction on any reasonable view of how economieswork a government canrsquot by laws hampering free exchange make the marginalproduct of labor rise at any rate not by a factor of 100 when allowing for theimproved quality of goods and services since 1800 or even the 20 or 30 asconventionally measured

And the crucial point is that even laws that reduced the misallocation leadingto a loss in the first place would yield gains very small by comparison withpregood-law income Look at the diagram again and note the big arrow labeledlsquoFactor of 30 or 100 1800-presentrsquo It is the big arrow not the little gains fromefficiency that explain the order of magnitude of real income per person in themodern world That is the great bulk of the enrichment of the modern worldhas not come (as some of the right argue) from repairing technically inefficientinstitutions and in any case could hardly come (as some on the left argue) fromlaws further hampering free exchange

The point is to show that the static assumptions of neo-institutional economicscannot have the quantitative oomph they claim in explaining the elephant in theroom of modern social science (as one referee of the paper perceptively put it)massive modern economic growth It will not do to reply that a small change2 per year say adds up to 100 (or so) in two centuries lsquoCompound interestrsquois not a reply It does not tell why the compounding only started in 1688 and inany case a static gain is precisely not compounded If railways increased nationalincome by two percent they did it once not every year It remains to discoverwhy the society changed to give a dynamic improvement of 2 every singleyear

Misallocation has limits in other words and therefore repairing it has limitsfar below the orders of magnitude of the Great Enrichment It is possible toreduce even a very high income to $1-a-day or less if the government goes insaneas governments have with some regularity been doing since they first came intoexistence Witness Assadrsquos Syria or Nerorsquos Rome or the conquering Mongolrsquosoriginal plan (they soon came to their senses) to turn the rich agricultural fieldsof China into depopulated grazing grounds for their horses But suppose badgovernment and market failure and wretched property rights reduced incomeoriginally by as much as 80 of its potential In that case a perfect governmentcorrecting all market failures and establishing ideal property rights wouldincrease income by a factor calculated by dividing the gain of 80 divided bythe original miserably inefficient 20 a factor of 4 Splendid But the GreatEnrichment was a factor not of 4 but of 20 or 30 or 100

The repair can have to be sure secondary effects of encouraging bettermentthat does in turn produce enrichment at the astonishing order of magnitude of1800 to the present But the neo-institutionalists have no theory for this crucialstep the step of the creative production of novelties ndash except a theory (explodedby Mokyrrsquos and Boldrin and Levinersquos recent work) that say patents makenovelties into routine property and a therefore subject for the routine investment



beloved of Samuelsonian economists15 Without the new liberty and dignityuniquely enlivening ordinary people in northwestern Europe the repairing ofincentives canrsquot produce much Most of the enrichment came from the curves inquestion zooming out by gigantic magnitudes as a result of spillovers from thewhole worldrsquos market-tested betterments That is what made the modern worldwas the radically improving of ideas such as the idea of the electric motor orthe idea of the skyscraper or the idea of the research university ndash not the merefacilitating of property (as conservative economists recommend) or the merehampering of property (as progressive economists recommend)

A government can do very little by the quantitative standard of the GreatEnrichment If the place starts with the usual rights to property and the usualmodest corruptions or robberies it cannot achieve anything resembling the 1900or 2900 or 9900 per person real growth of modern economies 1800 to thepresent merely by routine efficiency which is old or by routine mercantilismwhich is also old or least of all merely by wishing it and issuing propagandathat it has in fact been achieved which was the old Red-Chinese formula anda habit of kings claiming credit for a prosperity they did nothing to cause Ifeven moderately well governed there has been historically usually nothing likea 99 idiocracy to recover from merely by allowing people to exercise routineprudence A country achieves the Great Enrichment by allowing improvers tocreatively destroy earlier ways of doing things If the sultan throws the improveroff a cliff the Ottoman Empire will remain poor however snappily it equalizesknown marginal cost and known marginal valuation

Bettering institutions of government do not explain the bulk of a modern levelsof income New Zealand for example is honestly and efficiently governedItaly is not In ease of doing business New Zealand ranked in 2010 and2012 (among 183 or 185 countries) third from the top Italy in 2010 rankedeightieth slightly below Vietnam and in 2012 seventy-third slightly below theKyrgyz Republic In 2012 according to the Corruption Perception Index ofTransparency International among 173 ranked countries New Zealand was tiedfor first the most honestly governed Italy was seventy-second16 In 2009 in theEconomic Freedom Rankings New Zealand ranked first in its legal system andfifth from the top in its freedom from regulation Italy in its legal system rankedsixty-third just above Iran and ninety-fourth in its freedom from regulationjust above the Dominican Republic17 Italy as any sentient Italian can tell youhas terrible public institutions

Yet in real GDP per person New Zealand and Italy in 2010 were nearlyidentical at $ 8820 and $ 8680 a day a little above what Hans Rosling calls

15 Boldrin and Levine (2008) Mokyr (2009)16 httpwwwtransparencyorgcpi2012results17 World Bank lsquoDoing Businessrsquo httpwwwdoingbusinessorgrankings real income Penn Tables

for 2010



the Washing Line at which people start buying washing machines It is notefficiency as economists think of it that is the best of the good news of the GreatEnrichment but utterly novel betterments causing the marginal product of laborcurve to zoom out such as asphalt-paved roads cheap screws and bolts sewertraps in plumbing screens on open windows widespread secondary schoolscomputers and the internet ndash the sort of betterments which can be adopted evenby a terribly governed economy such as Italyrsquos with satisfactory results

lowastlowastlowast

No institution ndash not the state or the church or the university or the republicsof science and letters ndash rationally intended the frenetic betterment that hascharacterized the West and now the rest since 1800 That is another reasonwhy the economistrsquos Max-U neo-institutionalism does not explain what it claimsto explain The economists want to reduce motivation to predictable Max UBut the point is that the modern world was not predictable It depended on thenew and liberal notion of liberty and dignity and their unpredictable results inbetterment for all

Yet liberty and dignity are not easy to achieve because they require acceptingcommercial profit rejecting tribal protectionism resisting the temptations of areasonable sounding lsquoplanningrsquo or lsquoregulationrsquo and embracing an ideologicalchange towards equality for women and the poor and low-status castes thattraditional societies and even some modern societies resist As French economistsreported about slow growth in Madagascar lsquoalthough the Malagasy peoplelay claim to democratic principles they remain torn between the demands ofdemocratic and meritocratic nature and the traditional values that impose respectfor the real and symbolic hierarchies they have inherited from the pastrsquo18 Themiracle is that France itself or for that matter honors-drenched Britain bothheavily regulated are not instances

In any case it wonrsquot suffice as the World Bank nowadays recommends to addinstitutions and stir You can set up British-like courts of law and even providethe barristers with wigs but if the judges are venal and the barrister have noprofessional pride and if the public disdains them then the introduction of suchan institution will fail to improve the rule of law The economist Acemogluand the political scientist Robinson report on an attempt to curb absenteeismamong hospital nurses in India by introducing the institution of time clocks19

