Four years of analysis of institutions

First insertion on Heterodox Gazette Sam De Wolff: 5 september 2020

E.A. Bakkum is a blogger for the Sociaal Consultatiekantoor. He loves to reflect on the labour movement.

The Gazette studies since at least four years the importance of national institutions. The individual and social advantages of institutions can be illustrated with rational arguments. However, the human psyche imposes clear limits on rationality. Institutions are quite rigid. They exhibit a variety, which is determined by culture. And they are obviously a source of power. Theoreticians want to establish categories of national regimes, but this is quite difficult. For, institutions partly emerge due to spontaneous diffusion. Finally, the ideas of the economist Liefmann are studied.

Since its establishment the Gazette studies social actions, just like in the past its namegiver Sam de Wolff did. De Wolff still had to use class theory as his starting point. Since then the insight in collective action has increased significantly. Collective action interacts with the social institutions. The action forms these institutions, and is also restricted by them. The institutions are indispensable for maintaining the stability of society1. In other words, the system of institutions allows to manage society. Many equilibriums with corresponding institutions are conceivable. In the ideal case an optimal equilibrium is realized, where the social welfare function has its maximal value. It is scientifically controversial whether this can generally be achieved2.

The present blog describes a number of modern and dominating theories, and also consults the blogs from previous years. A lot of attention is paid to the economic system, because economic growth is indispensable for the unfolding of individual persons. The argument tries to adhere to methodological individualism, whenever possible. The argument is divided in three phases. In each phase the actor model is modified somewhat, corresponding to the nature of the studied process. First the emergence of institutions, including the state, is explained as a process of rational choice3. Next the social psychology is used in order to describe the dynamic change of institutions. Finally the theory of public administration is used in order to explain the development of the administrative regime.

The necessity of the state

When reference is made to the social administration, then at the moment this is still primarily the national state. In abstract terms, the state must supply public facilities, because these can not be supplied by the private markets4. The most important provision is the legal system. The national law consists of a set of formal institutions. They have usually emerged from the informal institutions, this is to say, from the traditional habits and convictions. For, therefore they already have some support after their formal introduction. This is called rule harmony5.

At the top of the legal order is the constitution6. It can be interpreted as a social contract, which is concluded by the citizens in consensus, in order to regulate their mutual interactions7. The constitution imposes the general and binding framework for detailed legislation. The introduction of property rights is very important for the functioning of the social system8.

It has just been stated, that the administration and its institutions protect the social stability. They solve a number of social problems. First, the administration guarantees, that the safety of each individual actor is maintained. It remains uncertain, what the natural form of human existence is (without administation). According to the philosopher Hobbes a war of all against all will develop. Your blogger believes, that this may well be true, but anarchists have a different view. The property rights eliminate a lot of sources of conflict. But even when the natural state would be peaceful, then the administration is still needed in order to correct the so-called external effects. For, individual actions often lead to consequences for other actors. This holds in particular for the public services, which improve the general wellbeing9.

Finally the administration can aim to reduce the transaction costs of the citizens10. The interactions between actors can only unfold in a satisfactory manner, when sufficient information is available, binding agreements are possible, and the fulfilment of contracts is enforced. The government can take care in an effective and efficient manner, that such conditions are satisfied11. In this way the administration eases the burden of the citizens, this is to say, it reduces the costs of social transactions.

Spreading of institutions

The total of formal and informal institutions determines the manners in society. They are called a collective or shared mental model12. This already suggests, that the institutions are a psychic phenomenon. Institutions do not form in a purely rational way, guided by calculations of the social interests. Although their aim is to minimize the transaction costs, their formation is the result of a power-struggle between groups13. Often this ends in a compromise between the groups. But when a certain group is very powerful, and unilaterally imposes its will, then it is even conceivable, that the total of all transaction costs will rise. There is exclusion. Then the powerful group spreads its own institutions across the whole society14. So it is desirable to study the spreading of institutions.

Photo of caricature Kuyper
Figure 1: caricature Abraham Kuyper
   as a shadow above the Heemskerk
   administation (Albert Hahn, 1908)

Institutions can be realized in three ways. Society can be forced to accept them, by means of supervision and enforcement. This is an expensive solution. The society can also exert a collective pressure to accept the institutions. This is the most usual way. Then the institutions must naturally already have some support at the start. And finally society can make propaganda to internalize the institutions. The institutions become a part of the personal identity. This situation would be ideal15. However, this is difficult to realize in a pluralistic society16. In reality all three ways will contribute somewhat to the support for the institution. This is described well in Sozialpsychologie (in short SP)17.

An actor has an interest to belong to groups18. Furthermore, groups gain in external strength, according as the internal cohesion increases. Therefore the members of a group have a natural inclination to comply with the rest. In addition they can be convinced by the information of the group (p.285, 372 in SP). Members do not want to give offense, because this weakens their personal position within the group (p.289). Thus group norms (institutions) are formed. Respect for the institutions is an obligation (p.302, 318). Reciprocity is valued, and dissonance is avoided (p.303, 318). The approval of the group is more important than the personal opinion (p.290)19. An actor only sticks to his opinion, when his personal interest is large (p.294). Sometimes within the group a minority forms, with a different view (diverging ideas) (p.296). It hurts the cohesion, but stimulates innovation20.

Psychology also argues, that institutions such as group norms make interactions more predictable within the group (p.341). This is the positive side of coherence (p.347). Certainly for large groups the institutions are important, because the personal ties are less strong. The famous economist M. Olson has argued, that a large interest group is really a public good. Then it is attractive for individual actors to engage in free riding on the group effort21. Sometimes symbols are used for bonding, such as wearing uniforms, which impose a role (p.341). Roles couple norms to a function, and create expectations about behaviour (p.343). A role can even lead to deindividuation (p.344)22. Bonding and status are not institutions themselves, but they do help in maintaining institutions (p.349). The goals and means both are a part of the structure of the group (p.347).

The state tries to bind its citizens by means of an ideology, and by means of national symbols and culture. Nevertheless, the state is not a group in the psychological meaning of the word. There are various social groups active, which compete mutually. The citizens experience this more as a conflict and struggle between subgroups than as the influence of a loyal minority. Thus within the state there are prejudices between groups, which even can result in discrimination (chapter 10 in SP)23. Prejudices are heuristics. The cognition classifies the actors as stereotypes (p.379)24. But next the stereotype gets an affective (emotional) charge (p.379). Therefore the struggle between groups is no longer purely rational. Apparently also psychology concludes, that institutions are partly determined by the relations of power. Usually reason will yet get the upper hand. But in case of excesses the state can even fail25.

