6124 Flashcards
Summary of Basu 2000
Economics is embedded everywhere, and modern economists are overconfident:
* Economics extended into law, politics, and sociology - forming new political economy.
* The author is skeptical of overconfidence of modern economists “cult effect” observed
Thin line between economics and politics; social norms and law:
* The state is set of beliefs rather than a fixed entity (e.g., young men putting on a tax – they are the government?)
* Social norms and laws are interrelated
Economic analysis should base more on game theory, less on conventional models:
* Game theory is employed to analyze and critique societal and economic phenomena - stable institutional framework vs fluid interactions
* Economic models might miss out on important power dynamics (e.g., road tax)
Summary of Bowles Prol.
Institutions are the determining factor for nations future prosperity:
* Institutions central to economic disparities between nations (evolutionarily), with no “blueprint” for optimal development.
o Landlord-dominated regions (e.g., Bengal under British rule) experienced stagnation, low productivity, and poor social indicators.
o West Bengal’s land reforms in the 1970s boosted agricultural productivity and political participation among the less well-off.
o Differences in institutions explain reversals of formerly wealthy colonies (e.g., Haiti, Mexico) compared to the rise of inclusive economies like the U.S. and Canada.
This might result from a doom loop – bad institutions, poor economic outcome, institutions …
* Can create “poverty traps” or “virtuous circles” of wealth.
Traditional models miss critical components determining economic prosperity
* Traditional economic models (Walrasian paradigm) often oversimplify by ignoring:
o Power dynamics, social norms, and institutional evolution.
o Non-contractual interactions (e.g., labor or credit markets).
o Behavioral complexities (such as emotions, fairness, and other-regarding preferences)
Policy intervention should be modest but based on assessment of institutional factors
Summary of Bowles Ch 1
Institutions are laws, informal rules and conventions, as well as equilibria of games:
* Types of games:
o Cooperative vs non-cooperative (whether binding agreements are possible)
o Common interest vs Conflict games
o Assurance games (where a pareto optimal solution is possible but improbable)
Bad coordination can lead to Pareto inefficient outcomes:
o Tragedy of the commons illustrate the challenge of aligning individual incentives with collective good.
Good institutions can enable cooperation:
o Examples of bad institutions: Persistent poverty in villages like Palanpur, where lack of cooperation leads to suboptimal agricultural practices.
Game theory helps to assess these dilemmas
Formal and informal mechanisms can facilitate cooperation
* Property rights, environmental norms, and government regulations.
* Informal mechanisms, like community norms, often complement formal institutions in resolving dilemmas. (e.g., fishing rotations, shared planting schedules, and civic virtues).
Summary of Dixit
Successful trade requires governance (e.g., legal systems) - often unreliable or absent:
* Governance mechanisms include state-provided legal systems, private alternatives, or informal social norms.
* Traditional economics assumes well-functioning state legal systems, while in reality, legal systems are often inefficient, slow, unreliable, or absent, particularly in less-developed and transition economies.
Informal institutions may substitute the absent formal institutions:
* Private governance systems (e.g., medieval trade fairs, diamond markets, and localized business associations), including:
o Reputation-based networks.
o Informal arbitration.
o Community enforcement mechanisms.
Effective, evolving institutions facilitate economic growth, as examined in NIE:
* Effective institutions (formal or informal) underpin long-term economic growth by securing property rights and ensuring contract enforcement.
* Institutions must be context-specific and evolve with societal and economic needs.
Definition of economics
- Economics – making the best of things (maximizing the U(f) )
Perfect competition assumptions
large infinite number of firms,
no product differentiation,
no barriers to entry,
no non-price competition,
firms are price takers
What does Monopoly lead to:
DWL - MR curve tilts (no longer equal to demand curve) and eq is with a higher price (wherever the MC = MR), DWL is between old P and new P
What prevents Monopolies
Competition law
What is faciliated by a market of lemons?
Emergence of agents
Explain edgeworth’s box:
- Edgeworth box, utility curves facing each one, the contract curve goes in the center, highlighting the point where once reached, it is no longer to change and not make one of them worse off
o Edgeworth box assumes that each participant makes voluntary choices
What do standard economic problems assume
- Standard economic problems assume that contracts can be enforced and coercion does not take place
What does a commitment do?
