In addition, the associated ECB working paper suggests that this type of regulation would allow for rental housing prices to increase less abruptly during the boom, an issue that policymakers in several countries of the euro area have attempted to handle via price regulation (an alternative that could generate price distortions).
The relationship between institutions and development is a long-standing topic in economic research. However, economists have tended to only evaluate formal institutions (such as laws and property rights), neglecting the informal (like conventions and norms). This overspecialisation precludes the analysis of ideas and ideologies. Without considering these abstract drivers of development, the space for ethically and politically dangerous explanations of success appears (such as for genetic reasons).
Contrary to recent literature, I argue that informal constraints are actually the basis of institutions and therefore the real generators of growth and development. I show this by examining revolutions – the cauldrons where new systems, ideas, and conventions begin, and old ones end.
The illusion of separation
Scholars of comparative development have noted the increasing divergence between developed and developing countries: the gap between Northern and Southern Europe and the underdevelopment of the Middle East and sub-Saharan Africa being major examples. Several theories attempt to explain this divergence, considering possible factors such as geographical characteristics and institutional differences. Notably, comparative development has even been attributed to levels of genetic diversity (Ashraf & Galor, 2013).
In particular, the crucial historical link between institutions and development is well known. Famous examples include the advantage of limited royal power (Acemoglu, 2005); reformed constitutional arrangements and strengthened property rights (North & Weingast, 1989); and the balance of power between merchants and princes (De Long, 1993). Yet, these studies put their emphasis on formal rules, neglecting the norms, ideas and ideologies that underwrite them.
The latter are fundamental elements of institutions as they influence formal rules. In a seminal contribution to institutional economics, North (1994) distinguishes between two forms of institutions: formal rules (constitutions, laws, property rights etc.) and informal constraints (norms of behaviour, conventions, self-imposed codes of conduct etc.). In a later work, he argued that institutions evolve incrementally and successively over time (North, 1991). When those two forms are approached as two separated sources of institutions, the role of informal constraints in institutional evolution will be missed, throwing a veil over a core aspect of institutions and leading us to fallacious conclusions about the key determinants of growth and development.
Similarly, Karl Popper (1945) distinguishes an open society from a closed society based on whether a distinction exists between normative laws and natural laws. Where there is none – what Popper calls a closed “tribal society”– taboos and conventions act as if they were natural law. This gives them a powerful role in society and a fundamental role in development. By creating formal laws, societies recognise the distinction between norms and natural laws, weakening the effect of conventions (although, as we will see, they still act through both formal and informal laws).
Both North and Popper agree on this chronological development of institutions meaning a better understanding of causation is needed. Myrdal (1978) convincingly argues that the mechanisms of social systems are determined by an endogenous cycle of causation that affects the distribution of power in a society and economic, social and political stratification). This means that a change in informal constraints will alter formal rules, which will then return to affect the former. Therefore the scaffolding of institutions consists of norms of behaviour, conventions and self-imposed codes of conduct.
The revolutionary crevasse
Just as a crevasse provides a glimpse deep into the ice, revolutions open a window to the creation and destruction of social systems. Revolutions are beloved by social scientists (especially in institutional economics) as they provide natural experiments to investigate causal effects. They can shed some light on the importance of norms and convention, as well as their relationship with ideas, ideologies and leaders.
In the literature, for example, Acemoglu et al. (2008) and North & Weingast (1989) have respectively examined the impact of the French Revolution on development and the Glorious Revolution on institutional structure. However, these types of studies have focused only on the secondary changes (in laws and property rights) instead of the initial causes of change (norms and conventions). In this regard, a re-evaluation of revolutions and their characteristics is necessary to observe the initial changes.
Let us first consider which elements prepare amenable conditions for the emergence of revolutions. Gottschalk (1944) identifies three broad factors:
demand for change stemming from (a) personal discontent and (b) social dissatisfaction
hopefulness derived from (a) popular programs of reform and (b) a leader
weakness of the conservative forces – perhaps the most important.
Demand comes from widespread provocations (corruption, taxation, poor infrastructure etc.) which generate social dissatisfaction. Yet, demand by itself is not sufficient for the revolution. Some hope of success is also needed. This comes from programs of reform, as provided by the Voltaires and Rousseaus, the Lockes and Ademses, and the Marxes and Kropotkins (Gottschalk, 1994). However, tuneless emphasis on widespread provocations that are based on the formal rules underestimates the phycological mechanisms that are mainly based on informal constraints.
