Contracting Boundaries as Institutional Infrastructure: Efficacy, Adaptation, and Obsolescence: Commentary on La Croix and Ghiselin's Comments

The New Institutional Economics (NIE) emphasizes that different governance structures generate a rich variety of observed institutional arrangements. In Yarbrough & Yarbrough (1999), we extended this reasoning to argue that different governance structures also carry implications for the sets of acceptable contracting partners or ‘insiders’. Here we discuss various contracting groups as institutional infrastructures and evaluate their efficiency, ability to adapt, and longevity or possible obsolescence in the face of changes in the nature of transactions or of the transactional environment. The fact that, despite their many shortcomings, private institutional infrastructures continue to be built, to adapt, and to function, even in modern societies with well-developed state-based legal systems, provides a measure of the centrality and complexity of the task of assuring contractual integrity. This revised version was published online in August 2006 with corrections to the Cover Date.     

The Bioeconomics of Cooperation

When transactions and information are costly and exchange is non-simultaneous, ‘institutions matter’. They matter because exchange under these circumstances subjects the participants to potentially harmful behaviors by other participants, among which are: opportunistic behavior, agency, the free-rider problem, cheating, moral hazard, and adverse selection. Institutions constrain these behaviors, allowing the participants to take advantage of the gains from trade and specialization, and thereby facilitating cooperation. Individuals adhere to institutional rules because they gain by doing so. Because the individual gains are inseparable from the structure of the institutions, the institutions themselves necessarily become the focus of the analysis—as we see in the new institutional economics (NIE). The new group selection position in biology involves a similar shift in focus from the level of the individual to the group when studying the evolution of altruism. But some of the proponents of group selection go further, arguing that altruism in biology evolves because it is in the interest of the group, but not the individual. In fact, group level analysis is necessary in biology, as in the NIE, because it allows for the discovery of ‘institutions’ that constrain cheating, opportunistic behavior, etc., thereby making participation in the group in the long-run self-interest of the individual. This revised version was published online in August 2006 with corrections to the Cover Date.     

Competition policy: ten lessons learnt from the financial crisis

The financial crisis brought great challenges also for competition policy. The aim of this paper is to summarize the most important insights for competition policy that could be derived from the turbulent period 2008–2010. The financial crisis is seen as project that demanded sound management from competition policy and enforcement. The insights will be presented in the instructive form of ‘lessons learnt’ which represents a common approved project management technique. We come to the result that the financial crisis is not the result of ‘too much competition’, but of regulatory failure and that the main answers to the financial crisis have to come from ‘smart regulation’. The relaxation of competition policy would be the wrong policy response in troubled times since competition policy can play an important role in bringing the crisis economy back on track. In contrast to banking we see no economic rationale for rescue packages for other economic sectors by referring to systemic risk. The renaissance of industrial policy is viewed with great skepticism since empirical evidence shows that the effort of picking ‘winners’ all too often results in saving ‘losers’.     

Money as Social Exergy

Synopsis It has been proposed that open thermodynamic systems will act to dissipate available energy gradients by self-organizing into coherent structures that, with time, evolve and develop into nested hierarchies – panarchies – that adapt to internal and external changes according to a characteristic adaptive cycle. This paper seeks to apply these ideas in the purely societal realm by investigating the role of money in economic systems. Money represents the value embodied in goods; a value that is separate from the exact nature of those goods. We suggest that money thereby liberates the ‘free value’ of economic desire and that this free value has properties analogous to energy. The result is the self-organization of structures and systems (‘econosystems’) that dissipate this ‘free value’. Econosystems act at different scales, and nested levels of econosystems form a panarchy, having effects that can be observed. In particular, it appears that money facilitates the creation of relationships between econosystem actors, increasing the connectedness of the econosystems that envelop those actors. We have identified a phenomenon whereby freed social value (i.e. money) can aggregate, or pool, at a larger econosystem scale in structures such as banks. These pools act as gradients that actors at the neighborhood scale can exploit for self-organization in the econosystem. Thus, econosystem actors appear to be freed from thermodynamic constraints by using money as a means of self-organization. However, because of these pools of aggregated social exergy, connectedness is increased at the larger scale of the econosystem. The potential consequence of this dynamic is that money may act to push larger scale econosystems toward a state of heightened vulnerability to collapse, while freeing smaller scale actors from apparent constraints. In this way, we propose that money acts to skew information feedback loops between econosystem actors and larger scale structures such as economies and ecosystems.      

