Wednesday, March 12, 2008

Institutions: Top Down or Bottom Up?

Institutions: Top Down or Bottom Up?- Easterly

A large research program in economics has established a persuasive link between institutions and economic development. But what does this imply for development policymaking? Can a political leader or aid agency who seeks to promote development readily change institutions? This article starts off wildly general, and then moves to specifics.

Two contrasting worldviews coexist in institutional economics, which go all the way back to the 18th century Enlightenment. Let us label these views “top down” versus “bottom up.” The top down view of institutions sees them as determined by laws written by political leaders (the view of most Enlightenment intellectuals like Rousseau and Condorcet). The bottom up view sees institutions instead as emerging spontaneously from the social norms, customs, traditions, beliefs, and values of individuals within a society, with the written law only formalizing what is already mainly shaped by the attitudes of individuals (the view of the leading critic of the top-down French Revolution, Edmund Burke).

The two worldviews have very different implications for institutional change. In the top down view, the political leadership can start with a blank slate, tearing up the old laws and making new laws at any time (as was attempted in the French Revolution). The bottom up view sees current institutions as heavily constrained by previous institutions. Institutional change in the bottom up view is always gradual, evolutionary rather than revolutionary.

The two views also have very different implications for the role of economists or other “experts.” In the top down view, there is a heavy burden on economists to determine the optimal institutions to recommend to political leaders, using theory and empirics to design new institutions from scratch. In the bottom up view, there is a much more specialized role for economists, who at best can recommend desirable incremental changes, subject to the constraint that institutional reforms cannot attempt “too much” without disrupting the functioning of the economy by much more than is justified by the benefits of the “desirable change.”

In the top down view, economists recommend institutions through pure reason. In the bottom up view, economists express reluctance to make drastic changes to institutions whose rationale they cannot fully comprehend, showing respect for the historical evolution that has somehow yielded today’s institutions. This is not to advocate the extreme view that “what is, is right,” only the more modest view that “what is, is for a reason.” The reason a particular institution has emerged (even if it is a bad reason) will certainly affect the consequences of attempts to change that institution.

Even if the bottom up economists can think of NO reason why a particular institution exists, they are still cautious about changing existing institutions abruptly (assuming such institutions are not too obviously destructive) with the knowledge that there is SOME reason, not yet understood and perhaps never to be understood, for their existence. As Richard Dawkins said about the analogous exercise in evolutionary biology of trying to understand the rationale for the anatomy of each species, “evolution is smarter than you are.”

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