The economists in charge of the experiment were sure that the bare incentivesof the lsquoright institutionsrsquo would work They didnrsquot The nurses conspired withtheir bosses in the hospitals to continue not showing up for work Acemoglu andRobinson draw the moral that lsquothe institutional structure that creates market

18 Razafindrakoto et al (2013) English abstract19 Acemoglu and Robinson (2012) p 450



failuresrsquo is what went wrong But the continuing absenteeism was not aboutinstitutions or incentives or market failures New institutions with the rightunfailing incentives had been confidently applied by the economists out of thetool kit of World-Bank orthodoxy and went wrong The wrongness was ratherabout a lack of an ethic of self-respecting professionalism among the nursesof a sort that say Filipino nurses do have which is why they are in demandworldwide The time-clock experiment imagined P-only when humans are alsomotived by S

Acemoglu and Robinson do not see that what failed was the new P-only Max-U theory of the economics profession of add-institutions and stir lsquoThe root causeof the problemrsquo they conclude was lsquoextractive institutionsrsquo On the contrary theroot was ethical failure in the presence of which no set of instituted incentiveswill work well and under which extraction will persist The institutions ndash thetime clocks and the management practices ndash and the incentives they are supposedto provide as though to rats in a maze ndash were not the problem The problem wasdefects in the ethics and in the impartial spectator and in the professionalism ofthe nurses and their bosses

The economist Coate shows in his paper on the swift recovery of SanFrancisco from the earthquake of 1906 that the existing (and corrupt) politicalinstitutions of the city were shoved aside The Army stationed at the Presidioand a committee of business and civic leaders ndash which was also as was theArmyrsquos 73-day-long patrolling of the ruined city Coate observes lsquoextralegalrsquondash took charge Yet he quotes with approval in his conclusion a remark bythe fine if conventionally Samuelsonian economist Jack Hirschleifer lsquoHistoricalexperience suggests that recovery [from a disaster] will hinge upon the abilityof government to maintain or restore property rights together with a marketsystem that will support the economic division of laborrsquo20 No it was the ethicsand the ethos of the Army and the committee and nothing like lsquothe abilityof [legitimate] governmentrsquo that saved the city just as in 2005 it was privatecompanies springing into action not any level of government that partiallysaved New Orleans during and after Katrina21 In both cases if existing formalinstitutions had been relied upon the result would have been further malfeasanceby the institutions ndash such as in New Orleans the malfeasance of the policedepartment and the office of Mayor Ray Nagin

The ur-neo-institutionalist Williamson in his reflections on governmentalbureaucracies ndash lsquopublic agencyrsquo ndash calls ethics lsquoprobityrsquo that is lsquothe loyaltyand rectitude with which the transaction is dischargedrsquo22 Like all properSamuelsonian economists Williamson wants to reduce ethics to incentiveslsquoprobity concerns will be relieved by governance structures to which reliable

20 Coate (2010) p 1521 Chamlee-Wright and Storr eds (2010)22 Williamson (1999)



responsiveness can be ascribedrsquo by which he means incentives that work tomake it unnecessary for anyone actually to have probity He claims that lsquoprobityconcernsrsquo only arise in lsquoextreme instancesrsquo lsquoBreach against probity is betterdescribed as inexcusable incompetence or even betrayal In the limit such breachis punishable as treasonrsquo His is a common error in recent thinking about ethicssupposing that ethics is only about grand issues (lsquoextremersquo) such as murder orabortion or outright fraudulence in accounting lsquoHouse-of-Cardsrsquo instances onemight say But ethics is also about daily good will and professionalism suchas an accountant doing as well as she can or a professor trying to tell thetruth

Williamson claims repeatedly as economists do when adhering to the dogmaof de gustibus non disputandum est that ethics change only very slowly But thereis no historical or experimental evidence for such a claim Sometimes ethics amatter of S and parts of L changes quickly Sometimes it does not You haveto find out The ethics of market participation by married women for examplechanged swiftly in the UK from the 1960s on partly because of the pill butpartly because of an ideological upheaval The ethics of the Roman state in thelate first century BCE did not change from republican to imperial slowly Theethics of western Christianity in the early sixteenth century did not change froma relaxed regime of indulgences to a rigorous Protestantism of congregationalshaming slowly

And most to the point here the British ethics evaluating markets andinnovation in the late eighteenth century did not change from contempt toadmiration slowly In fact ethics (understood not as individual ethics but whatis honored or dishonored by the society) is what changed in the eighteenthcentury rapidly not the institutional environment A time traveler from Englandin 1630 or Britain from 1730 would not have been astonished by the institutionalarrangements of the United Kingdom in 1830 except for the shift to thetranscendent power of a (thoroughly corrupt) Parliament and the weakeningof the (thoroughly corrupt) King The law courts worked as they had (lsquoThisis the Court of Chanceryrsquo Dickens intoned) Property rights had not changedCriminal law was still fiercely slanted against the poor Institutions such ascorporate law changed after the ethical change not before

Ideological change brings a new impartial spectator into the habits of theheart Institutions are frosting on the cake if they lack ethical backing fromthe bus driver taking professional responsibility for the plans and the lives of thesixty people under his care to the politician resisting the well-placed bribe offeredby a highway construction firm New egalitarian ideas in Europe ndash according towhich bus drivers and politicians professors and housewives felt themselvesempowered to be equally responsible ndash broke the cake of custom Surprisinglythe idea of treating people as free and honorable made us all in Britain Japanand the United States by historical standards immensely wealthy ndash that zoomingout of the marginal product of labor



lowastlowastlowast

The neo-institutionalist economists have not really taken on the idea that ideascan matter independent (sometimes) of incentives They say they have takenit on and become cross when some idiot claims they do not But then theykeep falling back into simplified arguments that say that institutions (letrsquossymbolize them by N since the other term Ideas also start with an I) suffice forgrowth (G)

N rarr G

That is (good) Institutions imply (positive) Growth The neo-institutionalistsin their actual scientific practice are denying what can be shown on the basisof masses of positivist behaviorist and Samuelsonian evidence but also onthe basis of the humanistic testimony of plays novels philosophy biographyand ordinary human experience namely that (remember N is institutions D isideas)

N and D rarr G

The ideas D are to be thought of as lsquosound pretty favorable ideas aboutmarkets and bettermentrsquo Likewise the Institutions N are to be thought of aslsquonot perfect but John-Mueller style pretty goodrsquo23 What actually changed inthe eighteenth century in Britain for example was D ideas pretty much notinstitutions

If one believes with North and Acemoglu and others that near enough N Gthen it follows in strict logic that not-G not-N and the hunt is on for institutionsthat failed and kept nations failing But suppose one believes that N and D Gas Donald Boudreaux has persuaded me to admit (tamping down my annoyanceat the arrogance of the new orthodoxy in economics) and as Joel Mokyr andJohn Nye have helped me to see more clearly24 Then it follows in equally strictlogic that not-G either not-N (the bad institutions) or not-D (the bad ideas)or both (The logical point in the philosophy of science is known as DuhemrsquosDilemma which if economists knew anything about the actual philosophy ofscience would demolish in two lines of symbolic logic the Friedman-Samuelsonfalsificationism for simpletons underlying modern econometrics) If so then thehunt is on for either bad institutions or bad ideas with no presumption thathunting for the bad-idea possibility is somehow less of a scientific priority

