Economic Analysis of Institutions and Systems.

Author:Stanfield, James Ronald
 
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Pejovich's volume reads as a collection of essays rather than as a book. The essays are divided into parts that examine institutions and property rights, property rights exchange and production, and the firm. The initial two chapters provide a brief statement of the problem of choice and a synoptic overview of the emergence of capitalist and socialist ideologies.

Chapter 3 defines institutions as the "legal and customary arrangements for repeated human interactions" [p. 30] whose major function is to "enhance the predictability of human behavior." An interesting distinction is made between the "French or rationalistic tradition," with its penchant for exogenous rule-making, and the "British or empirical tradition," characterized by endogenous, spontaneous, and non-compulsory rule-making [pp. 33-6]. It is clear that Pejovich, along with Hayek, favors the British approach, but beyond that the discussion is not sufficiently elaborated for the reader to form a useful conception of the issues. Chapter 4 asserts the efficiency properties of law made by judicial precedent as opposed to legislation by parliamentary bodies. Chapter 5 asserts the strength of private property rights in terms of efficiency and the restraint of political power.

Chapters 6 and 7 examine the significance of transaction costs in exchange, including the observation that although positive transaction costs may prevent resources from being allocated to their most valuable applications [p. 100], capitalism is nonetheless an efficient system in the sense that it institutionalizes a persistent effort to increase the extent of the market [p. 105]. Chapter 8 examines restrictions on exchange, including price controls, rationing, and discrimination; Pejovich observes counter-empirically that the last will be eliminated by competitive self-interest [p. 127]. In an unusual stylistic twist, Chapters 7 and 8 conclude with unannounced reprints of essays by James Buchanan and Henry Manne. Chapter 9 discusses the command planned economies (CPEs), observing that they were not historical mongrels, but the direct results of the premises of socialist doctrine [p. 142]. The principal conclusion otherwise seems to be that the CPEs suffer inordinately high transaction costs. Chapter 10 discusses innovation, with no apparent connection to transaction costs analysis, but makes the admirable point that the "larger the number of people who have the freedom to innovate, the higher is the probability...

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