Furthermore, not all actors will be equally inclined to join a group or organization. The consequence is, that the interests of some citizens are better served than those of others. According to Olson especially the interests, which are widely spread in society (for instance those of all tax payers) will lose in the power struggle between groups. Large groups are relatively powerless25.

The preceding argument confirms the hypothesis in a previous blog, that in many situations the actor model is rather complex. The personal interest is important, but sometimes yet the rational ideas fail. The heuristics can unintentionally have disastrous consequences. The spreading of institutions implies, that the actors continuously adapt their views. So it is not true, that the preferences of actors are constant, like the neoclassical paradigm assumes27. Nonetheless, the individual preferences naturally change quite slowly, and sometimes not at all. Often the social change is brought about by the decease of a generation. On the one hand, each actor has much freedom. On the other hand, the environment imposes severe restrictions28.

Path dependency

Apparently it takes an effort to build new institutions. This is an investment, which leads to costs. Therefore people want to maintain their existing institutions as much as possible29. Moreover the institutions form a coherent whole. It is difficult to renew a single institution, and yet maintain the coherence within the system. Changes, which undermine the consistency of the system, are not acceptable. Moreover a change often implies, that some groups are hurt. They will resist30. Furthermore the outcome of any change is uncertain. The uncertainty affects the utility of the change, because people are risk averse. All these factors imply, that there is a limit to the possible interventions in the system of institutions. It is said, that the development of the system is path dependent31. This is to say, institutions are rigid.

Figure of welfare growth
Figure 2: Growth of welfare W(t)
   incremental and radical
   (dashed including risk aversion)

Nonetheless change is sometimes desirable. Routines create their own problems32. According to the systems theory the feedback of the obtained results leads to incentives for learning. Usually institutions are changed incrementally. A development in small staps weakens the mentioned inhibiting factors. This insight is included in among others the punctuated equilibrium theory (PET), and in the theory of Hayek33. Legislation often builds on jurisprudence. This is called common law34. However, when a radical reform offers really large advantages, which are obvious to everybody, then it wil yet be executed. This is called constitutional law35. When all states realize similar radical changes, then such systems will converge. The convergence has been predicted by, among others, Tinbergen and Wilensky36.

The figure 2 illustrates the described considerations of the citizens. At the time t=0 the wellbeing is W0. Suppose that the citizen has a time horizon t=H, and that his discount factor equals δ (with 0<δ<1). This assumption implies, that beyond this horizon H one has δt = 0. The citizen is slightly myopic. An incremental policy begins with some costs, which temporarily reduce the wellbeing. However, soon the policy leads to an improvement W(t) > W0. This is the solid red curve. Unfortunately at the start the value of W(t) is still somewhat uncertain. The citizen is risk averse, and therefore devalues W(t) to W'(t). This is the dashed red curve. Now the citizen will agree with the incremental policy, when he expects a positive nett utility:

(1)     U(incremental) = Σt=0H  δt × (W'(t) − W0) > 0.

Exactly the same argument holds for a radical reform. According to the green curve here the costs and benefits of W(t) are relatively large. Since moreover W(t) is rather uncertain, W'(t) will be somewhat further below W(t) (dashed curve). The result U(radical) is calculated in the same way as U(incremental) in the formula 1. The citizen will prefer the radical reform above the incremental policy, when U(radical) > U(incremental) holds. Thus the preference for an incremental policy becomes clear. For, the radical reform (the dashed green curve) can be rejected in favour of the incremental policy (idem in red), even when in the end on t=H one has W(incremental) < W(radical). Then the citizen simply does not want to bear the high costs in the short term.

The structure of the state

In this paragraph the system of the state is studied more in detail. This system determines how the policy formation develops. Unfortunately, at the moment a general theory of the administration of the state does not yet exist37. In this paragraph attention is paid to three aspects, namely the constitutional structure, the political system, and the role of interest groups. The idea of this approach is evidently to describe the institutions, and to analyze how they function. Thus it becomes clearer, which paths a society can follow38. The reader is requested to always remember the psychological motives, which are the basis of the described institutions.

The constitutional structure

The state has a formal hierarchy, just like any other organization. The hierarcy is dictated by the national constitution. The constitution is usually based on the trias politica, this is to say, the separation of powers in a legislative body (parliament), an executive body (government), and a judicial body (judges). The separation of powers makes the probability of an abuse of power smaller. Various variants of the trias political are conceivable39. For instance, parliament can consist of a single house, or of several houses (usually two). Sometimes the government is led by a president with his own democratic mandate. The electoral system can distribute the seats in parliament according to the majority (district system), or proportionally. In the first case there are often two large parties. The one who wins the election, can itself form the government.

Furthermore, the state can be central or decentral. In the decentral system the state is a federation, with member-states. The state shares the administrative tasks with its member states. The federal administration is layered, but due to this division of tasks there is no strict hierarchy. A member-state is not a lower administration, like a province. This is called poly-centrism. The competences of the federation and member-states are documented in the constitution. The advantage of a federation is, that the decentral actors have more autonomy. The disadvantage is, that actions are more cumbersome. There is insufficient coordination of policies, and impasses are frequent. Scharpf calls this the joint-decision trap40.

The spreading of power by a division of tasks implies, that the concerned actors need each other. They are mutually dependent. No single actor can unilaterally dictate the whole state policy. Each actor in the action arena has some veto-power. Thanks to the balance of powers the groups have less opportunities to exploit others.

The political system

The political parties usually recrute their candidate members of parliament and of the government from their rank-and-file. Political parties have two goals: they make propaganda for a certain ideology, and they want to acquire paid functions for their members. They can only reach their goals, when they succeed in binding sufficient voters41. In the west there are traditionally three political currents, namely conservatism (in the past: christian-democracy), liberalism, and the social-democracy (in the past: socialism). During the first half of the twentieth century perhaps the most important political theme was the struggle resulting from different interests between labour and capital. Nowadays this is no longer the case, at least in the west (say, the OECD states)42. The parties must obviously take into account the feelings, which live within the population.