I recognize the impulse to stick with Max-U version of institutions as thefirst on the agenda since I used to say the same thing to conventional non-quantitative economic historians like David Landes lsquoFirst David letrsquos usemeasures of total factor productivity then if therersquos anything left over we

23 Mueller (1999)24 Hart and Richman eds (2014)



can look into the archives of the correspondence of ironmastersrsquo I neverintended to look at the archives and did not in fact do so to my shameSamuelsonian economics I thought sufficed So here (To the claim thatNorthian institutionalism steps beyond Samuelsonian economics by the wayI say again as I have been saying to the good Douglass now for thirty years Ithink not neo-institutionalism is Samuelsonian economics in evening dress)

Consider an institution that undoubtedly did encourage growth namelya large free-trade area in which local interest could not block entry It wasexpressed in black-letter law in the American Constitution and in practicalterms was prevalent in Britain (though not until the 1780s instituted also in JohnBullrsquos other island) Customs unions like the Zollverein or the Austro-HungarianEmpire were other examples of a big free-trade area So was the Chinese Empire

Local monopolies able to prevent entry as in European guilds surely diddiscourage growth which is to say not-N not-G from which one might wantto deduce that G N that is that if there was growth there must have beenthe institutions of large free-trade areas But the trouble is that even with alarge free-trade area in black-letter law an irritating competition from acrossthe mountains might inspire people to petition the state for protection In fact itdoes Without a strong ethical conviction D such as the conviction that spreadwidely in Britain and Ireland in the nineteenth century that such petitioning isbad or shameful the black letters will be dead N and D G Ideas matterideology matters ethics matter

It is not reasonable to reply that North and Greif and the rest do admitthe force of ideas in their neo-institutionalist stories In his Understanding theProcess of Economic Change (2005) for example North says repeatedly that heis interested in the source of ideas Good But instead of entering the humanisticconversation since cuneiform on clay which has largely been about the source ofideas he defers to the lsquobrain sciencesrsquo (about which it must be said North knowsvery little) That is he reduces ideas to matter and to the mechanical incentivessurrounding matter every time He takes the brain to be the same thing as themind which after all is the central error in the phrenological branch of the brainsciences

The less dogmatic of the neo-institutionalists such as Joel Mokyr and JohnNye seem on odd days of the month to believe in the NorthndashAcemoglu pre-judgment that N G No ideas present On even days the lesser-dogmatistscalls ideas D lsquoculturersquo which is the vague way people talk when they have nottaken on board the exact and gigantic literature about ideas rhetoric ideologyceremonies metaphors stories and the like since the Greeks or the Talmudistsor the Sanskrit grammarians

A referee pointed out to me what I should have seen originally that myargument for the importance of ideas D might have had the merely static effectsI deprecated earlier here Thatrsquos right But the historical point is that the ideaschanged The institutions did not It is quite wrong to think that the institutions



faced by British entrepreneurs in 1800 were radically different from the ones theyfaced in 1685 But ideas of what was honorable appropriate allowed amongright-thinking folk did change radically And the economic point is that ideas areintrinsically subject to economies of scale (lsquoideas having sexrsquo says Matt Ridley)but institutions are often as not deeply conservative To believe all this you willhave to read and love Bourgeois Equality How Betterment Became Ethical1600ndash1848 and Then Suspect forthcoming from the University of ChicagoPress in 2016 In that fine work I provide some reason at least to believe thatthe change in ideas was dynamic in the technical sense whereas the change ininstitutions was mostly not Or at least (says Horatio in Hamlet 11142) lsquoSo Ihave heard and do in part believe inrsquo

Let me exhibit what can be learned from the actual humanities and the actualbrain sciences the serious study of D tending even to a dynamic conclusionWe humans have an unusual capacity Creativity among humans is performedby what the philosopher Searle has called a lsquostatus functionrsquo that is a purposeperformed by a person (such as a president) or a thing (such as a $ 20 bill) oran entity (such as a limited liability corporation) by virtue of a social agreementSearle formulates it as lsquoX is treated as Y in the context Crsquo The crossing of thegoal line by the ball is treated as a goal (one point) in the context of playingsoccer

Searle insists that any status function requires language lsquoWithout a languagersquohe writes lsquoyou have only pre-linguistic intentional states such as desires andbeliefs together with dispositionsrsquo25 These pre-linguistic functions are whateconomists call utility functions and constraints Economics after Adam Smithhas been determinedly pre-linguistic In Marx or in Samuelson language andits accompanying ethical valences expressed in language donrsquot matter Whatmatters are desires and dispositions combined with powers (and Searle observesthat the very powers come from speech too) lsquoTo get to the point that youcan recognize an obligation as an obligationrsquo Searle points out lsquoyou have tohave the concept of an obligation because you have to be able to representsomething as an obligation that is something that gives you a reason for actionindependent of your inclinations and desiresrsquo26 Notice the words lsquorecognizersquolsquoconceptrsquo lsquorepresentrsquo They play no part in economics understood as not needinglanguage Game theory in economics is precisely the claim that we can dowithout language and language-created meanings Shut up and play the gameconsulting your budget constraints and your preferences Searle and I and manybrain scientists disagree with such a reduction lsquoGames and other nonlinguisticinstitutional phenomena can be explained only in terms of language You canrsquot

25 Searle (2010) p 9526 Searle (2010) p 96



use the analogy with games to explain language because you understand gamesonly if you already understand languagersquo27

Treating X as Y in the context C looks trivial merely a figure of speechmere talk So it is Searle argues if it is merely a lsquolinguistic institutional factrsquosuch as lsquoall unmarried men are bachelorsrsquo Treat a man as something called abachelor under the circumstances that he is unmarried and you are speakingEnglish But treating X as Y under circumstances C becomes a lsquononlinguisticinstitutional factrsquo with consequences (lsquopowersrsquo) beyond mere language whenthe circumstances and the person doing the treating have extra-linguistic powersarising from agreed conventions (themselves arising from language) Languageestablishes the meaning of the word lsquobachelorrsquo but the extra-linguistic contextcreates the powerful consequences that Bachelor X can marry a woman (andunder the U S Protection of Marriage Act only a woman)

