Professor of Economics Institute of Behavioral Science University of Colorado The New Institutional Economics: Its Roots, Growth and Future Lee J. Alston

What is the NIE? 1) Interdisciplinary 2) Comparative 3) Set of concepts, e.g., property rights, agenda control, credible commitment… 4) Different levels of analysis, e.g., causes and consequences of institutions

Government Informal Institutions (Norms of Society) Formal Institutions (Laws of Society) Property Rights Technology Transaction Costs Transformation Costs Costs of Internal Production Costs of Exchange Economic Performance Figure 1 Institutions and Economic Performance Contracts

Economic Performance Special InterestsCitizens/Consumers WinnersLosers ExecutiveLegislature Prime Minister President Committees Parties Laws JudiciaryBureaucracies Competent and Honest Independent and Honest Figure 2 The Determinants of Formal Institutions Government

Southern Paternalism and the American Welfare State Paternalism was an implicit contract: - workers exchanged good and faithful labor for a variety of in-kind goods and services

Demand and Supply of Paternalism Demand by workers: - resulted from the discrimination Supply by landlords: - high labor monitoring costs with pre- mechanized agriculture. Level of analysis at this point: - examines contracting given institutions.

Who Determined the Institutions? Political power: agricultural elite Political Power of Southerners: - one-party system in the South resulted in seniority; and pivotal ideological position

Institutional Results Little change in welfare policy, labor policy, civil rights or voting rights until the 1960s Why the 1960s? - mechanization of cotton production Southerners abandoned paternalism; allowed federal welfare state to expand; and sharecropping disappeared

NIE: What do we know? Contracting: linkages among institutions, property rights, transaction costs and contracts Political Economy: roles played by legislative institutions and special interests in shaping the laws of society Both have been absorbed into the mainstream of Neo-Classical Economics

NIE: What Don’t We Know? Staying Ahead of the Mainstream We know too little about the origins of norms and how they shape outcomes We need a better understanding of institutional path dependence in the presence of poor economic outcomes - the dynamics of institutional change

Why institutional path dependence? 1.Informational problems abound What can we learn from: - cognitive psychology and experimental economics? - empirical studies of insufficient political competition and insufficient media competition

Why Institutional Path Dependence? 2.Disapproval of the outcome but approval of the process that generated the outcome. Trapped? - role of political entrepreneurs 3.Serious collective action problems - role of political entrepreneurs 4.Insecure “political” property rights

Why Do We Want Insecure Political Property Rights? Transparent side-payments would undermine the legitimacy of government. Discourages politicians from making “bad” policy in order to be bought out.

Why Do We Want Secure Political Property Rights? It would enable more credible commitment among politicians It would stabilize policy - bright side and dark side of policy stability

Overcoming Institutional Path Dependence: Achieving Economic Development Political Entrepreneurship - Cardoso in Brazil vs Chavez in VZ - Someone who plays for the history books - Strong but checked executive powers? The Role of Crises - Gives more latitude for political entrepreneurship - Greater scope for action can be positive or negative

How do we make headway in the NIE? Continue what we are doing which requires insights from anthropology, economics, history, law, psychology, political science and sociology Orchestrated case studies over time of successful and unsuccessful institutional change such that we can begin to make some generalizations