Many attempts have been made to measure the ideology of parties. It turns out that this is quite difficult43. A problem is that each party must adapt to the national peculiarities. Again and again the context of the ideology also turns out to be important. This undermines the universality of the ideology. The context can also be international, for instance the economic globalization44.

Philosophers assume, that the citizens choose their own constitution, as well as their government. But practice reveals, that the turn-out on elections is never 100%. And percentages below 50% are not uncommon. It is indeed difficult to explain rationally, that citizens vote. For, this single vote is never decisive45. The citizens probably yet interpret voting as an obligation. His choice is partially determined by his environment. In modernism each citizen is a member of many groups, so that his dedication is divided46.

Interest groups

The previous considerations have made clear that actors benefit from joining interest groups. This can be a political party. But usually the group defends a specific interest, for instance of professional workers. This is called a distribution coalition47. Examples are the trade unions, or associations of entrepreneurs. They seek rent from the state. The influence of associations is measured in terms of the density, concentration, and centralization48. A high density and degree of centralization further their power. Well organized workers push up their own wages. When this is not moderated by institutions, then the power of the distribution coalitions affects the economic growth49.

The state can institutionalize the deliberations with certain interest groups. Then the associations also get political tasks. This is called neo-corporatism50. It requires that the interest groups unite in federations. An advantage of neo-corporatism is, that the concerned actors can internalize some external effects of their actions51. In this case the extra power due to centralization is used for constructive agreements. But nowadays the latitude is reduced due to liberalization and deregulation52. They enforce a supply side policy. All in all the benefits of neo-corporatism are controversial53.

Incidentally, enterprises can also as separate actors exert influence on the state. This is particularly true for transnational enterprises, which are relatively mobile in their activities54. Sometimes the enterprises are mutually strongly intertwined, like in the financial sector.

The power of the agenda-setter

Figure of stepwise policy reform
Figure 3: Stepwise policy reform
   S → S'→ S'' → A in the (Q, G) field
   of actors A, B and C with their loss circles

A recent blog has shown, that the control of the policy agenda gives a lot of power. This is an important subject in the theory of public administration. In certain circumstances the policy setter is even omni-potent. Your blogger copies the following argument from the famous textbook Public choice III55. See the figure 3. Suppose that there are three actors A, B and C, who must decide about a policy Q and a policy G. The present policy is represented by the point S. The preferences (optima) of A, B and C are the red, green and blue points. The actor A controls the agenda. For instance, A is the coalition of a minority government, and B and C are large parties outside of the coalition56. The figure 3 shows a spatial model, where the circles correspond to the indifference of the actors. They connect points with the same loss of utility with regard to the optimum.

A new policy will be accepted, when two of the three actors agree. In this situation it can be easily shown, that the actor A can stepwise realize his optimal policy (Q, G)! Namely, A first puts the new policy S' to the vote. This is a brilliant tactical move, because A himself will vote against it! For, according to A S' is less useful than S. But since B and C are indifferent with regard to S and S', yet S' will be accepted. In the second step A puts the new policy S'' to the vote. This is accepted with the support of A and B. In the final step A puts his own optimal policy to the vote. This is accepted with the support of A and C. Thus A has manipulated the agenda in such a manner, that in the end his optimal policy is supported. This is surprising, because the A-policy is less useful for B and C than the original S policy. The strategy of A works, because B and C are myopic. For, with some reflections they would be able to foresee the strategy of A57.

This model of the agenda setter has implications for institutions, because it shows that indeed the introduction of institutions partly depends on power, even in a democratic system. Furthermore it is a fascinating illustration of mathematical modelling in the theory of public administration.

The theory of regime variety

The theory of path dependency has led to the theory of regime variety. The social development would correspond to a handful of regimes, which group themselves around the ideologies of conservatism, liberalism and socialism. This theory is described in a previous blog. In the version of Esping-Andersen there are fundamentally two regimes, one in the United States of America, and the other in Sweden. The remaining group was called the continental regime. This Three-Worlds model has a marxist basis58. More generally, nowadays a distinction is made between liberal and coordinating policies59. Evidently the liberal regime is also coordinated, but this is done preferably by means of free markets. Decisive is the intensity of interventions. Previously, this blog concluded, that the ideology and culture shape the regime60.

In practice the theory of regimes is unsatisfactory. Namely, the categories are merely ideal types. But the mixture of ideology and culture leads to a large diversity in regimes, which can not really be analyzed with just a few categories61. The citizens can get very attached to their own regime. But the OECD states are still similar to such an extent, that for instance their economic growth hardly differs. The growth rate is mainly determined by the welfare level, because poorer states benefit from a catch up effect62. Regimes become only hurtful, when they suffer from mismanagement, such as corruption, patronage, a rigid bureaucracy, or a weak constitutional state. This kind of regimes is especially found in the developing states63.

Diffusion and learning from policy

An alternative for the theory of regime varieties is presented by the theory of diffusion. It is more a description than an explanation. A local improvement can spread by means of learning, imitation or by means of an incentive for competition (best practice)64. Here it is assumed, that the process is unilateral, and therefore not collective65. In this sense diffusion differs from the already studied spread, where the group exerts pressure. Diffusion does require a connector between the concerned states66. The diffusion theory fits well with evolutionary models of development67. It assumes that truth exists, in the sense of best practices68. But diffusion does not guarantee, that the policy of states will per se converge69. Even block formation is possible, because diffusion works best between similar states70.

Figure of diffusion with and without imitation
Figure 4: Diffusion via innovation (red)
   and via innovation and imitation (green)

In this sense regime variety can be called morally good, because it allows for competition between regimes71. This is a search for the truth. New institutional economics (in short NIE) assumes, that knowledge spreads via diffusion also in free markets. Due to the incentive of competition this can lead to convergence on the market. But it is not certain, that an equilibrium is really established72. In this sense the theory of path dependency contradicts the equilibrium theory of the neoclassical paradigm. Another point of debate is the degree, in which markets are embedded within the society. The common view is still, that markets florish in the presence of a certain freedom73. Precisely for this reason the economy has been deregulated somewhat since the eighties.