Meaning is the only power inside language itself If I promise to review a bookthe speech act of promising means well I hereby promise to review thebook Donrsquot count on it But if the extra-linguistic context obtains that the editoris a dear friend of mine the promise plus the context creates a power beyondmeaning It gives me a reason for action independent of my inclinations anddesires to say work rather on my own book or watch a cricket game lsquoOnceyou have a common language you already have a societyrsquo declares Searle TrueAnd therefore as the language changes so changes the sort of society one canhave The language game as Wittgenstein put it determines a form of life Asthe English word lsquohonestrsquo shifted from an aristocratic to a bourgeois sense ofhonor the sort of deals we could make the sort of action we could countenancechanged To call a man lsquodishonestrsquo in an aristocratic society requires a duel withswords next morning To call a man lsquodishonestrsquo in a bourgeois society requiresa suit for libel28

Economic innovation lsquocounts asrsquo (to use Searlersquos vocabulary) honorable onlyin the Bourgeois Era Or to be exact what was honorable (lsquohonestrsquo) in theAristocratic Era was innovation without a market test No one asked if anew machine of war was profitable The clerisy those pseudo-neo-aristocratsof lsquomeritrsquo judge their merit in non-market terms The well-named honorarydegrees count for more than high pay I witnessed a discussion of a candidatefor an academic job in which his success with a popular book in addition to hislarge and fine scholarly output was offered as a reason not to hire him Profitmakes a neo-pseudo-aristocrat dirty at any rate if she cannot well conceal thedirt

But Searlersquos analysis needs another word which one might coin as lsquoconjectiversquowhat we know together as against what we know inside an individual head orwhat we imagine to be Godrsquos objectivity The conjective is a result of human

27 Searle (2010) p 11528 For (much) more on lsquohonestrsquo (and eerlich) see McCloskey (2015)



agreement or acceptance The Latin is cum + iactus that is lsquothrown togetherrsquoas after all we humans are in our mammalian cuddling and especially in ourconversations

lsquoInstitutional facts are typically objective factsrsquo Searle writes by which hemeans that they bite That a $ 20 bill to take his favorite example buys $ 20worth of clobber bites as deeply in our lives as does the physical fact that the billfalls to the ground if you let go of it (And after it falls what does mere physicsndash lsquobrute factsrsquo in Searlersquos way of talking ndash imply about its future location Amistaken prediction Economics predicts that someone will pick it up which isnot something one could learn from its brute-fact physical equilibrium on thefloor) He continues lsquooddly enough [the institutional facts] are only facts byhuman agreement or acceptancersquo

But therersquos nothing odd about it Tallis himself a distinguished neuroscientistreviewed favorably Whorsquos in Charge Free Will and the Science of the Brainby Gazzaniga whom he describes as lsquoa towering figure in contemporaryneurobiologyrsquo Tallis writes sprinkling in phrases from Gazzaniga lsquoCruciallythe true locus of this activity is not in the isolated brainrsquo

but lsquoin the group interactions of many brainsrsquo which is why lsquoanalyzing singlebrains in isolation cannot illuminate the capacity of responsibilityrsquo [consider thecontrast with the procedures in behavioral economics and some experimentaleconomics] This the community of minds is where our human consciousnessis to be found woven out of the innumerable interactions that our brains makepossible lsquoResponsibilityrsquo (or lack of it) Mr Gazzaniga says lsquois not located inthe brainrsquo It is lsquoan interaction between people a social contractrsquomdashan emergentphenomenon irreducible to brain activityrsquo

The American historian Thomas Haskell wrote in 1999 a startling essaychronicling the new prominence of lsquoresponsibilityrsquo in a commercial Americain the eighteenth and nineteenth centuries The Oxford English Dictionary gives1787 as the earliest quotation of lsquoresponsibilityrsquo in its modern sense as acceptingthat one has done such-and-such by Hamilton in The Federalist Papers andshortly thereafter by Edmund Burke Haskell notes that it is used much earlier inlaw in the sense of being required to respond to a legal action Such a lsquoresponsiblersquoperson meaning lsquoliable to be called to [legal] accountrsquo (sense 3a) occurs asearly as 1643 The OEDrsquos earliest quotation for the favorable ethical meaningthe dominant modern sense lsquomorally accountable for onersquos actions capableof rational conductrsquo (sense 3b) is as late as 1836 ndash which is Haskellrsquos pointThe linking of lsquoresponsibilityrsquo with the market like word lsquoaccountabilityrsquo occursin the very first instance of lsquoaccountabilityrsquo detected by Haskell in 1794 inSamuel Williamsrsquo Natural and Civil History of Vermont lsquoNo mutual checks andbalances accountability and responsibilityrsquo (the older noun is lsquoaccountablenessrsquodating from 1668 the adjective lsquoaccountablersquo 1583 and simple lsquoaccountrsquo orlsquoaccomptrsquo are medieval)



Haskell is wary of praising the new dignity for market participants lsquomyassumption is not that the market elevates moralityrsquo But then he takes itback lsquothe form of life fostered by the market may entail the heightened senseof agencyrsquo29 Just so Surely commerce with seventeenth-century religion andchurch governance among the radicals heightened the sense of individualresponsible agency Earlier in the essay Haskell had attributed to markets thelsquoescalatingrsquo sense of agency lsquoresponsibilityrsquo So the market did elevate moralitySo much we can learn from humanistic historians studying the very words

To return to what can be learned from actual brain scientists Tallis concludesin his own eloquent words (he is a published poet too) lsquowe belong to a boundlessinfinitely elaborated community of mindsrsquo

that has been forged out of a trillion cognitive handshakes over hundreds ofthousands of years This community is the theater of our daily existence Itseparates life in the jungle from life in the office and because it is a communityof minds it cannot be inspected by looking at the activity of the solitary brain

Human agreement or acceptance what the philosopher Michael Oakeshottcalled the conversation of mankind is precisely what I call the conjective asagainst merely subjective

Searle argues persuasively that a society is glued together by conjective factsof the sort lsquoX counts as Y in context Crsquo Thus a clergyman saying lsquoI thee wedrsquocounts as marrying two people in the context of a properly constituted marriageceremony A $ 20 bill counts as legal tender in the context of the territories ofthe United States A ball going over the goal line counts as a goal in the contextof a soccer game As Fish so often notes of course such conjective facts arealways contestable Objective facts (lsquowater is two molecules of hydrogen andone of oxygenrsquo) or subjective facts (lsquoBeckham intends to score a goalrsquo) are notThe physical facts of the world and the psychological states of human mindsare lsquobrutersquo to extend Searlersquos word in the sense of being incontestable in theirvery nature their lsquoontologyrsquo as the philosophers say Physical constraints suchas the law of gravity and utility such as a great love for vanilla ice cream arenot the sort of facts we can quarrel about once we have grasped in a humanisticinquiry their nature their lsquoqualiarsquo as the philosophers put is All we can do thenis measure if we can

The conjective by contrast is always contestable and always in that senseethical that is about lsquodeontic statusrsquo in Searlersquos vocabulary lsquodeonticrsquo beingabout what we ought to do (the Greek means lsquobeing needfulrsquo) The clergymanmight be argued to be not properly authorized to perform the marriage (look atthe long controversy about gay marriage) the definition of lsquoUS territoryrsquo mightbe ambiguous (embassies abroad) the goal might be disputed If any part of the