- A commitment creates a constraint for the person imposing it, with the idea that it will benefit them in the future
Types of rationality
o No rationality – no one understands anything (evolutionary game theory)
o Bounded rationality – people try but may get confused
o Perfect rationality – all players understand the game perfectly (standard game theory)
2 types of game theory
- Game theory can be cooperative and non-cooperative (in cooperative agreements can be enforced)
- Types of games based on coordination:
o Pure coordination – both can benefit if they coordinate
o Pure conflict games – zero-sum pretty much
o Mixed motive games – have similar preferences but different pay-offs
What plays opposite to competition law
- Patent laws play opposite to competition laws, allowing for monopoly profits
How can monopolies make credible commitments?
- Companies could make credible threats by constraining themselves (investing in a semi-pointless plant or burning your ships)
Greif 2006
Institutions (also influenced by culture) in the form of rules, beliefs and norms are core drivers of economic prosperity:
* Institutions enabling cooperation, securing property rights, fostering contracts, and promoting specialization
* Institutions - systems of interrelated rules, beliefs, and norms – determined by history, influenced by prior institutions and cultural beliefs.
* Socioeconomic view of institutions – culture influences institutions.
Institutions as equilibria shaped by historical and cultural aspects:
* The Institutional Analysis framework via agency-based and structural perspectives view institutions as self-reinforcing equilibria.
* Game theory provides tools to assess institutions but lacks insights from sociology and historical contexts.
Institutional differences can be used to explain differences in economic development:
* Europe’s rise in late medieval period from unique institutions, (merchant guilds and corporations).
* In contrast, the Muslim world relied on kin-based networks and centralized governance.
Greif 1989
Maghribi traders created successful informal institutions to facilitate international trade:
* Medieval trade in the Mediterranean relied on overseas agents, due to asymmetric information and limited enforceability.
* The Maghribi traders were Jewish merchants created a coalition - as an economic institution that fostered trust.
* The coalition utilized a variety of business associations, (commenda partnerships, agency relationships) - characterized by flexibility and adaptability.
Success of informal institutions based on reputation, family ties (utilized for trust building) and information sharing:
* Membership in the coalition gave reputational advantages. If a member cheated, others would punish.
* Family ties played a significant role in establishing trust.
* Coalition’s effectiveness was contingent upon the flow of information.
Mokyr 2013
Culture is a contributing factor shaping institutions, driven by “cultural entrepreneurs”:
* Institutions are formal and informal rules that govern resource allocation and behavior, while culture is a set of beliefs, values, and preferences that shape those institutions.
* “Cultural entrepreneurs” alter societal beliefs and shape institutions (Martin Luther and Karl Marx strong examples)
* Cultural entrepreneurs introduce novel ideas
* The success of cultural entrepreneurs depends on their ability to persuade others to adopt their beliefs
A cultural shift was a key contributing factor to the success of the industrial revolution:
* In addition to well-functioning markets and supportive institutions, the Industrial Revolution required a cultural shift that emphasized applying useful knowledge to improve technology (Francis Bacon and Isaac Newton key in Industrial Enlightenment)
* Francis Bacon advocated for the practical application of knowledge to improve technology
* Isaac Newton’s demonstrated the power of the scientific method and the elevation of the social standing of scientists
North 1989
A credible commitment must be made by the government to sustain property rights:
* Institutional changes in 17th century England, allowed the government to credibly commit
* A ruler can show commitment in two ways:
1) establishing a precedent of responsible behavior,
2) being constrained to obey a set of rules.
Before the revolution, the Crown exercised a “confiscatory government” (centralized power):
* Under the Stuart monarchs, expropriation of wealth was rampant (e.g., sale of monopolies, forced loans, and the seizure of goods and property).
* The institutional basis centralized the power in the Crown and limited the ability of other institutions to constrain the monarchy.
The Glorious revolution restricted the crown, creating a credible commitment to property rights, leading to economic development in the region:
* The Glorious Revolution led changes (incl., parliamentary supremacy, parliamentary control over finances, limits on the royal prerogative, and an independent judiciary).