Diffusion can be described fairly accurately with the model of Bass74. In this model a new institution is realized by means of innovation or imitation. Innovation refers to a personal idea, for instance stimulated by competition. Suppose that at the time t=0 the fraction of states with a new institution equals f(0) = 0. At the time t the fraction (1 − f(t)) still uses the old institution. So innovation leads to a growth df/dt = α × (1 − f(t)) of the new institution, where α represents the capacity to innovate. Furthermore, imitation yields a growth β × f(t) × (1 − f(t)), where β is the capacity to imitate. Since imitation is an interaction, two fractions are present in the expression. Thus the growth equation of the new institution is:

(2)     df/dt = (α + β×f) × (1 − f)

The figure 4 shows the development of f(t) for β=0 (no imitation) and β>0 75. It is clear, that the diffusion is accelerated thanks to the imitation. And since the growth due to imitation is proportional to f(t), imitation becomes more and more important for growth. The growth has an S shape. However, note that this diffusion model does not describe the learning process, which is the basis for the imitation. This would require the use of a learning theory76.


The blog started with the hypothesis, that institutions help to reduce the transaction costs, so that they make the society more effective and efficient. But next a psychological analysis of groups showed, that the decisions in groups have irrational aspects, or at least are not very transparent. Often institutions are an expression of group power, and this can lead to conflicts with the social interests. In pluralism especially the large groups are weak, because by their nature they have a poor cohesion. Also the theory of the administration attaches much value to the power struggle between groups. This suggests, that institutions originate only to a limited degree from sound reason. They make behaviour predictable, but not per se socially effective.

The social evolution does play a role in forming effective institutions. For, states mutually compete for means. States with poor institutions will finally be pushed aside by effective states. This is a stimulus for states to learn from each other, so that good institutions can spread, for instance by means of diffusion. But although the evolution punishes irrational behaviour, nonetheless the evolution of institutions can proceed irrationally. For instance, an aggressive state can subjugate and exploit the others. Therefore the evolution is not a reliable substitute for sound reason. A constructive evolution with ever better institutions requires, that the most powerful group itself applies sound reason, and uses an enlightened self-interest. It must take into account the interests of the others.

Antiquated: Robert Liefmann

The economist Robert Liefmann (1874-1941) is mainly a philosopher77. He tries to describe the neoclassical paradigm in an era, when it was still in its infancy. This implies, that he wants to ignore social, moral and cultural phenomena in economics. Economics can not explain such phenomena, but must see them as an external fact. Therefore Liefmann opposes the Historical School. But the challenges for Liefmann are gigantic. In 1919 the general Walrasian theory of equilibrium is not yet common. Until now the Gazette has not yet explained this theory78. In short, the theory couples all present and future markets by means of product prices. Everything is mutually connected. Actors have complete knowledge about all markets, and therefore can determine an optimal strategy for themselves. Thus they maximize their own utility.

Liefmann still lives in an era, when the nett utility u (called Ertrag) is interpreted as the difference of benefits b and costs c. This has been described previously in a blog about the economist Wagner. Liefmann defines on p.273 in volume 1 of his book Grundsätze der Volkswirtschaftslehre (2 volumes; in short GV) the economic principle as realizing the largest possible result (target, output, benefits b) with the smallest expenditure of means (input, costs c)79. Similar to Wagner he states that the benefits must be maximized, and the costs must be minimized. Here the benefits and costs are purely psychic. For instance the productive actor must bear the displeasure due to labour, and the loss of the means of production. Liefmann is aware of the enormous complexity of this optimization problem, albeit only vaguely. For, the actor has an almost unlimited freedom of choice.

Even his initial situation is undetermined, because his means are variable. He can vary his effort of labour at will. There is no border for the set of production possibilities80. So Liefmann denies, that the actor is subjected to a limited budget. In this respect his view differs from the modern neoclassical paradigm. The actor stops working, as soon as his nett utility threatens to become negative81. Liefmann also dislikes the theory of the partial equilibrium, which keeps prices or quantities constant, like in the Edgeworth box. Furthermore he clearly sees, that the actor must take into account the benefits in the distant future. The optimization has an inter-temporal character. The actor can decide to invest a part of his means. Here Liefmann interprets the benefits in a broad sense, and he also wants to include the social, moral and cultural preferences of the actor. Suppose that the actor can imagine K goals, then his total utility is82

(3)     U = Σk=1K  (bk − ck) = Σk=1K  uk

Suppose that uk only depends on the variable qk, for instance the quantity of the good k 83. Then the actor must choose this qk in such a manner, that U is maximal for all k. This is expressed by the formula

(4)     Σk=1K  (∂uk/∂qk) × dqk = 0

The actor can increase his qk by working harder. In such a situation the dqk are all positive. Therefore the formula 4 leads to the requirement ∂uk/∂qk = 0. But Liefmann assumes, that the products are discrete. Consider the products k=1 en 2, with dq1 = -dq2 = 1, and keep the rest constant (dqk = 0). The exchange of products 1 and 2 implies that one has ∂u1/∂q1 = ∂u2/∂q2. In other words, in the optimum the marginal utilities (Grenzerträge) are identical (p.413 in GV1). This is the fundamental rule of Liefmann. The marginal utilities are not necessarily zero in the optimum, because qk can only vary in a discrete manner84.

Perhaps the reader notices, that product prices are absent in the argument of Liefmann. Apparently he does not like the second law of Gossen. Benefits and costs are purely psychical. Yet they can be expressed in money, namely by transforming them with the help of the utility of money bg. The utility of money is different for each actor, depending on his wealth y and other properties. The marginal utility of money is ∂bg/∂y. This illustrates again the complexity of human evaluations. When an actor receives a sum of money, then he must calculate how much nett utility this sum of money represents in his present situation.

Liefmann was ahead of his time in his search for a theory of the general equilibrium85. But he does not dispose of the mathematical techniques, which could present his ideas in a clear manner. He even dislikes mathematics (p.415, 445 in GV1)86. Therefore he has hardly contributed to the development of the modern neoclassical paradigm. Yet his ideas are present in modern concepts. For instance, the consumption outcome uk = bk − ck is clearly related to the compensated demand curve qk(p, b) for the product k. For, the marginal evaluation pk (willingness to pay, with k=1, ..., K) expresses the costs for the actor. The outcome uk can be calculated from the benefits and tne costs, with the help of the utility of money.