29 Haskell (1999) p 10



ball breaks the plane of the goal line is it a goal Was the linesman in a positionto judge

The theologian Martin Buber wrote in 1909 that lsquothere is no ldquoIrdquo taken in itselfrsquothat is no solipsism beloved of the dogmatic methodological individualist As theeconomist Wilson points out and has shown in linguistic analysis and laboratoryexperiments such a thing as lsquosocial preferencersquo resides in our language gamesamongst ourselves not within our isolated utility functions lsquoThe fundamentalfact of human existencersquo Buber wrote in Between Man and Man lsquois neither theindividual as such nor the aggregate as such but ldquoman with manrdquorsquo It is neithersubjective nor objective (lsquoObjective truth is not granted to mortalsrsquo said Buberat the treason trial of Aharon Cohen in 1958 not perhaps the best thing to havesaid under the circumstances) It is one may say lsquoconjectiversquo the lsquobetweenrsquo inBuberian talk what we know in speech and meetings and dialogue one humanwith another

What Searle does not appear to understand though is that his formulationof a status function ndash lsquoX is treated as Y in the context Crsquo ndash is itself analyzableinto a metaphor (lsquoTreat the female child Jannike as Mommyrsquo) and a story (lsquoWeare playing housersquo once upon a time there was a house with a Mommy and aDaddy and so the story continues as we play with exciting events characteristicof families) In a word Searlersquos status function is an allegory and literarymethods are to be brought into the analysis of institutions Pilgrimrsquos Progressis an allegory of the metaphor of a spiritual life as a journey (lsquoTreat a literaljourney as a metaphor of spiritual challenge and developmentrsquo) with a storygiving the metaphor a dimension of metonymy through time (events in a storyare contiguous to each other not like each other) Itrsquos like playing house Searlecorrectly noted that human children lsquovery early on acquire a capacity to do thisdouble level of thinking that is characteristic of the creation and maintenanceof institutional reality Small children can say to each other ldquoOkay Irsquoll beAdam you be Eve and wersquoll let this block be the applerdquorsquo Tomasello andcolleagues have shown in ape-human experiments that lsquohuman thinking [that isthe function of the very brain itself the lsquopreference orderingrsquo in the economistrsquosjargon] is fundamentally cooperativersquo Human infants for example unlike theirclose cousins among the great apes point That is they lsquoform a ldquowerdquo that actsas a kind of plural agentrsquo (Tomasello indeed cites Searle in this connection) Andchildren evaluate engaging in lsquoobjective-reflective normative thinkingrsquo ethics ina real world of brute facts and human intentions

So what Well letrsquos get serious about lsquobrain sciencersquo and letrsquos acknowledge thatthe humanities and the higher culture generally can shed light on lsquoinstitutionsrsquo

Searle is satisfied with calling allegory-making lsquoan element of imaginationrsquoand lsquofantasyrsquo without bringing to bear the research from ancient times to thepresent on human abilities to form metaphors and metonymies He says thatlsquocreating institutional factsrsquo such as that professors not the students lead classesor that walkers stay to the right on a crowded sidewalk or that Elizabeth II is the



queen of England depends on lsquoone formal linguistic mechanismrsquo The institutionalfacts lsquocarry deontic powersrsquo that is they lsquoprovide us with reasons for actingthat are independent of our inclinations and desiresrsquo such as the (recognized)responsibility of the professor to lead the class or the (acknowledged) right to notbe bumped into on a crowded sidewalk or the (accepted) power of Elizabeth toexercise her advisory role The institutionalist economists call them constraintsor the rules of the game Searle notes citing his understanding of Durkheim thatlsquoSome social theorists have seen institutional facts as essentially constrainingThat is a very big mistakersquo Whether Durkheim committed the mistake is notso clear But North and associates certainly do commit it Institutions Searleis arguing are not about regulating relations between pre-existing people andobjects They are about creating entirely new power relationships betweenpeople and then continually negotiating about them That is what is magicalabout status functions We declare our independence and thus fashion a newrelationship of power between King George and his former subjects

In other words itrsquos more complicated than mere budget constraints betweenbuying ice cream and paying the rent Searle points out that there are two kindsof rules regulative (lsquoDonrsquot stealrsquo lsquoDrive on the rightrsquo) which apply to alreadyexisting activities and constitutive rules which create the very activity (lsquoFollowthese rules and you are playing chessrsquo lsquoAct is this way and you are being a properbourgeoisrsquo) It is language in particular the combined metaphors and stories weuse to create allegories called institutions If the science of economics as theeconomists Nona and Storr argue needs meaning ndash it needs deontically notmerely rules of the game or brain science but the humanities all the way up tothe department of English30

lowastlowastlowast

Another example North speaks highly of the anthropologist Geertz It is hard notto North reads Geertz and his coauthors though as supporting the economisticnotion that in caravan trade such as in Morocco around 1900 in Northrsquosformulation lsquoinformal constraints [on say robbing the next caravan to passby] made trade possible in a world where protection was essential andno organized state existedrsquo North misses the non-instrumental shame-and-honor non-Max-U language in which Geertz in fact specialized and missestherefore the dance between internal motives and external impediments to actionbetween the dignity of a self-shaping citizen-not-a-slave and the merely utilitarianlsquoconstraintsrsquo The toll for safe passage in the deserts of Morocco Geertz and hiscoauthors actually wrote in explicit rejection of Max U was lsquorather more thana mere paymentrsquo that is a mere monetary constraint a budget line a fence anincentive an lsquoinstitutionrsquo in the reduced definition of Samuelsonian economics

30 Nona and Storr (2012)



lsquoIt was part of a whole complexrsquo the anthropologists actually wrote lsquoof moralrituals customs with the force of law and the weight of sanctityrsquo31

lsquoSanctityrsquo doesnrsquot mean anything to North the economist who for example inhis book treats religion with an unlettered contempt worthy of Richard Dawkinsor Christopher Hitchens (lsquoDitchkinsrsquo says Eagleton) Religion to North meansjust another lsquoinstitutionrsquo in his utilitarian subject-to-constraints sense that isrules for an asylum He labels religion repeatedly lsquononrationalrsquo Religion to himis not about sanctity or the transcendent not about faithful identity not aboutgiving lives a meaning through moral rituals It is certainly not an ongoingintellectual and rational conversation about Godrsquos love not to speak of anongoing conversation with God Religion is just another set of constraints ondoing business whether the business is in the market or in the temple or inthe desert In this North agrees with the astonishing economist Iannaccone andhis followers when they come to study religion Religion to them is a socialclub with costs and benefits not an identity or a conversation (Anyone whohas actually belonged to a social club of course knows that it soon developsinto lsquomoral rituals customs with the force of law and the weight of sanctityrsquoI could instance as such a club the Chicago School of economics during itsgreat days in the 1970s One of our sanctified rituals was to repeat De gustibusnon est disputandum while passionately advocating a very particular intellectualgustus) North asserts for example that in a prelegal stage lsquoreligious precepts imposed standards of conduct on the [business] playersrsquo He spurns theworldview that goes with religious faith (His own religion of Science of courseis in fact nothing like a mere constraint He construes it as his identity his moralritual his sanctity ndash in short the meaning of his life negotiated continuouslyover its extraordinary course But ethical consistency is not a strong point ofSamuelsonian economics)

