Preferences and Situations: Points of Intersection Between Historical and Rational Choice Institutionalism.

• Author: Munger, Michael C.
• Position: Book review

Preferences and Situations: Points of Intersection Between Historical and Rational Choice Institutionalism Edited by Ira Katznelson and Barry Weingast New York: Russell Sage Foundation, 2005. Pp. viii, 345. $45.00 cloth.

Institutions, according to Douglass C. North, are humanly devised rules of the game, consisting of formal rules and informal norms that govern individual behavior and structure social interactions. This definition settles the question of whether institutions matter because only those humanly devised rules that govern behavior or structure interactions qualify as institutions.

But how do I tell if a rule or a norm is an institution? And why does a society at a certain point in time have one set of institutions rather than another? Do institutions reflect current socioeconomic conditions, or do they persist after the conditions that gave rise to them have changed? Are institutions the means by which agreements, morally defensible or not, are guaranteed and maintained over time?

Preferences and Situationsis a timely and important book, but its subtitle, invoking "points of intersection" between different approaches to understanding and studying institutions, is somewhat misleading. Sometimes when two academic regions share a border, they do not intersect so much as they come to resemble a disputed border like Kashmir's: an area of smoking ruins, claimed by both sides in such strong terms that neither can concede without loss of face.

In my view, every society faces three fundamental problems of design:

1. Collective choice: I want, you want, but what do we want? Does a collective desire even exist, or must you and I simply fight over the outcome?

2. Information and transactions cost: Even if we know what we want, how does each of us know what to do? Who directs us and how?

3. Collective action: even if I know what we want and I know what to do, why will I do it? Why don't I just sit back and let others provide for my wants?

Any system of social organization must supply answers to these questions. Markets perform reasonably well on numbers 1 and 2 without coordination, but may fail on number 3 if basic police and territorial control services are not provided. Dictatorships solve number 1 by making the dictator the "we" and solve number 3 through the lash, but command economies fail to direct individuals, owing to their inability to account for the specific information of time and place (see F. A. Hayek, "The Use of Knowledge in...