Institutional Economics

                                  Ag and Applied Economics/Economics 707
 
      Daniel W. Bromley
      Spring 1997
      8:30-9:45 W & F
 
      I.  OVERVIEW
 
      The central problem to be addressed here is that of the institutional underpinnings of a market
  economy or in John R. Commons' terms the "legal foundations of capitalism."  My purpose is to give the
  student a clear understanding of the institutional preconditions of exchange and contracting among economic
  agents.
 
    We start out with a consideration of the "policy problem" in economics.  This seems like the obvious
  place to start because it is my presumption that students are drawn to economics in general, and appliedeconomics in particular, because of the expectation that they will learn about economic problems in the human
  condition.  Moreover, there is the presumption that economics is a powerful analytical aid to the clarification of
  choice in the policy arena.  This early exploration of the policy problem in economics will consist in a careful
  look at the conceptual foundations of modern welfare economics and its empirical counterpart benefit-cost
  analysis.  The presuppositions and the normative content of benefit-cost analysis, and its pertinence to the
  policy problem, will be explored.  The logical problems in efficiency and Pareto optimality as economistic
  "truth rules" will be studied.
 
    We will then turn our attention to the concept of institutions and of institutionalism in economic
  thought and practice.  The first part of this section will be concerned with the origins of institutional
  economics primarily the influence of John R. Commons.  We will then turn to a treatment of the "new
  institutional economics" exemplified by the works of Coase, Demsetz, and North.  Because institutionalism
  originally arose as a skeptical counterweight to classical and neo-classical economics, we will spend some time
  on epistemological issues in an effort to understand how economists come to know what we think we know
  about behavior and choice.  This will provide the opportunity to compare the "old" and the "new" institutional
  economics.
 
    The third section of the course will seek to develop a conceptual synthesis between the "old" and the
  "new" institutional economics.  We will develop this synthesis in the context of rationality, the firm, the
  market, and institutional innovation.
 
    A final focus of concern will be the intersection of law and economics with particular reference to
  concepts of rights and property rights.
 
 
                        II. EXPECTATIONS
 
    There will be weekly writing assignments (gobbets), one page in length, in which students will
  respond to a question or statement distributed during the prior class.  These will be distributed each Friday and
  they are due the following Wednesday.  We will spend the first part of each class on Wednesday discussing the
  particular question for that week.  These assignments will account for 40 percent of the grade.
    Each student will prepare a research paper covering some aspect of economic theory and practice.  The
  paper will: (1) identify some concept (idea) in economics; (2) discuss and explain the social and economic
  context out of which that particular concept arose; and (3) discuss its current role and importance in economic
  thought and policy advice.  The paper is limited to 15 double-spaced typed pages.  The paper will count for 60
  percent of the grade.
 
