Institutional Law and Economics: The Legal-Economic Nexus

 On November 14, 2020, Neil Irwin of the New York Times write a piece about capitalism and the pandemic arguing how the capitalist system both works within a pandemic and needs government action as well. https://www.nytimes.com/2020/11/14/upshot/coronavirus-capitalism-vaccine.html?campaign_id=29&emc=edit_up_20201116&instance_id=24151&nl=the-upshot&regi_id=15895369&segment_id=44604&te=1&user_id=8a8710e84fff940945beb27c1ab4daf8 Irwin’s argument is that big business (corporations) and big government (primarily federal) need each other for their to be successful.  In particular, he focuses on the role of the federal government as a “risk absorber” as he calls it. Here, Irwin is channeling the argument made by Paul Krugman (who was quoting Peter Fisher, (an undersecretary from Treasury in 2002) that the “federal government is an insurance company with an army”. Ther government is the one entity that can take on big and uninsurable risks, like a global p...

We can further examine Marc Tool's social value principle by looking at the book edited by Charles M.A. Clark in 1995 in honor of Tool entitled, "Institutional Economics and the Social value Theory".   Tool wrote about social value principle in several places but most importantly in his Discretionary Economy in 1979.   As outlined by William Dugger in the book honoring Tool in 1995, Dugger argued that Tool had moved the field beyond the concerns of the institutionalist Clarence Ayres and his focus on the importance of technology in human society in the 1940’s and 1950’s.   Both Ayres and Tool think about the Veblenian dichotomy of instrumental knowledge versus ceremonial knowledge. Ayres, as argued by Dugger, was focused on how human innovation and technological improvements will help move us past ceremonial or unproductive parts of human society.  Dugger then goes on to argue that Tool had moved on to a focus on the importance of democracy and civil rights and...

The Paerto efficiency concept has often been used by neoclassical economists to provide a guide to deciding between states of resource allocation and policy.  The concept simply means that no one can be made better off without making someone else worse off.  It was thought to be a value or ethical free principle for making policy decisions in which economists did not have to take sides.  It is not, but that is a longer story (See Schmid 1987). Institutional economists have tried to fashion their own guide to how policy or resource allocation decisions can be made.  They do not base this attempt on a belief that there is a neutral or non-ethical way to do this. That said, some believe we can fashion a concept that has a broad consensus and can guide decision making. Marc Tool is the best known institutional economist for this type of attempt with his social value principle. The social value principle:   "choose  or do that which provides for the continu...

I spent the last two weeks reading some of the work of insitutionalist John R. Commons in preparation for a reading group centered on topics around capital and capitalism. I thought I'd share a crib-notes version of some of Commons thoughts regarding the relationship between law and economics, particularly from his 1925 article Law and Economics. This is in no way an exhaustive summary of the paper, which also includes numerous historical references and exploration of foundational econ topics such as capital and scarcity.  In this nearly century-old piece, Commons considers why "the two sciences of law and economics" have not been treated as one and advanced together.  He asks us to consider the core economic concept of scarcity (among others) and how they are fundamental to the legal concept of property.   It is in thinking about property and rights, and how they are defined, that Commons makes his case for a stronger joint understanding of law and economics. Given the f...

Complexity science and complexity science economics has become a very popular part of scientific thinking.  The general idea is that the individual parts of a system interact and emergent behavior occurs that is often difficult to predict. Eric Beinhocker wrote a book in 2006 entitled "The Origins of Wealth" that focused on complexity science economics*.  In that book he defined complexity science economics as involving: 1) the economy is dynamic and nonlinear, 2) individual agents are modeled with bounded rationality, 3) interactions between economic agents is key in networks, 4) there is no distinction between micro and macro and system behavior is emergent and 5) the system evolves without equilibrium over time. What does this set of ideas have to do with capitalism and its critique of socialism? In terms of socialism, complexity science is in line with Hayeks critique.  The concepts underlying complexity science that individuals agents knowledge cannot be captured cen...

Last week, Eric wrote about George Will's thoughts on capitalism and the spontaneous order . I haven't yet read the book,   The Conservative Sensibility (2019) but being from the rural Midwest, I'm pretty familiar  with the conservative heart of his work. Check out Eric's post for a brief  run-down. What's most interesting to me in these kinds of arguments about capitalism and social order is that there are often two distinct kinds of discourse occurring:  we have the defense of some idea or view of how the world ought to be, and we have discussion of how the world currently is, and how we might address issues in it (Will engages in both at times, the former more so in his book, the latter in his columns). What we rarely get in either type of discourse is a clear, detailed definition of the role of government.   There is plenty of opposition to the "centrally planned economy" on the basis of the work of Hayek (the  knowledge problem ) and Ludwig ...

The idea and concept of capitalism may have many different definitions which makes it difficult to assess arguments for or against capitalism.  George Will is a principled defender of capitalism and the spontaneous order. We unpack his arguments here to make sense of what case can be made in defense of capitalism.  This information comes from George F. Will, "The Conservative Sensibility" from 2019.* George Will's defense of capitalism is not necessarily anything new but is instructive on how the conservative side thinks about the arguments needed.  The definition of capitalism can often be elusive but is generally defined as having to do with a system dependent on private property ownership, a price system and reliant on voluntary exchange.  To defend this system, Will primarily relies on Hayek's idea of information and Locke and others defense of private property and the moral implications of those who act within a market.   Will subtitles the chapter in his b...