The process and a simple logic of ‘meso’. Emergence and the co-evolution of institutions and group size

‘Summing-up’ aggregation of micro decisions contrasts with structural emergence in complex systems and evolutionary processes. This paper deals with institutional emergence in the ‘evolution of cooperation’ framework and focuses on its size dimension. It is argued that some ‘meso’ (rather than ‘macro’) level is the proper level of cultural emergence and reproduction. Also Schumpeterian economists have discussed institutions as ‘meso’ phenomena recently, and Schelling, Axelrod, Arthur, Lindgren, and others have dealt with ‘critical masses’ of coordinated agents and emergent segregations. However, emergent group size has rarely been explicitly explored so far. In an evolutionary and game-theoretic frame, ‘meso’ is explained in terms of a sustainably cooperating group smaller than the whole population. Mechanisms such as some monitoring, memory, reputation, and active partner selection loosen the total connectivity of the static and deterministic ‘single-shot’ logic and thus allow for emergent ‘meso’ platforms, while expectations ‘to meet again’ remain sufficiently high. Applications of ‘meso-nomia’ include the deep structure of ‘general trust’ and macro-performance in ‘smaller’ and ‘well networked’ countries which helps to explain persistent ‘varieties of capitalism’.     

The Economics and Bioeconomics of Folk and Scientific Classification

Synopsis This paper is the product of a collaboration between a biologist (Ghiselin 1997) who works on the philosophy of classification and an economist (Landa 1981, 1994) who works on the ‘Economics of Identity’: how and why people classify people based on identity in the context of a theory of ethnic trading networks. In developing the ‘bioeconomics’ (the synthesis of economics with biology) of classification, we crossed a number of disciplinary boundaries—anthropology, economics, sociology, biology, and cognitive psychology including evolutionary psychology’s ‘fast and frugal’ heuristics. Using a bioeconomics approach, we argue that folk classifications—the classifications used by ordinary persons—have much in common with scientific classifications: underlying both is the need for economy of information processing in the brain, for the efficient organization of knowledge, and for efficiency of information acquisition and transmission of information to others. Both evolve as a result of trial and error, but in science there is relatively more foresight, understanding, and planning.     

The evolution of IT innovations in Swedish organizations: a Darwinian critique of ‘Lamarckian’ institutional economics

Fundamental correspondence and analogies between the evolution of technological and biological innovations call for an ‘innovation Darwinian’, ‘universal Darwinian’ or ‘memetic’ approach to understanding technology innovation. Neo-institutional, in fact pseudo-Lamarckian evolutionary economic theory, represented by North, Nelson and Winter, Freeman and others, is criticized. Pseudo-Lamarckian (“by volition”) evolution is explained and analyzed on Darwinian grounds (as intentional and artificial selection), as is Schumpeter’s definitions of creative and imitative innovation. Data from a web survey among Swedish public and private organizations in 1999 are studied. Data show that Darwinian co-evolutionary interaction between producers and users or clients provide essential conditions and stronger influence on creative IT innovations than both ‘Lamarckian’ strategies and competition.

The Study of Ethnicity and Nationalism Needs Better Categories: Clearing up the Confusions that Result from Blurring Analytic and Lay Concepts