Personal discontent (arising for idiosyncratic reasons) only appears at the individual level yet plays an essential role in generating the leaders of revolutions. These leaders then support the new-born ideas and ideologies based on the program of reform which has a multiplier effect by coherently spreading revolutionary sentiment. This is crucial once we think of revolutions as risky events over which individuals have varying valuations of the possible outcomes. Gneezy et al. (2006) show that individuals, faced with a complex choice, may choose to stay in the old system if they value the risky benefits of revolution less than the worst outcomes of rebelling. However, once the revolutionary “lottery” is based on intellectuals’ programs of reforms and explained by leaders it becomes easier to code.
In this way, agents facing complex task (in this case revolution), might act following the leader through many of the channels identified by behavioural economics such as Tversky and Kahneman’s simple heuristics, Walker and Wooldridge’s conventions and Shiller’s narratives. These share common features which affect the majority’s decision-making processes – especially when tasks are complex.
This process is essential to notice the importance of informal constraints and how they become formal rules since leaders are the symbol of ideologies and ideas. As Axelrod indicates norms precede laws and laws strengthen norms. After the success of the revolution laws strengthen the norms through formalization. And after social conventions are entrenched, they become thoughtlessly accepted by individuals (Epstein, 2001).
As with the example of revolutions, before a change in the formal rules, an ideological revolution has occurred when intellectuals provide the programs of reforms. The ideas become conventions during the revolution, changing societal expectations. Notions of equality and liberty – in the case of the French Revolution – became the convention as the system was upended. The relationships between ideas, ideologies, norms and leaders encourage us to take them into account when evaluating growth and development.
I have argued that ideas, norms and ideologies are the initial drivers of development and have had an immense effect on our civilizations. However, traditional political economy’s overemphasis of formal rules fails to capture this. The insularity of this approach is highlighted by examining Revolutions, which provide evidence in favour of more inclusive definitions of institutions and the importance of ideas, ideologies and leaders in creating social systems. Therefore, I contend that a more holistic approach to analysing development is required otherwise alternative and ill-founded explanations of growth with remain.
Acemoglu, D., Cantoni, D., Johnson, S., & Robinson, J. A. (2008). From ancien regime to capitalism: the French Revolution as a natural experiment. Natural Experiments…, op. cit, 221-256.
Acemoglu, D., Johnson, S., & Robinson, J. A. (2005). The rise of Europe: Atlantic trade, institutional change, and economic growth. American Economic Review, 95(3), 546-579.
Ashraf, Q., & Galor, O. (2013). The ‘Out of Africa’ hypothesis, human genetic diversity, and comparative economic development. American Economic Review, 103(1), 1-46.
Axelrod, R. (1986). An evolutionary approach to norms. The American Political Science Review, 1095-1111.
De Long, J. B., & Shleifer, A. (1993). Princes and merchants: European city growth before the industrial revolution. The Journal of Law and Economics, 36(2), 671-702.
Epstein, J. M. (2001). Learning to be thoughtless: Social norms and individual computation. Computational economics, 18(1), 9-24.
North, D. C. (1991). Institutions. Journal of Economic Perspectives, 5(1), 97-112.
North, D. C. (1994). Economic performance through time. The American Economic Review, 84(3), 359-368.
North, D. C., & Weingast, B. R. (1989). Constitutions and commitment: the evolution of institutions governing public choice in seventeenth-century England. The Journal of Economic History,49(4), 803-832.
Popper, K. R. (1945). The open society and its enemies. Routledge, London.
Myrdal, G. (1978). Institutional economics. Journal of Economic Issues, 12(4), 771-783.
Gottschalk, L. (1944). Causes of revolution. American Journal of Sociology, 50(1), 1-8.
“We are both professors of economics with a passion for what used to be called price theory. This newsletter is our attempt to work through and clarify points in price theory,” the authors explain in the newsletter’s introduction.
“You’ll have to pry supply and demand from my cold, dead hands.”
That’s the title of Brian’s first post to the newsletter. In it, he gives an overview of the Economic Forces project and and “a simple defense of (the increasingly scoffed at by the loudest voices online) supply and demand. “It seems silly to need to defend supply and demand within economics circles,” Brian says, “But it is 2020…”
Vicky Fouka ’10 (Economics) is an editor of this new meeting point for HPE researchers
About the project
Broadstreet is a blog dedicated to the study of historical political economy (HPE). Its goal is to foster conversations across disciplines in the social sciences, namely economics and political science, but also history, sociology, quantitative methods, and public policy. Correspondingly, its editors (and guest contributors) are drawn from these respective disciplines.
Given the boundaries that typically exist across academic disciplines, scholars who work on similar subjects – like HPE – rarely talk to one another or read each other’s work. Our hope in starting Broadstreet is to break down some of these artificial boundaries, generate true cross-disciplinary dialogues, and produce better and more wide-ranging HPE research.
