Nightcap

  1. Brexit and the battle for sovereignty Alex Massie, CapX
  2. Japanese media and its foreigners Elanor Sezer, Japan Times
  3. The most original novelist in America Laura Miller, Slate
  4. The Englishman who saved Japan’s cherry blossoms Claire Hazelton, Spectator

Three Lessons on Institutions and Incentives (Part 2); Institutions: definition and subtypes

Implicitly, Douglass C. North, William Easterly, and Daron Acemoglu & James A. Robinson share the same notion of “institution.” In this respect, what must be taken into account is not a real definition of the former but its operative concept, that is, what characteristic features relate it to the rest of the concepts of each theoretical body. In this sense, we can affirm that for these authors an institution is a limiting factor for human interaction. More precisely, in terms of D.C. North, institutions can be defined as abstract constraints imposed on human social decisions that structure political, economic, and social interaction. The rational agent finds limited its action and its spectrum of choices by institutions, which can be derived as much from the law as from custom, his habits, or his moral constraints.

However, the particular limitations that a particular person experiences are not relevant, but those that are incorporated into the behavior of a large number of human beings that interact with each other, which allows them to recognize a structural pattern of human social action. In this way, although an institution limits human action, because it is widespread throughout the social fabric, building it, it allows each individual inserted in such a set of interactions to represent expectations about the behavior of their fellow human beings that have a high probability of being true (something similar to what Friedrich A. Hayek had previously enunciated in his concept of “spontaneous order”). These expectations allow each individual to make plans with a high degree of probability of accomplishment, or at least to identify those actions that could be ruinous. In this sense, an institution is not only a limitation of human action, but, correlatively, a motivator for it, i. e. an incentive. The structure of human interactions that institutions project in the political, economic, and social fields helps the rational agent to make more efficient decisions, since they have a lower margin of risk. Of course, not all the incentives generate the same economic performance.

It is true that any pattern of human interactions that constrains the scope of choices of the agent (i.e., institutions), however inefficient they might be, represent an advantage over the total absence of it, since it works as a hedge against the arbitrary power and violence from third parties. Thus, the main distinction to be drawn is between anomie and institutionalization.

This latter opinion is expressly stated in Why Nations Fail: the extractive institutions -the ones that establish rules that favor a group at the expense of the whole-, both politically and economically, although they are harmful, are less so than civil war, polarization, factions, or anarchy. Acemoglu & Robinson argue that a country that does not have “inclusive” institutions, but at least have extractive institutions, might experience a rapid development obtained from the importation of discoveries from better organized countries – the phenomenon of “catch up.” However, after reaching a certain maturity, if the country in question does not advance towards political and economic opening, stagnation and subsequent implosion will be difficult to avoid.

Here is where the book of Acemoglu & Robinson finds its point of greatest affinity with the work of William Easterly: to continue on a path of growth and development, countries and their ruling classes must be willing to admit that progress only comes through innovation and that all innovation is accompanied by a process of “creative destruction.”

[Editor’s note: You can find Part 1 here. You can find the entire Longform Essay here.]

Nightcap

  1. James Buchanan calling the kettle black David Glasner, Uneasy Money
  2. The war that never ended Patrick Hagopian, History Today
  3. ‘The Mind of Pope Francis’ J Matthew Ashley, Commonweal
  4. Mueller’s done. What now? Samuelsohn & Gerstein, Politico

Three Lessons on Institutions and Incentives (Part 1): Introduction

There are books that are aimed at a spectrum of readers that are counted within the “well-informed public.” They are not books confined to academic circles, they are not for mass consumption, but they do concern problems that involve entire countries and are written in a register that involves certain intellectual training. In this genre, there are three works that have much to say about the relationship between institutions and incentives. The first of them dates from 1990 and was published by a Nobel Prize winner in Economics, Douglass C. North: Institutions, Institutional Change and Economic Performance, which elaborates the distinction between formal and informal institutions and incremental and disruptive institutional change, ending with a historical analysis that seeks to explain the differences in economic performance between the United States and Latin America. It is an academic book that can be approached by the said well-informed public.

