Incentives and adaptive efficiency

Incentives matter. I think Boyes highlights a key application in economic reasoning, one that I have been reflecting on in the context of my summer reading as well as the current expansion of the state in our country.

Incentives come from the institutional framework of society. These institutions, as Douglass North tells us, can be formal or informal, and they are important in shaping the incentives that shape behavior. Boyes does a great job of exemplifying the impact of incentives and incentive changes in this post.

However, I am interested in the process by which both the institutions and the incentives change. In rereading North's challenging book - Understanding the Process of Economic Change - I encountered his concept of adaptive efficiency. North argues that the emergent and evolutionary process that characterizes change is shaped to a large extent by the degree of adaptive efficiency embedded in a society.

In addition, he argues that while formal institutions can be changed very quickly (the example that Boyes provides us - or the current effort to change the "rules of the game" for health care)informal institutions (norms, beliefs, values, and shared cultural constructs) change very slowly, in his words this change is incremental and gradual. Further, my reading of North, Hayek and Smith leads me to believe that the informal institutions that emerge have a stronger influence than do formal institutions on the evolution of change. In writing this however, I wonder how
Boyes' Australian example reflects the relative importance of formal and informal norms and their relation to adaptive efficiency.

So, what we seem to be seeing in contemporary political debate in the US is an effort to quickly change a formal institution in the face of no change in informal institutions. Stated differently, current political leaders seem to be attempting to shape formal institutions in a way that conflicts with informal institutions - norms, beliefs, conventions held by a large segment of society.

This also seems to illustrate the adaptive efficiency of our society - that is a flexibility that encourages trial and error and failure. To the extent that the current political movement fails, there has been a higher order outcome and, tragedically, vice versa.

The relationship between Economics, Values and Organizations is the topic of a collection of essays that I might recommend.

So, Boyes challenges us to consider the impact of an attempt to change formal institutional structure in a rapid, tops down manner. His example of Australia seems to have lead to a higher order outcome, but the contemporary effort at change, while still unclear, may have the opposite effect. I can't help but think about the alternative to this tops down approach - the emergent and evolutionary development of institutional structures described by Hayek.

Douglass North - Economic Performance Through Time

http://nobelprize.org/nobel_prizes/economics/laureates/1993/north-lecture.html


Arnold Kling on Adaptive Efficiency

http://www.tcsdaily.com/article.aspx?id=061807A

Benjamin Friedman - The Moral Consequences of Growth

Nathan Rosenberg - How the West Grew Rich

Rizzo - On Leviathan and Krugman

"Let me go back to Krugman’s article. I italicized an interesting phrase. Big government can work when it is run by people who understand its virtues. He should have said big government can work when it is run by people who themselves determine how well it works."

Higgs - a great post



Opposing view - Megan McAardle
http://meganmcardle.theatlantic.com/archives/2009/08/did_big_government_save_us_fro.php