The blog’s name, Broadstreet, is a nod to the legendary John Snow and his study of the 1854 cholera outbreak in London. Snow found convincing evidence for a previously unproven water-born theory of cholera transmission, with a rigorous yet interdisciplinary approach — using detailed socio-economic data, ethnography, historical patterns of disease transmission, and early techniques of causal inference. The Broad Street water pump in London’s Soho district was not only a meeting place for the diverse residents of the neighborhood, but served as the focal point for Snow’s interdisciplinary breakthrough. While the Broad Street pump is no more, the legacy of this innovative research lives on. We hope that Broadstreet will be go-to location for all those with interests in HPE.
Publication in PNAS by Katharina Janezic ’16 (Economics) and Aina Gallego (IBEI and IPEG)
Honesty is one of the most valued traits in politicians. Yet, because lies often remain undiscovered, it is difficult to study if some politicians are more honest than others. This paper examines which individual characteristics are correlated with truth-telling in a controlled setting in a large sample of politicians. We designed and embedded a game that incentivizes lying with a non-monetary method in a survey answered by 816 Spanish mayors. Mayors were first asked how interested they were in obtaining a detailed report about the survey results, and at the end of the survey, they had to flip a coin to find out whether they would be sent the report. Because the probability of heads is known, we can estimate the proportion of mayors who lied to obtain the report.
We find that a large and statistically significant proportion of mayors lied. Mayors that are members of the two major political parties lied significantly more. We further find that women and men were equally likely to lie. Finally, we find a negative relationship between truth-telling and reelection in the next municipal elections, which suggests that dishonesty might help politicians survive in office.
Connect with the authors
Katharina Janezic ’16 (Economics) is a PhD candidate in Economics at UPF and Barcelona GSE.
Working Paper by Nicolò Maffei Faccioli (Macro ’15 and IDEA) and Eugenia Vella (Sheffield)
What is the macroeconomic impact of migration in the second-largest destination for migrants after the United States?
In this paper, we uncover new evidence on the macroeconomic effects of net migration shocks in Germany using monthly data from 2006 to 2019 and a variety of identification strategies in a structural vector autoregression (SVAR). In addition, we use quarterly data in a mixed-frequency SVAR.
While a large literature has analyzed the impact of immigration on employment and wages using disaggregate data, the migration literature in the context of macroeconometric models is still limited due to a lack of data at high frequency. Interestingly, such data is available for Germany. The Federal Statistical Office (Destatis) has been collecting monthly data on the arrivals of foreigners by country of origin on the basis of population registers at the municipal level since 2006. The figure below shows the net migration rate by origin.
Migration shocks are persistently expansionary, increasing industrial production, per capita GDP, investment, net exports and tax revenue.
Our analysis disentangles the positive effect on inflation of job-related migration from OECD countries from the negative effect of migration (including refugees) from less advanced economies. In the former case, a demand effect seems prevalent while in the latter case, where migration is predominantly low-skilled and often political in nature (including refugees), a supply effect prevails.
In the labor market, migration shocks boost job openings and hourly wages. Unemployment falls for natives, driving a decline in total unemployment, while it rises for foreigners (see figure below). Interestingly, migration shocks (blue area in the first row) play a relevant role in explaining fluctuations in industrial production and unemployment of both natives and foreigners, despite the bulk of these being explained by other shocks (red area in the first row), like business cycle and domestic labor supply.
We also shed light on the employment and participation responses for natives and foreigners. Taken together, our results highlight a job-creation effect for natives and a job-competition effect for foreigners.
The COVID-19 recession may trigger an increase in migration flows and exacerbate xenophobic sentiments around the world. This paper contributes to a better understanding of the migration effects in the labor market and the macroeconomy, which is crucial for migration policy design and to curb the rise in xenophobic movements.
This paper studies the spillover of a macroprudential regulation in Spain to the Mexican financial system via Mexican subsidiaries of Spanish banks. The spillover caused a drop in the supply of household credit in Mexico. Municipalities with a higher exposure to Spanish subsidiaries experienced a larger contraction in household credit. These localized contractions caused a drop in macroeconomic activity in the local non-tradable sector. Estimates of the elasticity of loan demand by the non-tradable sector to changes in household credit supply range from 1.2–1.8. These results emphasize cross-border effects of regulations in the presence of global banks.
Loan-loss provisions introduced in Spain in 2012 imposed a significant burden on the balanced sheet of Spanish banks. This regulation was unrelated to the Mexican financial system or the credit conditions of Mexican households. However, Mexican subsidiaries of two large Spanish banks, BBVA and Santander, reduced lending to Mexican households in response to the regulation (Fig. 1).
