Institutions Matter, But Fixing Economics Requires More Than Just Saying That

|Peter Boettke|

There has been a lot of talk since 2008 that economics as a discipline should be held responsible.  And in the wake of these criticisms, that the standard curriculum should be adjusted.  Of course, what is supposed to replace the boggeyman of "neoclassical" economics is often little more than a warmed over and updated version of Marx, Veblen and Keynes (modern Galbraitheanism since the earlier version didn't succeed).

The Guardian actually reports that what is absent from economic education is the ideas of Marx and Keynes and that instead students are taught to worshop the free market.  Really?! I actually don't think these reporters have ever met a real free market economist, nor have they absorbed the theory of market failure that permeates textbook economics.

There have been silly initiatives -- Occupy Economics being one --- and serious initiatives to reform economic education.  The INET project to impact basic economic education is one that should be seriously considered -- CORE (Curriculum Open-Access Resources in Economics).  But among those resources, I hope they will consider as one possible alternative to standard textbook education the approach that Paul Heyne pioneered and which Dave Prychitko and I have continued to represent in The Economic Way of Thinking.  This approach to basic economics represents the ideas of Armen Alchian, James Buchanan, Ronald Coase, Harold Demsetz, and of course F. A. Hayek.  Now in its 13th edition, the book emphasizes that economics is about exchange and the institutions within which exchange takes place.  An institutionally antiseptic theory of economic behavior is rejected in favor of an genuine institutional economics. (More advanced readers are recommended to read Institutional Economics: Property, Competition, Policies as well.)

Institutions matter because it is through institutions that the structure of incentives is established, and the relevant information for action is filtered.

James Buchanan spent much of his time since 2008 explaining how the economics of the Older Chicago School --- Knight, Viner, Simons (Friedman, Stigler and Becker as in Buchanan's rendering intermediate cases between the Old and the New) --- was full of institutional analysis, whereas the New Chicago School of Lucas and Sargent as well as Fama was relatively weaker in this regard.  The New Chicago School stressed market efficiency under any conceivable set of circumstances, rather than a product of various alternative institutional arrangements.

 

So my question to INET and CORE -- will the sort of 'genuine institutional economics' that Alchian, Buchanan, Coase, Demsetz, and Hayek advocated in their scientific careers be part of the reformed curriculum, or will it get mischaracterized as part of the neoclassical textbook because of some prior commitment to rejecting all theories that appear to place greater weight on the power of the market economy to guide resource use and reconcile conflicts than political mechanisms with the problems of the vote motive, bureaucracy, and rent-seeking? In studying the race between erring entrepreneurs and bumbling bureaucrats, it seems very important to keep in mind how the different ecology of decision making in each of the realms will impact the incentives and information that decision makers will face.

Institutions do in fact matter, and economics must account for institutions. But saying that doesn't fix economics.  We must give our students a framework for studying comparative institutional arrangements.  And in the history of our discipline, that requires studying more Adam Smith, and the ideas of those who sit in the seat of Adam Smith.

Comments

[Rafe Champion]

It is strange that the idea of the hidden hand is usually invoked as Smith's signature idea, in fact The Wealth of Nations looks like institutional analysis, all the way down. Not to mention the moral framework which was the subject of his first book, a matter that Deirdre McCloskey is bringing back to life, following a tip from Karl Popper in his 1954 address to the Mont Pelerin Society. http://www.the-rathouse.com/CRPublicOpinion17.html

[Thinkmarkets.wordpress.com]

Let us apply the lesson that "institutions matter" to the economics profession itself. Economics will not change for the better until the institution framework in which the discipline is practiced is changed. The incentive structure of economists must be altered; preaching is not enough.

How can the institutional framework of economics as a discipline be changed and in what direction should it be? I do not know.

Mario Rizzo