* After the revolution, government borrowing increased dramatically, interest rates fell, and private capital markets flourished
* Glorious Revolution played a critical role in making possible economic growth and political freedom (compared to France)
- Classical constitutional conundrum
designing institutions to effectively govern while limiting the power of those who govern (Bowles)
What does inventing a state do?
- Inventing the “state” can solve the constant “war” faced by actors
- Different views of institutions:
o “laws informal rules, and conventions that give a durable structure to social interactions among members of a population” (Bowles)
o strategy selected by players in equilibrium - but is context dependent (Dixit)
o “the rules of the game in society” or “humanly devised constraints that shape human interaction” (North)
o “a system of social factors – such as rules, beliefs, norms and organizations – that guide, enable and constrain the actions of individuals” (Greif)
Mokyrs views:
o formal and informal regulations, viewed as fixed by players
o Institutions influence culture
o Culture also shapes institutions
Organizations vs institutions
- Organizations are players, institutions are the rules of the game
- North’s distinction of the role of state and institutions:
o Contract theory – the state and institutions serve to enable private contracts
o Predatory theory – instrument of transferring resources from one group to another
- Acemoglu’s model of political institutions:
o Political institutions & distribution of resources -> economic institutions & political institutions (t+1)
- Different views of institutional origins:
o Incidental institutions view (for the common good) – emerge on accident as a result of other actions (parliaments arose only in need to muster resources for war – formed in countries engaged in war)
o Efficient institutions view (for the common good) – societies select institutions to maximize their surplus, the distribution of that surplus, however, does not affect the institutions (Coase theorem – given that parties can negotiate for free they can reach an agreement on distribution)
o Costly institutions view (for the common good) – institutions created to solve economic problems (e.g., enforcing contracts). Main distinction with the efficient view – there are costs associated with this – so benefit has to be higher than the cost to happen (e.g., enforcing property rights)
o Social conflict view (NOT for the common good) – result from economic agents, but are not necessarily efficient – those in power make the institutions. Importantly, Coase theorem is not enforced here as there is a commitment problem – government both makes and enforces the law..
Acemoglu 2005
Institutions are the major determinant of economic prosperity, influenced by political institutions:
* While geography and culture may play a role, economic institutions are the major source of differences in economic prosperity.
* Distribution of political power in society is the key determinant of economic institutions.
* Developing a comprehensive theory of institutions is crucial towards effective policy recommendations for promoting development in poorer countries.
Institutions differ due to commitment issues of rulers – unwilling to limit their powers:
* The “social conflict view” (most plausible explanation for why countries have different institutions) - bad institutions arise because groups with political power benefit from bad institutions.
* Rulers and elites resist institutional changes that could increase overall prosperity but reduce their own power (e.g., white elite in Rhodesia tried to structure institutions to protect their interests during the transition to majority rule, but these guarantees ultimately failed).
Hierarchy of institutions – political institutions (who holds power & how are they constrained) shape economic institutions:
* Political institutions determine who holds power and the constraints on the use of power, which in turn shapes economic institutions.
o The division of Korea: After the Korean War, differing economic institutions were adapted by North (communist system) and South Korea (market oriented economy)
o European colonialism: Previously prosperous colonies ended up with worse institutions, while sparsely-settled areas developed institutions protecting property rights. (e.g., Dutch and their Southeast Asian colonies; British colonies in the Caribbean vs United States, Canada, and Australia).
o End of Feudalism in Western vs Easter Europe: English peasant communities had more power and were able to end feudal regulations, while in Eastern Europe, lords were able to intensify feudalism.
o Financial institutions in USA vs Mexico: United States, with more democratic and federal political institutions, saw the rise of competitive banking, while Mexico, under an authoritarian regime, had a monopolized banking system
o Agricultural price regulation in Kenya vs Ghana: Ghana and Zambia marketing boards with monopsony power extracted resources from farmers. In contrast, in Kenya and Colombia, farmers had more political influence and were able to secure favorable policies.
