Economic Analysis of Institutions and Systems.

• Author: Eggertsson, Thrainn

By Svetozar Pejovich Dordrecht: Kluwer Academic Publishers, 1995. Pp. x, 231. $84.00 cloth.

In his Knowledge and Persuasion in Economics (New York: Cambridge University Press, 1994) Donald McCloskey wrote affectionately of the Good Old Chicago School of Economics. The book under review belongs to another cherished tradition, the Good Old Property Rights School of Economics, a first cousin of the Chicago School. Although many people complain that recent studies in economic theory often have little relevance to actual economic systems, the Good Old Property Rights School cannot be accused of irrelevance. The use of simple economic theory has seldom produced more powerful and important results than did the early property-rights analysis of the Soviet enterprise and the labor-managed firm by scholars such as Svetozar Pejovich and Eirik Furubotn. Their joint survey of the property rights literature ("Property Rights and Economic Theory: A Survey of the Recent Literature," Journal of Economic Literature 10 [December 1972]: 1137-62) is a modern classic. The empirical evidence on the Soviet enterprise and the Yugoslav labor-managed firm is now clear to (almost) all, and the evidence supports those early studies.

The renaissance of institutionalism in the last quarter of the twentieth century has fostered many different approaches. Scholars who draw on rational choice (purposeful behavior) and methodological individualism have struggled primarily with two major questions: (1) What institutional arrangements maximize wealth, and what are the consequences of deviations from optimal arrangements? and (2) What determines the choice of institutions, particularly in the political domain?

Studies that deal with both these issues have combined economic analysis, usually flavored with property rights and transaction costs, and rational-choice political science (and to some extent rational-choice sociology and anthropology). Pejovich's book deals primarily with (1), the consequences of institutional arrangements, and the book's strength lies not in an exhaustive survey of recent work but in a vivid, compelling, accessible, and often outstanding analysis of the role of incentives and transaction costs in economic life. The book provides intelligent people everywhere with a clear and reader-friendly introduction to the nature of economic systems.

In an effort to establish the link between institutions and wealth, the author examines how alternative...