  1. See p.548 and 564 in Neue Institutionen-ökonomik (2007, Schäffer-Poeschel Verlag) by M. Erlei, M. Leschke and D. Sauerland, p.417 and 419 in Institutions and economic theory (2003, The University of Michigan Press) by E.G. Furubotn and R. Richter, or p.89 and 122 in Individuals, institutions, and markets (2001, Cambridge University Press) by C. Mantzavinos. But p.11-23 in L'économie institutionelle (2012, La Découverte) by B. Chavance describes the theory of T. Veblen, which warns against the hurtful effects of institutions. (back)
  2. Evidently Marx does not think so. Precisely for this reason there is a class struggle. According to p.22 in L'économie institutionelle also Veblen believes in an elite of parasites. One can hope, that degenerated institutions will disappear due to the democracy. But Hayek believes that in the democracy the majority will still exploit minorities. The present blog will also express doubts during its evaluation. (back)
  3. Rational behaviour is a psychological phenomenon. The chapters 1 up to and including 4 in Individuals, institutions, and markets are competely devoted to this theme. On p.21 Mantzavinos states, that the human brain is more functional than logical. It creates primitive solutions for social problems. On p.56 and 100 Mantzavinos merges the homo economicus and the homo sociologicus into an enlightened actor. This aspect is fascinating, but not really relevant for the present blog. (back)
  4. According to p.339 in Neue Institutionen-ökonomik the state must distribute incomes, stabilize society, and allocate means. This has a a nucleus of truth. For instance, the state must guarantee safety and security, and this also includes social stability. The allocation refers among others to the production of public goods (p.339). (back)
  5. See p.556 in Neue Institutionen-ökonomik. According to p.85 and 101 in Individuals, institutions, and markets the informal institutions consist of conventions, moral rules, and social norms. Only the norms would be culturally determined (p.118). (back)
  6. See p.549 in Neue Institutionen-ökonomik. (back)
  7. See p.430 in Institutions and economic theory. The philosophy of the social contract has been developed by among others Hume and Locke. (back)
  8. See p.418 in Institutions and economic theory, or p.147 in Individuals, institutions, and markets. (back)
  9. See p.342 in Neue Institutionen-ökonomik. (back)
  10. See p.548 and 553 in Neue Institutionen-ökonomik. (back)
  11. According to p.133 in Individuals, institutions, and markets the state establishes institutions, so that the citizens can engage in mutually credible obligations. The obligation is an important instrument for solving problems in interactions. (back)
  12. See p.67 in Individuals, institutions, and markets. This is called a cognitive structure (p.68). Cognitive learning would be a genetic hallmark of humans (p.72). According to p.153-154 in Les concepts fondamentaux de la psychologie sociale (2015, Dunod) by G.-N. Fischer cognition orders the available knowledge and information, based on morals and convictions. (back)
  13. See p.421 in Institutions and economic theory. According to p.96 in Individuals, institutions, and markets and p.66 in L'économie institutionelle, in the beginning D.C. North believed, that institutions originate from the ambition of efficiency. Later he changes his mind, and attributes them mainly to group interests. They are partly ideological. His new ideas naturally significantly complicate the social analysis. On p.180 in Group Dynamics (1983, Brooks/Cole Publishing Company) D.R. Forsyth states, that power, authority and influence are similar concepts. Power is sometimes studied by means of network analysis. See p.1 and further in Political networks (2003, Cambridge University Press) by D. Knoke. The network approach has the disadvantage, that it does not address the ties (cohesion) between the considered set of actors. A network can have (very) thin institutions. (back)
  14. According to p.415 in Institutions and economic theory groups can avoid the imposed institutions by emigration. But this has huge costs for them. In principle economic growth is beneficial for everybody, also for the dominant group. Unfortunately some dominant groups are more savage than wise. Especially Africa and South-America illustrate this statement with many examples. Then the problem occurs, that the optimum of the dominant group does not coincide with the social optimum (p.416). This is shown poignantly in the Waarom sommige landen rijk zijn en andere arm (2012, Nieuw Amsterdam Uitgevers) by D. Acemoglu and J. Robinson. (back)
  15. According to p.184 in Group Dynamics the internalization of an institution has the consequence, that the actor uses the institution to evaluate his Self. Then the institution indeed generates a powerful control. According to p.46 and further as well as p.60 in Groepspsychologie (1993, DSWO Press) edited by H. Steensma, D. van Knippenberg, T. Borsboom and M. van Son individuals are inclined to categorize themselves. They classify themselves in a group, and accept their norms. Your columnist read the latter book for the first time in 1995. At the time the intention was to obtain practical tips, but it is too abstract for this. Odd, that now it yet becomes relevant. (back)
  16. On p.125 in Individuals, institutions, and markets it is stated, that internalization of institutions occurs out of fear for social sanctions. This is somewhat peculiar. In this case will the institutions be forgotten, as soon as the sanctions are eliminated? Or will they grow in into the behaviour? On p.151 Mantzavinos states, that internalization occurs by means of socialization. This suggests, that internalization is not a personal choice. See also p.13 in L'économie institutionelle. (back)
  17. See Sozialpsychologie (2008, Spektrum Akademischer Verlag) by L. Werth and J. Mayer. A limitation is, that social psychology especially studies the interactions in small groups. On p.335 it is stated. that anonymous organizations are not seen as groups. A group must be a unity. It is indeed conceivable, that large groups behave differently, notably due to the anonymity of its members. Without social control the group can not produce collective goods. See the theory of M. Olson in The logic of collective action (1971, Harvard University Press), or the theory of Frijters. Nonetheless the book of Werth and Mayer at least gives a first impression of what is possible. (back)
  18. On p.335 and further in Sozialpsychologie the following advantages are mentioned. There is a material utility of goal realization and security. And there is a psychical utility thanks to interactions (such as learning), the personal identity, and self-esteem (authority). In principle the group makes better decisions than the individual actor (p.364). This does assume, that the individual is free to choose. On p.93 in The human network (2019, Atlantic Books) by M.O. Jackson a justified criticism is expressed with regard to the Indian caste system. (back)
  19. This can be illustrated with numerous examples. Interesting is the remark on p.29 in The human network, that micro finance can be organized in this way. (back)
