Wolfgang Kasper has a new article up at the Edward Elgar blog dealing with the failed policies of the Eurozone. The teaser for the article states: "The Eurozone is in crisis, and only bold reforms can tackle the root causes. In the following article, Wolfgang Kasper explains why we should be tuning the clock back to before the Maasstricht Treaty, and proposes that an understanding of institutional economics is crucial in order to comprehend the current politico-economic predicament." I recommend reading the entire piece.
Late in 2012, we published the second edition of Institutional Economics: Property, Competition, Policies. The book is available in eBook, paperback and cloth. This book is appropriate for use with advanced undergraduates as well as graduate students as a main text or supplemental text for classes addressing comparative instituitonal analysis and applied price theory.
Starting with Adam Smith, Tyler and Alex are now tackling the topic of the great economists. I have known Tyler Cowen for close to 30 years and his knowledge of the history of economic thought has always been one of the most impressive of anyone I've ever met. Ironically, Tyler published most of his papers in the field of history of thought prior to attending graduate school --- including papers on Nicholas Barbon, J. B. Say, and various papers discussing the ideas of Wicksell, Mises, and Hayek. I suspect this course to be informative and always putting the material in the most interesting light possible.
That quote, which I believe comes from Herbert Spencer, was often stated in my classes with Professor James Buchanan. It is not intended as a knock, but as a call for continuous effort to communicate clearly the core points of your position.
In this spirit, students and scholars of public choice and constitutional political economy should welcome then the new issue of Journal of Economic Perspectives and the article by Daron Acemoglu and James Robinson. The abstract reads as follows:
Economics versus Politics: Pitfalls of Policy Advice
The standard approach to policy making and advice in economics implicitly or explicitly ignores politics and political economy and maintains that if possible, any market failure should be rapidly removed. This essay explains why this conclusion may be incorrect; because it ignores politics, this approach is oblivious to the impact of the removal of market failures on future political equilibria and economic efficiency, which can be deleterious. We first outline a simple framework for the study of the impact of current economic policies on future political equilibria -- and indirectly on future economic outcomes. We then illustrate the mechanisms through which such impacts might operate using a series of examples. The main message is that sound economic policy should be based on a careful analysis of political economy and should factor in its influence on future political equilibria.
I am currently working on a book manuscript that has several working titles --- Against Triage Economics, or Ordinary Economics for Extraordinary Times, or Don't Panic. The subtitle of which is Misadventures in Economic Emergency Room, and the punchline is that we must not let emotions get in the way of sound economics. Emotional economics results in unsound economic policy. Or to put it the way that Acemoglu and Robinson put it "sound economic policy should be based on a careful analysis of political economy and should factor in its influence on future political equilibria." Politics, however, is often driven by emotions of the moment -- especially so in perceived crisis situations --- but when we respond to the emotions of the moment and structure public policies along those lines the long term impact is counter-productive.
When folks at Harvard and MIT are making the same argument as used to be heard only within the cardre of Virgina Political Economists and/or Austrian economists, you know the varied reiterations are starting to work. Now is not the time to stop reiterating the basic truths of economics and political economy.
Follow this link to see the video of Abby's presentation (starts at 70 min mark).
Bob Murphy recently interviewed me for the Lara-Murphy report, which should be available online somewhere though I haven't be able to track it down.
My paper with Jayme Lemke and Liya Palagashvili "Riding in Cars with Boys: Elinor Ostrom's Adventures with the Police," has been published (online first) at the Journal of Institutional Economics.
Two papers with Chris Coyne and Pete Leeson have also been recently published (online first) -- "Earw(h)ig: I Can't Hear You Becuase Your Ideas Are Old," Cambridge Journal of Economics, and "Comparative Historical Political Economy," Journal of Institutional Economics.
argue that Machlup's (1955) interpretation of Mises’s epistemology is at
least, if not more, plausible than Rothbard's (1957). The implications
of Machlup’s interpretation of Mises and Austrian epistemology affect
Austrians, non-Austrians and how they relate to each other. Machlup’s
interpretation shows that Austrian’s epistemology is well grounded and
that most criticisms of Austrian economics based on their aprioristic
characteristic are misplaced. Furthermore, Machlup’s interpretation
provides a potential road to re-built the academic interaction between
Austrians and non-Austrians that was characteristic of the early
That's the abstract of a new working paper by Gabriel Zanotti and Nicolas Cachanosky. You can access the full paper here.
