1 Institutional Economics and the Relation between Institutions and Development Basilia Aguirre Arnoldshain Seminar XI “Migration, Development, and Demographic Change: Problems, Consequences and Solutions” June 25 – 28, 2013 University of Antwerp, Belgium

2 Introduction Objective To discuss how far theory has gone to explain the relationship between institutions and development

3 Introduction Presentation Plan Critics to Institutional Economics Alternative views on institutional economics Basic features of modeling Institutional Economics Potential to deal with problems of development

4 Critics to IE Empirical difficulties Problems with definitions Theoretical perspective Institutional Economics

5 Most of the authors that criticize Institutional Economics agree that institutions are important to understand development Critics to IE

6 Pande and Udry (2005) Measures are flaw, scarce and urban Voit (2013) Definitions neglects important aspects of institutions Chang (2011) Theoretical attitudes x theories Voluntarism or fatalism Critics to IE

7 Three basic questions: Is it possible to identify an institutional theory? What is institutional economics? What do the various institutional approaches have in common? The importance of institutions The purpose of explaining institutional change Alternative views

8 DiMaggio and Powel (1997) Organization theory, Political Science, Public Choice, history and sociology Common skepticism about the place of social processes’ atomistic conception Shared conviction on the importance of institutional mechanisms Alternative views

9 Nevertheless there are authors that see more convergence than divergence Alternative views

10 Williamson (2000) Alternative views Years 10 2 to to to 10 Continous Level Purpose Social Theory Positive political economy Transactions costs economy Neo classical economy

11 Hodgson (1998) 1.Emphasis on institutional and cultural factors 2.Analysis is openly interdisciplinary 3.No recourse to the model of the rational utility- maximizing agent 4.Mathematical and statistical techniques are recognized as the servants of economic theory 5.The analysis starts from stylized facts and theoretical conjectures concerning causal mechanisms 6.Extensive use is made of historical and comparative empirical material Alternative views

12 Richter (2001) NES and NIE have a common object: social action. Both deal with social structures or organizations (“institutions”). Where most of them still differ are their models of man: various motives of human actions (including rational choice) on the one side, individual rationality (pure or bounded) on the other. Alternative views

13 Modeling institutions North (2005) “Human environment is a human construct of rules, norms, conventions, and ways of doing things that define the framework of human interaction.” (pp. 11) Scientists divided the environment in many disciplines “Our analytical frameworks must integrate insights derived from these artificially separated disciplines if we are to understand the process of change.” (pp.11)

14 Ostron (2007) “To model a human-interaction as a game, the theorist must decide which components to use from a set of seven working parts of an interaction as well as how the individuals who are interacting will be modeled.” (pp. 7) Modeling institutions

Modeling individuals 15

Modeling individuals 16

Modeling individuals 17

Modeling individuals 18

Attempts towards an conjoint theory Besides the common characteristics pointed by Hodson (1998) and Richter (2000) there are tree more: Uncertainty Conflict Methodological individualism Some of then are going toward the building of a unified theory. 19

Attempts towards an conjoint theory Hodgson (2006) “However, while rules are not in the DNA, it would be a mistake to go to the other extreme and regard rule following as something entirely deliberative.” (p.4) “However, as Commons hinted and Veblen (1909, 628–30) argued in more depth, behavioral habit and institutional structure are mutually entwined and mutually reinforcing: both aspects are relevant to the full picture.” (p.8) 20

Attempts towards an conjoint theory Ostrom (2000) Proposal: Indirect evolutionary approach Rigorous theoretical approach Helps understanding how preferences, including those associate to social norms, evolve and adapt Learning by adapting Through experience Learn trust, fairness 21

Attempts towards an conjoint theory North (2005) “In contrast to Darwinian evolutionary theory, the key to human evolutionary change is the intentionality of the players. The selection mechanism in Darwinian evolutionary theory are not informed by beliefs about the eventual consequences.” (p.viii) “Part of the scaffolding humans erect is an evolutionary consequence of successful mutations and is therefore a part of genetic architecture of humans such innate cooperation within small interacting groups; part is a consequence of cultural evolution such as the development of institutions to favor larger group cooperation.” (p. ix) 22

Attempts towards an conjoint theory North (2005) Scaffolds and beliefs How do we acquire then? “Much of learning comes from absorbing and adjusting to subtle events that have an impact on our lives, incrementally modifying our behavior ever so slightly. Implicit knowledge evolves without ever being reasoned out.” (p.26) 23

Institutions and development Two main promising contributions to the understanding of relation between institutions and development. Ostrom (2007) North, Wallis and Weingast (2009) 24

Institutions and development Ostrom Irrigation systems studies Understanding the process of change in multiple specific setting Method of displaying rule inventory and follow changes in that inventory over time. Identification of the dynamics of rule change in the specific contexts Interaction between formal and informal rules Understanding of the choices people did along their history concerning the design of irrigation systems 25

Institutions and development North, Wallis and Weingast Social order: Limited access order – LAO Open access order – OAO Transition Impersonal transactions Perpetual organization Control of violence Rule of law 26

Institutions and development North, Wallis and Weingast Change is a product of elites intentional acts Consistent with their interest Not necessarily with their intentions The idea of inclusion and capabilities 27

Institutions and development Contributions Development as a historical process Integration between formal and informal rules Self-interest and rules 28

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