Mexican municipalities with a higher exposure to Spanish banks (Fig. 2) experienced a larger contraction in lending to households. This drop in lending to households (i.e. a drop in credit supply) was associated with a reduction in lending to the local non-tradable sector driven by a drop in local demand. This shows (1) cross-border effects of a macroprudential regulation on lending and economic activity, and (2) the macroeconomic effects of shocks in lending to households in an emerging economy.
Elliot Jones ’18 (Macro) and Maximilian Magnacca Sancho ’21 (incoming ITFD)
Maximilian and Elliot connected through social media due to the Barcelona GSE connection and started working together on this piece due to shared research interests.
The COVID-19 pandemic is changing the way that we live our lives. As time passes it is becoming apparent that even once the lockdown policies have been eased and some level of normality has been resumed, the new world that we live in will be different to the one we knew before. This article focuses on emerging trends within the UK that have largely taken place as a result of COVID-19, or in some cases the pandemic has simply accelerated a trend that was already occurring. We then look to offer a range of public policy solutions for the recovery period where the overarching objective is to increase wellbeing in society in a sustainable way. These are focused towards the UK but several could be paralleled to other advanced economies.
But first, before we get to the policy solutions, briefly, what have been the main economic and wellbeing effects that we have seen as a result of COVID-19? In 2020, it is expected that the fall in overall economic output is going to be larger than during the financial crisis in 2008. Much of this is due to the level of decline in economic activity as a result of the UK governments lockdown policy. This was a necessary decision in order to reduce the spread of the virus and ensure the health service still has capacity to treat those that have unfortunately caught the disease. However, it has led to a significant liquidity shock for both households and businesses. Large portions of the labour market are now out of work and levels of consumer spending have declined rapidly (Chart 1). Alongside sharp falls in measures of economic performance, measures of wellbeing have declined rapidly as well (Chart 2). Increases in measures of uncertainty have mirrored increases in anxiety. While, social distancing policies are having a large impact on measures of happiness.
The UK government responded to the shock posed by COVID-19 with a range of policy interventions to provide funding to those that have been most impacted. At a macro level, the long-lasting effects of this crisis will be more pertinent if economic activity does not respond quickly after the government’s schemes have ended. Large portions of UK businesses have limited cash reserves to fall back on in a scenario where demand remains subdued for some time. However, even if the recovery period is strong there will still have been some clear winners and losers during this crisis. Younger workers, those on lower incomes and those with atypical work contracts are the ones that have been most heavily impacted (Chart 3). Whilst those on higher incomes, that are more likely to be able to work from home, have increased their household savings during this period, due to less opportunities to consume.
The policy solutions outlined below aim to be complementary of one another and look to amplify observed trends that are positive for wellbeing and to provide intervention where trends have been negative for wellbeing:
Climate at the centre of the response: This is less a policy recommendation and more a theme for the response. However, our message here is that increased public spending projects, focused towards green initiatives should be combined with a coherent carbon tax policy which influences incentives and helps to support the UK’s transition to a low carbon economy.
Labour market reforms: The government should look to develop a centralised job retraining and job matching scheme that supports workers most impacted by COVID-19, helps to encourage structural transformation towards emerging industries and increases the amount of highly skilled workers in the UK workforce.
Tough decisions on business: Some businesses will require further assistance from the UK government in the form of equity funding, rather than the debt funding seen so far. This should be done on a conditional basis, requiring all these businesses to comply with the UK’s climate objectives and should only be provided to businesses in industries that are expanding or strategically important to the UK economy.
Modernising the regions on a cleaner, greener and higher level: Looking to build on the governments ‘levelling up the regions’ policy to reduce regional inequalities, our policy consists of government funded infrastructure policies that include green investments for regions outside of the UK’s capital.
Harbouring that rainbow effect: Building on the increased community spirit that has been observed during the pandemic, this policy solution looks to increase localised community funding to maintain social cohesion and support those with mental health issues.
Lastly, as the policy recommendations focus on expanding public investment to support the recovery, it is important to consider what this means for public debt sustainability in the UK. The conclusion is that as a result of the low interest rate environment, the most efficient way out of this recession is to borrow and spend on projects that will increase resilience to future shocks and support the UK’s transition to a low carbon economy.
Please click on the link below to read about this in more detail. Comments are welcome.
We investigate unemployment due to mismatch in the United States over the past three and a half decades. We propose an accounting framework that allows us to estimate the contribution of each of the frictions that generated labor market mismatch. Barriers to job mobility account for the largest part of mismatch unemployment, with a smaller role for barriers to worker mobility. We find little contribution of wage-setting frictions to mismatch.
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