What is Economic History?

the study of long-term changes & transformations over decades or even centuries

many questions open up including institutional change, technical change, the formation of values

Economic History versus Economics

economic agents as managers maximizing subject to constraints entrepreneurs looking for ways to change constraints

Economic History & Path-dependency

economic history embraces complexity economic historians tend to argue that how an economy functions in the current state is a product of how it got to that state in the first place

Path-dependency
you cannot understand x by simply observing its characteristics you need to understand how we got from non x to x

capabilities & tipping points

Economic theory loses its history

the real world is messy and not easily subject to mathematical analysis solution starting in the 1870s was to build model economies based on assumptions and predict how they work

 universal system rather than a particular system

the theory was ahistorical and built around abstract individuals

the features and institutions of a specific economy were lost emergence of Real-World Economics
Mainstream economics truly is the economics of nowhere.(p. 37)

Complexity Economics
critical of equilibrium concepts implicit in traditional economic theory

traces this back to Walras work in the 1870s to make models work they assumed self-interest, perfect information, notransaction costs

 see the economy as always in transition and moving

the path is as important as the forces towards equilibrium

traditional theory assumes an economy exists but how they are created
assumes wealth exists but how it is created

It is important to note that the key behavioral assumptions of Traditional Economics were not developed because anyone thought they were a good description of real human behavior; they were adopted to make the math work in the equilibrium framework.
E.Beinhocker, The Origin of Wealth, page 118.

Responses to Neoclassical Theory

anthropologist offered evidence that societies do not create unlimited wants

in some earlier societies the problem was unlimited resources and scarcity of wants
rejected idea that humans are driven by greed and insatiable needs

Behavioral economists
The Selfish Pig Experiment

John offers to give Bob and Mary, two strangers, $5,000. Bob decides how the money should be divided, and Mary can either accept this division or give the money back to John. What should Bob and Mary do?

Political Economy and Institutional Analysis

reject the idea of an ahistorical universal economic model Marx and idea that each socioeconomic system had its own logic and contradictions Veblen and the need to connect the individual actor to specific structures and institutions

 institutional theorists begin with the institution, not the individual, as the unit of analysis
this provides a framework for explaining individual values forces a focus on questions of historical transformations and crisis rather than equilibrium

Markets, Control, Coordination, Cooperation

Do markets ensure optimal outcomes?
most economic theory gives individuals full control of their destiny subject to constraint

it has become increasingly accepted that my pay-off to a strategy depends on your strategy (Game Theory)

Market Game

Player B Wait Move 0,0 Move

-1,-1 Player A 0,0

2,2

Wait

Market Game

Player B Wait Move 0,0 Move

-1,-1 Player A 0,0 optimal outcome

2,2

Wait

Co-ordination Game Player B Wait Move 0,0 Player A -8,4 3,3 Wait 4,-8 Move

Co-ordination Game Player B Wait Move 0,0 Player A -8,4 Sub-optimal outcome 3,3 Wait 4,-8 Move

Implications of Mutual Dependency

individual maximization/minimization may lead to sub-optimal outcomes role of strategic behaviour

mechanisms of co-operation, coordination & control

role of history and learning role of institutions

Institutions and Economic Development

institution are rules, customs and practices that define interactions between economic agents
they facilitate competition, cooperation and control

Types of Institutions
markets are one type of institutional arrangement (price mechanism) co-ordination institutions (traffic lights, wheat pools, central banks) control institutions (monopolies, patents, unions, corporations)

 institutions can be beneficial to all in society resolving co-ordination and prisoners dilemma games they can also be exploitive, forcing some agents into strategies that are sub-optimal

Neo-classical Calculus of Institutions Davis and North agents invest in institution building when the group payoff exceeds the group costs Theory has trouble dealing with institutions that produce public goods

Institutions that Produce Public Goods

state/taxes defense, police, public health, education peace movement
subway systems political parties

trade unions

Why Do These Institutions Exist?

A neoclassical world would be a jungle and no society would be viable. Douglas North Institution building always has a degree of politics and power as a factor

Economic History is Economic Theory

the argument that theory needs to be rooted in specific socioeconomic systems makes the study of history a different approach to theorizing

A Brief History of Market Individualism

today the dominant global economic ideology is one of individualism & market regulation this is a very recent development (late 18th century) (Hobbes, Locke, Smith)

prior to this the dominant ideology was one of collective responsibility and collective ownership (religious or secular)

Rise of Market Economies

18th century witnessed the rapid extension of market mechanisms (Britain) Also witnessed the rapid growth of the state to facilitate and regulate market exchanges State had to protect, regulate, subsidize, standardize and intervene to make markets work

Canada and the Emergence of Market Individualism

Canadian economic history spans this divide native societies were pre-market individualism (but not pre-trade) the roots of Canadian values from the earliest settlers (pre-1800) were also pre-market individualism

Further Reading
Douglas C. North, Structure and Change in Economic History, (New York, 1981).

R.E. Solow, "Economics: Is Something Missing", in W.N. Parker (ed.), Economic History and the Modern Economist, (Oxford, 1986). Geoffrey M. Hodgson, Economics and Utopia: Why the Learning Economy is Not the End of History, (London, 1999). Eric D. Beinhocker, The Origin of Wealth; Evolution, Complexity, and the Radical Remaking of Economics, (Boston, 2006). Stephen A. Marglin, The Dismal Science: How Thinking Like an Economist Undermines Community (Boston, 2008)