Clark gives Greif Grief
By Arnold Kling
Gregory Clark goes medieval on Avner Greif.
In chapter 2, Greif lays out a formal definition of an institution. This is, “An institution is a system of rules, beliefs, norms and organizations that together generate a regularity of (social) behavior” (p. 30)…Each of the component terms in the definition—“rules,” “beliefs,” “norms,” “organizations,” “regularity,” “behavior”—is itself a loosely defined ordinary language term. We do not get clarity by defining one ambiguous concept in terms of six others equally ambiguous.
It is indeed a sad irony that the Achilles heel of the new institutional economics is the very definition of the term “institution.”One approach is to define institutions as rules that are hard-coded–the provisions found in constitutions, established law, and so forth. This makes for neat, testable hypotheses.
Greif, however, wants to allow for institutions that are not hard-coded. These cultural habits and informal rules operate in parallel with, or even in contradiction to, the formal institutions. As Clark points out, this makes Greif’s version of institutional economics difficult to pin down and to test.
At the level of substance, I see institutions as helpful for explaining one but not both of the two main facts concerning comparative living standards. The first fact is that living standards improved much faster from 1800 to the present than they did prior to 1800. The second fact is that average living standards vary dramatically across countries.
Clark is known for offering a “quality of labor” theory to explain both facts. He says that improvements in labor quality in some countries made possible the factory system, and with it economic growth. The low standard of living in some parts of the world reflects poor labor quality.
Greif and others want to use institutions to explain both facts. In this view, growth took off in the West because of better institutions. It remains hampered in some parts of the world today because of poor institutions.
I lean toward using two separate explanations for the two facts. For the historical pattern of growth, I am inclined to align this to the emergence of knowledge. Our standard of living began to accelerate along with our rate of accumulating knowledge.
For the divergence between the developed world and the underdeveloped world, I am inclined to focus on institutions. However, labor quality (or the Unmentionable factor of IQ) may also play a role.
In person, Clark will acknowledge that examples such as the contrast between North and South Korea clearly demonstrate that there is a role for institutions in the short run. However, he sees it as inevitable that North Korea’s inferior institutions will fail to survive, so that in the long term there will not be major institutional differences.
On the methodological issue, my inclination is to focus on formal institutions in order to keep things rigorous and testable. However, I can understand the reluctance to limit the concept of institutions to only those social rules that are hard-coded, because that approach is incomplete and possibly misleading. I do not have a fully satisfying answer.