Synopsis It has been difficult to make progress in the study of ethnicity and nationalism because of the multiple confusions of analytic and lay terms, and the sheer lack of terminological standardization (often even within the same article). This makes a conceptual cleaning-up unavoidable, and it is especially salutary to attempt it now that more economists are becoming interested in the effects of identity on behavior, so that they may begin with the best conceptual tools possible. My approach to these questions has been informed by anthropological and evolutionary-psychological questions. I will focus primarily on the terms ‘ethnic group’, ‘nation’, and ‘nationalism’, and I will make the following points: (1) so-called ‘ethnic groups’ are collections of people with a common cultural identity, plus an ideology of membership by descent and normative endogamy; (2) the ‘group’ in ‘ethnic group’ is a misleading misnomer—these are not ‘groups’ but categories, so I propose to call them ‘ethnies’; (3) ‘nationalism’ mostly refers to the recent ideology that ethnies—cultural communities with a self-conscious ideology of self-sufficient reproduction—be made politically sovereign; (4) it is very confusing to use ‘nationalism’ also to stand for ‘loyalty to a multi-ethnic state’ because this is the exact opposite; (5) a ‘nation’ truly exists only in a politician’s imagination, so analysts should not pretend that establishing whether something ‘really’ is or is not ‘a nation’ matters; (6) a big analytic cost is paid every time an ‘ethnie’ is called a ‘nation’ because this mobilizes the intuition that nationalism is indispensable to ethnic organization (not true), which thereby confuses the very historical process—namely, the recent historical emergence of nationalism—that must be explained; (7) another analytical cost is paid when scholars pretend that ethnicity is a form of kinship—it is not.     

The ‘science-as-market’ analogy: a constitutional economics perspective

The ‘science-as-market’ analogy has been used in support of the notion that in science just as in markets competition works as an effective instrument for reconciling the self-interested ambitions of individual agents with the social function that science and markets are supposed to serve. This paper examines the analogy from a constitutional economics perspective, drawing attention to the role that the rules of the constitution of the ‘game of science’ as well as the ‘market game’ play in conditioning the ways in which competition works in the two realms.     

Does trade foster contract enforcement?

Contract enforcement is probabilistic, but the probability depends on rules and processes. A stimulus to trade may induce traders to alter rules or processes to improve enforcement. In the model of this paper, such a positive knock-on effect occurs when the elasticity of supply of traders is sufficiently high. Negative knock-on is possible when the elasticity is low. Enforcement strategies in competing markets are complements (substitutes) if the supply of traders is sufficiently elastic (inelastic). The model provides a useful structure of endogenous enforcement that gives promise of explaining patterns of institutional development. Presented to the GEP Conference on ‘New Directions in International Trade Theory’, 8 and 9 June, 2007. An earlier version of this paper under another title was presented to the American Economic Association meetings, January 2004.     

Darwinism in economics: from analogy to ontology

Several social scientists, including ‘evolutionary economists’, have expressed scepticism of ‘biological analogies’ and rejected the application of ‘Darwinism’ to socio-economic evolution. Among this group, some have argued that self-organisation is an alternative to biological analogies or Darwinism. Others have seen ‘artificial selection’ as an alternative to natural selection in the socio-economic sphere. Another objection is that Darwinism excludes human intentionality. It is shown that all these objections to ‘biological analogies’ and ‘Darwinism’ are ungrounded. Furthermore, Darwinism includes a broad theoretical framework for the analysis of the evolution of all open, complex systems, including socio-economic systems. Finally and crucially, Darwinism also involves a basic philosophical commitment to detailed, cumulative, causal explanations. For these reasons, Darwinism is fully relevant for economics and an adequate evolutionary economics must be Darwinian, at least in these fundamental senses. However, this does not undermine the need for auxiliary theories and explanations in the economic domain.     

Towards Sustainability Economics: Principles and Values

Synopsis  Radical alternatives, in terms of our ideas about science in society, about economics, ideology and institutional arrangements, should be included among possibilities considered within the scope of a pluralistic philosophy. While all these aspects of our mental maps are interrelated and important, economics plays a key role in attempts to get closer to a sustainable society. Mainstream neoclassical economics is not enough. The tendency to exclusively rely on this particular theory is considered part of the problems faced. A ‘sustainability economics’ more in line with dominant ideas of democracy is proposed, emphasizing the ethical, ideological and political elements. Reference is made to institutional theory but the principles and concepts suggested are in many ways similar to other kinds of heterodox economics and developments in other social sciences. Neoclassical economics is used as a point of reference in pointing to alternative ideas about human beings, organizations, markets, decision- making, efficiency, rationality, progress in society and institutional change processes. Predilection for such an alternative conceptual framework (or for neoclassical economics) is not exclusively a scientific choice but as much a matter of political and ideological preferences. One paradigm may be dominant at a time, but because of the ideological specificity of each paradigm, competing theoretical perspectives should be accepted and even encouraged in a democratic society.      

