1. CONSTITUTIONAL POLITICAL ECONOMY AND HISTORICAL ANALYSIS
Historical Analysis
Rules, Institutions,
and Social Institutions
Institutional
Theory
Modern Institutional Theory
Constitutional
Economics
Public Choice
Summary
CONSTITUTIONAL POLITICAL ECONOMY AND HISTORICAL ANALYSIS
The task in this chapter is to discuss, briefly, the general type
of theoretical approach used in this study. My theoretical explanation
of the rise and the decline of the Icelandic Commonwealth is founded in
modern institutional analysis. My purpose is to explain the history of
the Commonwealth, but in doing so I explain how institutions arose and
changed during this period. In other words, I will be telling the institutional
history of the Commonwealth, and not the history of any particular individuals
or events. My approach is an institutional analysis of the medieval Icelandic
experience.
I claim in this chapter, as have several new schools of economists, that without institutional analysis economic theory is incomplete. In particular, I argue that without institutional analysis economics as perceived by mainstream economists cannot throw much light on history. The essence of doing proper empirical work is to explain how institutions are shaped and how they themselves shape the choices of agents.
The chapter will give support to my argument by explaining the relation between institutional analysis and history. Next I explain what we refer to as "institutions" and 1"institutional theory." Finally, I discuss modern political economy, in particular, constitutional economics and public choice theory, since my approach is derived from these schools of analysis.
INSTITUTIONS AND HISTORICAL ANALYSIS
The significance of institutional analysis is best demonstrated
in the role it plays in empirical work. One could even go as far as to
say that without accounting for the role institutions play in every historical
situation there would be no history. There would be no history of how the
economy developed and how society evolved, there would only be the biographies
of individuals and "freeze-frame" pictures of choices in different periods.
What institutional theory and analysis adds to a historical study is a
`window' of perception, through which we can understand why and how choices
were made the way they were, and the consequences of those choices. By
incorporating institutions into our study, we can begin to understand why
an economy developed or regressed, or why a society was stable or unstable.
Institutions allow us to tell an institutional history; a history with
a continuum. The continuous development or incremental change in institutions
allows us to connect periods of history together, learning both how institutions
change and what consequences the institutional changes have on economy
and society. We can understand how and why certain institutions came into
place, whether as the result of an organized effort on the part of some
or all members of that society, or as an unintended consequence of some
behaviourial pattern. Institutions reveal the relation between the polity
and the economy, and the way these influence and effect each other. Through
the study of institutions and a historical analysis of them we understand
why people constrain themselves in those particular ways and not some other
way. Or, as North says:
The incorporation of institutional theory into historical analysis
not only allows us to understand the role of institutions better, it allows
us to understand history and theory better. Theoretical analysis gives
us conception of history, it allows us to determine what the facts are
and how to arrange them in sets so they make a coherent story. But the
historical knowledge that we gain through theoretical analysis also allows
us to theorize better. In the same sense that there is no history without
theory, so it is that there is no theory without history.1
We have a circle; theory informs history, which in turn informs theory.
It is not the purpose of institutional theory to replace orthodox price theory. In fact institutional theory should be thought of as complementary to price theory; without institutional analysis price theory is incomplete. The relation between the two is circular; institutional theory and price theory inform each other.
RULES, INSTITUTIONS, AND SOCIAL INSTITUTIONS
Modern institutional analysis is concerned with the role of institutions
in economics. This new subdiscipline analyzes how and why institutions
emerge, and how they evolve, change, and are comparable to each other.
We now have to define what we take "institutions" to be, or how we define
them.
