McElroy's conclusion is, I think, very important and useful in our reading of Why Nations Fail.
What is an institution?
An institution is any stable and widely-accepted mechanism for achieving social and political goals. Traditional institutions of society include the family, court systems, the free market, and churches. Institutions generally evolve over time to reflect the history and dynamics of a culture. For example, the institution of common law evolved on a grassroots level to meet the demand for justice by average people. Equally, the institutions of money and the market arose to satisfy human need and desire for goods.
As those needs and desires change, so do the institutions. Sometimes the change occurs due to conscious human design. Trial by a jury of one’s peers, for example, was a procedure consciously designed to maximize the justice of verdicts. This court procedure weathered the test of time well enough to now be viewed as a cornerstone of Western jurisprudence. When institutions are responsive and grassroots in nature, they become such a natural part of human progress that they change in a spontaneous manner, as in the continuing evolution of language. Like the free market, they strongly encourage peaceful interaction because that is what benefits the vast majority of people.
The political system is the institution upon which libertarians focus. They commonly observe that politics ‘institutionalizes corruption’; political structures and procedures encourage bad results like the personal malfeasance of elected figures. A large reason for the corruption is that the political system is not responsive, not grassroots. As a static institution, it serves the embedded interests of an elite class rather than the dynamic ones of the average person. (The elite class consists of politicians and those with political pull.) What libertarians call ‘corruption’ is what the elites call ‘profit’. They have consciously sculpted the institution to increase their profits through such procedures as non-transparency.
In a sense, the embedded corruption of politics is good news for libertarians because it spotlights a basic truth about institutions. They can promote liberty or statism depending upon their structure, procedures and the embedded incentives. The Founding Fathers knew this. For example, they attempted to limit the government by constructing a tripartite system of checks and balances designed to prevent the centralization of power. The Bill of Rights created incentives toward liberty by laying down societal ground rules to be upheld by the Supreme Court. (Whether the best intentions of the Founding Fathers were doomed to defeat by the inherent nature of politics is debatable.)
The specific structures and procedures of any institution will determine the results it produces. As long as the procedures are followed, the motives of those participating in the institution are irrelevant. Elsewhere, I offered the example of a man who works in a candy factory with the intention of producing canned tuna. As long as he follows the workplace rules and procedures, however, he will produce candy. A police officer may want to promote libertarian justice but as long as he enforces the laws of a totalitarian state, he will produce injustice.
Equally, as long as everyone respects the rules of the free market, it will function as a mechanism of peace and prosperity even if some of its participants are ill intentioned human beings. You may buy goods from a man whom you would never allow into your home; he can detest your religion or skin color even as money peacefully changes hands. As long as the rules of the free market are observed, freedom itself is served.
The burning question now becomes: how do we construct institutions that encourage liberty?
There are two answers on how to construct freedom-oriented institutions. The first: do not to construct them at all. Allow them to evolve through the spontaneous interaction of individuals pursuing their own self-interest. This is how free markets function, families are created, free speech rings out… Many institutions require merely to be unobstructed.
But other institutions require some design beyond the “anything that is peaceful” rule. For example, a court system requires procedures of justice such as “innocent until proven guilty.” And, so, the second answer to designing institutions is: do so in as minimal a manner as possible and only to promote individual rights.
America’s rugged individualism has been called the ‘soul’ of its character. America needs its soul back.http://lfb.org/today/freedom-is-dead-long-live-freedom/
This post from the Fed Reserve (see my blog tomorrow) discusses two views of the output gap. At an FTE event earlier this year, this issue was raised and both sides of the debate presented (see my blog tomorrow).
"You may have another view and, again quoting Lockhart's recent speech, "reasonable people can consider the issues...and come to different conclusions. ""
To me, productive discussion is a free examiniation and exchange of ideas, as opposed to a closeminded and pedantic rejection of any view that does not conform to pre-existing ideas or ideology.