Synergy Goes to War: A Bioeconomic Theory of Collective Violence

Synopsis Synergy – here defined as otherwise unattainable combined effects that are produced by two or more elements, parts or individuals – has played a key causal role in the evolution of complexity, from the very origins of life to the evolution of humankind and complex societies. This theory – known as the ‘Synergism Hypothesis’ – also applies to social behavior, including the use of collective violence for various purposes: predation, defense against predators, the acquisition of needed resources and the defense of these resources against other groups and species. Among other things, there have been (1) synergies of scale, (2) cost and risk sharing, (3) a division of labor (or, better said, a ‘combination of labor’), (4) functional complementarities, (5) information sharing and collective ‘intelligence’, and (6) tool and technology ‘symbioses’. Many examples can be seen in the natural world – from predatory bacteria like Myxococcus xanthus to social insects like the predatory army ants and the colonial raiders Messor pergandei, mobbing birds like the common raven, cooperative pack-hunting mammals like wolves, wild dogs, hyenas and lions, coalitions of mate-seeking and mate-guarding male dolphins, the well-armed troops of savanna baboons, and, closest to humans, the group-hunting, group-raiding and even ‘warring’ communities of chimpanzees. Equally significant, there is reason to believe that various forms of collective violence were of vital importance to our own ancestors’ transition, over several million years, from an arboreal, frugivorous, mostly quadrupedal ape to a world-traveling, omnivorous, large-brained, tool-dependent, loquacious biped. The thesis that warfare is not a recent ‘historical’ invention will be briefly reviewed in this paper. This does not mean that humans are, after all, ‘killer apes’ with a reflexive blood-lust or an aggressive ‘drive’. The biological, psychological and cultural underpinnings of collective violence are far more subtle and complex. Most important, the incidence of collective violence – in nature and human societies alike – is greatly influenced by synergies of various kinds, which shape the ‘bioeconomic’ benefits, costs and risks. Synergy is a necessary (but not sufficient) causal agency. Though there are notable exceptions (and some significant qualifiers), collective violence is, by and large, an evolved, synergy-driven instrumentality in humankind, not a mindless instinct or a reproductive strategy run amok.      

Convergent cultural evolution and multilevel selection: Reply to comments on Janet Landa’s ‘The bioeconomics of homogenous middleman groups as adaptive units: Theory and empirical evidence viewed from a group selection framework’

The comments on Janet Landa’s (J Bioecon 10(3):259–278, 2008) target article provide a fascinating snapshot of how multilevel selection theory is perceived across several disciplines. When we focus on the zone of agreement among the commentators, Landa’s article provides an important example of convergent cultural evolution. When we focus on the zone of disagreement, we find a snapshot of the current status of the group selection controversy that goes beyond narrow scientific issues and requires a ‘truth and reconciliation’ process to resolve, as discussed in my series of blogs titled “Truth and Reconciliation for Group Selection” (Wilson , 2009) and briefly summarized here.      

Spatial welfare economics versus ecological footprint: modeling agglomeration,externalities and trade

A welfare framework for the analysis of the spatial dimensions of sustainability is developed. It covers agglomeration effects, interregional trade, negative environmental externalities, and various land use categories. The model is used to compare rankings of spatial configurations according to evaluations based on social welfare and ecological footprint indicators. Five spatial configurations are considered for this purpose. The exercise is operationalized with the help of a two-region model of the economy, that is, in line with the ‘new economic geography.’ By generating a number of numerical ‘counter-examples,’ it is shown that the footprint method is inconsistent with an approach aimed at maximum social welfare. Unless environmental externalities are such a large problem that they overwhelm all other components of economic well-being, a ‘spatial welfare economic’ approach delivers totally different rankings of alternative land use configurations than the ecological footprint.      

Hold-up and externality: the firm as a nexus of incomplete rights?

