Inside and Outside Perspectives on Institutions: An Economic Theory of the Noble Lie

If there exist no incentive or selective mechanisms that make cooperation in large groups incentive-compatible under realistic circumstances, functional social institutions will require subjective preferences to diverge from objective payoffs – a “noble lie.” This implies the existence of irreducible and irreconcilable “inside” and “outside” perspectives on social institutions; that is, between foundationalist and functionalist approaches, both of which have a long pedigree in political economy. The conflict between the two, and the inability in practice to dispense with either, has a number of surprising implications for human organizations, including the impossibility of algorithmic governance, the necessity of discretionary rule enforcement in the breach, and the difficulty of an ethical economics of institutions. Leeson and Suarez argue that “some superstitions, and perhaps many, support self-governing arrangements. The relationship between such scientifically false beliefs and private institutions is symbiotic and socially productive” (2015, 48). This paper stakes out a stronger claim: that something like superstition is essential for any governance arrangement, self- or otherwise. Specifically, we argue that human social structure both requires and maintains a systematic divergence between subjective preferences and objective payoffs, in a way that usually (though in principle does not necessarily) entails “scientifically false beliefs” for at least a subset of agents. We will refer to the basis of such preferences from the perspective of those holding them as an “inside perspective,” as opposed to a functionalist-evolutionary explanation of their existence, which we will call an “outside perspective.” Drawing on the theory of cooperation, we then show that the two perspectives are in principle irreconcilable, discussing some implications of that fact for political economy and the prospects of social organization.

Yoram Barzel and the Economics of Institutions

This article examines the relationship between the work of Yoram Barzel and Institutional Economics. Barzel has developed a property rights/transaction cost approach to economics and has written on topics ranging from car racing to slavery to Jewish lending to voting rules in condominium associations. Among his many ideas are those about racing to claim assets, multitasking, rationing by waiting, divided ownership of complex assets, measurement costs, and the economic orgins of democracy. In the process Barzel’s work unearthed the economic rationale for many institutions and offered a framework for analyzing them. Barzel holds an important place among all economists for expanding the scope of economic science in a way that focuses attention on the importance of property rights in understanding institutions and the economic logic of their variety. In this way he has been a crucial part of economic study of institutions.

Kornai: Shortage versus surplus economies

The economics of institutions and comparative systems owes an enormous debt to János Kornai. This was well exemplified by Kornai (2014a), offering a synthetic characterization of socialism and capitalism, respectively, as shortage and surplus economies. I was very fortunate, over the last fifty years, to have had many opportunities to meet him and to talk to him, and to discuss these issues directly with him. János can be very persuasive, and over the years I have somewhat converged towards his views, but in this essay, I am going to rehearse one residual major disagreement on the shortage economy, and three reservations on capitalism as the surplus economy which, after discovering from talking to him that he was in basic sympathy with them, I have downgraded to qualifications.

Economics of Institutions and Law

This book provides a set of lectures for an intermediate course in Public economics devoted to four topics, in many elements related each other. The first one is the Economics of institutions and political economy, as a general framework to analyze the public intervention in modern economies. The second one is the Economics of Law, which is at the basis of the working of the exchange economy. The third one is the Economics of public services enterprises ownership and the fourth one is the Economics of the organization of public administration in providing public services, with particular reference to the National health care systems and to the local public municipalities. As the standard textbooks in the field usually do not treat within unitary and comprehensive terms these issues, the book would provide an attempt in this direction.

The Coase Theorem and Core Theory

The writings of Ronald Coase, along with those of Armen Alchian and Harold Demsetz, on the theory of property rights, transaction cost economics, and the economics of institutions have yielded powerful insights and transformed many areas of economics. The seminal paper of Ronald Coase (Coase 1960, “The Problem of Social Cost,”

The Economics of Institutions, Equity, Efficiency and Effectiveness: The Case of Water Distribution in Lower Sundays River Valley, South Africa

Water supply disruptions are prevalent in various parts of South Africa. The Lower Sundays River Valley is not an exception. However, there is currently no physical shortage of water in the catchment. This study defines institutional arrangements and dynamics in the water sector in South Africa, using the Lower Sunday River Water Users Association as the case study. Key informant interviews reveal that relevant stakeholders are not adequately represented in management committees. Such institutional arrangement vacuums can lead to a failure of the water institutions in the catchment to provide water resources effectively.

The challenge of personalized education on the institution of higher education

Purpose – This paper aims to look at the potential impact of personalized or competency-based learning on educational institutions at the structural level and in the knowledge acquisition domain. Design/methodology/approach – This article takes the structure of an editorial piece. Findings – The essay suggests that the shift in pedagogy can impact on the operational and economic structure of the institution separate from the educational impact. Originality/value – The potential impact of pedagogy shift could affect the economics of institutions as well as the entire operational structure and employment of the institution at the administrational level.

Costly institutions as substitutes: novelty and limits of the Coasian approach

One of the main contributions of Ronald H. Coase was to demonstrate how mainstream economics was based on a contradictory amalgam of costly physical inputs and free institutional resources, and to give origin to the economics of institutions: each institution is a mode of allocation and organization of economic resources that is to be investigated. In particular, none of the institutions (including the market) is a free lunch. The Coasian approach regards institutions as costly substitutes and provides a fundamental starting point for comparative institutional analysis. However, Coase neglected two issues deriving from the observation that institutions are not cost-free. First, when institutions are costly, one should not only consider their possible substitutes but also how complementary institutions affect their costs, as well as the costs of the possible institutional substitutes. Second, the economic analysis should also take into account that the transition from one institutional setup to another cannot occur in costless meta-institutions. The initial conditions may substantially affect the final institutional arrangements. Both the novelty of Coase's approach and its limits were grossly undervalued. In particular, the costly institutions assumption requires a view of economics as a historical discipline.