REVIEW #9: Informal Institutions and Decentralization of Governance

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In recent years, the Czech Republic experienced significant economic growth. Should this fact be a reason for enthusiasm, or is there a reason to worry? Sound economics should analyze social processes in depth and at their structure rather than rely on aggregate indicators. Together with F. A. Hayek, who famously claimed “nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger“1, we have to maintain that only through a detailed analysis of economic systems with a thorough understanding of underlying political, legal, and institutional processes can we come to more robust conclusions about the nature of its development.

Famous economists (most recently, Thomas Piketty) together with many economic reporters, point out that post-communist countries are rather economies with cheap labor colonized by foreign investors than structurally developed economies with prospects for innovation. Regardless of the positive development of GDP, these countries lack a tendency to converge with its economically stronger neighbors in the European Union (EU). Nevertheless, it is not necessarily caused by the scarcity of physical resources or financial capital, but instead by a conflict of institutions, which are at first glance well-aligned with those of more developed Western democracies, but which are not dovetailing on the margin of individual action.

This article explores a relationship between a feasible degree of decentralization of governance and totalitarian mental models, which prevail in the society. Current political and business leaders in post-communist countries often belong to a generation which formed mental models through education and experiences during the communist era. These mental models are on various margins in the conflict with formal institutions of property rights and contractual relationships which were introduced to those countries to mimic the free-market capitalism of the West. The following analysis explores this potential clash, which might cause friction that could further obstruct development of economic systems in post-communist countries.

In Institutional Analysis, History Matters: Rationality, Path-Dependence, and Institutional Change

To understand the interplay between institutions, governance, and (de)centralization, the fact that rationally acting human individuals make choices utilizing specific mental models23, which have been formed by their experiences embedded in institutional environment, must be taken into account. Peter Boettke, when praising the Bloomington School of Political Economy, emphasized that: “[Vincent and Elinor Ostrom] did rational choice theory as if the choosers were human and they did institutional analysis as if history matters”4. His viewpoint thus connects human action to irreversible historical (real) time5, which has been formed by their experiences embedded in the institutional environment.

Read full article: JIŘÍ NOHEJL_INFORMAL INSTITUTIONS AND DECENTRALIZATION OF GOVERNANCE


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1 Hayek, F.A. (1956) “The Dilemma of Specialization”. [in:] White, L.D. (ed.) The State of the Social Sciences. Chicago: University of Chicago Press, p. 463.

2Caton, J.L. and E.J. Lopez (2018) The Cognitive Dimension of Institutions. SSRN. Available [online]: https://ssrn.com/abstract=3214278

3“In order to understand decision-making under conditions of strong uncertainty, we must understand the relationship between the mental models that individuals construct to make sense of the world around them, the ideologies that evolve from such constructions, and the institutions that develop in a society to order interpersonal relationships. “ Denzau, A.T. and D. North (1994) Shared Mental Models: Ideologies and Institutions. Kyklos, Vol. 47, Issue 1, pp. 3-31

4 Boettke, P.J. (2016) YouTube Interview: Bloomington School of Political Economy I: The Science & Art of Association. Arlington: Mercatus Center. Available [online]: https://www.youtube.com/watch?v=MFkdg69J1f8 ADD SOURCE

5 In contrast to “Newtonian time“. For more details see O’Driscoll, G.P.Jr. and M.J. Rizzo (1996) The Economics of Time and Ingnorance. London: Routlege, pp. 52-70.

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Jiri Nohejl