Institutional and Behavioral Economics

1
Institutional and Behavioral Economics

• Peter Boettke
• Econ 881/Spring 2005
• 25 April

2
Another Look at Economics
Narrowing of economics from classical political
economy to mathematical formalism --- 1940-1970.
Broadening of economics from mathematical
formalism to post-classical political economy
1990---
3
Institutions as Constraints

• Property Rights
• Control Rights
• Cash Flow Rights
• Transaction Costs
• Information
• contracting

4
Choice, Constraints, and Predictable Behavior
All other goods
As the relative price of candy bars falls, the
budget constraint will rotate and the utility
maximizing position will change.
Utility
Candy Bars
Q2
Q1
5
Choice, Constraints and Predictable Behavior in
Economic History

• Institutions work their impact through changes in
  the relative price of a particular behavior and
  then lead to changes in the general pattern of
  behavior
• Plagues impact on the relative price of labor
  and the rise of free labor
• Women entering the work force after WWII and the
  change in workplace norms, etc.

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What Exactly Are Institutions?

• Rules of the Game
• Formal
• Informal
• Enforcement of the Rules
• Contractual monitoring
• Third-party enforcement
• Self-policing through norms and conventions

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From Constraints to Frames of Reference

• Norths change of perspective
• Institutions are important because they structure
  the incentives that are in operation in any
  society
• E.g., Marginal Revolution cite to the FT article
  on Levitt
• Saying that people respond to incentives doesnt
  say anything until you can address how
  individuals represent those incentives in their
  own mind
• E.g., meanings that individuals attribute to
  belief systems

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Cognitive Dimension in Institutional Analysis

• Economizers on information processessing ---
  rules of thumb
• H. Simon and satisficing
• Predictability in a world of uncertainty
• Uncertainty of the world is minimized so that
  reasonable action can be predicted
• Heiner on behavior rules, and Rizzo on law
• Embodiment of ideology
• Belief systems
• Denzau and North
• The move from constraint to inside the utility
  curve

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Cognition, Economy and Society

• The contributions of Timur Kuran
• Private Truths and Public Lies --- the dilemma of
  social action
• Homo-economicus
• Max utility subject to constraints
• Homo-sociologicus
• Max reputation with peers
• Homo-psychologicus
• Max self-satisfaction with choices
• The Contributions of Mark Granovetter
• Embedded nature of individual action and market
  exchange
• Markets are omnipresent but come in a variety of
  forms

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Vernon Smith and the economics as an experimental
science

• Efficiency
• Model of perfect and imperfect competition
• Market failure theory
• Cooperation
• Das Adam Smith problem
• Prisoners Dilemma

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Where Do Institutions and Cognition Fit In
Austrian Economics?

• The point to stress is that institutions and
  cognition permeate the school of thought from
  Menger to today
• Menger designed and undesigned institutions
• Bohm-Bawerk applied microeconomics
• Mises institutional prerequisites of monetary
  calculation
• Hayek spontaneous order and the legal/political
  framework of a liberal order
• The sensory order
• Rothbard the institutional framework of
  libertarian society
• Kirzner channeling entrepreneurship

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Conclusion

• The hour-glass metaphor is highlighted by the
  changing status of institutions in economic
  analysis
• Bator institutionally antiseptic
• Hayek, Buchanan, Coase, North, Smith, Shleifer,
  Glaeser, Acemoglu, etc.
• The mind is the filter through which all human
  action takes place
• Interpretation, judgment, action
• Imperfection in our knowledge
• Cognition, Economy and Society
• Broadening economic science to accommodate a
  changing intellectual universe
• Boulding --- there is no such thing as economic
  science only social science applied to economic
  questions