  20. On p.71 and 172 and further in L'acteur et le système (1977, Éditions du Seuil) by M. Crozier and E. Friedberg it is remarked, that sometimes in an interaction one of the actors has a monopoly position. Then he has much power. For, then the other actors do not dispose of the exit option (unless they give up the whole interaction). (back)
  21. See p.58 in The logic of collective action, or summarizing on p.62 in Political Networks. The hypothesis of Olson is naturally merely a tendency. Knoke rightly warns on p.64, that the influence of collective morals must not be underestimated. (back)
  22. The deindividuation is emphasized in the economic theory of Frijters. The actor develops devotion (love) with respect to the group. This changes his original preferences. He becomes another person. This theory is complex, because it does maintain the actor model of the homo economicus. Forsyth calls it on p.164 in Group Dynamics a cognitive restructurization. (back)
  23. On p.100 and further in The human network various examples of social segregation are mentioned. For instance, pupils voluntarily engage in some ethnic separation in their class. At the individual level this choice is rational. (back)
  24. According to p.19 in Sozialpsychologie the cognition is identical to the social way of thinking. It determines how information is processed, and is related to the actual context. This consideration may be less relevant for the theme of this blog. (back)
  25. The same remark can be made for organizations. The state is itself an organization, albeit a special one. On p.58 and further, and p.115 and further in L'acteur et le système Crozier and Friedberg describe a factory. In the factory the maintenance technicians have a position of power. For, their effort determines whether the machines will remain operational, and therefore whether the production targets are realized. Therefore the maintenance technicians can extort benefits for themselves. They have a higher status than the other workers, and even than the supervisors. Their status is informal, and is not apparent from the formal structure. The maintenance technicians can naturally not permanently hurt the production, because then the factory would close. (back)
  26. See p.127 in The logic of collective action. On p.154 and further in An economic theory of greed, love, groups and networks (2013, Cambridge University Press) by P. Frijters and G. Foster it is stated, that large groups base on the principle of reciprocity. This implies the presence of some deindividuation. On p.207 it is remarked, that the members in the group use self-categorization. Then the individual acquires a social identity. See also p.46 and further in Groepspsychologie. The argument of Olson is, that in the large group this collective identity is weak. (back)
  27. See p.201 in Individuals, institutions, and markets. The criticism with regard to the neoclassical actor model naturally contains a nucleus of truth. Just consider developments of fashion. According to p.208 in The human network imitation is partly a coordination (and not learning). But the criticism is also a bit problematic. It suggests, that individuals lack a personal will, and can easily be manipulated. Then they would not be able to choose their own democratic government. (back)
  28. The book L'acteur et le système is devoted completely to the tension between individual freedom and the restriction of power by the organization or the system. According to Crozier and Friedberg organizations are characterized by uncertainty. In the collective chaos the actors try to defend their own interest as well as possible. It may be a matter of nuances, but yet your blogger sees a durable structure in most organizations. According to Knoke on p.93 in Political Networks it is desirable, that the formal structure of the organization and the informal power coincide. (back)
  29. See p.54 in Politische Ökonomie (2003, Leske + Dudrich) edited by H. Obinger, U. Wagschal and B. Kittel. On p.119 in Comparative politics (1999, Cambridge University Press) edited by M.I. Lichbach and A.S. Zuckerman, S. Barnes states, that the institutions must be reconcilable with the culture. This book distinguishes between rational behaviour, institutions, and culture. When desired, culture (and incidentally also the collective morals, or the shared mental model) can be interpreted as informal institutions. See also p.194. The institutional analysis of E. Ostrom distinguishes between rules and culture. (back)
  30. See p.163 in Handbuch Policy-Forschung (2015, Springer Fachmedien) edited by G. Wenzelburger and R. Zohlnhöfer, and P.A. Hall on p.192 in Comparative politics. This resistance can be rational, but it can also emerge from the personal identity. (back)
  31. See p.556 and 563 in Neue Institutionen-ökonomik, p.77 and 236 in Individuals, institutions, and markets, or p.69 in L'économie institutionelle. On p.155 and further in Handbuch Policy-Forschung J. Beyer argues, that it is yet often possible to deviate from the institutional path. Preferences are never absolute, because actors can learn and adapt their expectations. Your blogger believes, that this is obvious, because social determinism does not exist. (back)
  32. See p.57 in Individuals, institutions, and markets. (back)
  33. On p.82 in Individuals, institutions, and markets Mantzavinos rejects the incrementalism of Hayek. Namely, according to Hayek the institutions develop in spontaneous processes. Mantzavinos points out, that sometimes the reason that institutions perform well, is that everybody accepts them from the start. Then their power is universalism. Their diffusion must be extremely fast. (back)
  34. See p.554 in Neue Institutionen-ökonomik. (back)
  35. See p.554 in Neue Institutionen-ökonomik. On p.32 in L'économie institutionelle this is called statute law. According to p.146 in Individuals, institutions, and markets and p.51 in L'économie institutionelle Hayek calls this the thesis. Then the common law is the nomos. The disadvantage of constitutional law or the thesis is, that it can be used to exploit certain groups (p.241). This explains the resistance of Hayek against a strong and socially active state. (back)
  36. It is conceivable, that the states prefer similar interventions, because reality forces them to do this. They use their common sense or awareness of the truth. Then there is a diffusion of policy. But it has also been said, that the identical interventions are caused by dominant morals. Remember the controversies around the Washington consensus. (back)
  37. See p.369 in Politische Ökonomie. Here Obinger and Kittel analyze the development of the ratio of the social security for ten OECD states. However, their conclusions are valid for all policies. (back)
  38. The reader is reminded, that according to the systems theory of N. Luhmann the political sub-system hardly affects social life. Sub-systems are closed, and society is threatened by dis-integration. This idea is very controversial. Furthermore, note that states also lose influence as a result of globalization, and of the formation of supra-national institutions. See p.58 in Politische Ökonomie. The complications of layered governance reinforce nationalism. In the Netherlands this became clear by the rapid rise of the politician Fortuyn in 2002. (back)
