Wednesday, May 26, 2010

Modesty, Balance, and the Evolution of Institutions

Greg Mankiw linked to this thoughtful column by David Brooks. Here are a couple of key excerpts:
Burke was horrified at the thought that individuals would use abstract reason to sweep away arrangements that had stood the test of time. He believed in continual reform, but reform is not novelty. You don’t try to change the fundamental substance of an institution. You try to modify from within, keeping the good parts and adjusting the parts that aren’t working.

We Americans have never figured out whether we are children of the French or the British Enlightenment. Was our founding a radical departure or an act of preservation? This was a bone of contention between Jefferson and Hamilton, and it’s a bone of contention today, both between parties and within each one.

[...] The children of the British Enlightenment are in retreat. Yet there is the stubborn fact of human nature. The Scots were right, and the French were wrong. And out of that truth grows a style of change, a style that emphasizes modesty, gradualism and balance.
This column reminded me of the excellent work by Douglass North on Institutions and Institutional Change (an excellent book to read for any young academic in the social sciences).

North's broad conclusion is the same as Brooks, and it is a profound insight that won North the Nobel Prize. Institutions evolve slowly over time because they embody systems of cultural norms, past prejudices, and worldviews that are not easily transformed. These norms interact with the formal, written laws to create the "rules of the game" that govern and constrain individual behavior. Moreover, our best evidence suggests that features of these institutions determine economic prosperity.

Written rules can change quickly, but norms evolve slowly. Because the match between these two types of institutions is important, political change necessarily creates tension. We would like to turn what we know about institutions and institutional change into effective policy that improves well-being. North's insight is that -- even if we know what policy is optimal -- no policy is made in a vacuum.

This fact constrains what policies are possible. In a world where our governing rules are being modified dramatically one piece at a time, North's work is a powerful reminder that the written rules are only one piece of the puzzle. Policies made without regard to norms are missing a key ingredient.

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