Seminar 4. New Institutional Economics

This seminar will be led by Professor jean-Michel Glachant. he is an economist specialisingin energu regulation who has also written widely on new institutional economics. he has provided two items of reading and a set of questions for reflection. Please prepare some answers to the questions – but there is no need to send in your answers before the seminar.

Reading

two chapters of Eric Brousseau & Jean-Michel Glachant “Institutional Economics. A Guidebook » (CUP, 2008)

First/ The introduction by Paul JOSKOW (former Dean Department of economics at MIT) pp1_22 (link); It is an introduction to institutional economics as Paul himself discovered it from 1975 onwards when doing research & teaching at MIT. Paul has been later on a President elect of the academic international association for Institutional Economics (ISNIE). Paul gives a vision of the theoretical frame and of its positioning vis-a-vis the old “classical economics” and a bit vis-a-vis the new classical economics sometimes known as “new microeconomics”.

 Second/ Chapter  16 by Michel Glachant and Yannick Perez pp328_362 (link). It is an application of New Institutional Economics to an empirical policy question: the liberalization of the power sector.

Paul Joskow is known to have open this policy box as soon as 1988 with his very challenging book “Markets for Power. An Economic Analysis of Electrical Utilities Deregulation” (MIT Press 1988). However the policy has been much more difficult to conduct that this early book was suggesting. Hence my own paper… 20 years later.

 

Questions

1/ Paul Joskow favors in his introduction an approach of new institutional economics centered on the four levels distinguished by Oliver Williamson in the Journal of Economic Literature.

1-1   Do these four levels speak to your mind?

1-2   Do they make you fully understand what institutional economics is about?

1-3   Are these levels more convincing for economists of for lawyers?

1-4 Do you really think that anyone will someday elucidate how each level works and how all levels interact?

1-5 Hence: and so what?

 

2/ Glachant & Perez approach the empirical policy question by claiming that they do institutional economics.

2-1 Where do they lodge in the scale of four levels given by Williamson – Joskow?

2-2 Do Glachant-Perez really do institutional economics at all?

2-3 What do they finally conclude regarding the feasibility of a successful liberalization of the electricity sector?

2-4 Do they recommend any particular policy to succeed it (let say: in the European Union)?

2-5 Hence: and so what?

 

One comment on “Seminar 4. New Institutional Economics

  1. PrzemekPalka says:

    I really enjoyed the readings and I’m looking forward to our tomorrows discussion.
    One general comment: I like NIE, because every time I read sth about it, I have this feeling that I understood everything – no maths, no formal arguments etc. This cuts two ways, though. Because, on the other hand, there are people out there doing that full-of-maths, econometric analysis, which they seem to be needing and I do not get. That always rises my suspicion towards NIE… Not to mention, that “NIE” means “NO” in my mother tongue 🙂 But, to answer the questions:

    Paul JOSKOW
    1) The four levels described are an interesting proposition in my opinion; to answer directly: yes, they speak to my mind. The time ranges could be argued about, but I believe they were not supposed to be ideally descriptive.
    The only point where I would disagree, is the level 2 – “formal rules of the game”. I think it is too broad – placing constitutions and human rights together with all the other laws might be a mistake, and for sure blurs the image. Discussing effects of the institutions of this level might vary from the first amendment till burden of proof in consumer litigation – significance, time needed to change, measures needed to change etc. are so different that “this is not the same!” bell rings in my head.
    On the other hand, I guess that might be due to the legal boxes I think though now – probably similar distinctions could be made on every level (take religion and customs). And having 27 levels of institutions, even if correct, would probably be hardly helpful in the initial model.

    2) Do those levels make me fully understand what institutional economics is about? That is the tricky question, because an affirmative answer would presuppose a statement “I fully understand what institutional economics is about”. And I would not dare to make such a statement. I will answer indirectly here: I thought I understood (a little bit) what NIE is about, even before reading this text. Now I think I understand it better.

    3) I don’t know about economists, but I think they might be convincing for lawyers (but right now I’m starting to feel that I should not be convinced, and maybe have read the second text before making this reply..). Anyway – as I wrote above, level 2 is about law, though it encompasses almost all of it – that could be not convincing. Dworkin would say that level 1 is also about law, and to certain extent is would be true. Level 3 is about private ordering within the 3, and together with 1 constitutes empiric material to assess 2. Well, I am convinced now. Very interesting!

    4) “Do you really think that anyone will someday elucidate how each level works and how all levels interact?”. Ha! This question suggests an answer! So, well, I don’t think anyone will some day fully elucidate all that – but I am not sure if that is really the point. Isn’t the whole enetrprise of social sciences more about the process of “getting there” than about the point in time when we get there? This is not a zero-sum game. We might never understand it in 100%, but if the choice is between understanding 0% and 30/50/70%, I believe its worth to take a chance.

    5) So I think it’s time to see the second reading

    Glachant & Perez

    1) I would say that, in terms of the Williamson/Joskow scale, this is a text about level 3 – the institutions of governance (“the play of the game”) – and to what extent they are shaped by level 2 (“formal rules of the game”) – trying to give an answer to the question “how altering institutions of lvl 2 will influence institutions of lvl 3 and why?”. Sometimes it can be shape more than would seem (the radio example) and sometimes not as much as it would seem (e.g. railway). So, to sum up – I think this text is about effect of changing lvl 2 institutions on lvl 3 institutions.

    2) Do Glachant-Perez really do institutional economics at all? I guess the expected answer would be “It might seem they are not, but they actually are, because…”. I think it might be helpful to look at this reading in the light of the former. First, the object of analysis are network markets, not institutions themselves. On the other hand, the analysis is conducted in high awareness of the institutions shaping the object. So, one yes. Second, this is no longer just positive science, “looking at institutions will help us make explicit what actors do, but know only implicitly”, but actually normative speech, about policy makers trying to change what actors do and assessing it. But I suppose NIE can be both normative and positive in its nature… Thirdly, there is no maths and only one curve 🙂 So, yes, I would say this is institutional economics.

    3) It depends. It will be hard, but is not impossible. What needs to be taken into account, is the institutional background in particular states (what examples of different models in England and Germany show well). So, even though not explicitly worded, I think that the answer would be “liberalization of energy markets is feasible, but: institutions in place need to be taken into account; there is no “one-fit-all” solution, at least at the beginning.

    4) As far as I understood the argument of the paper, the policy (to be successful) should take into account the existing institutions of Member States – therefore we might define a common aim, but the means (time, change of regulation) should be, at the beginning, State-specific.

    5) So… We should be aware of institutions in place. If we draft a policy, I guess what we want to shape is mostly lvl 3 and 4. We do it through alteration of lvl 2. There are theories to teach us how it really work, and being aware of all that makes economic analysis of law even more appealing. I guess.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s