Invisible Hands, Russian Experience, and Social Science: Approaches to Understanding Systemic Failure Hardcover by Stefan Hedlund

Author:Stefan Hedlund
Language: eng
Format: mobi, pdf
Tags: Economic development – Russia (Federation), Economics, Financial crises, Economic History
ISBN: 9780521768108
Publisher: Cambridge University Press
Published: 2011-06-19T18:30:00+00:00

Cambridge Books Online

http://ebooks.cambridge.org/

Invisible Hands, Russian Experience, and Social Science

Approaches to Understanding Systemic Failure

Stefan Hedlund

Book DOI: http://dx.doi.org/10.1017/CBO9781139003612

Online ISBN: 9781139003612

Hardback ISBN: 9780521768108

Chapter

6 - Institutional Choice pp. 167-196

Chapter DOI: http://dx.doi.org/10.1017/CBO9781139003612.008

Cambridge University Press

6

Institutional Choice

In his main presentation of institutional theory, Douglass North writes,

“Institutions are the rules of the game in a society or, more formally, are

the humanly devised constraints that shape human interaction.” 1 Th

ere is

obvious truth in this. Since time immemorial, humans have strived to regu-

late their relations to other humans by making rules. Beginning as unwrit-

ten codes, conventions, and norms, handed down by tradition, over time

this rule making has become increasingly formalized and increasingly

complex.

In a modern society, making and enforcing rules and regulations gener-

ates substantial employment, oft en at high incomes, in multiple professions

across both the private and the public sectors. Th

is said, one should not be

lured into taking the continued reliance of many traditional societies on

unwritten rules as a sign of lacking sophistication. As many anthropolog-

ical studies have shown, the systems of informal norms that mark what is

sometimes known as “primitive societies” can be highly sophisticated. 2

As we have argued, however, from a narrow perspective of economic

effi

ciency there is clear empirical evidence that systems of formal rules,

backed by credible and impartial third party enforcement , generate better

economic performance than informal systems backed by social censure

and sanctions. Th

e contrast between north and south in Italy brings this

point home, as does the broader contrast between Russia and the West.

Th

e question that must now be approached concerns why countries with

poorly functioning judiciaries, which persist in generating large informal

1 North, Douglass C. ( 1990a ), Institutions, Institutional Change and Economic Performance ,

Cambridge: Cambridge University Press, p. 3.

2 For example, Colson, Elizabeth ( 1974 ), Tradition and Contract: Th

e Problem of Order ,

Chicago: Adeline.

167

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168

Invisible Hands, Russian Experience, and Social Science

sectors with low value added, have such long track records of failing to

emulate the positive experience of those countries that have been more

successful.

We have touched on this crucial question repeatedly in previous chap-

ters, citing questions both by North and by others to the eff ect that while

necessary, opportunity and self-interest have clearly not been suffi

cient for

poor countries to rise out of poverty, or for centrally planned economies to

undertake a successful transition to rules-based market economy. Here we

may add a similarly crucial question, posed by David Landes in a discussion

of why poor people stay poor:

Certainly the incentive is there: the gap between what is and what can be is enor-

mous. And the opportunity. Once (here fi ll in the appropriate condition) the bur-

den of colonialism is lift ed, the government sets growth as the objective, the plans

are drawn up, and the requisite resources are mobilized, growth and development

should follow as the night the day. Only it has not. 3

Th

is insight not only goes against the grain of long-standing beliefs in

the benefi ts of being late and of having an easy opportunity to catch up.

Even more so, it

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