Greif Northrsquos ally in neo-institutionalism calls culture lsquoinformal institutionsrsquoand North tries to talk this way as well32 The lsquoinformalityrsquo however wouldmake such lsquoinstitutionsrsquo very different from asylum-type lsquorules of the gamersquo Onedoes not negotiate the rules of chess But informality is continuously negotiatedndash that is what the word lsquoinformalityrsquo means exactly the degree of setting asiderules that distinguishes a backyard barbecue from a state dinner How to behaveat the barbecue (Hint do not jump naked into the bushes) Just how far cana man go in teasing his mates Just how intimate can a woman be with hergirlfriends The rules are constructed and reconstructed on the spot which insuch cases makes the Samuelsonian metaphor of constraints inapt One does nothave to deny that an ethical persuasion is often influenced by incentives to believethat once it becomes part of a personrsquos identity it has an effect independent of thevery incentives Once someone is corrupted by life in a communist country for

31 Geertz et al (1979) p 137 quoted in North 1991 p 104 italics supplied32 Greif (2006)



example it is hard to reset her ethics She goes on relying on the lsquobureaursquo model ofhuman interaction as against the market Once you are educated in Samuelsonianeconomics it is hard to reset your intellectual life You go on thinking of everysocial situation in terms of Max Ursquos mechanical reaction instead of a sociallyconstructed dance But the Geertzian metaphor of negotiation and ritual oftenmakes more sense lsquoO body swayed to music o brightening glance How canwe know the dancer from the dancersquo

Some economists grasp that institutions have to do with human meaningnot merely Northian lsquoconstraintsrsquo The Austrians and the old institutionalistsmanaged to escape Houdini-like from the straightjacket that North BeckerDeepak Lal Greif Levitt Max U and their friends have so eagerly donnedThe Austrian economist Lachmann (1906ndash1990) for example spoke of lsquocertainsuperindividual schemes of thought namely institutions to which schemesof thought of the first order [notice that to the Austrians the economy isin fact thought all the way down] the plans must be oriented and whichserve therefore to some extent the coordination of individual plansrsquo33 Thus alanguage is a scheme of thought backed by social approval and conversationalimplicatures Thus too is a courtroom of the common law a scheme of thoughtbacked by bailiffs and law books

North like the numerous other economists such as Levitt who have settledinto the straightjacket talks a good deal about meaning-free incentives becausethat is what Samuelsonian economics can deal with The constraints The budgetlines The relative price Yet one can agree that when the price of crime goesup (that is the incentives change in the direction of say harsher punishment)less of it will be supplied sometimes yet nonetheless affirm that crime is morethan a passionless business proposition If you donrsquot believe it tune into oneof the numerous prison reality shows and watch the inmates struggling withthe guards with a mad purpose though prudent means or listen to Ishmael onCaptain Ahab lsquoin his heart Ahab had some glimpse of this namely all mymeans are sane my motive and my object madrsquo34 If crime is more than utterlypassionless calculations by Max U then changing the ethics of criminals andtheir acquaintances can affect it ndash ethics that do change sometimes quicklyCrime rates fall dramatically during a big war for example at any rate on thehome front The metaphors of crime as being like employment as a taxi driveror of a marriage as being like a trade between husband and wife or of childrenbeing like consumer durables such as refrigerators have been useful Neat stuffBut they donrsquot do the whole job Sometimes they are disastrously misleading aswhen economists provided ammunition for conservative politicians in the 1990sfor increasing punishments for crimes such as the crime of sitting peacefullysmoking a joint

33 Lachmann (1977)34 Melville Moby Dick Chp 41



Prudence is a virtue It is a virtue characteristic of a human seeking purelymonetary profit ndash but also of a rat seeking cheese and of a blade of grass seekinglight Consider that temperance and courage and love and justice and hope andfaith are also virtues and that they are the ones defining of humans Unlikeprudence which characterizes every form of life and quasi-life down to bacteriaand viruses the non-prudential virtues are uniquely characteristic of humansand of human languages and meanings In no sense is a prudent blade of grasslsquocourageousrsquo or a prudent rat lsquofaithfulrsquo (outside of the movie Ratatouille whosehumor turns on the irony of the rat hero being more faithful and less motivatedby prudence only than many of the humans) As Hugo de Groot in LatinlsquoGrotiusrsquo put it in 1625 lsquoThe saying that every creature is led by nature to seekits own private advantage expressed thus universally must not be granted [The human animal] has received from nature a peculiar instrument that is theuse of speech I say that he has besides that a faculty of knowing and actingaccording to some general principles [called lsquovirtuesrsquo] so that what relates tothis faculty is not common to all animals but properly and peculiarly agrees tomankindrsquo35 North and company however will have none of human speech andmeanings and acting according to some general principle aside from onersquos ownprivate interest The positivistic talk about lsquoconstraintsrsquo and lsquorules of the gamersquomisses what he could have learned from Geertz Weber Smith Aquinas CiceroConfucius Moses or his mother (Northrsquos mother or Mosesrsquos) ndash that social rulesexpressed in human languages have human meanings They are instruments aswell as constraints as Lachmann says playthings as well as fences communitiesas much as asylum rules

Take for example so trivial an institution for providing incentives as a trafficlight When it turns red it surely does create incentives to stop For one thingthe rule is self-enforcing because the cross traffic has the green (In the old jokea New York city taxi driver drives at high speed through every red light butscreeches to a halt at every green His terrified passenger demands to know whylsquoToday my brother is driving too and he always goes through red lightsrsquo) Foranother the police may be watching or the automatic camera may capture yourlicense plate The red light is a fence a constraint a rule of the game or of theasylum So far goes North and with him most economists

Yet the red light has meaning to humans who are more than rats in a prudence-only experiment facing food incentives Among other things it means statedominance over drivers It signals the presence of civilization and the legitimacygranted to the state that a civilization entails (Test you are struggling through apathless jungle and come upon a traffic light lsquoMr Civilization I presumersquo)It signals too the rise of mechanical means of regulation in contrast to a humantraffic officer on a raised stand with white gloves The red light is in Lachmannrsquosterms a system of thought It is a system that some drivers find comforting

35 Grotius (1625) propositions vi and vii



and others find irritating depending on their attitudes toward the state towardmechanical inventions toward traffic officers For a responsible citizen or anIowan or indeed a fascist conformist the red light means the keeping of rules Shewill wait for the green even at 300 am at an intersection obviously clear in alldirections an intersection lacking a license-plate camera or police person in atten-dance or a reliably irresponsible brother on the road even when shersquos in a bit of ahurry Incentives be damned But for a principled social rebel or a Bostonian orindeed a sociopath the red light is a challenge to his autonomy a state-sponsoredinsult Again incentives be damned If the broken-window policy is applied toovigorously it could well evoke an angry reaction from potential criminals andcould result in more not less crime or at any rate widespread resentment of thepolice The over-policing in Ferguson Missouri in 2014 is a case in point