Institutions can be defined in several ways, distinguished mainly by how broad or narrow one's analytical needs are. A narrow definition might claim that institutions include all "physical" phenomena, such as the Federal Reserve System, the Congress, the courts, firms, museums, the United Nations, the state, etc. This definition would exclude all "non-physical" phenomena, such as morals, manners, culture, language, etc. A broad definition, on the other hand, would include all "physical" and "non-physical" phenomena, ranging from lighthouses to manners, as long as some routine or rule-following behaviour were involved.2
Using this broader definition, which I adopt, it might be more proper to speak of "Social Institutions" rather than just "institutions." The term "social institutions" incorporates all institutions, whether economic or other, all rules, whether statutory law or morals, and all routine or rule-guided behaviour, whether cultural or personal rules are involved. This last part is the essence of the term; a social institution is any behaviour of an individual or individuals that is based on either a routine or rule-guidance. Under this broad definition the terms "rules," "institutions," and "social institutions," are interchangeable; they all refer to the same sort of behaviour. Having defined institutions, let us now turn to the question of why institutions matter for the study of economics.3
The best way to answer the above question of what "institutions"
are, is to explain what the purpose of institutions are. Institutions are
created through, or with the intention of providing, routine behaviour.
They are intended to provide some certainty in an otherwise uncertain world,
to provide stability. In providing stability, institutions allow an individual
to either adopt or refrain from certain form of behaviour and to allow
the other individuals to form expectations about her behaviour. Without
institutions individual behaviour would be chaotic; without routine expectations
would be hard or impossible to form.4
Individuals want stability to be able to form expectations of how other
people will or will not behave. To get this stability they are willing
to constrain themselves or be constrained. It is the task of institutional
theory to analyze how individuals constrain themselves, how institutions
emerge, evolve, and change, and how they compare with alternative institutions,
whether former institutions or imagined ones. Understanding how people
constrain themselves and how they might alternatively do so, helps us understand
why their choices are what they are and how they could be under different
institutional arrangements. Orthodox economic theory teaches us how individuals,
under given constraints, make choices. Adding institutional theory to the
orthodox theory, teaches us how choices will differ depending on the institutional
arrangement. Institutional theory and orthodox theory are complementary,
and together they help the economist answer criticisms from other disciplines,
claiming that economic theory only holds in a certain institutional environment.
As North states:
Modern Political Economy is a new subdiscipline within economics. It is actually a broad field of study that incorporates rather diverse schools of thought. Over the past several decades a whole array of schools within economics have appeared. These schools have gone under various labels, including: Public Choice, Property Rights School, Transaction Costs Economics, the New Economic History, Law and Economics, and Constitutional Economics. Sometimes more broadly encompassing labels have been used, such as Institutional Economics, New Institutional Economics, New Political Economy, Constitutional Political Economy, and Neoinstitutional Economics.
Modern Political Economy may, on the other hand, be said to originate
in the works of the Scottish Moral Philosophers and particularly in the
work of Adam Smith. As Buchanan says:
Despite differing and sometimes conflicting labels, all of these
schools of thought, which we in sum have called the Modern Political Economy,
are alike concerned with the role of institutions in economics. In one
way or another, all try to explain why and how institutions and rules emerge,
and how they evolve, change, and are comparable with each other. Except
for the "Old" Institutional school, all schools incorporate the rational
choice model or homo economicus into their analysis.6
Yet, though the task of the various schools is for the most part similar
and the schools' paradigms incorporate the same hard core principles, there
are notable differences. Some, such as the Property Rights School, focus
more narrowly on the institutions of property, and others, such as the
Transactions Costs school, more narrowly on the costliness of exchanges.7
Instead of a detailed discussion on each of these schools I will focus
on two of these schools.
Economics, especially the neoclassical tradition, focuses on the
choices of individuals. These choices are postulated as being constrained
in one way or another, such as by nature, budgets, prices, rules, and institutions.
These constraints are taken as givens and individuals can only make choices
within these boundaries. No attempt is made to explain why any of these
constraints are there, nor is the question asked whether some of these
constraints are determined or are there by choice. It seems absurd to the
orthodox economist that people might actually choose to constrain their
own behaviour and choices. Scarcity, according to orthodox economics, is
the basis for choice, and overcoming scarcity is basically the motive for
behaviour. The idea that people may actually choose to artificially increase
the degree of scarcity has not found a place within orthodox economics.
At this point Constitutional Economics enters the arena.9 Constitutional Economics focuses on how constraints come into being; how rules and institutions are chosen. As Buchanan says, in moving "beyond the models of orthodox economics....we observe that individuals do, in fact, choose their own constraints, at least to a degree and within limits" (1990:3). It is the task of Constitutional Economics to explain why and how individuals come to choose one institutional arrangement, rather than another: "The whole inquiry involves the study of rules, how these rules work and how rules might be chosen" (Buchanan 1990:2).
