----------------- HES POSTING ----------------- In Dan Bromley's excellent post on Coase and Commons, he pointed out that Commons' explanation of institutions differed from the analysis of Coase, which was to become the foundation for the transactions cost-based explanation of institutions. Commons, he wrote, explained institutions by referring to conflict. My knowledge of Commons is limited. So I will take his report to be factual. I would like to make three points to add to the discussion. First, the history of the more mainstream approach to institutions does not end with the simple exchange models of Coase. Almost simultaneous with the development of the transactions cost approach to institutions, a Public Choice approach was emerging. Public Choice theorists sometimes worked within the neoclassical paradigm by theorizing about democracy as if it was the exchange solution to public goods problems. But Public Choice also saw democratic institutions, or more generally government itself, as a solution to an initial difference in coercive power. They worked, for example, on the question of what institutions individuals might rationally create when in a Hobbesian state of anarchy. In their models, conflict and a power struggle ended with the emergence of institutions, although these were ordinarily considered as exchange solutions to the problem of order, as the prospective combatants were assumed able to perceive the benefits of future exchange. Since some of the founders of Public Choice were political scientists, the focus on differential initial power is not surprising. (Gordon Tullock (ed.), Explorations in the Theory of Anarchy, Blacksburg, Va.: Center for the Study of Public Choice, 1972.) In grad school at VPI in the early 70s, I recall studying Autocracy, War, and Revolution in my Public Choice class. It was accepted as a matter of principle that institutions emerged from these situations or events. There is also a rent-seeking theory of institutions, which sees institutions emerging within a democratic system in order to extract wealth. In a model of a pure market economy, this wealth would go to producers and traders. Also, within the Coasean tradition, there was Harold Demsetz's (AER, 1967) theory of the evolution of property rights, in which an increase in the price of beaver pelts raised the profitability of establishing private property rights in North American hunting areas. As I recall, Demsetz reported that new hunting rights were established through wars (including wars of conquest) and peace treaties. One might argue that some or all of these contributions are not mainstream economics. But they certainly fit neatly within the framework of the maximizing assumptions of neoclassical economics. Accordingly, any comparison of the old institutionalism with the new ought, I think, to take them into account. Second, one of the most interesting critiques made by Veblen and other "old institutionalists" was based on the the common sense idea that peoples' choices can be influenced by others through advertising, propaganda, etc. So far as I know, neither neoclassical economics nor mainstream economics has dealt effectively with this critique. Unless I am mistaken, the "animal spirits" explanation of stock market booms, for example, treats the individual as a slave of her instincts but disregards the creativity of those who take advantage of the "instincts" of others by misleading them, swindling, and betting against them. Deception, swindling, and "parasitic positioning" also occurs in politics, rent seeking, and international affairs, of course. Third, the idea that the Supreme court determines values seems less satisfactory than the idea that its decisions may be based, on the one hand, entirely on efforts to maximize long run wealth (Richard Posner, Economic Analysis of Law) and, on the other hand, entirely on efforts to redistribute long run wealth. Modern economics has developed the latter dichotomy for analytical convenience. We must presume, however, that both elements might play a part in any particular decision. Pat Gunning ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]