  39. See p.64 and further in Politische Ökonomie. Judges are mainly occupied with enforcing rules, so that they can not take personal initiatives. (back)
  40. See Community and autonomy (2010, Campus Verlag GmbH) by F.W. Scharpf, or much more succinct p.303 and further in Handbuch Governance (2007, Verlag für Sozialwissenschaften) edited by A. Benz, S. Lütz, U. Schimank and G. Simonis. This latter reference is a chapter by Benz about multi-layered governance. (back)
  41. See p.54 in Politische Ökonomie, or p.90 in Handbuch Policy-Forschung. (back)
  42. See p.49 in Politische Ökonomie. Originally many parties represent a certain class. Later they change into people's parties. Even later parties emerge, that defend certain specific interests. See also p.83 and further in Handbuch Policy-Forschung. On p.129 in Comparative politics Barnes states, that the western voters separate in materialists and post-materialists (New Left). (back)
  43. See p.94 and further, as well as p.123 in Handbuch Policy-Forschung. (back)
  44. According to p.361 in Politische Ökomonie the effect of the ideology is studied by conflict theory. It partly coincides with the theory of means of power theorie. The effect of globalization is studied with the international approach. But functionalism and institutionalism also yield explanations for the formation of policy. (back)
  45. See p.121 and further in Comparative politics. (back)
  46. See p.43 and further in Political Networks. (back)
  47. See p.118 in Politische Ökonomie. (back)
  48. See p.88 in Politische Ökonomie. (back)
  49. See p.129 in Politische Ökonomie. Obinger confirms the economic damage by distribution coalitions on p.135 in his own empirical study, but adds, that this correlation is statistically "fragile". According to Obinger even the number of yearly strike days is not relevant. This is odd, and must perhaps be attributed to an inverse causality. Then the intensity of striking is high, when the economic growth is large. (back)
  50. See p.56 in Handbuch Policy-Forschung. For a long time the Gazette Gazette elaborates on neo-corporatism. The concept is ambiguous, just like this other "neo"-word, neo-liberalism. It suggests centralization. But on p.113 and 129 in The logic of collective action Olson ties it to decentral pluralism. (back)
  51. See p.96 in Politische Ökonomie. Kittel mentions as an example a central agreement, which can be furnished with obligations by the state. (back)
  52. See p.71 in Handbuch Policy-Forschung. The social-democracy is clearly weakening. This also holds for trade unions, unless they participate in the execution of the social security (Belgium, Sweden and the like). But the trade union as an insurer is no longer a defender of group interests. (back)
  53. On p.135 in Politische Ökonomie it is stated, that neo-corporatism does not affect the economic growth. The same is stated about a high state ratio, or high taxes. But p.127-134 shows, that other researchers did measure effects. This controversy is naturally alarming. Incidentally the quality of the state can also be measured with other indicators than economic growth. For instance, a large state ratio implies, that the citizens have little freedom of consumption. In chapter 11 of Politische Ökonomie T.R. Cusack and S. Fuchs profoundly analyze the causes of the height of the state ratio. In chapter 12 Obinger and Kittel study the rate of the social security. Your blogger will definitely address this theme in the future. (back)
  54. See p.113 and further in Political Networks. (back)
  55. See p.112-113 in Public choice III (2009, Cambridge University Press) by D.C. Mueller. (back)
  56. Consider the cabinet Rutte 1. The coalition of VVD (31 seats) and CDA (21 seats) is tolerated by the PVV (24 seats). The coalition is actor A. The actors B and C can be respectively the PvdA (30 seats) and the PVV. The policy fields may be the size of the state ratio (Q) and the supervision of the limits (G) to immigration. In this respect Het minderheidskabinet (2010, Einstein Books) by W. Vermeend and E. Bode is relevant, and your blogger definitely plans to read this. (back)
  57. On p.112 in Public choice III the following rule of thumb is proposed. Let r be the radius of the circle around S, which just includes A and C. Let d be the distance between S and S''. Then A is certainly able to realize his optimum, when d > 3×r holds. For, in the most unfavourable case A and C are opposite to each other on the circle, at a distance 2×r. For this d the distance between S'' and C is larger than 2×r, so that C prefers A above S''. (back)
  58. According to p.358 in Politische Ökonomie the model of Esping-Andersen is a theory of means of power. (back)
  59. See p.174 in the argument of M. Höpner in Handbuch Policy-Forschung, or p.360 in Politische Ökonomie. Furthermore, in this latter book a reference is made to the distinction between the Anglo-Saxon and Rhineland regime. (back)
  60. On p.372 in Politische Ökonomie Obinger and Kittel conclude, that in the short term the political parties have little influence on policies. Their analysis concerns in particular the rate of the social security. In the long term the effect does exist, via the formation of institutions (p.377). (back)
  61. See p.178 and further in Handbuch Policy-Forschung. (back)
  62. In chapter 4 of Handbuch Policy-Forschung Obinger shows this by referring to tens of empirical studies concerning the performances of regimes. It is somewhat alarming, that some studies draw conclusions, which are very sensitive to the selection of the data. The inclusion or exclusion of a few states can lead to totally different research results! This does not become the concerned analysts. (back)
  63. See p.139 and further in Handbuch Policy-Forschung. Here loyal readers of the Gazette recognize the argument of Acemoglu and Robinson in Waarom sommige landen rijk zijn en andere arm. (back)
  64. See p.548 and 576 in Neue Institutionen-ökonomik, or p.255 in Handbuch Policy-Forschung, or p.110 in Political Networks. According to p.32 in Individuals, institutions, and markets imitation mainly occurs in situations, where knowledge can not be transferred by verbal communication. He calls this know-how (p.77). Diffusion is not always good. On p.58 and further in The human network contamination is discussed as a kind of diffusion. On p.78 it is stated, that in the financial sector distrust can diffuse. (back)
  65. See p.247 in Handbuch Policy-Forschung. Diffusion is not a one-sided effect, because all actors influence each other. But the direction of the dominant influence is uncertain. On p.169 in The human network is is noted, that during diffusion the source of the signal receives an echo. (back)
  66. See p.259 in Handbuch Policy-Forschung. Spatial proximity and trade are connectors. Thus a network of states is studied. See p.108 and further in Political Networks. (back)
  67. On p.70 in Individuals, institutions, and markets this is called the gen-culture co-evolutionary theory. (back)