Constitutional Economics does not claim that orthodox analysis is unimportant or useless, but rather that it is incomplete. Analyzing how individuals make choices within a given institutional setting is in a way a trivial study; explaining these choices and their results in different institutional settings, by comparison, is of real significance. The latter paradigm helps us understand why and how people come to adopt one set of rules and institutions rather than some other.
Not only has orthodox economics confined itself to analyzing choice
within given constraints, but, further, economics has traditionally focused
on individual choice in a market setting. In such a setting individuals
are constrained by budgets, prices, and other market institutions, and
they make choices and exchange with each other on the basis of these monetary
terms. What public choice adds to conventional economics is its focus on
hampered markets and politics; in other words, non-market settings. The
novelty of the public choice approach is that it asks us to view politics
as a market setting; the political market. Instead of viewing politicians
and bureaucrats as altruistic, it postulates that these actors have the
same motives for behaviour as do actors in market settings. At the same
time, it recognizes that the incentives for choices in a non-market or
political market may differ from those in a market setting.
Although public choice focuses on non-market and political market settings it does not intrude on the field of political science. Rather, it adds to the study of political science. Political science views politics as a conflict where one side or the other comes out on top. Public choice, like economics, emphasizes the cooperative element of politics, where actors exchange with each other. Instead of viewing a political outcome as a triumph for a particular group, public choice may look at the outcome as a cooperative solution, where most or all groups got something they wanted. Public choice can also analyze conflicts, as economics analyzes market rivalry.
Together, public choice and constitutional economics, give us an alternative paradigm by which to study politics and other non-market settings. Together these analyses add to the field of economics by explaining how constraints come into being, how they work, how they change, and how they are comparable. The areas in which these emerging fields add to the inquiry are properly viewed as the extension of the economic paradigm. Constitutional Political Economy should also be viewed as necessary for a more complete analysis of the market and social order. Without the fields of Constitutional Economics and Public Choice, the question of how a market order comes into being, evolves, and declines may not be properly understood. More generally, with the addition of these fields, the study of how social order is possible and comes about may be more fruitfully answered.10
The Constitutional Political Economy of the Icelandic Commonwealth is what this study is all about. The theory I construct in this study and then use to explain the institutional structure of medieval Iceland, falls squarely within the paradigms of Constitutional Economics and Public Choice.
bibliography
chapter 2
_______________________________
1 Theory here, of course, refers to institutional theory.
2 There should be no need to underline the fact that
in theory building, such as institutional theory, institutions are created
as "ideal types", and the historian will analyze institutions as ideal
types. "The characteristic mark of an `ideal type'...is that it implies
some proposition concerning valuing and acting... When it refers to institutions,
it implies that these institutions are products of uniform or similar ways
of valuing and acting or that they influence valuing and acting in a uniform
or similar way" (Mises 1957:316). "The service a definite ideal type renders
to...the historian in his analysis of the past is dependent on the specific
understanding that led to its construction. To question the usefulness
of an ideal type for explaining a definite problem, one must criticize
the mode of understanding involved" (Mises 1957:319) "Ideal types are expedients
to simplify the treatment of the puzzling multiplicity and variety of human
affairs. In employing them one must always be aware of the deficiencies
of any kind of simplification" (Mises 1957:320). "In acting-in their daily
routine, as well as in technology and therapeutics, and also in history-people
employ `real types,' that is, class concepts distinguishing people or institutions
according to neatly definable traits" (Mises 1957:315). "The simplest way
to describe the relationship between the analytical social sciences (praxeology)
and the various kinds of history is in terms of the respective parts they
play with regard to the production and use of ideal-typical conceptual
schemes. Briefly, the former produce and the latter use them. They are
used, as it were, as a foil against which to hold `real events', so as
to bring out particular properties of the latter by comparison" (Lachmann
1986:34) For an excellent discussion on the relation between ideal-types
and rules (institutions), see Horwitz (1989).
