Economics and institutions

Do institutions matter?

To judge from recent discussions among mainstream economists, you’d think there’s a real battle over the relevance of economic and political institutions.

Daren Acemoglu and James Robinson accuse development economists, all the way back to Paul Rosenstein-Rodan, of getting it wrong because they have ignored the role of institutions and politics.

The main reason why Rosenstein-Rodan got it so wrong is because he completely ignored the role of institutions and politics.

Now the thing is that, though most economists today would espouse more sophisticated theories than those of Rosenstein-Rodan, much of development economics — especially when it comes to the practice of development — still ignores institutions and politics.

Meanwhile, Giancarlo Corsetti has initiated a new debate on Voxeu about austerity, arguing that the “terms of the debate are clear.”

• The debate is not about the desirability of restoring safer fiscal positions after the large increase in gross and net public debt in the last few years.

This can be safely taken for granted.

Uh, no. The terms of the debate over austerity are not clear and it’s not that development economists have ignored institutions and politics.

In both cases, mainstream economists have long presumed a particular set of institutions—of private property, free markets, and government rules to protect free markets and private property—and simply can’t imagine or won’t allow for a fundamental change in those institutions.

The only difference, as far as development economics is concerned, is that the Rosenstein-Rodan’s of the immediate postwar period presumed that, once the process of postcolonial economic growth was initiated (through state intervention), modernization would sooner or later usher in the appropriate set of capitalist institutions. Acemoglu and Robinson think we need to reverse that order and look for the cases where, within colonialism itself, the rules of and respect for private property were established.

As for austerity measures in Europe, what Corsetti and other mainstream economists can’t abide is the idea that the set of economic institutions that created the debt crisis in the first place might be scrapped in favor of a different set of economic institutions. All they can see is making a choice between reducing deficits now or later, within the existing set of institutions and politics.

In both cases, the only institution that matters is private property. And mainstream economists will do everything in their power, including the shedding of blood, to protect it.

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