Reddit reviews Institutions, Institutional Change and Economic Performance (Political Economy of Institutions and Decisions)

R1:

Today I bring you this WaPo Op-Ed on how the Carrier deal will return business norms back to ones that favor labor and community because firms will fear Trump’s wrath. Here the author offers a distorted view of America’s past, a dysfunctional view of how contracts and norms interact, and a wayward portrayal of economists as unable to fathom agents and systems which do not follow strict mathematical functional forms.

>There was a time in America when there was an unwritten pact in the business world — workers were loyal to their companies and successful companies returned that loyalty by sharing some of their profits with their workers in the form of higher wages, job security and support for the local community.

The author wistfully describes a past that did not exist when businesses and workers in long term marriages because it was what was right and good for the community.

At its heart this period existed because unionization (or more accurately worker bargaining power) made it possible. Certainly on the point of loyalty, unionization decline is the largest contributor to declining tenure (see Bidwell. As unionization fell, this loyalty also disappeared.
However, unionization's decline can largely be explained by the rule of law (right-to-work laws, unionization process etc.) though governing and business norms played a role (to be discussed).

With bargaining power largely reduce, workers had additional difficulty (for better or worse) attempting to hold their jobs in the face of international pressures and especially technological change as countless economist (Autor just to name check one) have documented.

>modern day economists tend to ignore such shifts in social norms because they can’t quantify them in the same way they can quantify trade flows or technological innovation or changes in educational attainment. They assume that social norms change in response to economic fundamentals rather than the other way around.

This is the sort of things that can ruin my work day as a nominally institutionalist style economist. To begin, several Nobel prize winning economists have done significant work studying norms formation and effects such as North, Ostrom, Akerlof, Akerlof again!.

Beyond this, others have built off these works (Ostrom was focusing on the importance of norms, but not specifically addressing the problem) to try to model norm development in game theory example.

In fact, in Samuel Bowles’ Microeconomics, discusses in detail the way contracts influence the norms and institutions of exchange (Chapter 8, p. 265). The long and short of Bowles’ discussion is that norms are well understood, evolutionary, and in the absence of complete contracting have significant influence on the results of exchange.

Norms matter greatly to economists in the event that contracting is incomplete. One would hope, it seems in vain, that contracting between the federal government and American firms is more complete than most contractual situations.

>the new norm is not longer acceptable, and [Trump] intends to do whatever he can to shame and punish companies that abandon their workers.
>He may even have to make an example of a runaway company by sending in the tax auditors or the OSHA inspectors or cancelling a big government contract.

Many economists see the potential change of market norms that will result from government contracts suddenly being less than 100% enforceable as a problem. Coming back to Bowles, he notes that said norms “are sustained by the structure of the market and other social interactions in which traders routinely engage.” If having government contracts and enforcement become less predictable is to be the new norm of enforcement, surely the market response will be to ask government from some premia in contracting to account for uncertainty. New firms may avoid starting their business under the supervision of this government altogether.

Tyler Cowen points out that the new norms that would arise likely involve more complex contractual agreements to skirt restrictions, degradation of U.S. tech advancement, a ramping of favoritism to levels not seen since the Harding administration, potential de facto capital controls, or at best a politicization of the economy with no real rule of law effects.

>Teddy and Franklin Roosevelt understood that. So did Ronald Reagan when he fired thousands of striking air traffic controllers and set back the union movement for several decades.

Perhaps most crucially, the author here references a variety of Presidents who enforced their support (or lack therefore) for labor, but did so through the rule of law via various anti-trust acts, the championing and enactment of a large set of labor relations legislation, and the decision to enforce laws enshrined in code 15 years prior that had been previously ignored. As opposed to potentially undermining the rule of law as Trump does by leveraging government contracts and regulation.

A bonus on this point is that—though Reagan’s actions may have signaled willingness from government to support changing business norms by supporting them through rule of law—unionization’s decline had already begun years prior to the changes in business norms Reagan’s ruling supposedly incited.

The study of economics is not one that lacks an understanding of how norms influence market interactions. Though I am not as well versed in studies accounting for changes in norms mathematically, I’d wager someone here could produce good examples of studies that do just this through the use of good instrumental variables.

The Carrier deal will likely change norms in business actions, but those are likely to be related to businesses’ certainty in contracting with government during the Trump presidency. Just as is seen in Trump’s cabinet, the only people left to provide work will be those certain they can take advantage of information asymmetry to get a better deal from U.S. governments. Any mass effort to enforce job retention on a scale much more massive than the Carrier deal will be enacted via law and will be just as harmful to business culture as Cowen and other economist predict, but it will be the changes to contractual enforcement that drive these results and not revolution in norms spurred on by backroom dealing.

