Bringing Institutions Back In

Thráinn Eggertsson (1941-2026)

I was saddened to learn of the passing of Thrainn Eggertsson the other day. Thrainn’s books Economic Behavior and Institutions (1991) and Imperfect Institutions (2005) where critical to my own thinking and my teaching at NYU and then GMU respectively during those decades. The first book provided a thorough survey of the literature on bringing institutions back into economic analysis after decades of being pushed to the periphery. The second discusses the trials and tribulations associated with institutional reform let alone transplantation. Both shaped how I thought and taught in profound ways.

During the 1990s I had the great privilege to be a Visiting Scholar at the Max Planck Institute in Jena, Germany. It was the first Planck Institute established to study economics and was divided into 3 research groups — Institutional Economics, Evolutionary Economics, and Economic History. I was invited by Manfred Streit to come to Jena for an extended period of time as part of the Institutional Economics Division. I loved it there, though unfortunately, Manfred’s health at the time had taken a turn for the worse so I didn’t not get to spend the much anticipated time with him that I was so looking forward to. But I found intellectual friends in Stefan Voigt and Michael Wogelmuth. And, Thrainn Eggertsson who happen to be visiting at the same time. I had also known Ulrich Witt (head of the Evolutionary Economics Division) from his visits to the Center for Study of Public Choice when I was a graduate student, so he also was a gracious host and source of great conversations. I learned much during my time there that has stayed with me in a variety of ways since, and some of it is reflected in Institutional Economics: Property, Competition, Policies which I was asked by Kasper and Streit to join as co-author for the 2nd edition. The influence of Eggertsson should be seen throughout.

Lee Alston has a memorial tribute, and Hannes Gissurarson has a more personal note of tribute. But let me conclude with a short note on what I think modern readers so used to the concept of “institutions” in economics and political economy should take way from Eggertsson’s work in addition to him being ahead of the curve.

First, in Economic Behavior and Institutions, he made a distinction between Neo-Institutionalism and New Institutionalism, and that distinction was based on the behavioral foundations — namely Becker maximizing, or Simon bounded rationality. Elinor Ostrom in her APSA Presidential address distinguished between first-generation and second-generation rational choice models. The “weaker” the conception of rationality, the “stronger” the institutional analysis must be. By second generation all she meant was what Gerd Gigerenzer refers to as ‘rationality for mortals’ and that invites detailed institutional analysis. Neo-Institutionalism suffers what Barry Weingast coined as “the neoclassical institutional fallacy.” And, what Eggertsson and Ostrom understood, I would argue, is a lesson stressed early in the development of modern Institutional Economics from the German social thinker Hans Albert, that economics could never repair its institutional deficiency until it repaired its behavioral deficiency. This isn’t an abandonment of rational choice theory, but rather a deepening of our understanding of human action and the agony of choice, the coping with ignorance, the complexity of decision making under deep uncertainty. And, again, it invites a detailed analysis of how alternative institutional arrangements impact the ability of individuals to pursue productive specialization and realize peaceful social cooperation.

Second, in Imperfect Institutions Eggertsson stressed the difficulties of institutional change, and in particular the problems and paradoxes associated with institutional transplantation. Just because a certain set of institutions work in country A, does not automatically translate into them working equally as well in country B. The issue isn’t the general theory of institutions and economics is wrong. Incentives must be aligned, information processes must generate the necessary knowledge and provide the required feedback for continuous learning. But there is a deeper issue related to the cultural filter through which institutions have meaning and are granted legitimacy. In more or less economistic language, the underlying belief systems raise or lower the costs of the enforcement of different institutional arrangements. As Ostrom stressed in her work, there is a difference between “rules in form” and “rules in use”, and what matters for performance is the “rules in use” — so we must study not only function and operation, but emergence and maintenance. This requires that we say something more than “Institutions” in our proposed remedies to social ills. There is cultural contexts that must be accounted for, and ignoring that will result in frustration and failure in not only analysis but in social transformation. This, of course, is one of the hard lessons we have all learned since 1989 and the history of efforts at development planning across the globe. As developed by Eggertsson we political economist must pay attention to social as well as physical technologies, we must acknowledge the knowledge-problem that the complexity of social systems present to any reform effort, and we must grapple with the persistence of suboptimal arrangements due to powerful political dynamics, high transactions costs, and stubborn cultural attitudes and beliefs. Commercial life, and thus market reforms, do not exist in a vacuum, but always operate within a context of law, politics and society. To put this another way, in order for modern political economy to scientifically advance it must take its cue not from the technocratic discipline of the 20th century, but from the grand tradition of political economy as practiced from Adam Smith to J. S. Mill, but updated with the tools of marginal analysis and advances in our understanding of market theory and the price system. Smith’s Theory of Moral Sentiments must be read into An Inquiry into the Nature and Causes of the Wealth of Nations and vice a versa. There is no Adam Smith problem, there is only political economy and social philosophy blended together with different points of emphasis given the scientific task before us.

Anyway, Thrainn Eggertsson deserves credit and gratitude for all he did to help solidify the institutional revolution in economics and political science since the 1980s. He was very kind and encouraging to me at an early stage in my career, and I appreciate that greatly and will remember him fondly. May he RIP.