Topic 1a History & Theory

8/3/2019 Topic 1a History & Theory

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What is Economic History?

the study of long-term changes &transformations over decades oreven centuries

many questions open up includinginstitutional change, technical

change, the formation of values


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Economic History versus Economics

economic agents as managersmaximizing subject to constraints

entrepreneurs looking for ways tochange constraints


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Economic History & Path-dependency

economic history embracescomplexity

economic historians tend to argue

that how an economy functions inthe current state is a product ofhow it got to that state in the firstplace


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Path-dependency

you cannot understand x bysimply observing its characteristics

you need to understand how we gotfrom non x to x

capabilities & tipping points


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Economic theory loses its history

the real world is messy and noteasily subject to mathematical

analysis

solution starting in the 1870s wasto build model economies based

on assumptions and predict how

they work


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universal system rather than aparticular system

the theory was ahistorical and builtaround abstract individuals

the features and institutions of aspecific economy were lost

emergence of Real-World Economics

Mainstream economics truly is the

economics of nowhere.(p. 37)


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Complexity Economics

critical of equilibrium concepts

implicit in traditional economictheory

traces this back to Walras work inthe 1870s

to make models work they assumedself-interest, perfect information, no-transaction costs


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see the economy as always intransition and moving

the path is as important as the forcestowards equilibrium

traditional theory assumes aneconomy exists but how they arecreated

assumes wealth exists but how it iscreated


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It is important to note that the key

behavioral assumptions of Traditional

Economics were not developedbecause anyone thought they were agood description of real human

behavior; they were adopted to makethe math work in the equilibriumframework.

E.Beinhocker, The Origin of Wealth, page

118.


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Responses to Neoclassical Theory

anthropologist offered evidence that

societies do not create unlimitedwants

in some earlier societies theproblem was unlimited resourcesand scarcity of wants

rejected idea that humans are drivenby greed and insatiable needs


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Behavioral economists

The Selfish Pig ExperimentJohn offers to give Bob and Mary,two strangers, $5,000.

Bob decides how the money shouldbe divided, and Mary can either

accept this division or give themoney back to John.

What should Bob and Mary do?


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Political Economy and InstitutionalAnalysis

reject the idea of an ahistoricaluniversal economic model

Marx and idea that each socio-economic system had its own logicand contradictions

Veblen and the need to connect theindividual actor to specific

structures and institutions


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institutional theorists beginwith the institution, not theindividual, as the unit of analysis

this provides a framework for

explaining individual values

forces a focus on questions ofhistorical transformations andcrisis rather than equilibrium


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Move Wait

Move

Wait

Player B

Player A -1,-1

2,2

0,0

0,0

Market Game


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Move Wait

Move

Wait

Player B

Player A -1,-1

2,2

0,0

0,0

Market Game

optimal outcome


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Move Wait

Move

Wait

Player B

Player A 0,0

3,3

4,-8

-8,4

Co-ordination Game


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Move Wait

Move

Wait

Player B

Player A 0,0

3,3

4,-8

-8,4

Co-ordination Game

Sub-optimal outcome


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Implications of Mutual Dependency

individual maximization/minimizationmay lead to sub-optimal outcomes

role of strategic behaviour

mechanisms of co-operation, co-ordination & control

role of history and learning

role of institutions


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Institutions and Economic

Development institution are rules, customs and

practices that define interactionsbetween economic agents

they facilitate competition, co-

operation and control


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Types of Institutions

markets are one type of institutionalarrangement (price mechanism)

co-ordination institutions (trafficlights, wheat pools, central banks)

control institutions (monopolies,patents, unions, corporations)


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institutions can be beneficial to allin society resolving co-ordinationand prisoners dilemma games

they can also be exploitive, forcingsome agents into strategies thatare sub-optimal


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Neo-classical Calculus of Institutions

Davis and North

agents invest in institution building

when the group payoff exceeds thegroup costs

Theory has trouble dealing withinstitutions that produce publicgoods


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Institutions that Produce PublicGoods

state/taxes defense, police,public health, education

peace movement

subway systems

political parties

trade unions


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Why Do These Institutions Exist?

A neoclassical world would be a

jungle and no society would beviable.

Douglas NorthInstitution building always has adegree of politics and power as afactor


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Economic History is Economic

Theory the argument that theory needs to

be rooted in specific socio-economic systems makes the studyof history a different approach totheorizing


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A Brief History of Market Individualism

today the dominant global economicideology is one of individualism &

market regulation

this is a very recent development (late18th century) (Hobbes, Locke, Smith)

prior to this the dominant ideology wasone of collective responsibility and

collective ownership (religious or

secular)


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Rise of Market Economies

18

th

century witnessed the rapidextension of market mechanisms

(Britain)

Also witnessed the rapid growth of thestate to facilitate and regulate market

exchanges

State had to protect, regulate,subsidize, standardize and intervene

to make markets work


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Canada and the Emergence ofMarket Individualism

Canadian economic history spansthis divide

native societies were pre-market

individualism (but not pre-trade)

the roots of Canadian values fromthe earliest settlers (pre-1800)were also pre-market individualism


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Further ReadingDouglas C. North, Structure and Change in Economic

History, (New York, 1981).

R.E. Solow, "Economics: Is Something Missing", in W.N.Parker (ed.), Economic History and the ModernEconomist, (Oxford, 1986).

Geoffrey M. Hodgson, Economics and Utopia: Why theLearning Economy is Not the End of History, (London,1999).

Eric D. Beinhocker, The Origin of Wealth; Evolution,Complexity, and the Radical Remaking of Economics,(Boston, 2006).

Stephen A. Marglin, The Dismal Science: How Thinking

Like an Economist Undermines Community (Boston, 2008)


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Topic 1a History & Theory

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