3 Although it is important that the reader know what
I am referring to when I speak of institutions, my study, as such, is not
concerned with arguing for one definition rather than another. Neither
is my concern with why it is that individuals adopt routine and rule-following
behavior, i.e. establishing institutions. I take it as a given that people
establish institutions and my concern is how they do it, not why they do
it. For those interested in pursuing this latter avenue should consult
the following literature: Vanberg (1988;1989), Heiner (1983;1990), Schotter
(1981), Langlois (1986), Hayek (1967;1973), Nelson and Winter (1982), Horwitz
(1989), and Ullman-Margalit (1977). (There are actually several "why" questions.
The first is why an individual is willing to follow rules himself, another
is why he wants others to follow rules. The former question is dealt with
in the literature listed above, while the latter will be discussed below.)
4 This is the second "why" question, and the answer. For an excellent
discussion of the role of institutions and rules, see Horwitz (1989) and
Hayek (1973).
5 "The subject matter is not new or novel, and it may be argued that
`constitutional economics' is more closely related to the work of Adam
Smith and the classical economists than its modern `non-constitutional'
counterpart." (Buchanan 1987c:584)
6 On the methodology of Constitutional Political Economy,
see Brennan and Buchanan (1985). On the methodology of neoinstitutional
economics, see Eggertsson (1990). On the different methodological approaches
of the `Old' Institutionalist and the New, see Vanberg (1988).
7 On these various schools see: Buchanan (1987c;1990) on constitutional
economics, Mueller (1989) and Buchanan (1984) on public choice, Hodgson
(1988) on institutional economics, Langlois (1986) and Schotter (1981)
on new institutional economics, Eggertsson (1990) on neoinstitutional economics,
North (1990) and North and Thomas (1973) on the new economic history, Alchian
(1965), Demsetz (1967), Alchian and Demsetz (1973), Pejovich (1972), and
Furubotn and Pejovich (1972) on the property rights school, and Coase (1960)
and Posner (1981) on law and economics.
8 Although Buchanan uses the terms Constitutional Economics
and Constitutional Political Economy synchronously, which I do not, and
in a `narrow' definition, i.e. seperating this school from the others mentioned
above, he does allow for a more `wider' definition: "In continental Europe,
the whole set of subdisciplines is included under the rubric `The New Political
Economy'. Within this set we can place (1) Public Choice, from which Constitutional
Economics emerged; (2) Economics of Property Rights; (3) Law and Economics
or Economic Analysis of Law; (4) Political Economy of Regulation; (5) the
New Institutional Economics, and (6) the new Economic History. Defined
imperialistically, Constitutional Economics would parallel the inclusive
term and embrace all of these programmes, since some attention is drawn
in each case to the legal-political constraints within which economic and
political agents choose. (Buchanan 1987c:586) By Constitutional Economics,
I refer to this wider or imperialistic definition of the field. Constitutional
Economics, for me, refers to all choices by agents at the constitutional
or meta-rule level. I do seperate Public Choice theory from this and to
me it refers to all choices, in non-market settings, within the constitutional
or meta-rule constraints. Together, Constitutional Economics and Public
Choice, I refer to as Constitutional Political Economy.
9 "By both contrast and comparison, constitutional
economic analysis attempts to explain the working properties of alternative
sets of legal-institutional-constitutional rules that constrain the choices
and activities of economic and political agents, the rules that define
the framework within which the ordinary choices of economic and political
agents are made. In this sense, constitutional economics involves a `higher'
level of inquiry than orthodox economics; it must incorporate the results
of the latter along with many less sophisticated subdisciplines." (Buchanan
1987c:585)
10 "The major contribution of modern Public Choice, as a subdiscipline
in its own right, has been that of endogenizing political decision-making.
In its direct emphasis, public choice theory examines the political decision
rules that exist with a view toward making some predictions about just
what sort of tax institutions or tax instruments will emerge. Constitutional
Economics, as an extended research programme that emerges from Public Choice,
goes a step further and uses the inputs from both neoclassical economics
and public choice theory to analyze how alternative political rules might
generate differing tax rules." (Buchanan 1987c:587)
EasyHelp/Web from Eon Solutions Ltd
(Tel: +44 (0)973 209667, Email: eon@cix.compulink.co.uk)
http://www.eon-solutions.com