Eleven years later, in 2001, William Easterly published The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. It is proposed as a political essay in which an economist interprets his own professional experience as a member of international teams for the development of Third World countries. To do this, drawing on the theoretical notions of other leading economists, such as Paul Romer (who later, in 2018, received the Nobel Prize in Economics), he makes an assessment on the development plans for the Third World that were implemented since the end of World War II. The central thesis of Easterly stresses that, in order to have an empirical relevance, every theory of development -or of the absence of it- must carry the following behavioral postulate: “people respond to incentives.” If this reality is not taken into account, there is no public policy that can be successful. The main lessons that can be drawn come from the theoretical instruments deployed to explain the political dynamics of most of these countries, particularly in regard to the phenomenon of polarized societies.

The third book to consider is also the more recent publication. Why Nations Fail, by Daron Acemoglu & James A. Robinson, was published in 2012 and reached the global debate on the realm of the well-informed public. The proportions achieved by the population of academics and professionals, in addition to the extension of the internet, allowed the aforementioned book to generate varied opinions along both traditional and digital media throughout the world. Acemoglu & Robinson dedicate their pages to those countries that were successful, as well as those that were not, but also here, in the case of this book, the most juicy lessons truly comes from the conceptual structure that articulates the whole book. Among such notions, we find those of inclusive and extractive institutions, which in turn are divided into political and economic institutions. The worst of the institutions are preferable to the total lack of institutions. Thus, a country organized around a closed political and economic system will be preferable to a failed state. However, once a certain degree of centralization and institutionality has been achieved, it is preferable to move towards a pluralist democracy and a competitive economy. The challenge is how to accomplish such transitions.

Since there are still four years left until the year 2023 – following the periodicity of the selected works – we are still in time to make a brief synthesis of the ideas that can be applied to the analysis of the impact of the institutions on economic and political incentives.

[Editor’s note: this is the first part of a rich series on institutions and incentives. You can find the full, Longform Essay here.]

Nightcap

  1. The strange relationship between virtue and violence Barbara King, Times Literary Supplement
  2. Nixon’s path to peace included bombing Cambodia Rick Brownell, Medium
  3. The suboptimality of the nation-state Branko Milanovic, globalinequality
  4. The threshold of land invasion Nick Nielsen, Grand Strategy Annex

Michel Temer, Brazil’s former president, sent to jail

Maybe Brazil is trying to set a record. With Luis Inacio Lula da Silva already sentenced, Michel Temer was sent to jail this Thursday. Temer was Dilma Rousseff’s vice-president and came to power with her impeachment in 2016. Temer is now also one of the prisoners made by Operation Car-Wash, formerly lead by judge Sergio Moro, currently president Jair Bolsonaro’s minister of justice.

Temer’s party, the MDB (until recently PMDB), is known for being a centrist party with little to none ideological leanings. In many ways, it is similar to Mexico’s Institutional Revolutionary Party. In his time in power, however, Temer made a fairly good job. Although not an enthusiast of free markets, he made some reforms that Brazil desperately needs, showing that only really radical people on the left deny that free markets are the way to prosperity. The problem is that Temer’s party is too deeply entangled in private interests (as his prison shows) to go deeper into the reforms the country needs.

The left’s standard narrative is that Temer made a coup in Dilma’s impeachment. Of course, nothing could be further from the truth. Brazil leftists are more and more like members of  Flat Earth Society. Temer was Dilma’s vice-president, and this alone shows that he could not be too far from corruption.

Overall, Operation Car Wash is already one of the greatest blows against corruption in Brazilian history. To have two former presidents in jail might be bad for other countries. But in Brazil, it is a reason to celebrate. The law finally applies to everyone and anyone.

Nightcap

  1. What are the real fault lines diving Americans? George Hawley, Law & Liberty
  2. Beliefs and interests Chris Dillow, Stumbling & Mumbling
  3. Can we trust deliberation priests? Robin Hanson, Overcoming Bias
  4. R. Kelly and mob justice Irfan Khawaja, Policy of Truth