>>modern day economists tend to ignore such shifts in social norms because they can’t quantify them in the same way they can quantify trade flows or technological innovation or changes in educational attainment.
>They assume that social norms change in response to economic fundamentals rather than the other way around.
This is the sort of things that can ruin my work day as a nominally institutionalist style economist. To begin, several Nobel prize winning economists have done significant work studying norms formation and effects such as North, Ostrom, Akerlof, Akerlof again!.

I think your formatting failed there, it appears like one quote, whereas I think the seconds part is supposed to be your response. Pretty confusing to read.

No the book is excellent. It's required reading. It's not a 'final explanation for all poverty and all world events' but it's required reading.

I'm curious who dismisses it because very few high level economists do. If it's 'political scientists' on reddit they're probably morons with a bone to pick.

If you want the more academic version and not the popsci version read Douglass North's Institutions, Institutional Change & Economic Performance, or read Acemoglu and Robinson's papers like

https://economics.mit.edu/files/4469 or https://economics.mit.edu/files/4123

> It's a beautiful tangled interwoven tapestry of science, mathematics, philosophy, and social theory.

Economics is a comprehensive study. Many Economists, Douglas North, Daron Acemoglu, and Nathan Nunn to name a few, have used Institutional Economics to analyze some of the non-quantifiable factors that explain some of the differences in performance between developed and developing countries.

If you want some books by economists that seek to answer this question. Why Nations Fail, Douglas North's Institutions, Institutional Change and Economic Performance and Francis Fukuyama's Political Order series.

One reason that ties into some of the answers here, but provides a slightly different perspective is that Anglo America's political development created institutions with various checks and balances, and people developed trust in these institutions. That trust, in turn, helps people develop their economy, knowing these institutions will be in place to assist them. One of the insidious things about corruption is that even the appearance of corruption harms an economy, because as trust crumbles, the individual's willingness to invest in the economy goes with it.

I recall some years ago reading a book that mentioned that in South America, there is a word common to Brazil and Spanish speaking countries that means something like "cheating the system" or "someone who cheats the system for personal gain" and, IIRC, it was considered complimentary. That's because there's a perception, probably correct, that the system is rigged to screw you, so if you screw it first, you win. That's one of the worst things about Americans' growing distrust of our institutions. It's almost becoming a self-fulfilling prophecy.

The word (I think) you want is "Nonhierarchical."

In political science we call this sort of focus on organizational hierarchy "structuralism" however "neo-institutionalism" (which is not mutually exclusive) also discusses a lot of relevant concepts.

And organization (including governments) requires hierarchy of some sort essentially by definition.

That said, some hierarchies, especially those within government, diffuse decision making at the top. For example, a commission has 3 or more commissioners who vote on the final executive decisions of their agency. The Michigan Public Service Commission, for example, has three commissioners, who together make decisions about the regulation of the states regional monopolies (electricity/gas, auto carrier, cell phones, etc...). Another example of shared power, some city governments have a "weak mayoral" system where the mayor is simply chosen by the city-council from the city-council and who only has weak agenda setting powers and little to no independent executive capacity. That said, in many weak mayoral systems the city-council hires a city-manager who reports to them. Is that a pyramid, in your estimation?

Not all hierarchies are designed like a pyramid. Is a public traded companies hierarchically shaped like a pyramid? Not really. It has a CEO but, s/he answers to a board of shareholders where the residual interest and decision making power is highly diffuse. Coase argues that these sorts of imperfect pyramid shaped structures are far less efficient than pure single-manager hierarchies where only the "CEO" has a right to the residual interest of the organization (the profits/rewards/or ills). Coase, and others from the Chicago school tradition (like North), that same article the non-profits and (democratic) government must be extremely inefficient because of the extreme diffusion of power/residual interest.

Not even all hierarchies have a clear and narrowing path to the top. The hierarchies of some high-risk agencies (like-NASA), for example, employ a matrix hierarchy which creates more "veto points" (making it easier to avert disaster) but at increased personnel costs and greater ambiguity regarding the chain of command.

Elinor Ostrom however argues that extreme diffusion of power within the decision making environment can work really effectively to manage common pool resources. However, Ostrom only found that the common pool resource was only successfully managed in this way by really small groups where essentially everyone in the group owned a residual interest and everyone had near perfect information about the behavior of the other group members AND could effectively punish members who shirked their responsibility. These are really impossibly hard criteria to achieve in most situations. That said Ostrom also doesn't dismiss the possibility of some sort of leader existing in that scenario.

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I think Miller's Managerial Dilemmas is a good first read which describes the importance of hierarchy on outcomes.

Hammond has a bunch of research on the impact of structures (hierarchy) in government too.

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Your question was really short and could be interpreted in lots of ways so I kind of took the shotgun approach here. Hope it was useful anyway.

Seems like you are arguing along the lines of what Douglass North articulated in this book. For what it's worth, I found it to be a pretty persuasive argument, but seeing as how it was a pivotal publication in terms of his winning the Nobel Memorial Prize in Economics, and still studied two decades later in the social sciences, I submit that he may have been onto something.