I’m grateful to Daron Acemoglu and James Robinson for their most
recent post in our exchange. In it they pose several important questions, two
of which in particular go to the heart of our disagreement about the reason for
pirate democracy and the efficiency of institutions more generally.
Acemoglu and Robinson ask:
Leeson notes that a democratic organization, with a more
equal distribution of political power and better checks on leaders, was
efficient for pirates. Probably right. But the same reasoning suggests that it
would have also been efficient for many other businesses and social and
political organizations. But we see nondemocratic organizations persist in many
of those spheres. So where are the efficient institutions?
I’ve tried to address this question in The Invisible Hook by comparing pirate
ships’ organization to that of the legitimate ships from which pirates were
drawn: 18th-century merchantmen. As Acemoglu and Robinson suggest,
although the former were organized democratically, the latter were not. Indeed,
merchantmen were organized quite “autocratically”—i.e., via appointed officers
endowed with substantial authority over sailors. If democracy was efficient for
pirates, why not for merchantmen too?
The answer, I contend, is that democracy’s cost was far
higher for merchantmen than for pirates.
Merchantmen were organized and outfitted by external financiers—wealthy
landlubbers who had commercial expertise and capital, but weren’t sailors and
thus hired seamen to sail their ships. To make sure crewmembers didn’t shirk,
embezzle cargo, or steal the vessels they sailed on in owners’ absence, owners
appointed officers to monitor and control them. Allowing crewmembers to
democratically elect their officers instead would’ve been extremely costly in
this context. Merchant sailors who could choose their officers democratically
would have an incentive to elect the opposite kind of officer from what owners wanted—the
kind of officer who would let sailors do whatever they pleased, destroying voyages’
Pirate ships, in contrast, weren’t organized or financed by
external landlubbers. Pirates stole their vessels jointly: they were both the
owners and employees of their ships. Because of this, democracy’s major
potential cost on merchantmen—the prospect of crewmembers electing lax officers
and thus undermining voyages’ profitability—was absent on pirate ships. Pirates
who elected lax officers, qua employees, would’ve undermined their own interest,
qua owners. Their incentive was therefore to elect the kind of officer that maximized
profit. Consequently, for pirates, democracy was cheap.
Efficient institutions are context dependent. The contexts—and
thus costs and benefits of alternative institutional forms—that pirates and
their legitimate counterparts faced were different. So it’s natural that efficient institutions in these "societies" would differ too.
Exploring differences or similarities in the specific contexts various societies operate in, which in turn generate differences or
similarities in the constraints and prices their members face is, in my view, essential to understanding why we observe a variety of institutors
in the world, but institutions that are the nonetheless efficient.
Moreover, it’s possible to use this approach to evaluate
alternatives to the efficient institutions hypothesis, such as the de facto
power hypothesis put forward by Acemoglu and Robinson. Consider, for instance,
their suggestion that more equal power drove pirate democracy.
As Acemoglu and Robinson point out, “all pirates had
cutlasses.” But pirates weren’t alone in this respect. For example, all sailors
on 18th-century Royal Navy vessels were armed too. Notoriously, however,
Royal Navy vessels were organized autocratically, similar to merchant ships,
not democratically, as were pirates. Or consider privateers, where, again, everyone "had cutlasses," but governance was considerably more democratic than on naval ships yet considerably more autocratic than on pirate ships. At least on the surface, these observations pose a challenge to the de facto power hypothesis. In contrast, the efficient
institutions view can comfortably explain the institutional variation we
observe across floating societies—from pirates, to explorers, to privateers.
The other important question Acemoglu and Robinson raise in
their piece, which goes to the core of our broader disagreement about institutional
efficiency, is the following:
How can we understand, if not as highly inefficient for
economic prosperity and for the majority of the population, regimes such as
Acemoglu and Robinson’s excellent and thought-provoking book, Why Nations Fail, sheds critical light on the reasons for why some countries
languish with very low incomes (while others do not). The point I want to make is
simply that incredibly low income need not imply institutional inefficiency.
In every society the “institutional opportunity set”—i.e.,
range of feasible institutions—is constrained. At least in the short run, a
society’s “history” and “cultural” features, for example, limit the institutional
choices its people can make. Since history and culture vary significantly
across societies, institutional constraints do too. As I’ve argued elsewhere, these
constraints suggest that we should think about institutional efficiency in
terms of constrained, not unconstrained, optima.