This is a very useful post that allows for a framework to discuss the costs and benefits of national income accounting and the costs and benefits of policy based upon GDP accounting.
Both the recent Becker/Posner blog entries and the article below reveal a trend in beliefs in the US that may well shape the formal institutions which are the subject of discussion as well as contribute to further expansion of state action in society.
Becker argues that heavily regulated industries may display more "corrupt" behavior than do less regulated industries. This assertion calls to mind the recent article in the JEL Economic incentives and social preferences: substitutes or complements? http://tuvalu.santafe.edu/~bowles/EconomicIncentives-new.pdf
I read this work as an important contribution to understanding the interaction between incentives, individual and social behavior.
So Becker and Posner would seem to be agreeing with Bowles et al in the assessment that economic incentives may well shape the informal institutional framework in a manner that is both wealth threatening and highly disruptive to wealth enhancing social capital. These types of perverse outcomes could lead to a spiral as further efforts to correct the perverse outcomes actually accelerate the disruption.
Is Banking Unusually Corrupt? Becker
"Financial intermediation was formerly dominated by commercial banks that borrowed short term and lent long term to local and sometimes national businesses. In those days, banking leaders denoted solid, respectable, if not very imaginative, individuals who were the pillars of society. Commercial banks are still important, but modern financial intermediation is dominated by investment banks, mutual funds, and hedge funds that often invest large sums of money in equities, derivatives, and other mainly risky assets, including junk bonds.
Has this change in the nature of modern banking changed also the type of individuals who enter banking toward those who are more likely to be more corrupt and of lower character than the traditional banker? An April 2010 study in The Daily Beast, in partnership with the think tank Transparency International, listed the 17 most corrupt industries. Wall Street/ Securities was in fact number 2, but number 1 was Utilities, and numbers 3-5 were Telecommunications, Construction, and the Media. Traditional banking was among the remaining industries that were mainly other heavily regulated industries, such as mining, insurance, oil and gas, and pharmaceuticals. It is not clear how much weight to give to this and similar studies, but I believe two factors do encourage somewhat more corrupt individuals to enter modern banking."
Is Banking Unusually Corrupt, and If So, Why? Posner
"One has the impression—no more than that, but it is difficult even to imagine what “evidence” is obtainable that could confirm or refute the impression—that imprudent, unethical, unlawful, and downright criminal behavior is more common in large financial institutions (“banks,” as defined in the next paragraph) than in other, and otherwise comparable, business firms. Much of this behavior occurred during the housing and related credit bubbles of the 2000s and was discovered in the wake of the financial collapse of September 2008, yet much seems to have taken place afterward as well, continuing up to the present with the Libor scandal."
I read this work as an important contribution to understanding the interaction between incentives, individual and social behavior.
Economic incentives and social preferences: substitutes or complements?
" That’s where David Levy, of George Mason University; Sandra Peart, of the University of Richmond; and Margaret Albert, of the Colorado School of Mines, come into the picture. In Economic Liberals as Quasi-Public Intellectuals: The Democratic Dimension, appearing in one of the Emerald Group’s periodic volumes of Research in the History of Economic Thought and Methodology, they argue that Lane attacked Tarshis because something about his book – his “democratic reformism” – especially got under her skin, while Samuelson’s more technocratic position somehow rendered him immune to her ire.
You have to really love the ins and outs of libertarian thought (I don’t) and read the extensive documentation they supply (I did) to follow their argument: that a strange alliance between Tarshis and von Mises demonstrates how modesty distinguishes true experts, such as James Buchanan and John Rawls, in their role as public intellectuals, from more “aristocratic” experts, such as Lane and her strange bed-fellow Samuelson.
This much, however, is clear, and relevant. In newspaperman Robert LeFevre, Rose Wilder Lane found a kindred spirit. In 1956 LeFevre founded the Freedom School in the mountains betweenDenver and Colorado Springs. It was later known as Rampart College. At one point, when the school was about to go out of business, Lane emptied her bank account to pay a critical month’s rent. Lefevre later named his new “phrontistety” (from the Greek, a “place for thinking”) for her, Rose Wilder Lane Hall.
