Intangible Wealth and Institutional Economics

This study sure plays havoc with Bryon's arguments that education adds no value.

As a very young economist at M.I.T. 25 years ago, I thought all of this was patently obvious. Yet the profession seemed to be locked into post WWII leftism. Even Solow, after his basic model showed that about 2/3 of growth could not be accounted for by capital accumulation, still talked as if policies related to capital accumulation were the key to labor productivity. Even 25 years ago, a simple comparison of countries around the world showed the role of entrepreneurial capitalism vs. either natural resources or government programs to generate quality living stands. What's amazing is that the the profession has taken so long coming to this point - if it is indeed believed widely.

Gary Jefferson at Brandeis teaches a course on NIE and growth issues: Comparative and Institutionalist Economics.

One of the difficulties for the NIE has been formalizing and mathematizing the core insights of Coase, North, Olson, etc. Even when they said useful things, the NIE was kept out of the top journals and is still mostly absent except tangentially through Acemoglu, Robinson, and Shleifer's more mainstream work on institutions.

Fortunately, the US academic network has always been broad enough that the big three above plus Buchanan, Williamson, Barzel, and early rational choice pioneers (in polisci) such as Ostrom, Riker, Bates, Weingast, Ferejohn, etc. continued to produce good work and train students in the period from around 1965-1990 even when they weren't members of the top five departments.

It just took awhile for the insights to be absorbed, and it helped to relabel all of them into an NIE "movement". I think that the World Bank and other big money centers will be spinning off empirical work based on the core NIE ideas for at least another generation.

The International Society for New Institutional Economics has a good reading list at http://www.isnie.org/links.htm.

The lack of concern for institutions is what caused the failure of Sachs's reforms in Russia. His ideas would have worked well had the country possessed the institutions of the rule of law, honest judges and police, and protection of private property. At the time, Russia didn't even recognize private property. Had Sachs understood the importance of institutions, he would have encouraged the Russians to work on those before implementing the financial reforms.

Roger -- Thanks for the link and for the info on the other thread as well.

The next step shall be quantify the value of political leadership.

I am not sure if it is relevant, but Sharon doubled the value of the Israeli stock exchange. Come a cleptocrat leader like Mobutu and the million sq. km. of Zaire (Congo) with its diamond mines and other natural resources, is soon worth - nothing.

I like this discussion.

What is the definition of an institution?

Is General Motors an institution?

Is Marriage an institution?

What are the forces that seek to tear down our institutions?

Daveg,
Institutions can be formal, such as our Constitution, structure of government, laws, the Supreme Court, etc., or informal, such as attitudes toward the law, education, bribery, trust, etc. The World Bank book cited above has good definitions.

There's a small group of sociologists led by Lawrence Harrison and Samuel Huntington that link culture as the source of institutions. They've written the book Culture Matters: How Values Shape Human Progress.

A reliable social arrangement is an institution. Anything you can say with confidence that it will be valid in the future.

Marriage, a steady arrangement between two partners, with sexual and reproductive and children rearing etc. understandings (normally carrying social rewards and punishments) is an institution. Should be hunger in the land, my wife and me will share our food.

According to Encarta Dictionary an institution is:

1. Important Organization(s) such as a bank, college, or hospital

2. Established Practice (Supreme Court Precedents, Marriage)

3. Starting of Something (a bill being instituted in Congress)

4. Long-established person or thing (Our Constitution or belief in the rule of law)

There are two more, but they can be fitted under #1.

Reading Terry Pratchett, institution may be defined as a shared, accepted fantasy.

The Encarta definitions are not those used in the NIE. The usual definitions are closer to #2 and #4 (persons are excluded). See North's work. Number 1 is usually considered an Organization not an institution. So the US legal system is an institution, but the World Bank is an organization.