Page 52 - Global Political Economy_Understanding The International Economic Order

THE NATUR E OF PO LITIC AL ECO NOMY
The role of institutions in determining economic behavior and out-
comes is of particular interest in the political economy interpretation.
Social, political, and economic institutions are significant in that they
determine, or at least influence, the incentives that shape the interac-
tion of individuals and groups as political and economic actors. In
economics the two principal explanations for the creation of institu-
tions are neoclassical institutionalism and the theory of public choice.
Both of these theories assume that institutions can be explained as
resulting from conscious action by economic actors to further their
economic interests. These two positions differ, however, regarding
the purpose of institutions. Neoclassical institutionalism is based on
the belief that institutions are created primarily to solve economic
problems and will result in increased economic efficiency; for exam-
ple, neoinstitutionalists believe that business corporations are created
to reduce transaction costs. The public-choice position, on the other
hand, believes that government institutions are created by powerful
groups, public officials, and politicians to promote their own self-
interest and that they decrease efficiency; for example, tariffs are es-
sentially rent-seeking devices to shift income from consumers to do-
mestic producers. Both positions, however, explain the creation of
institutions as resulting from rational intentions.
Political economists, on the other hand, believe that institutions are
created for a variety of rational, irrational, and even capricious mo-
tives. Moreover, in contrast to economists’ emphasis on efficiency or
rent-seeking, the political economists argue that institutions are built
on the idea of path dependence and that economic and other institu-
tions are the result of accidents, random choices, and chance events
that frequently cannot be explained as the result of rational economic
processes. Institutions are sometimes the consequence of historical ac-
cident and self-reinforcing and cumulative processes. (One of my fa-
vorite examples is the constitutional prohibition against foreign-born
Americans becoming President; its purpose was to bar the detested
Alexander Hamilton from the presidency.) As a consequence, many
institutions are neither efficient nor do they necessarily represent the
economic interests of the individuals who brought them into exis-
tence. However, once these institutions are created, for whatever
chance or irrational reason, they have a powerful advantage over new
and more efficient institutions that could otherwise displace them.
Institutions are even more tenacious than neoinstitutionalism and
public-choice theory suggest, and it is frequently difficult to replace
an inefficient institution with a more efficient one. Neoclassical insti-
tutionalism, for example, is based on the assumption of constant re-
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