Meaning matters A cyclist in Chicago writing to the newspaper in 2008 abouta fellow cyclist killed when he ran a red light declared that lsquowhen the trafficlight changes color the streets of our cities become an every-man-for-himselfanything-goes killing zone where anyone who dares enter will be caught ina stream of intentionally more-deadly high-mass projectiles controlled byoperators who are given a license to kill when the light turns greenrsquo36 Themotorist who unintentionally hit the cyclist probably gave a different meaningto the event A good deal of life and politics and exchange takes place in thedamning of incentives and the assertion of meaning ndash the motherrsquos love or thepoliticianrsquos integrity or the economistrsquos enthusiasm what Keynes (and after himAkerlof and Shiller) called animal spirits and what Sen calls commitment andwhat I call virtues and corresponding vices other than prudence only

Meaning matters metaphors matter stories matter identity matters ethicsmatter Considering that we are humans not grass it matters a great deal

References

Acemoglu D and J A Robinson (2012) Why Nations Fail The Origins of Power Prosperityand Poverty New York Crown Business

Adams J (1994) lsquoEconomy as Instituted Process Change Transformation and ProgressrsquoJournal of Economic Issues 28 331ndash355

Akerlof G and R Shiller (2009) Animal Spirits How Human Psychology Drives theEconomy and Why It Matters for Global Capitalism Princeton Princeton UniversityPress

Becker G and G Stigler (1977) lsquoDe Gustibus Non Est Disputandumrsquo American EconomicReview 67 76ndash90

Boldrin M and D K Levine (2008) Against Intellectual Monopoly Cambridge CambridgeUniversity Press

Carlos A M and F D Lewis (1999) lsquoProperty Rights Competition and Depletion in theEighteenth-century Canadian Fur Trade The Role of the European Marketrsquo CanadianJournal of Economics Revue Canadienne drsquoEconomique 32 705ndash728

36 Aaron Keuhn letter to the editor Chicago Tribune March 7 (2008) p 20



Chamlee-Wright E and V H Storr (eds) (2010) The Political Economy of HurricaneKatrina and Community Rebound Cheltenham UK Edward Elgar

Coase R and N Wang (2013) How China Became Capitalist Basingstoke UK Palgrave-Macmillan

Coate D (2010) lsquoDisaster and Recovery The Public and Private Sectors in the Aftermathof the 1906 Earthquake in San Franciscorsquo Rutgers University Newark New JerseyWorking Paper

Das G (2009) The Difficulty of Being Good On the Subtle Art of Dharma Oxford OxfordUniversity Press

Davis J (2012) Medieval Market Morality Life Law and Ethics in the English Marketplace1200ndash1500 Cambridge Cambridge University Press

Eagleton T (2006) lsquoLunging Flailing Mispunching Review of Dawkins The God DelusionrsquoLondon Review of Books October 19 pp 32ndash34

Fish S (1980) Is There a Text in This Class The Authority of Interpretive CommunitiesCambridge Harvard University Press

Fish S (2001) How Milton Works Cambridge Harvard University PressFouquet R and P J G Pearson (2011) lsquoThe Long Run Demand for Lighting Elasticities

and Rebound Effects in Different Phases of Economic Developmentrsquo Basque Centre forClimate Change (BC3) Working Paper No 6

Gazzaniga M S (2011) Whorsquos in Charge Free Will and the Science of the Brain NewYork Harper-Collins

Geertz C H Geertz and L Rosen (1979) Meaning and Order in Moroccan Society NewYork Cambridge University Press

Greif A (2006) Institutions and the Path to the Modern Economy Lessons from MedievalTrade Cambridge Cambridge University Press

Grotius (Hugo de Groot) (1625) lsquoPreliminary Discourse concerning the Certainty of Rightsin Generalrsquo in De iure belli ac pacis English trans of 1738 from the French of JeanBarbeyrac 1720 At Online Library of Liberty httpolllibertyfundorg

Gwartney J R Lawson and J Hall (2011) Economic Freedom of the World 2011 AnnualReport Vancouver Fraser Institute

Hardin G (1968) lsquoThe Tragedy of the Commonsrsquo Science 162 1243ndash1248Hart D M and S Richman (eds) (2014) Discussion with Joel Mokyr John Nye and

McCloskey of lsquoDonald J Boudreauxrsquos ldquoDeirdre McCloskey and Economistrsquos Ideaabout Ideasrdquo rsquo Liberty Matters website July Indianapolis IN Liberty Fund Athttpolllibertyfundorgpagesmccloskeylowastlowastlowastconversation1

Haskell T L (1999) lsquoResponsibility Convention and the Role of Ideas in Historyrsquo in P ACoclanis and S Bruchey (eds) Ideas Ideologies and Social Movements The UnitedStates Experience since 1800 Columbia University of South Carolina Press pp 1ndash27

Hiser R F (2003) lsquoMoral Consequences of Institutional Structurersquo Planning and Markets6(1) At httpwww-pamuscedu

Iannaccone L (1998) lsquoIntroduction to the Economics of Religionrsquo Journal of EconomicLiterature 36(3) 1465ndash1495

Kelling G L and J Q Wilson (1982) lsquoBroken Windows The Police and NeighborhoodSafetyrsquo The Atlantic 249 29ndash38

Lachmann L (1977) Capital Expectations and the Market Process Kansas City SheedAndrews and McMeel

Maddison A (2007) Contours of the World Economy 1ndash2030 AD Oxford OxfordUniversity Press



McCloskey D N (1985) The Applied Theory of Price New York MacmillanMcCloskey D N (1998) lsquoBourgeois Virtue and the History of P and Srsquo Journal of Economic

History 58 297ndash317McCloskey D N (2001) lsquoWomenrsquos Work in the Market 1900ndash2000rsquo in I Zweiniger-

Bargielowska (ed) Women in Twentieth Century Britain Economic Social andCultural Change London LongmanPearson Education

McCloskey D N (2008) lsquoNot by P Alone A Virtuous Economyrsquo Review of PoliticalEconomy 20 181ndash197

McCloskey D N (2010) Bourgeois Dignity Why Economics Canrsquot Explain the ModernWorld Chicago University of Chicago Press

McCloskey D N (2015) (forthcoming) Bourgeois Equality How Betterment BecameEthical 1600ndash1848 and Then Suspect Chicago IL University of ChicagoPress

Mokyr J (2009) lsquoIntellectual Property Rights the Industrial Revolution and theBeginnings of Modern Economic Growthrsquo American Economic Review 99(2) 349ndash355

Mokyr J (2010) lsquoCulture Institutions and Modern Growthrsquo Conference on UnderstandingInstitutions and Development Economics The Legacy and Work of Douglass C NorthSt Louis 4ndash6 Nov 2010

