A New Edition of the Handbook of New Institutional Economics
This post is cross-posted at How the World Became Rich
A new edition of the Handbook of New Institutional Economics, edited by Claude Ménard and Mary Shirley was recently published. And thanks to a generous donation from the Coase Institute, it is open access!
It was an honor to contribute a chapter (written with Desiree Desierto) on Institutional Change; I remember reading through the original edition (I think from 2005) as a graduate student. I’ve written about that chapter in detail here.
The Handbook retains the original chapters written by the four Noble laureates of New Institutional Economics: Douglass North, Ronald Coase, Oliver Williamson, and Elinor Ostrom but the rest of it is brand new and many of the chapters will be of interest to Broadstreet readers.
I’ve only glanced through the Handbook, but here are a couple of chapters that took my attention.
First, Claude Ménard and Mary Shirley discuss the range and scope of the New Institutional Economics (NIE). This is not an easy task, as the New Institutional Economics is no longer new. The seminal work by North, Coase, Williamson and Ostrom was published 60 to 30 years ago. In the meantime institutional analysis has become mainstream. Overall, Menard and Shirley have done a commendable job of surveying a large and increasingly sprawling literature. But I felt that it was a shame they could not get Daron Acemoglu and James Robinson to contribute. Their work is probably more representative of new work in institutional economics since the first edition of the Handbook was published in 2005.
Next, I found Roger Myerson on Local Politics in Nations and Empire of particular interest from the perspective of historical political economy. Myerson’s puzzle is how can national or centralized state effectively govern an extensive territory of heterogeneous individuals. This is tricky because:
“The establishment of a national state means imposing its national leaders’ authority over communities which may already have their own forms of local leadership with local political accountability (Murtazashvili, 2018; Myerson, 2022)”.
Power has to be delegated by the ruler. The question is who to delegate to?
Myerson considers two paradigms. The first is a centralized cadre of elites loyal to the center. Myerson calls these mandarins. Because their social and ideological ties are to the center and because they are rotated, mandarins cannot take a long-term perspective on the development on any one province.
In contrast, authority can be given to elites whose ties are local, namely the gentry. The gentry stay in their local area so they have a long-term interest in how it is governed. But they also need some of communicating with the center in order to influence policies.
For Myerson then the difference between a feudal monarchy and an absolute monarch is determined by the relative influence of the mandarins versus the gentry. Ancient Egypt for him is a clear instance of a mandarin state. In general, Myerson argues the role of the two types of elites are complementary so most traditional regimes rely on a mixture of the two.
This tension between mandarin rule and gentry-rule can be related to Machiavelli’s well known dictum that some states are easier to invade but difficult to conquer whereas others are difficult to invade but easy to conquer. (Machiavelli gives France during the Hundred Years War as an example of the former, and Persia before it was conquered by Alexander the Great as an example of the latter). Myerson notes that:
This distinction can be derived from the relative strengths of the local gentry and the central mandarin administration of a kingdom. A stronger gentry could retain a larger share of local revenues, leaving less resources for the central government’s defense of the kingdom’s frontiers; but in that case, a successful invader would meet continuing resistance from local leaders who were determined to defend their privileges of power.
Next Myerson considers the role of representative institutions. He sees this as a way of aligning local interests with those of the central state. In particular, it was the presence of towns in the English Parliament that would distinguish it from other representative bodies such as the Polish Sejm:
The fact that towns were represented in Parliament could make them more effective as engines of economic growth. Unlike the tradition in Spain, towns in medieval England did not have jurisdiction over the rural areas around them, and so the town councils and rural gentry each had their own representatives in the English Parliament.
Myerson then goes on to discuss the development of local political participation in the colonies of North America and then in the democratic United States. He makes the intriguing observation that while social scientists often associate a successful democratic with citizen’s voting rights in central elections,
[s]uch an assumption would ignore the historical fact that representative institutions of national democracy originally developed from institutions for maintaining a balanced working relationship between local community leaders and the state’s national leadership. A comparison between the American Revolution and the French Revolution provides further evidence of the potential importance of local political roots for successful national democracy.
He goes on to link this discussion with a more conventional account of federalism in the United States. The overall message is that the stability and prosperity of national states has historically depended on working with local elites. He concludes by pointing to how this insight might shape our understanding of recent failed attempts at democratic nation-building:
The need for deeper understanding of the foundations of successful democratic states was tragically demonstrated by the 2021 collapse of the US-supported Republic of Afghanistan, where the last President, Ashraf Ghani, had been widely regarded as an expert on fixing failed states. Ghani and Lockhart (2008) cogently argued that the ultimate goal of state-building assistance should be to help a country establish an effective government that is accountable to citizens. But from our perspective, serious questions should have been raised about whether effective democratic accountability could be achieved in a state that centralized all responsibility for government under one elected official, the President of Afghanistan, leaving no public responsibilities for local leaders who could be directly accountable to their communities.
This struck me as an important and original insight. And there are many more of these to be found in the rest of the handbook.