Just as it’s not sensible to reason from the fact that I own
a used Subaru instead of say, a clearly “superior” car, such as a Porsche, to
the conclusion that my automobile choice is “inefficient,” I don’t believe it’s
sensible to reason from the fact that in some societies we observe “inferior”
institutions and thus low incomes instead of the much higher incomes we know “superior”
institutional arrangements can generate to the conclusion that these
societies’ institutional choices are “inefficient.” My budget constraint prevents
me from owning a Ferrari: a used Subaru is my constrained automobile optimum.
Likewise, institutional constraints can prevent some societies from adopting “superior”
institutions that generate higher incomes: their “inferior” institutional
regimes can reflect constrained institutional optima.
To say an institution is efficient is not to say its
outcomes are ideal, or even that they’re “good.” It’s merely to say they’re the
best that is currently possible given the constraints confronted in a
particular case. Efficient institutions, in other words, are context dependent.
On WhyNationsFail.com, Daron Acemoglu and
James Robinson provide a fascinating discussion of pirate democracy in which
they were kind enough to discuss my work on the subject. As they point out, I characterize
pirate democracy as an efficient institutional response to a principal-agent
problem. Pirates were worried that if they delegated power to their captains, their
captains would abuse that power, as their captains had done on the merchant
ships pirates sailed on before turning to piracy. Constitutional democracy
permitted pirates to address this problem.
Acemoglu and Robinson disagree with my explanation for
pirate institutions, however, which they describe as a manifestation of the
“efficient institutions view.” Instead, they argue that, like other
democracies, pirate democracy is better explained in terms of power. As they
put it, “Democracy arises when nondemocratic elites are forced to cede power to
the previously disenfranchised.” In pirates’ particular context, Acemoglu and
Robinson suggest, democracy likely “arose because the distribution of de facto
power was fairly equal” among crewmembers.
So whose theory is right? My theory, based on a
principal-agent problem, or theirs, based on power?
Answering this question, or at least shedding significant
light on it, may be easier than Acemoglu and Robinson suggest. They
state that “Leeson doesn’t present any evidence on why pirates chose democracy
and the separation of powers,” and that “they don’t have any evidence either on
why pirates chose the institutions they had.” But there is evidence on why
pirates chose the institutions they had. And I present it in my 2007 JPE paper
on the topic, and in my book, The Invisible Hook.
Before turning to that evidence, though, I want to briefly consider
the broader issue of the “efficient institutions view,” which Acemoglu and
Robinson critique by way of the former’s important work on the political Coase
theorem (or rather its absence). According to that critique, Coasean bargains
with institutional rulers can’t be externally enforced since the task of
enforcement itself typically falls to rulers. Any such bargains must therefore
be self-enforcing and, in general, self-enforcement isn’t up to the task. Coasean
bargains thus precluded, inefficient institutions abound.
Acemoglu and Robinson are right to characterize my view of pirate
institutions as efficient. Indeed, I follow George Stigler in regarding all
long-lasting institutions as efficient. I’ve tried to defend this perspective in
my work, which shows that a wide variety of institutions that seem obviously
inefficient—and, indeed, sometimes downright absurd—are in fact, on closer
inspection, efficient and not so absurd after all. (See, for example, my research on ordeals, trial by battle, human sacrifice, and vermin trials).
Am I then suggesting that the variety of institutions we
observe reflect Coasean bargains after all? No. I’m suggesting that the absence
of Coasean bargains doesn’t imply institutional inefficiency and often implies
just the opposite.
My reason for thinking that long-lasting institutions are
efficient isn’t rooted in the Coase theorem, which I agree is often (though,
not always) inapplicable in institutional contexts. Rather, as it was for
Stigler, my reason is rooted in the simple fact that inefficient institutions can’t
survive long in a world of rational people. In this “efficient institutions view,”
Coasean bargains aren’t required to get to efficient institutions. In fact,
efficient institutions are often efficient precisely because they don’t reflect
Coasean bargains aren’t free. Indeed, sometimes they’re very
expense. Their expense stems from the cost of arranging and enforcing them, which
in some cases isn’t possible at all, where they’re infinitely costly.