                         COURSE OUTLINE
 
  Session 1:  Overview
  I.                     THE POLICY PROBLEM
 
  Session 2:  Public Policy and Values
    Aaron: "Public Policy, Values, and Consciousness"
       Weston: "Toward a Better Understanding of the Positive/Normative Distinction in                Economics"
         Klappholz:  "Value Judgments and Economics"
    Session 3:  The Framing of Policy
    Samuels: "The Legal Economic Nexus"
    Heilbroner: "Was Schumpeter Right After All?"
    Stone:  "Causal Stories and the Formation of Policy Agendas"
  Session 4:  Truth Rules in Economics
       Saraydar: "The Conflation of Productivity and Efficiency in Economics
              and Economic History"
      Mishan: "How Valid Are Economic Evaluations of Allocative Changes?"
  Session 5:  Policy Analysis: I
       Tribe: "Policy Science: Analysis or Ideology"
         Bromley: "The Ideology of Efficiency"
    Session 6:  Policy Analysis: II
    Porter and van der Linde: "Toward a New Conception of the Environment-                    Competitiveness Relationship"
    Palmer, Oates, and Portney: "Tightening Environmental Standards: The Benefit-Cost         or
  the No-Cost Paradigm?"
    Arrow, et al.: "Is There a Role for Benefit-Cost Analysis in Environmental, Health, and        Safety Regulation?"
  Session 7:  Review
            II. INSTITUTIONAL ECONOMICS: OLD AND NEW
                                  Session 8:  Origins of Institutionalism: I
       Commons: "Institutional Economics"
         Biddle: "Purpose and Evolution in Commons's Institutionalism"
  Session 9:  Origins of Institutionalism: II
       Mayhew: "The Beginnings of Institutionalism"
         Neale: "Institutions"
    Session 10:  Origins of Institutionalism: III
       Chasse: "John R. Commons and the Democratic State"
         Whalen: "John R. Commons's Institutional Economics: A Re-Examination"
         Rutherford: "J. R. Commons's Institutional Economics"
    Session 11:  The New Institutional Economics
       Coase: "The Problem of Social Cost"
         Demsetz: "Toward a Theory of Property Rights"
    Session 12:  Externalities
       Samuels: "The Coase Theorem and the Study of Law and Economics"
         Dahlman: "The Problem of Externality"
    Session 13:  On "Efficient" Institutions
       North and Thomas: "An Economic Theory of the Growth of the Western World"
         North and Thomas: "The Rise and Fall of the Manorial System: A Theoretical Model"
    Session 14:  A Critique of "Efficient" Institutions
       Field:  "On the Explanation of Rules Using Rational Choice Models"
         Field: "The Problem with Neoclassical Institutional Economics: A Critique with Special         Reference to the North/Thomas Model of Pre-1500 Europe"
       Fenoaltea: "The Rise and Fall of a Theoretical Model: The Manorial System"
    Session 15:  On Nation Building
         Bromley: "Reconstituting Economic Systems: Institutions in National Economic              Development"
         Burawoy: "The State and Economic Involution: Russia Through a China Lens"
         Przeworski and Limongi: "Political Regimes and Economic Growth"
    Session 16:  Review
 
               III. TOWARDS A CONCEPTUAL SYNTHESIS
 
  Session 17:  Rationality and Choice
       Sen: "Rationality and Social Choice"
         Simon: "Rationality in Psychology and Economics"
         Stewart:  "A Critique of Instrumental Reason in Economics"
    Session 18:  The Firm
       Cheung: "The Contractual Nature of the Firm"
         Putterman: "The Firm as Association versus the Firm as Commodity"
         Ben-Porath: "The F-Connection: Families, Friends, and Firms and the
              Organization of Exchange"
    Session 19:  Markets
       Simon: "Organizations and Markets"
         Sen:   "Markets and Freedoms: Achievements and Limitations of the Market
                      Mechanism in Promoting Individual Freedom"
       Ramstad: "Is a Transaction a Transaction?"
  Session 20:  Institutional Change
       Bromley: Chapter 2 "On Institutional Change: The Conventional Views"
         Bromley: Chapter 3 "The Nature of Institutions"
       Bromley: Chapter 5 "Institutional Transactions"
  Session 21:  Review
 
               IV. LAW AND ECONOMICS: PROPERTY RIGHTS
 
                                    Session 22:  Law and Markets
     Hurst: Chapters 1, 2, & 3 Law and Markets in United States History
     Wilkins: "The Neglected Intangible Asset: The Influence of the Trade Mark on the Rise          of the Modern Corporation"
  Session 23:  Contracts
       Kronman: "Contract Law and the State of Nature"
         Goldberg: "Toward an Expanded Economic Theory of Contract"
       Lowry: "Bargain and Contract Theory in Law and Economics"
  Session 24:  Property Rights
       Bromley: Chapter 7 "Property Rights and Institutional Change"
         Williams: "Kant's Concept of Property"
       Perry: "A Paradigm of Philosophy: Hohfeld on Legal Rights"
  Session 25:  Property and the Courts
     Sax: "Some Thoughts on the Decline of Private Property"
     Bromley: "Regulatory Takings: Coherent Concept or Logical
            Contradiction?"
    Session 26:  Property and the Legislature
     Samuels: "The Interrelations Between Legal and Economic Processes"
     Buchanan: "Politics, Property, and the Law: An Alternative Interpretation of Miller et         al. v.
  Schoene"
 
     Samuels: "In Defense of a Positive Approach to Government as an Economic Variable"
 
  Session 27:  Review
 
   Sessions 28, 29, and 30: RESEARCH PAPERS
                          BIBLIOGRAPHY
 
      (Required readings marked with *)
 
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      *Arrow, Kenneth J. et al. "Is There a Role for Benefit-Cost Analysis in Environmental, Health,    and
      Safety Regulation?" Science 272:221-222, 12 April 1996.
 