Among the summer phronistery professors were von Mises, Milton Friedman, G. Warren Nutter, Leonard Read and Gordon Tullock. Among its graduates was Charles Koch, who, as a rich Wichita businessman, has come to exemplify a certain kind of ultra-individualistic philanthropist of the Little House on the Prairie school."
Another example of the work of those who work to shape public opinion as "intellectuals". I recall reading this book and wondering if it was the same writer as The Grapes of Wrath.
"Editor’s Note: When John Steinbeck's Travels With Charley in Search of America was first published 50 years ago on July 27, 1962, it quickly sold hundreds of thousands of copies and stayed on the nonfiction bestseller lists for over a year. Since then it has become a classic American road book, loved by millions on account of Steinbeck’s quirky humor, vivid descriptions of the natural world, and wise and cranky observations about America and its people.
Yet as Bill Steigerwald revealed in Reason’s April 2011 issue, Steinbeck’s work of “nonfiction” is riddled with fictional people and events and offers a mostly inaccurate portrait of the Nobel laureate’s actual travels. As part of his groundbreaking research, Steigerwald read the original manuscript of Travels With Charley at New York’s Morgan Museum and Library, where he discovered that the book’s first draft was heavily edited to remove Steinbeck’s New Deal politics and create the myth of an open-minded journey. Thus the reading public was deceived into seeing Steinbeck as an impartial observer, rather than as the staunch partisan he really was. Just as Barack Obama used composite characters and other fictional conceits in his memoir Dreams from My Father (as detailed in David Maraniss’ recent biography of the president), Steinbeck departed from the truth in order to further his narrative."
In the essay I was reading, a contribution to Institutions and Economic Performance, a conference volume, Mokyr zeroed in on a question underlying the current controversy in which one of the world’s most important interest rates was manipulated in some small degree during the crisis of 2008, both for the preservation of civilization (by regulators) and for private profit (by traders) – How did London get to be the way it is?"
I have always thought one of Mokyr's books would be great for ASET bookclub.
Here are a few of Friedman's one-liners collected by Sanderson:
Concentrated power is not rendered harmless by the good intentions of those who create it.
History suggests that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition.
The problem of social organization is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of a system.
With some notable exceptions, businessmen favor free enterprise in general but are opposed to it when it comes to themselves.
The free man will ask neither what his country can do for him nor what he can do for his country.
The case for prohibiting drugs is exactly as strong and as weak as the case for prohibiting people from overeating.
If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.
Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.
Yes, I know, you want to reject all these factual findings because they are “right-wing” or “libertarian.” All I ask you to do is, once in a while, consider. Don’t believe everything you read in the papers.
A strongly recommend a listen to this short overview of Susan Athey's work on internet search and market design.
Susan Athey, Department of Economics, Harvard University, discusses her participation in our Research Symposium on the Economics and Law of Internet Search. (Note: Athey and her husband have moved to Stanford)
This is a sample of the research that Athey is leading.
Will Internet search trends offer early signals . . . http://www.capitalspectator.com/archives/2012/06/searching_for_m.html
In the past three weeks, the Congressional Budget Office (CBO) has released two reports that seem to justify contradictory fiscal policies. The first calculated that the U.S. economy could be thrown into recession because of existing legislation to reduce the deficit sharply next year (the so-called fiscal cliff). The second projected that the U.S. is headed for an eventual financial crisis if the deficit is not reduced sharply. So what are we supposed to do? Obviously, America’s debt is a problem – but is it a clear and present danger, or just something we need to deal with as circumstances permit? To understand how to make smart policy choices that address both these issues, it’s helpful to take the debt numbers apart.
Read more: http://business.time.com/2012/06/12/how-dangerous-is-americas-debt/#ixzz1xaDX4vu2