4 - Institutions and (In)efficiency

Summary

Institutions produce social effects, and one vocabulary for thinking about these effects derives from economics and focuses on efficiency and inefficiency. Neoclassical economics held little space for institutions, beyond the sparest notion of uncoerced market exchange. Over the course of the twentieth century, problems associates with transaction costs, bounded rationality, strategic interaction, and puzzles of macroeconomic growth called forth welfare-impacting institutions. Beyond merely impacting incentives (e.g., by economizing on transaction costs), institutions came to play a central role in explaining thorny problems such as collective action and credible commitment. We survey a range of applications in economics or working broadly within its rational choice framework which speak to the increasing centrality of theories of institutions in explaining central social outcomes such as development. Efficiency approaches to institutional origins are superficially attractive, modeling them as choice outcomes, but can slip easily into problematic post hoc ergo propter hoc functionalism. By contrast, they show real comparative strength in accounting for institutional stability and change.