Institutions, Law and Economic Thought

March 11, 2018

 

Within the broader agenda pursued by INET and YSI to help shift the dominant paradigm in economic thought, our working group focuses on the institutions and legal frameworks in which economic processes are embedded. The paradigm that developed around neoclassical economics explains these processes as if they occured in a bubble detached from the real world. Uniform agents defined by orders of preferences and an instrumental approach to the outside world interact within an ideal setting, where they only have other agents to confront. Contrary to this frictionless conception of the social realm, Ronald Coase argued that the real world often involves costs of interaction between parties related to the institutional setting necessary for transactions to occur. For example, agreements between parties depend on the enforceability of contracts that ultimately involve costs of creating, sustaining, and developing a legal system. In this sense, insitutionalist scholars have observed that agents do not engage with  the legal system only in an instrumental manner, weighing the probability of rules being enforced to prevent them from pursuing their ends against the costs of punishments that would follow. According to this line of scholarship, the legal system is based on a set of norms that is more or less in tune with those adopted by the actors within it[MCdB1] . An analysis that begins with this insight leads to a more sophisticated and complex picture of the dynamics of the economic process and provides a better understanding of the ways it can be effectively managed through policy. This broader real-world institutional conception helps us overcome narrower perspectives according to which all kinds of problems affecting economic processes can be fixed on a technical basis only, by exploring alternative institutional scenarios.

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