  68. Your blogger believes that science must search for the truth. However, some (mental) models are better than others. Not everybody shares this view. Previous blogs have criticizes theories, that believe that all perceptions are scientifically equal. A system could be constructed at will. On p.61 in Individuals, institutions, and markets this view is called sceptical. Mantzavinos cites a negative reaction by the famous philosopher Hume: "Here is the chief and most confounding objection to excessive scepticism. (...) We need only ask such sceptic, what his meaning is? And what he proposes by all these curious researches? He is immediately at a loss, and knows not what to answer". (back)
  69. See p.248 in Handbuch Policy-Forschung. On p.251 Jahn mentions as an example a failed policy, which is deterrent for other states. (back)
  70. See p.76 in L'économie institutionelle. When actors are in separated components, then the connector is absent, and diffusion is impossible. (back)
  71. See p.173 and further in The human network. (back)
  72. This interesting remark is made on p.213 and further in Individuals, institutions, and markets. Entrepreneurs do see the product prices moving, but they do not know exactly what is the underlying cause. Therefore they can not react adequately (appropriately). (back)
  73. According to p.38-41 in L'économie institutionelle the anthropologist K. Polanyi believes, that free markets are fairly autonomous within society. This also fits well in the systems idea of Parsons. But the theory of regime variety assumes, that the economy can be constructed institutionally. The truth lies somewhere in the middle. The analyst must always select the theory, which is fitted best for his case. (back)
  74. See p.187-188 in Social and economic networks (2008, Princetom University Press) by M.O. Jackson. (back)
  75. According to p.187 in Social and economic networks the solution is f(t) = (1 − e-(α+β)×t) / (1 + (β/α) × e-(α+β)×t). (back)
  76. Chapter 8 in Social and economic networks gives a model of Bayesian learning, and the DeGroot learning model. (back)
  77. Liefmann was a professor in National economics in Freiburg. He was also considered as an authority in matters of cartels and trusts. The end of his life was miserable. Since his parents were of Jewish origin, in 1940 he was transported to the French concentration camp Camp de Gurs. In 1941 he died due to the hardships, precisely at the moment of his release. (back)
  78. Those who want to really understand the general Walrasian equilibrium theory, must read the chapters 15, 16 and 17 in Microeconomic Theory (1995, Oxford University Press) by A. Mas-Colell, M.D. Whinston and J.R. Green. These can only be digested, when also many of the preceding chapters are read. This is 300 pages of complex mathematics in small print. Your blogger indeed has this ambition since a decade, but again and again other literature has precedence. (back)
  79. See volume 1 of Grundsätze der Volkswirtschaftslehre (1923, Deutsche Verlags-Anstalt) by R. Liefmann. This is the third edition, of 700 pages. Volume 2 dates from 1922, and is the second edition, of 850 pages. At one time your bought both volumes for a total sum of 40 euro. These 1550 pages can easily be reduced by a factor of 10, without loss of information. But Liefmann is addicted to polemics, and wants to criticize all important German economists of his era. Sometimes he also devotes many pages to complain about the (supposedly) unfair reception of his ideas. Besides, he is convinced, that his theory is a break-through in economics. He states that within several decades his ideas will be embraced as the foundation of economics. For instance on p.224: "Meine Gedanken haben mit so viel Widerständen, vor allem mit der persönlichen Trägheitsmoment in der Wissenschaft und den Interessen ihrer augenblicklichen Vertreter zu rechnen, daß sie sich nur sehr langsam, wohl erst nach einem Menschenalter, durchsetzen werden". Your blogger believes that this book is charming and amusing, precisely because Liefmann is such a querulous person. More fun to read than Microeconomic Theory. (back)
  80. At least, this is the interpretation of the explanation of Liefmann by your blogger. This is odd. The effort of labour is naturally also restricted within physical boundaries. Nobody can work for 24 hours a day at full strength. But it is true, that an actor can not accurately judge his actually available labour strength. (back)
  81. So in the theory of Liefmann the productivity of the workers can be very different, and therefore also their reward. (back)
  82. On among others p.395 and 423 in volume 1 of Grundsätze der Volkswirtschaftslehre Liefmann remarks, that u = b − c and u' = b/c are mathematically equivalent. For, eu = eb / ec. Define u'= eu, b'= eb, and c'= ec, then one has u'= b'/c'. In other words, the difference of benefits and costs can be transformed into the ratio of benefits and costs, when desired. On p.424 Liefmann does not use such formulas, but he demonstrates this by means of numerical examples. On p.423 he adds: "Der Unterschied ist nur, daß der Ertrag, als Differenz aufgefaßt, nichts mehr sagt über die Größe der sie bildenden beide Faktoren. (...) Im Begriff des Verhältnisses sind die beiden es bildenden Faktoren noch vorhanden". This is wrong. For instance, let b' = α×c, then one has u'=α. The c information is eliminated. (back)
  83. This implies, that the benefits b and the costs c are coupled via the quantity q. However note, that in the blog about Wagner it is precisely assumed, that b and c are functionally separated. For instance, b can be determined by the quality of the product, whereas c is determined by the production technique. The modelling itself fixes the dependencies of b and c, and these must fit with the studied case. (back)
  84. On p.418 in volume 1 of Grundsätze der Volkswirtschaftslehre it is stated: "Vollkommen = 0 kann er auch dann nicht sein, weil sonst ja jede Veranlassung zur Aufwendung des letzten Kosteneinheit fehlen würde". On p.419 Liefmann states that it is conceivable, that the working day can be legally shorter than the worker really wants. Then the possible benefits are also higher than the possible costs due to labour. Another limitation is the winter break, where Liefmann apparently assumes, that the worker can not change his profession or activities. On the same page he also states, that the consumption of a rentier can lead to a positive marginal yield, because his income is bounded. Your blogger believes, that in this case has should try to find a paid job.
    Sam de Wolff, the namegiver of the Gazette, draws in his book Het economisch getij (1929, J. Emmering) the attention to the work of Liefmann. On p.295-297 De Wolff clashes with Liefmann, because the latter denies, that utility can be measured quantitatively. De Wolff emphasizes that measurements are possible. On p.324-327 De Wolff agrees with the law of equal marginal yields. When an actor desires an optimal outcome, then the marginal yields must be zero (p.321, 327). On p.316-317 De Wolff calls this economical production. The rational production already halts at a positive marginal yield. (back)
  85. But on p.444 and further in volume 1 of Grundsätze der Volkswirtschaftslehre Liefmann himself is critical about the general equilibrium. For, an equilibrium suggests a stationary state. And according to Liefmann the economy is indeed dynamical. (back)
  86. According to your blogger the theory of Liefmann is a textbook case of an analysis, where graphs and mathematical formulas are much more clear than an explanation in text. (back)