The Coasean theory of the firm (Coase in Economica 4:386–405, 1937) has flourished with the theory of incomplete contracts. Transaction costs in the form of enforcement costs have been deemed to be the main determinants of the decision to ‘make’ versus ‘buy’. Surprisingly, this stream of literature has almost neglected that transaction costs may also generate incomplete property rights (Coase in J Law Econ 3:1–44, 1960). As firm’s activities entail both contractual and property rights, these two domains interfere each other on the decision to carry out a transaction within the firm. When property rights are incomplete, potential externalities may increase the cost of using the price mechanism to procure the assets needed in a given transaction. The resulting ‘Coasean firm’ would not only centralize incomplete contracts under a unified governance system, but it will also aggregate incomplete property rights under a unified ownership structure.     

Property as an economic concept: reconciling legal and economic conceptions of property rights in a Coasean framework

Adopting a simplistic view of Coase (J Law Econ 3:1–44, 1960), most economic analyses of property rights disregard both the key advantage that legal property rights (that is, in rem rights) provide to rightholders in terms of enhanced enforcement, and the difficulties they pose to acquirers in terms of information asymmetry about legal title. Consequently, these analyses tend to overstate the role of “private ordering” and disregard the two key elements of property law: first, the essential conflict between property (that is, in rem) enforcement and transaction costs; and, second, the institutional solutions created to overcome it, mainly contractual registries capable of making truly impersonal (that is, asset-based) trade viable when previous relevant transactions on the same assets are not verifiable by judges. This paper fills this gap by reinterpreting both elements within the Coasean framework and thus redrawing the institutional foundations of both property and corporate contracting.     

中国地区工业生产绩效:结构差异、制度冲击及动态表现

This paper is dedicated to probing into the dynamic performances of industrial productivity across regions of transitional China, using the panel data of provincial level. Based on the approach by Kumbhakar (2000), TFP (total factor productivity) growth is decomposed into four components. The main results are as follows. First, since 1988, the industrial TFP growth has been commonly accelerated across regions, with a rising technical change rate as the principal impetus. Second, meanwhile, technical efficiency and factors’ allocative efficiency are deteriorated with scale efficiency switching from being retrogressive to being progressive. Third, although the SOE (state-owned enterprise) reform in the late 1990s has constituted a common shock to the industrial productivity, the eastern area with relatively few SOEs suffers the least from this policy enforcement. Fourth, by exploring the sources of productivity differences, we further confirm that the institutional shock launched by SOE reform in the late 1990s is crucial for the enhancement of scale effects as well as the temporarily rapid decline of factors’ allocative efficiency; in addition, the educational level of the labor-force and the share of non-SOEs in the industrial output contribute positively to the acceleration of technical change and the improvement of allocative efficiency. The economic transition, accompanied by gradual institutional reforms, is reshaping the map of regional industrialization through various channels. Translated from Jingji Yanjiu 经济研究 (Economic Research Journal), 2006, (11): 48–59     

Towards a Disequilibrium Theory of Endogenous Economic Growth

This paper discusses the need for a new approach to economic growth theory. The standard theory of growth-in-equilibrium driven by exogenous, uncaused, productivity gains has an implication that is both unjustified and perverse from a policy perspective: that government intervention of any kind can only introduce constraints and reduce option space, thus decreasing potential growth. It is argued that growth theory should (1) acknowledge the importance of natural resources, especially fossil fuels, as a driver of past and present economic growth, (2) incorporate an explicit recognition that growth is a consequence of technological innovation, especially radical innovation, that often responds to natural resource scarcities or other societal needs and (3) explicitly reflect the fact that the important (i.e. scarce) factors of production in economics can and do change over time, i.e. from a rural ‘cowboy’ economy of the past to an urbanized ‘spaceship’ economy of the future. In short, it should reflect the fact that ‘necessity is the mother of invention’. The first and third of these modifications have been proposed before, but not in combination. The third seems to be new.     

Mobile phone termination charges with asymmetric regulation

We model competition between two unregulated mobile phone companies with price-elastic demand and less than full market coverage. We also assume that there is a regulated full-coverage fixed network. In order to induce stronger competition, mobile companies could have an incentive to raise their reciprocal mobile-to-mobile access charges above the marginal costs of termination. Stronger competition leads to an increase of the mobiles’ market shares, with the advantage that (genuine) network effects are strengthened. Therefore, ‘collusion’ may well be in line with social welfare.