Efficient institutions maximize social wealth net of such
costs. Where these costs prohibit Coasean bargains, as they often do, efficient
institutions won’t involve Coasean bargains. If Coasean bargains were free, many
institutions would surely look different than they look now, just as if
platinum were free, railroad tracks would look different than they look now. But
prohibitive transaction costs no more imply inefficiency in existing
institutions than prohibitive platinum costs imply inefficiency in existing
Returning to the reason for pirate institutions: Did pirates
choose a system of democracy and separated powers to solve a principal-agent
problem, as I argue? Or did they choose it because of equal power, as Acemoglu
and Robinson suggest?
The evidence we have that bears on this question, and I
adduce in my previous work, is surprisingly direct. Pirates actually tell us—or
rather told their contemporaries—why they adopted their institutions. And their
reasoning is preserved in the historical record.
As pirate Walter Kennedy testified at his trial:
“Most of them having suffered formerly from the
ill-treatment of Ofﬁcers, provided thus carefully against any such Evil now
they had the choice in themselves . . . for the due Execution thereof they
constituted other Ofﬁcers besides the Captain; so very industrious were they to
avoid putting too much Power into the hands of one Man” (Hayward  1874,
This pirate, at least, explicitly linked the desire to avoid
captain abuse—the “ill-treatment of Officers”—which pirates suffered as
merchant seamen in their pre-piratical employment, to pirates’ reason for adopting
separated powers. This is about the most direct evidence for the
principal-agent theory we can hope to get from the 18th-century
This isn’t to say that small asymmetries in pirate power
didn’t have important influences on pirate organization. For example, roughly
equal pirate strength surely helped to make captains’ agreements with their
crewmembers self-enforcing, enabling a piratical Coase theorem to operate. But
if we take pirates’ own explanation for their institutions at face value, which
I think we should, the raison d’etre of pirate institutions was a principal-agent
Here is a photo sent to me by my teaching and research assistant, collaborator and co-author, and outstanding young economist -- Liya Palgashvili, who made the early morning trip to see the sun rise. Hopefully the quality of the discussion over the next few days will match the quality of the views.
Epistemic arguments play a significant role in the foundations of market liberalism as exemplified, in particular, by the work of F. A. Hayek. Competition in free markets is claimed to be the most effective device both to utilize the knowledge dispersed throughout society as well as create new knowledge through innovation competition. The fast pace with which new economic opportunities are discovered and costs are reduced is considered proof of the benefits of free markets to the common good. However, with its inherently unpredictable consequences, innovation competition is actually ambiguous in this respect. This feature raises questions over the stringency of market liberal pleas that oppose quests for redistribution and environmental concerns in an absolute fashion.
The NYT recently wrote the following: “A specter is haunting university history departments: the specter of capitalism. After decades of ‘history from below,’ focusing on women, minorities and other marginalized people seizing their destiny, a new generation of scholars is increasingly turning to what, strangely, risked becoming the most marginalized group of all: the bosses, bankers and brokers who run the economy.” Last night, Tom Ashbrook devoted his radio show "On Point" to a re-examination of capitalism.
The "second look" title is actually misleading because as I listened to the show it became obvious that the 'look' being provided was errily reminiscient of the perspective that we used to hear out of history departments (and other members of what McCloskey refers to as the 'clerisy'). Capitlaism is inefficient, unstable, and unjust. And the commentators cannot distinguish between state monopoly capitalism, and laissez faire capitalism. They are largely innocent of the basic principles of economics as a science of human action, and are highly questionable in their interpretation of historical evidence and data analysis.
I don't view this as depressing, but rather as simply requiring a renewed commitment by economists as teachers, as scholars, and as public intellectuals. We have our work cut out for us, but we also have great intellectual tools to work with, and our success or failure is really in our own hands as communicators.
That's the title of a new paper of mine released today by the Mercatus Center. It is intended to de-mystify monetary policy in a way that the layperson can understand. It might be useful in the classroom as well. Here's the abstract:
This study examines the history and
operation of the Federal Reserve System (“the Fed”). It explores the Fed’s
origins in American economic history and emphasizes the political compromises
that produced it. It seeks to provide an accessible explanation of how the Fed
attempts to change the money supply and of the structural challenges it faces as
it attempts to get the money supply correct.. The paper uses the framework
thereby developed to examine recent monetary policy, including quantitative
easing. Inflation and deflation result when the Fed creates too much or too
little money, and the study discusses the causes and costs of both in some
detail. The paper concludes with an examination of alternatives to central
banking, including the gold standard and a system of competition in money
production known as free banking.