      *Ben-Porath, Yoram, "The F-Connection: Families, Friends, and Firms and the   Organization of
      Exchange," Population and Development Review 6(1):1-30,  March             1980.
 
      *Biddle, Jeff E. "Purpose and Evolution in Commons's Institutionalism," History of Political Economy 22(1):19-47, 1990.
 
       Brandl, John E., "Distilling Frenzy from Academic Scribbling," Journal of  Policy Analysis  and
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      *Bromley, Daniel W., Economic Interests and Institutions: The Conceptual Foundations of      Public PolicyOxford: Basil Blackwell, 1989.
 
      *Bromley, Daniel W., "The Ideology of Efficiency: Searching for a Theory of  Policy     Analysis,"
      Journal of Environmental Economics and Management 19:86-107, 1990.
 
      *Bromley, Daniel W. "Regulatory Takings: Coherent Concept or Logical Contradiction?"    Vermont Law
      Review 17(3):647-82, Spring 1993.
 
      *Bromley, Daniel W. "Reconstituting Economic Systems: Institutions in National Economic
      Development," Development Policy Review 11:131-51, 1993.
 
    *Buchanan, James M. "Politics, Property, and the Law: An Alternative Interpretation of Miller  et al. v.
  Schoene" The Journal of Law and Economics 15:439-52,  October 1972.
 
      *Burawoy, Michael, "The State and Economic Involution: Russia Through a China Lens,"    World
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      *Chasse, John Dennis, "John R. Commons and the Democratic State," Journal of  Economic  Issues20:759-84, September 1986.
 
      *Cheung, S. N. S., "The Contractual Nature of the Firm," Journal of Law and Economics   26:1-22,
      1983.
 
     Coase, Ronald, "The Nature of the Firm," Economica  4:386-405, 1937.
 
      *Coase, Ronald, "The Problem of Social Cost," Journal of Law and Economics 3:1-44, 1960.
 
     Coase, Ronald, "The Institutional Structure of Production," American Economic Review   82:713-19,
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      *Commons, John R. "Institutional Economics," American Economic Review 21:648-57,   December
      1931.
 
      Cooter, Robert and Peter Rappoport, "Were the Ordinalists Wrong about Welfare      Economics?" Journal
      of Economic Literature 22:507-30, June 1984.
 
      *Dahlman, Carl J., "The Problem of Externality," Journal of Law and Economics 22:141-162,    April
      1979.
 
      *Demsetz, Harold, "Toward a Theory of Property Rights," American Economic Review   57:347-59,
      1967.
 
     Drury, S. B., "Locke and Nozick on Property," Policy Studies 30:28-41, 1981.
 
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     Dwyer, Larry, "The Alleged Value Neutrality of Economics: An Alternative
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       Elsner, Wolfram, "Adam Smith's Model of the Origin of Institutions: The Modern Findings of  the
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       Fama, Eugene F. and Michael C. Jensen, "Separation of Ownership and Control," Journal of    Law
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      *Fenoaltea, Stefano, "The Rise and Fall of a Theoretical Model: The Manorial System,"   Journal of
      Economic History 35:386-409, 1975.
 
      *Field, Alexander J., "On the Explanation of Rules Using Rational Choice Models," Journal of      Economic Issues 13:49-72, March 1979.
 
      *Field, Alexander J., "The Problem with Neoclassical Institutional Economics: A Critique with     Special Reference to the North/Thomas Model of Pre-1500 Europe," Explorations In     Economic
      History 18:174-98, 1981.
      *Goldberg, V., "Toward an Expanded Theory of Contract," Journal of Economic Issues      10:45-61,
      1976.
 
       Hallowell, A. Irving, "The Nature and Function of Property as a Social Institution," Journal of  Legal and Political Sociology 1:115-138, April 1943.
 
       Hausman, Daniel, "Economic Methodology in a Nutshell," Journal of Economic Perspectives     3(2):115-27, Spring 1989.
 