Mueller J (1999) Capitalism Democracy and Ralphrsquos Pretty Good Grocery PrincetonPrinceton University Press

Nona M P and V H Storr (2012) lsquoTalk Changes Things The Implications of McCloskeysBourgeois Dignity for Historical Inquiryrsquo Journal of Behavioral and ExperimentalEconomics 41 787ndash791

Nodharus W D (1996) lsquoDo Real Output and Real Wage Measures Capture Reality TheHistory of Lighting Suggests Not in T F Breshnahan and R Gordon (eds) TheEconomics of New Goods Chicago Chicago University Press

North D C (1991) lsquoInstitutionsrsquo Journal of Economic Perspectives 5(1) 97ndash112North D C (2005) Understanding the Process of Economic Change Princeton Princeton

University PressParks T (2013) Italian Ways On and Off the Rails from Milan to Palermo New York and

London NortonRazafindrakoto M F Roubaud and J-M Wachsberger (2013) lsquoInstitutions Gouvernance

et Croissance de Long Terme a Madagascar Lrsquoenigme et le Paradoxersquo Unpublishedessay Universite Paris-Dauphine UMR DIAL (Developpement Institutions ampMondialisation)

Rossi G and S Spagano (2014) lsquoFrom Custom to Law ndash Hayek Revisitedrsquo Unpublishedessay Edinburgh School of Law and Department of Economics and business Universityof Catania At httpmpraubuni-muenchende56643

Searle J R (2010) Making the Social World The Structure of Human Civilization OxfordOxford University Press

Sen A (1977) lsquoRational Fools A Critique of the Behavioral Foundations of EconomicTheoryrsquo Philosophy amp Public Affairs 6 317ndash344

Tallis R (2011) lsquoReview of Deacon and Gazzangarsquo Wall Street Journal November 12Tomasello M (2014) A Natural History of Human Thinking Cambridge Harvard

University PressWilliamson O (1999) lsquoPublic and Private Bureaucracies A Transaction Cost Economics

Perspectiversquo Journal of Law Economics and Organization 15 306ndash342



Wilson B J (2010) lsquoSocial Preferences Arenrsquot Preferencesrsquo Journal of Economic Behavioramp Organization 73 77ndash82

Zamagni S (2010) lsquoCatholic Social Thought Civil Economy and the Spirit of Capitalismrsquo inD K Finn (ed) The True Wealth of Nations Catholic Social Thought and EconomicLife Oxford Oxford University Press pp 63ndash93


References


in Germany are the same as in Evanston The difference is ethics TheEnglish novelist and essayist Parks who has taught at university in Italysince 1981 notes that lsquoit is extraordinary how regularly Italy creates areas of uncertainty How is the law [of say train travel with a validticket] to be appliedrsquo The lsquoculture of ambiguous rulesrsquo seems lsquoto serve thepurpose of drawing you into a mindset of vendetta and resentment You become a member of [Italian] society insofar as you feel hard doneby [playing in] a gaudy theatre of mimed tribal conflictrsquo He gives theexample of il furbo the crafty one who jumps the queue to buy a ticket at thetrain station in a way that would get him assaulted by grandmothers in Germanyand by handgun licensees in the United States The law-abiding Italians groanbut do not act effectively to protect the public good of queues They wouldrather be resentful and therefore be justified in taking advantage sometime oftheir own acts of furbismo2

Economists call ethics often by another name lsquoenforcementrsquo The new wordwith its whiff of third-party intervention somehow made legitimate howeverdoes not make it any less about the ethical convictions with which a groupoperates lsquoNormsrsquo are one thing lsquorulesrsquo are another The neo-institutionaliststurn their arguments into tautologies by melding the two They end up sayinglsquoSocial change depends on societyrsquo One supposes so lsquoInformal constraintsrsquo arenot informal if they are constraints and if they are informal the theory hasbeen reduced to a tautology because any human action is now by definitionbrought under the label lsquoinstitutionsrsquo The neo-institutionalists have nothingnon-tautological to say about ethics because they have not read the immenseliterature on ethics since 2000 BCE including the literature of the humanitiesturning back to look at the rhetoric of language Being economist raised onthe childish philosophy that separates positive and normative when most of ourscientific lives are spent in their intersection they are quite unwilling to bringethics seriously into their history and their economics As one of them saidgenially to me lsquoethics schmethicsrsquo

The historian of the medieval English economy Davis concludes on thecontrary that lsquowithout a proper understanding of the morality and socialconventions of the marketplace the historian cannot understand the influenceof formal institutionsrsquo such as the assize of bread or the rules of guilds lsquoInmedieval Englandrsquo Davis writes a lsquopragmatic moral economy was not asimple efficient alignment of institutions and cultural beliefs but rather a headyand complex mixture of vested interests pragmatism and idealism that variedaccording to the prevailing circumstancesrsquo ranging from the pressures of themarket to the preachments of the pulpit3 One reason that bankers in Florencefinanced the explosion of sacred art and architecture in the quattrocento is that

2 Parks (2013) pp 8ndash9 18 143ndash1443 Davis (2012) pp 453ndash455











B = α + βP + γ S + δL + ε







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for 2010




lowastlowastlowast





















lowastlowastlowast


N rarr G


N and D rarr G


















25 Searle (2010) p 9526 Searle (2010) p 96
























29 Haskell (1999) p 10












lowastlowastlowast


























References




























































References










B = α + βP + γ S + δL + ε







lowastlowastlowast

































for 2010




lowastlowastlowast





















lowastlowastlowast


N rarr G


N and D rarr G


















25 Searle (2010) p 9526 Searle (2010) p 96
























29 Haskell (1999) p 10












lowastlowastlowast


























References




























































References



lowastlowastlowast

































for 2010




lowastlowastlowast





















lowastlowastlowast


N rarr G


N and D rarr G


















25 Searle (2010) p 9526 Searle (2010) p 96
























29 Haskell (1999) p 10












lowastlowastlowast


























References




























































References



























for 2010




lowastlowastlowast





















lowastlowastlowast


N rarr G


N and D rarr G


















25 Searle (2010) p 9526 Searle (2010) p 96
























29 Haskell (1999) p 10












lowastlowastlowast


























References




























































References



lowastlowastlowast





















lowastlowastlowast


N rarr G


N and D rarr G


















25 Searle (2010) p 9526 Searle (2010) p 96
























29 Haskell (1999) p 10












lowastlowastlowast


























References




























































References















lowastlowastlowast


N rarr G


N and D rarr G


















25 Searle (2010) p 9526 Searle (2010) p 96
























29 Haskell (1999) p 10












lowastlowastlowast


























References




























































References













25 Searle (2010) p 9526 Searle (2010) p 96
























29 Haskell (1999) p 10












lowastlowastlowast


























References




























































References























29 Haskell (1999) p 10












lowastlowastlowast


























References




























































References











lowastlowastlowast


























References




























































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References




























































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References

max u versus humanomics: a critique of neo …...changing the institution of not being a snitch, not...

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