Institutions and economic growth: sharpening the research agenda: remarks upon receipt of the Veblen-Commons award.

Author:Nelson, Richard R.

After a long hiatus, "institutions" again is a fashionable term in the vocabulary of professional economists. Indeed, there is widespread agreement that the right institutions are the key to economic productivity and progressiveness, but beneath this apparent consensus lies something of a muddle. There are several different definitions of what institutions are and what they do. Most analyses that purport to identify the "right" institutions are superficial and unpersuasive. And, there are serious questions regarding why societies have the institutions they do at any time and their ability to deliberately improve them.

My argument is that the conglomerate of things different economists have called institutions largely reflects the fact that many different kinds of structures and forces mold the way individuals and organizations interact to get things done. Many different institutions are needed, and the institutions that are effective are very context dependent.

I argue that economic growth involves the co-evolution of technologies and the institutions needed for their effective operation and advancement. Some institutions provide the broad background conditions under which technological change can proceed, and others come into existence and develop to support the important new technologies that are driving growth. Institutional change, and its influence on economic activity, is much more difficult to direct and control than technological change, and hence prevailing institutions are often drags on economic productivity and progressiveness.

Unpacking the Concept of Institutions

First of all, there is the question: what are institutions? Many scholars of institutions propose that institutions should be understood as "the basic rules of the game," the broad legal regime and the way it is enforced, widely held norms that constrain behavior, etc. (North 1990). Other scholars associate institutions with particular governing structures molding aspects of economic activity, like a nation's financial "institutions," or the way firms tend to be organized and managed (Williamson 1975; 1985). Still other social scientists associate the term institutions with customs, standard and expected patterns of behavior in particular contexts, like the acceptance of money in exchange for goods and services (Veblen 1899). The conception here is with the ways things are done, rather than broad rules or governing structures that constrain behavior; although these things are connected, they are somewhat different. Also, while many authors use the term "institution" to refer to somewhat abstract variables, like the consistency and justice of the rule of law in a society, or the general use of money in exchange, other scholars associate the term with particular concrete entities, such as the Supreme Court of the United States, or the Federal Reserve System.

Certainly we have a wide range of "things" here. This diversity of meanings, and analytic foci, makes coherent discussion about the nature and role of institutions difficult.

If the research by individual economists and other social scientists on the nature and role of institutions in long run economic development is to go forward in a way that is coherent and cumulative, there clearly needs to be more shared agreement regarding just what the term "institutions" is presumed to mean, and how they affect economic activity. The position I want to espouse here is that the most useful conception of what institutions are would encompass a wide range of somewhat different things, but with different ones relevant in different analytical contexts. The unity and focus of the research program would be provided by agreement on what institutions broadly do.

Bhaven Sampat and I have proposed (Nelson and Sampat 2001) that despite the diversity in the literature regarding how institutions are defined, a large share of the writing is intended to illuminate the factors molding the goal oriented behaviors of economic agents in contexts where the actions of several parties determine what is achieved. The authors generally take the position that the simple lean theory contained in standard raicroeconomics of the forces determining modes of transacting, economic interacting more generally, leaves out important constraints, pressures, and mechanisms, and introduce the concept of "institutions" to fill in the gaps they see, or in some cases to provide a quite different theory of the determinants of behavior. The objective of virtually all of the authors is to use the concept of institutions to provide a better explanation of why modes of interactive behavior of economic agents differ across countries and over time in ways that profoundly affect the effectiveness of economic activity. The different concepts of institutions that one finds in the literature partly reflects the particular economic phenomena the authors are focusing on, including whether the phenomena are broad and pervasive or more specific to particular sectors and activities, partly the particular "institution" they are analyzing, and partly where they choose to apply the "institutions" term in the chain of logic they are proposing.

Sampat and I proposed that the concept of a "social technology" was a useful one for making the writings about institutions more coherent. Our social technologies concept involved a broadening of the way economists think about an economic "activity."

In its standard use in economics, an activity is thought of as a way of producing something, or more generally doing something useful; Sampat and I take a broad view of what the term encompasses. Undertaking an activity or a set of them--producing a radio, growing rice, performing a surgery, baking a cake, procuring a needed item, starting a new business--involves a set of actions or procedures that need to be done, for example as specified in a recipe for the preparation of a cake. These steps or procedures may require particular inputs (like flour and sugar for the cake, cash or a credit card to procure the ingredients for the cake), and perhaps some equipment (something to stir, a stove, a vehicle to go to the store). Economists are prone to use the term "technology" to denote the procedures that need to be done to get the desired result.

However, a recipe characterization of what needs to be done represses the fact that many economic activities involve multiple actors, and require some kind of a coordinating mechanism to assure that the various aspects of the recipe are performed in the relationships to each other needed to make the recipe work. The standard notion of a recipe is mute about how this is done. Sampat and I proposed that it might be useful to call the recipe aspect of an activity its "physical" technology, and the way work is divided and coordinated its "social" technology.

From this perspective, virtually all economic activities involve the use of both physical and social technologies. The productivity or effectiveness of an activity is determined by both aspects.

The social technologies concept does not include all of the kinds of behavior that at least some of the writings on institutions appear to want to encompass, but I propose that it does include a large part of the spectrum most relevant to the analysis of economic productivity and progressiveness. The "technology" part...

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