Political Entrepreneurs

The Economic Engine of Political Change

Informal Institutions, Formally

March 14th, 2017 by Edward Lopez

That’s the title of a paper I’ve finished a first draft of, which I’ll be presenting at the NYU market process colloquium in two weeks. The paper draws heavily on Madmen.

I’ll post a complete draft after incorporating comments from NYU, and will post as an addendum here. For now, here is the abstract and introduction.

Informal Institutions, Formally

Edward J. Lopez
Professor of Economics
Western Carolina University

Abstract: Informalinstitutions are important to numerous areas of political economy research, but scattered usages of the term create ambiguity in assessing the role of informal institutions as a whole. This paper presents a general model of informal institutions and their interaction with formal institutions. The model is used to address problems in political economy research associated with definition (what is a formal versus informal institution?), codification (how does an informal institution become a formal institution?), and integration (how aligned are formal and informal institutions?).

1. Introduction

Institutions are the humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights). North (1991, p.97)

This paper presents a model of informal institutions and their interaction with formal institutions in political economy settings. In the political economy literature, scholars rely on institutions as a central construct. Institutions are the building blocks of modeling decision environments for agent choices, both individually as in the marketplace and collectively as in politics. A common approach is to treat an observed outcome (e.g., trade, growth, inequality, corruption) as a function of the structure of incentives that shape the chain of decisions leading to the observed outcome. The structure of incentives is in turn defined by prevailing institutional arrangements, yielding a general proposition for analyzing society through time: as institutional rules evolve to increase (decrease) the net costs to agents of engaging in behavior Q, we can expect to see a decrease (increase) in the observed quantity of Q. Some studies, in the manner of the epigraph by Douglass North above, make frequent use of formal institutions as distinguished from informal institutions, or from culture, or ethics, or customs, norms, taboos, or conventions, to name a few. While these usages perform substantial heavy lifting in their respective studies, the literature as a whole shows that these usages are varied and disparate, not always consistent, and sometimes contradictory to each other (Kingston and Caballero 2009). In a 2015 symposium on the nature and definition of institutions, Hodgson (2015:) observes:

The ambiguous terminology of ‘formal’ versus ‘informal’ institutions is often deployed but much less often defined. Sometimes ‘formal’ is intended to mean codified. Others use it to mean designed. Still others use it to refer to laws. Given this confusion, the intended meaning of these terms should always be clarified.

We can take Hodgson’s critique as a starting point in this paper, and build a simple model that could serve as a common reference point among these disparate uses. Section 2 begins with identifying three problems that arise in the political economy literature due to inconsistent usage of informal institutions. Then in Section 3 we briefly review the philosopher John Searle’s theory of institutions. This theory is more general than the social science approach to institutions, in the sense that Searle’s net is cast to include not just political-economic interaction but all of social life. Section 4 then adapts Searle’s framework to build a simple logical model of informal and formal institutions, which is used to address the three identified political economy problems. Section 5 then concludes with a discussion of implications and future work.

 

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.

©2017 Wayne A Leighton & Edward López • Web Design by Barrel Strength