Institutional Economics and the Relation between Institutions and Development

1. 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

2. Introduction • Objective • To discuss how far theory has gone to explain the relationship between institutions and development

3. Introduction • Presentation Plan • Critics to Institutional Economics • Alternative views on institutional economics • Basic features of modeling Institutional Economics • Potential to deal with problems of development

4. Critics to IE

5. Critics to IE • Most of the authors that criticize • Institutional Economics agree that institutions are important to understand development

6. Critics to IE • 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

7. Alternative views • Three basic questions: • Is it possible to identify an institutional theory? • What is institutional economics? • What do the various institutional approaches have in common?

8. Alternative views • 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

9. Alternative views Nevertheless there are authors that see more convergence than divergence

10. Alternative views Williamson (2000) Social Theory Level Years Purpose Embeddedness Informal institutions, customs, tradition Often non calculative, spontaneous Positive political economy 102 to 103 Institutional environment Formal rules of the game (polity, judiciary, bureaucracy) Get the institutional environment right 10 to 102 Transactions costs economy Governance Play the game, esp. contracts Get the governance structure right 1 to 10 Neo classical economy Get the marginal conditions right Resource allocation and employment Incentives alignment Continous

11. Alternative views • Hodgson (1998) • Emphasis on institutional and cultural factors • Analysis is openly interdisciplinary • No recourse to the model of the rational utility-maximizing agent • Mathematical and statistical techniques are recognized as the servants of economic theory • The analysis starts from stylized facts and theoretical conjectures concerning causal mechanisms • Extensive use is made of historical and comparative empirical material

12. Alternative views • 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.

13. 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)

14. Modeling institutions • 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)

15. Modeling individuals

16. Modeling individuals

17. Modeling individuals

18. Modeling individuals

19. 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.

20. 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)

21. 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, fairness

22. 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)

23. 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)

24. Institutions and development • Two main promising contributions to the understanding of relation between institutions and development. • Ostrom (2007) • North, Wallis and Weingast (2009)

25. Institutions and development • Ostrom • 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

26. 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

27. 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 capabilities

28. Institutions and development • Contributions • Development as a historical process • Integration between formal and informal rules • Self-interest and rules

29. Thank you!