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The Institutional Analysis of Economic Development and Social Progress

The Institutional Analysis of Economic Development and Social Progress. Peter Boettke Econ 828/Fall 2005 7 November 2005. Breaks and Departures in Human History. Backwardness of Europe in 1200ad, and superiority of China and Islamic world in 700-1400ad

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The Institutional Analysis of Economic Development and Social Progress

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  1. The Institutional Analysis of Economic Development and Social Progress Peter Boettke Econ 828/Fall 2005 7 November 2005

  2. Breaks and Departures in Human History • Backwardness of Europe in 1200ad, and superiority of China and Islamic world in 700-1400ad • Modern economic growth and institutional configurations • The Socialist Experience

  3. North’s Contribution • Institutions as Constraints • Optimizing behavior as guided by relative price movements • Institutions as Rules • Cost/Benefits of enforcement of rules • Norms and de facto rules • Institutions as arenas of meanings and shapers of preferences • Fly in a bottle and cognition • Cognitive limits of human abilities

  4. Why Did the West Take-Off? • Security of property rights • Freedom of contract and trade • Values and Beliefs • Fiscal institutions (fixed tax system) • Political decentralization (delineated scope of authority) • Enforcement technologies

  5. Why was Socialism Attractive and Why Did It Not Work? • Attractiveness • Claims of Justice • Great Depression and instability • Defeat of Hitler • Failure • Incentives • Information • Response to Failure

  6. Economic Problems of Socialism Property Ability to engage in economic calculation reinforces the incentive effects of private property to generate wealth Trade generates exchange ratios Calculation Knowledge Relative prices are inputs into economic accounting

  7. The Evolution of Economic Thinking During the Transition Years • Getting the Prices Right • Macro-stabilization • Market clearing • Getting the Institutions Right • Property rights • Rule of law • Getting the Culture Right • Beliefs • Acceptance of Western institutions • Networks • Clusters --- entrepreneurs and engineers

  8. Where “We” Ran Into Problems in Russia? • “We” mentality versus “They” from the point of view of the US • Only path to reform is an indigenous one • Shock Therapy and Gradualism • Shock in name and gradualism in reality • E.g., monetary policy 1992-1995 • E.g., price liberalization 1992 • Privatization • De facto privatization • Legitimation and the New Oligarchs • Fiscal System • Centralization versus De-Centralization • Politics • Liberal authoritarianism?

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