14.5.03

THE EVOLUTION OF COOPERATION. Professor Farrell offers some thoughts on institutional economics and the evolution of governance structures. Evidently one of the central parables of political science is the parable of the offer you can't refuse. His post asks an interesting question, "where's the 'free market' in institutions?" and notes, "there are an awful lot of institutional arrangements out there that demonstrably have very little to do with efficiency or transaction cost reduction, and an awful lot to do with furthering the interests of social elites. Just look at the pervasiveness of corruption in various societies in the developing and developed world, at the practices of authoritarian regimes, and so on." Let's see, isn't the beginning of libertarianism consciousness the recognition that a protection racket with badges and regulations still a protection racket? But I digress. There is a continuum of governance structures, with the Ba'ath regime recently ejected from Iraq and the Sicilian Mafia at one end, and Milwaukee in the middle 1950s at the other, with Cicero, Illinois, and Milwaukee in the early 2000s somewhere between. There is also some research that connects the evolution of more transparent institutions with prosperity (see Rosenberg and Birdzell, How the West Grew Rich (you'll also find some interesting nuggets about the separation and transference of risk, but without transparent institutions good luck enforcing an insurance policy or a futures contract.) As a first cut, the "free market" in institutions is the movement of people from less-transparent to more-transparent governance structures. Lots of room for cross-disciplinary conversation here. Lots of promising economic work that fits in: on one hand there's David Friedman's Law's Order; on the other there's a whole bunch of technical stuff here (via Legal Theory, note presence of authors recommended here, somebody did a good job as seminar coordinator). Hal Varian (via Newmark's Door) looks at an expansion of markets and suggests, "Markets may be able to aggregate expert opinion in ways that help voters form beliefs about the likely consequences of various decisions." (This Virginia Postrel post might be of passing interest.)

All of this leads back to the behavioral economics course recently rejected at Harvard. Do you judge a model by the realism of its premises? What credence do you put on econometric estimates of cost functions if you reject concavity in prices? And what do you put in its place? There are certainly some things I don't understand about evolutionary stable strategies, but perhaps that's the best place to start. Breaking free of restrictive institutional structures (throwing off ad-hoc Mob rule for consent of the governed?) poses a somewhat harder problem.

UPDATE: Professor DeLong has some potentially germane observations about the emergent absolutist state.

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