Expectations and the Meaning of Institutions: Essays in Economics

Few economists will deny that the market operates within a framework of legal and other institutions, that its modus operandi may be helped or hindered by the varying modes of this framework, and that the outcome of market processes will not be unaffected by changes in it. That the obvious implication of these facts for the operation of the modern market economy are so rarely understood is of course to some extent due to the circumstance that in the products of the textbook industry they are commonly ignored. This neglect is largely the result of the fact that in the general equilibrium model of neoclassical economics institutions do not qualify as 'data' of the system and hence are abstracted from. This merely goes to show that, contrary to a view widely held today, abstraction is not a procedure in which arbitrary choices may be made to suit our 'analytical convenience', and that, in a significant sense, the quality of abstraction reflects the quality of the abstracting mind.

To the classical economists, as Lord Robbins has often reminded us, the economic importance of institutions was well-known. In opposing the mercantilist view that the production of wealth was not a matter to be left to chance, but required the constant attention of, and carefully designed action by, the state bureaucracy (at their time a fairly recent creation), the classical economists held that, if only the institutions of property and contract were firmly entrenched and safeguarded, the market would give rise to a continuous process in the course of which far more wealth would be produced than the wisest of bureaucracies could ever have designed. As they, however, were, in the terminology we have

-249-