      *Heilbroner, Robert, "Was Schumpeter Right After All?" Journal of Economic Perspectives      7(3):87-96,
      Summer 1993.
 
       Hodgson, Geoffrey M., Economics and Institutions Cambridge, England: Polity Press, 1988.
 
       Holderness, Clifford G., "The Assignment of Rights, Entry Effects, and the Allocation of    Resources,"
      Journal of Legal Studies 18:181-189, January 1989.
 
      *Hurst, J. W. Law and Markets in United States History Madison: University of Wisconsin      Press, 1982.
 
      *Klappholz, Kurt, "Value Judgments and Economics," in The Philosophy of Economics, ed. by    Daniel Hausman, Cambridge: Cambridge University Press, 1984. (chapter 14).
 
       Klein, Benjamin, "Contracting Costs and Residual Claims: The Separation of Ownership and    Control," Journal of Law and Economics 26:367-74, June 1983.
 
      *Kronman, Anthony T., "Contract Law and the State of Nature," Journal of Law, Economics,     and
      Organization 1:5-32, Fall 1985.
 
       Kuhn, Thomas S., "Objectivity, Value Judgment, and Theory Choice," in: Readings in the      Philosophy of
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       Lang, Mahlon George, "Economic Efficiency and Policy Comparisons," American  Journal of     Agricultural Economics, 62:772-77, 1980.
 
      *Lowry, S. Todd, "Bargain and Contract Theory in Law and Economics," Journal of    Economic
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       Mandelbaum, Maurice Purpose and Necessity in Social Theory Baltimore: Johns Hopkins    University
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       Mandelker, Daniel R. "Of Mice and Missles: A True Account of Lucas v. South Carolina   Coastal
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         1993.
       Mandelker, Daniel R. "The Shifting Presumption of Constitutionality in Land-Use Law,"  Journal of
      Planning Literature 4(4): 384-93, 1989.
 
       Matthews, R. C. O., "The Economics of Institutions and the Sources of Economic Growth,"     Economic Journal 96:903-18, December 1986.
 
      *Mayhew, Anne, "The Beginnings of Institutionalism," Journal of Economic Issues 1(3):971-    98,
      September 1987.
 
       McCloskey, Donald, "The Rhetoric of Economics," Journal of Economic Literature 21:481- 517, 1983.
 
       Mirowski, Philip, "The Philosophical Bases of Institutional Economics," Journal of Economic      Issues 21(3):1001-1038, September 1987.
 
      *Mishan, E. J., "How Valid Are Economic Evaluations of Allocative Changes?" Journal of  Economic
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       Mishan, E. J., "The Folklore of the Market," Journal of Economic Issues 9:681-752,     December
      1975.
 
      *Neale, Walter, "Institutions," Journal of Economic Issues 21(3):1177-1206,  September  1987.
 
       Neale, Walter, "Property in Land as Cultural Imperialism," Journal of Economic Issues  19(4):951-58,
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       Nelson, Richard R. and Sidney G. Winter, An Evolutionary Theory of Economic Change     Cambridge:
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      *North, Douglass C. and Robert P. Thomas, "The Rise and Fall of the Manorial System: A  Theoretical
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      *Przeworski, Adam and Fernando Limongi, "Political Regimes and Economic Growth,"   Journal of
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       Sugden, Robert, "Spontaneous Order," Journal of Economic Perspectives 3(4):85-97, Fall      1989.
 
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       Tversky, Amos and Daniel Kahneman, "Rational Choice and the Framing of Decisions" in   Rational
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       Wandschneider, Philip R., "Neoclassical and Institutionalist Explanations of  Changes in    Northwest
      Water Institutions," Journal of Economic Issues 20:87-107, March 1986.
 
      *Whalen, Charles J., "John R. Commons's Institutional Economics: A Re-Examination,"     Journal of
      Economic Issues 23(2):443-54, June 1989.
 
      *Weston, Samuel C. "Toward a Better Understanding of the Positive/Normative Distinction in   Economics," Economics and Philosophy 10:1-17, 1994.
 
       White, H. C., "Where do Markets Come From?" American Journal of Sociology 87:517-47,   1981.
 
      *Wilkins, Mira, "The Neglected Intangible Asset: The Influence of the Trade Mark on the Rise      of
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