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Issues in Institutional Theory
Sunday, Jan. 3, 2021
10:00 AM - 12:00 PM (EST)
Association for Evolutionary Economics & Association for Social Economics
(Are) Institutions More Important than Innovation?
The aim of this paper is to shed more light on the effects of technological innovation on economic progress from the institutionalist perspective. Based on historical data on economic growth and technological changes in the United States, we question the assumption of mainstream economics that innovation, performed by profit-making enterprises, is a key source of productivity growth. The difference between the golden age and the period since then suggests that economic progress is primarily determined by a successfully functioning institutional structure and progressive institutional changes.
Keywords: Economic progress, Technological innovation, Progressive institutional changes, Old institutionalism
JEL: B52, O33, O43.
Economic Theory, Realism and Performativity: A Case Study with the Concept of ‘Competition’
"The paper uses the example of the theoretical concept of ‘competition’ to illustrate how the implicit meta-theoretical commitment of neoclassical economics to a modeling approach that devalues realism leads the endorsement of policy measures that aggravate socio-economic inequalities.
The vantage point is an extensive interdisciplinary review of how various social sciences and humanities theorize ‘competition’ (Altreiter et. al. 2020). The review shows that the neoclassical approach is distinguished by a very particular epistemological approach: the reliance on a form of equilibrium-based modeling that values internal consistency (‘verification’) over the actual relation to the system under investigation in the real world (‘validation’, see Gräbner 2018). Such an approach is shown to be incompatible with any philosophically coherent account of realism.
At the same time, the performativity of the neoclassical approach, i.e. its impact on the real world – e.g. via its indirect impact on the design of economic policies (e.g. Heimberger et al. 2019), or its direct effect on the decision-making of humans (e.g. MacKenzie 2006) – exceeds that of any other theoretical approach to the investigation of ‘competition’.
The combination of an epistemological approach devaluing the realism and a strong performative impact of the models themselves is problematic: the modeling approach of neoclassical economics contains implicit assumptions that tend to overstate the efficiency, distributional justice and feasibility of policies that address problems of allocation through ‘competition’. Many of these assumptions are so implicit that they are hardly discussed within neoclassical economics.
To explicate their relevance, we formalize the central neoclassical theory of competition within an agent-based model. Because of its focus on mechanism-based explanations (Gräbner 2016, 2017), such a model explicates many of the implicit assumptions of the equilibrium-based model.
Smartphones, Social Networks, and Fake News: Institutional Economics Approach to Decision-Making in the 21st Century
Realism has a place in the core of Institutional Economics approach to decision-making. Institutional Economics’ founding fathers relied on pragmatic philosophy looking for a practical understanding in decision-making. Hence, habits – and institutions as outgrowths of habits – are the key decision-making issues resulting from cumulative causation. From an evolutionary perspective, habits carry information, emulative logic, and, possibly, vested interests. Behaviors of others impact how decision-makers interact – by direct or indirect observation and emulation of a social class. However, today’s world differs from the time of Institutional Economics’ founding fathers. Technological innovation for receiving information and interacting with others has changed decision-making. Since the end of the 20th century, the Internet has drastically increased the quantity of information available to a decision-maker. The decision-maker’s main task now is to select reliable sources of information, recognizing that previous habits may be obsolete, and adaptation requires time. The beginning of the 21st century brought a social network boom, which changed interactions, habits building, institutional spreading, and emulative logic. Social networks have become a filter of information and have changed how decision-makers deal with traditional media. Social networks have been used to change the meaning of information, making fake news possible. This study aims to approach 21st century information technology to Institutional Economics’ reading of decision-making, specifically examining habits building, social interaction, emulative logic, and vested interests.
The Non-Evolutionary and Non-Benign Character of Stylized Facts
While becoming economists we are socialized into understandings of our object of study. Stylized facts, empirical “regularities,” that are taken as Truth, are one of the first bits we internalize. Once we know the stylized facts, they can be taken for granted and more complex understandings can be erected on them. However, stylized facts imbue a staticity to an inherently dynamic system. With stylized facts animating economic research, empirical regularities that may have been established through inductive methods, turn into a deductive endeavor, searching for evidence of an empirical relationship, now taken as Truth (e.g. the multitude of Phillip Curve models seeking to show there is still a tradeoff, an empirical relationship that broke down in the 1970s and 1980s in the US). Taking an empirical regularity as Truth is antithetical to an evolutionary approach, further removing us from our object of study. Moreover, findings reached by economists based on “common sense” stylized facts can influence policy directions. If this “common sense” is not being continually updated through inductive methods, then ceremonial knowledge is animating policy decisions. This is when stylized facts take on a non-benign character, directly affecting peoples’ lives. This paper will explicate the methodological problems inherent in stylized facts, demonstrating their nonevolutionary nature. The insights of Pierre Bourdieu will be drawn upon to understand the socialization processes which create common sense understandings of our world that are nonbenign, what Bourdieu calls doxic understandings. Examples of stylized facts will be invoked to demonstrate their doxic character. Doxic understandings of the world are inherently ceremonial and antithetical to an evolutionary approach. To overcome these problems, does not mean the elimination of heuristics from how we understand the economy; but rather, a continual application of reflexivity.
Whose State and Whose Economy? Buchanan, Samuels, and the Positive Theory of Public Choice
This paper revisits the debate between James Buchanan and Warren Samuels over Miller, et al. v. Schoene (1928). The initial court case—concerning the rights of government in the face of conflicting private interests—and subsequent debate between Buchanan and Samuels have important implications for the interrelations between legal and economic processes, the difference between a normative and positive theory of public choice, and the nature of public choice more generally. In published papers and private correspondence, the writings of Samuels reveal an alternative conception of public choice theory as a positive endeavor divorced from the free market normative implications of Buchanan’s work. Application of Samuels’ framework for public choice to rent seeking, the Coase Theorem, and income redistribution illustrate its continued relevance for political economy.
The Consequences of Institutional Variety and Ayres-Veblen Lag for Technology in Economic Development
Can the Ayres-Veblenian concept of institutional ‘lag’ inform the dynamic phenomenon of institutional variety and its implications for technological capabilities in economic development? Development economics tends to avoid the theoretical conundrum about whether or how to reduce the evolution of variety (the ‘market menagerie’), and views change more as instrumental quasi-optimization, where ordered convergence of economic structure and institutions occurs over time. This could take place through dominant institutions such as market; societies of one kind become more like another, and social relevance is filtered through primarily market outcomes or manifested through non-market institutions such as values and social custom. At the level of microeconomics, however, a variety of institutional combinations and iterative policy interventions could result in fragmented systems with no clear sense of social connection or shared idea of progress, offering examples of blind drift. Such uncertainty about the future environment in which individuals and firms act, can direct or paralyze the search and learning process for building technological capabilities. At the level of the individual, the Nyaya and Vedanta Schools for instance (of the six Hindu Schools of philosophy), offer pre-Cartesian systems of reason centering on individual consciousness, perception, and action in response to their inference and judgement about phenomena. The formation of individual and collective meaning however does not seamlessly translate into a society’s articulation of its values for technology selection and the design of industrial policy. Clarifying the relationship between institutional variety and institutional lag is therefore an opportunity to enrich the philosophy of development economics with an Ayres-Veblen perspective on the selection of technology within a democracy.
B5 - Current Heterodox Approaches