a mathematical model developed during the second world war to plan expenditures and returns in order to reduce costs to the army and increase losses to the enemy. It was kept secret until 1947. Postwar, many industries found its use in their daily planning[cf. jones & romer: "as long as these transformations are governed by convex production possibilities" (pg. 10)] vs. nonlinear programming:
Applicabilitythe key, regarding NIE, appears (buried in the 'treat institutions' link) to be "The Grand Equivalence Version of the Coase Theorem," which allows:***
A typical nonconvex problem is that of optimizing transportation costs by selection from a set of transportion methods, one or more of which exhibit economies of scale, with various connectivities and capacity constraints.
the Coasean maximum-value solution [to become] a benchmark by which institutions can be comparedre: nonrivalry, also see delong on "Speculative Microeconomics for Tomorrow's Economy," specifically wrt the 'technological' prerequisites of the market economy:
The ongoing revolution in data processing and data communications technology may well be starting to undermine those basic features of property and exchange that make the invisible hand a powerful social mechanism for organizing production and distribution. The case for the market system has always rested on three implicit pillars, three features of the way that property rights and exchange worked.re: the optimal design of institutions, also see delong & summers (yes that l.summers) wrt 'gov't patent buyouts'...
New institutions and new kinds of institutions -- perhaps even some that have been tried before, like the French government's purchase and placing in the public domain of the first photographic patents in the early nineteenth century (see Kremer (1998)) -- may well be necessary to achieve the fourfold objectives of (a) price equal to marginal cost, (b) entrepreneurial energy, (c) accelerating the cumulative process of research, and (d) providing appropriate financial incentives for research and development. The work of Harvard economist Michael Kremer (1998, 2000), both with respect to the possibility of public purchase of patents at auction and of shifting some public research and development funding from effort-oriented to result-oriented processes (that is, holding contests for private companies to develop vaccines instead of funding research directly), is especially intriguing in its attempts to develop institutions that have all the advantages of market competition, natural monopoly, and public provision.and varian (google's [1,2,3] chief economist) wrt 'differential pricing and efficiency':
Abstract---
The classic prescription for economically efficient pricing -- set price at marginal cost -- is not relevant for technologies that exhibit the kinds of increasing returns to scale, large fixed costs, or economies of scope found in the telecommunications and information industries. The appropriate guiding principle in these contexts should be that the marginal willingness to pay should be equal to marginal cost. This condition for efficiency can be approximated using differential pricing, and will in fact, be a natural outcome of profit-seeking behavior. [/em added]
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We've come a long way since Kaldor; in fact, many researchers with these interests are now working in the field New Institutional Economics
Disclaimer: I'm not an economist by education or profession - actually an econometrician with a strong focus in capital markets - but as coincidence would have it, I'm writing up a case study on NIE for an MBA economics class I took just 'cause I wanted to learn more economics (aka "glutton for punishment").
A good introductory reading list for NIE would include:
- Furubotn, E., G., Richter, R., (2005) Institutions and Economic Theory: The Contribution of the New Institutional Economics
- Menard, C., Shirley, M., M., (2008) Handbook of New institutional Economics
And a little deeper into the material:- Alchian, A., A., Demsetz, H., (1972), “Production, Information Costs, and Economic Organization,” American Economic Review 62:5 (December 1972), pp. 777-795
- Benham, A., Benham L., , "Measuring the Costs of Exchange," in Ménard, Claude, Institutions, Contracts and Organizations: Perspectives from New Institutional Economics, Edward Elgar, 2000, pp. 367-375.
- Breit, W., Hochman, H., Saueracker E., (1971) Readings in Microeconomics
- Coase, R., (1937), "The Nature of The Firm ," Economica, November 1937, pp. 386-495
- Coase, R., (1960), "The Problem of Social Costs," Journal of Law and Economics, October 1960, pp. 1-44
- Coase, R. H., (1988), The Firm, the Market and the Law, The University of Chicago Press, 1988.
- Keefer, P., Knack, S., (1997), "Why Don’t Poor Countries Catch Up: A Cross National Test of an Institutional Explanation," Economic Inquiry, 35:3 (July 1997), pp. 590-602.
- North, D., C., (1993), "New Institutional Economics and Development." working paper [ .pdf ]
- North, D., C., (1995) "Five Propositions about Institutional Change," in Explaining Social Institutions, Jack Knight and Itai Sened, eds., University of Michigan Press, 1995, pp. 15-26.
- Williamson, O., (1979), "Transaction Cost Economics: The Governance of Contractual Relations," Journal of Law and Economics, 22 (October 1979), pp. 233-261
- Williamson, O., (1985), The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting, The Free Press, 1985
- Williamson, O., Winter, S., (1993), The Nature of the Firm: Origins, Evolution and Development, Oxford University Press, 1993.
- Williamson, O., (2000), "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, 38 (September 2000), pp. 595-613.
Great post! As if I didn't already have more than enough in my summer reading list ....Thanks for this.
posted by Mutant at 3:20 AM on July 14, 2009 [2 favorites]