Acemoglu 2003
3 approaches to understanding policy and institutional changes:
* Political Coase Theorem (PCT)
* Modified Coase Theorem – ideological view
* Social conflict
PCT is disproven by the differing political institutions implemented in emerging economies:
* The PCT claims that societies will tend towards efficient outcomes regardless of power dynamics
* Societies choose inefficient policies and institutions, contrary to PCT, because they serve the interests of those in power.
o Example of European Colonists: European colonists implemented different types of institutions based on their own interests
o North and South after the Korean War: South Korea adopted a capitalist model with private property rights, while North Korea implemented a centrally planned economy.
Commitment problems are the main culprit for PCT failure, with theories examining social conflict providing a better framework for assessing institutional choices than PCT:
* Commitment problems as the main reason why the PCT fails.
o Scenario with a ruler and citizens: ruler has the power to tax, the ruler’s inability to commit to future tax rates can lead to underinvestment by citizens.
o When citizens make individual investment decisions, distortionary taxes can help prevent overinvestment, which might trigger the ruler to expropriate all output.
Acemoglu 2000
Influential parties sometimes block new technologies to retain their ‘economic’ control:
* Societies fail to adopt new and beneficial technologies:
o Example of the delayed adoption of railways in the 19th century.
* They challenge the “which suggests that powerful interest groups block new technologies to protect their economic rents.
However, Acemoglu challenges the economic-losers hypothesis,” and proposes the “political-loser hypothesis” - arguing that groups block technological advances to protect their political power, not necessarily their economic interests.
o A monopolist and a potential rival: the monopolist is more likely to block the new technology when its political power is threatened.
* During the Industrial Revolution in 19th-century Europe, aristocracies in Britain and Germany did not block industrialization because their political power was secure, unlike their counterparts in Russia and Austria-Hungary (e.g., railways example in 19th century)
* The authors suggest that the landed elites in Russia and Austria-Hungary may have had more to lose politically from industrialization due to their more entrenched feudal systems and less adaptable political institutions.
Ostrom 2000:
Zero contribution thesis is disproven by observations of people contributing to public goods:
* Mancur Olson’s “zero contribution thesis” - rational, self-interested individuals will not act to achieve common goals unless the group is small or there is coercion.
* However, this thesis contradicts many observations of real life.
Individuals more likely to cooperate if others will too and in case of face-to-face comms (facilitating trust) – people split into conditional cooperators and willing punishers:
* Existence of “conditional cooperators” and “willing punishers.”
o Conditional cooperators are willing to cooperate if they believe others will reciprocate.
o Willing punishers are inclined to punish those who do not cooperate.
Evolutionary theory proves this as people needed to build trust in small groups to survive (e.g., irrigation systems still work):
* Humans evolved in small groups where cooperation was essential for survival, which may have selected for individuals with a predisposition to follow social norms, including norms of cooperation.
o Example of irrigation systems: self-organized resource regimes can successfully manage common pool resources – thanks to clear boundary rules, rules that are tailored to local conditions and that distribute benefits fairly, and the ability of users to participate in making and modifying rules.
* However, not immune to threats, and identifies several factors that can undermine them, such as rapid population changes and government interference.
- Glorious revolution in short:
o The crown had legislative, executive and judiciary powers
o English civil war with the king being beheaded
o Cromwell’s rule was bad, the king took over again
o Glorious revolution with the parliament restructuring the constitution but keeping the monarch
o Power and credibility (judicial power) were separated
- Results of the glorious revolution:
o Security of property rights
o Increased tax revenues
o Less risky government debt
o Bank of England – financial stability
o Private capital markets also grew
o Potentially the right set of circumstances was made for the industrial revolution later on
- Maghribi trader overview:
o Jews living in muslim world – minority with distinct social identity
o To deal with trade uncertainty and distance, they employed agents
o Agents got a share of the pie – to have proper incentives
o Multilateral reputational mechanism – via the information sharing coalition
- In Medieval Europe it was different to Maghribi traders:
o Since there was a lack of this tight-nit community, it was difficult to track everyone’s reputation
o Institutions were then put in-place in fairs and private merchant courts – where everyone’s reputation was logged upon entering
Nash equilibrium
None of the players would unilaterally change their strategy
Check each of the players individually and if they would change – considering the other player remains.
Subgame perfect nash equilibrium
if there’s a Nash equilibrium in every subgame of the game
