I am currently at the ISNIE conference in Barcelona, which is one of my favorite cities in Europe. For those who don’t know the place, it has an amazing architecture (with buildings designed by, among others, Bofill, Calatravas, Foster, and, of course, Gaudi), beautiful (for a city of 3 million) beaches (they were built 15 years ago), and a unique culture which is a mixture of Catalunya and Spain.
Some famous names are participating in the conference, such as Thrainn Eggertsson, Geoffrey Hodgson, Paul Joskow, Gary Libecap, and Oliver Williamson. The neo-institutionalists are a very interesting bunch of economists, presumably intellectually closer to Austrians than many others.
However, a few sessions today reminded me of the gap existing between Austrians and neo-institutionalists. As I see it, the goal of new institutional econmics (NIE) is twofold:
• First, it is to explain how various institutional arrangements impact economic performance, and
• Second, it is to measure as much as possible the transaction costs that individuals face and which constrain the outcomes that can be observed. The idea is to find a relationship between institutional arrangements and the level of transaction costs.
This is a worthy research program and one that has immensely improved the state of economics. Thanks to Ronald Coase’s work, many economists do not reason in an institutional vacuum anymore. Instead, they look at the way institutions impact the costs of transacting. The study of actual contract arrangements for instance and how they impact various transaction costs has been, to use Coase’s words, a revolution in economics. Comparative institutional analysis is a very important field because it goes a long way to explain the observed differences in economic performance.
This being said, I believe neo-institutionalists expect too much from their own approach. At the end of the day, what requires explanation is social change. In other words, it is because we can explain the source of social change that we can study the political economy of sustained prosperity.
The problem with NIE is that it operates in a neo-classical framework and thus meets the same limits as neo-classical theory. While most neo-institutionalists would not define themselves as neo-classical economists, as Austrians see the discipline, they are. It is true that NIE has pushed the neo-classical paradigm in very important directions and opened new roads offering very powerful explanations of economic problems. However, at the end of the day NIE is only comparative statics with an empirical obsession to measure transaction costs.
Most Austrians would see the empirical study of alternative institutional arrangements and their impact on transaction costs as a valuable exercise. Case studies and field work research provide (historical) knowledge of economic arrangements and can be necessary for policy reform.
However, there are limits to such an approach. Measuring transaction costs is a limited exercise if one considers that costs are fundamentally subjective. The idea that alternative institutional arrangements give birth to different costs of transacting is not in dispute. The problem is that a mostly empirical research program (Erin Anderson and Lee Benham for instance qualify NIE as such) will not provide the responses needed.
In the absence of a theory of entrepreneurship, NIE will not fully explain the nature of social change. Austrian economics is ahead of the game because it operates from the principle of open-endedness. Comparative institutional analysis has been part of Austrian economics for a long time – at least since the 1920s and the work of Mises on the socialist commonwealth. The fact that alternative institutional arrangements impact the costs of transacting is a very important Coasean insight. However, what is missing from this analysis is the role of the entrepreneur, especially as far as the development of institutions is concerned – and especially the institutional arrangements enabling self-governance.
Because NIE is another (mostly) empirical research program, neo-institutionalists miss important theoretical insights that would help them explain social change in a much richer and more powerful way. Many Austrian economists such as my co-bloggers Pete Boettke, Chris Coyne, and Pete Leeson, as well as Peter Klein for instance (who is at the conference in Barcelona and alluded to the Austrian view in his presentation on Friday) use the results of NIE. However, the difference is that they do so in an open-ended framework in which human beings are not merely Robbinsian maximizers but, more importantly, entrepreneurs. For this reason, Austrians can explain social change in a way that NIE cannot.
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