Increasing Marginal Utility

A blog so good it violates the law of diminishing marginal utility.

Evolved Institutions is Ad Hoc Face-Saving

For 69 years before the Soviet Union fell in 1991, free market economists were consistent in what they felt about socialism. If we get private property there, people will be better off. That’s the message of Mises’s Socialism all the way up to 1991.

But then Russia, no longer Soviet, communist, or socialist, got private property, but the economy continued to stagnate. So in 1997, Shleifer tells us that we need stakeholders who make sure reforms matter. We can’t have democracy without people who have a stake in private property enforced effectively, after all. More recently, we get William Easterly telling us that we can’t impose private property from the West; such property rights need to evolve.

I don’t know guys. I thought institutions were supposed to provide incentives and information for maximizing economic agents with subjective preferences. That was the argument the entire time, right? But it’s not just Shleifer (who is as first rate an economist as a neoclassical can be) and Easterly (the same); this comes up all the time recently, even more so in conversation. No, we can’t just impose the free market. We don’t like that, so we’ll call that top-down. Even though we said for the better part of a century that the free market is the bottom-up approach.

This all looks rather odd. People who both insist on incentive-providing constraints and that de gustibus non est disputandum are arguing that private property isn’t working as well as it could because people culturally don’t like it. In other words, people have a preferences against the functioning of a private free market. But don’t worry about that; we’ll just call this an informal institution! No disputing preferences! Huzzah!

Occam’s razor says now (and said pre-1990) that the world is complicated. Don’t start ad hoc’ing all sorts of silly theories of why your theory didn’t perfectly correlate 1-to-1 with reality. If you wish to define economics in terms of rational choice theory, as many of these economists are wont to do, then economics is by nature a partial view of life, as Alfred Marshall would have put it. The vibrancy of economies is contingent on all sorts of sociological factors that economists have no visibility into. This whole evolution thing is just a way to force incentives into the picture so as to miss the greater point.

Worse, these eminent free market economists insist on invoking Hayek when discussing these issues. We’re just Hayekians! Hayek talked about evolution! Group selection! These people have published far more on Hayek than I have, and I’m just a jerk grad student, but… really? Cursory reading of Hayek’s theories on group selections will reveal (if memory serves) three mechanisms for group selection: conquest, imitation, and breeding. So…. this “top-down” imposition of private property is imitation. In terms of Hayekian evolution, this top-down imposition of the free market is fine.

Look. My point, as is typical ’round these parts, methodological. There are many variables (sociological, psychological, what have you) that are important for economic variables like growth and unemployment, but irrelevant in rational choice theory . You can either have an economic theory that throws out the first at the expense of occasionally predicting growth and unemployment poorly, or an economic theory that occasionally throws out rational choice theory when appropriate. It takes Orwellian definitions to try to maintain both consistent policy prescription and rational choice theory. So, drop it. Either economics cannot always explain the economy, or culture matters. Because the whole evolving institutions business is a mess.

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7 responses to “Evolved Institutions is Ad Hoc Face-Saving

  1. Lee Kelly October 24, 2011 at 11:09 am

    Good point. I might qualify some of these comments, but good point.

    In other news, check out my new blog. Click my name!

  2. Pingback: What I’ve Been Reading « Increasing Marginal Utility

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  4. Michael Wiebe March 27, 2012 at 1:51 pm

    Do the indigenous/foreign and endogenous/exogenous distinctions introduced here help to resolve this?

    • rhmurphy March 27, 2012 at 4:38 pm

      As I said in the post I assume you got here from, my feelings on this have cooled substantially.

      I still do not like how this literature developed in response to the transition from communism.

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