In 1998, apart from a number of things I was writing, including my doctoral dissertation, I started work on the following article for potential publication in an academic journal. After starting the article, and with many thoughts on its improvement yet to be implemented, I got very bad RSI and got derailed from all writing for quite a while.
This article asked: why should economists limit themselves to being advisors, not doers. If a pilot knows how to fly a plane, he doesn't advise. He flies the plane. So, too, economists need to 'fly' their country's governance. In a way, all my work since 1998 is an evolution of this basic question.
I was reminded of this frozen article that never got completed for some reason today, and I thought I'd put it out for comment.
One day, with more time (and better health – now my eyes are bothering me!) I'll try to complete this article. I suspect that if I do work further on this article, it will change its form and shape dramatically. [Note also that mechanism design undertakes some of the work I refer to, below, although there is often nothing better than simply leaving a market free to innovate].
From Economics to Action
Dr. Sanjeev Sabhlok
There has been much progress in our understanding of various aspects of competitive production and distribution in an economy since Adam Smith wrote his seminal work on the process of creation of wealth in nations. There has been a simultaneous increase in our understanding of the role of political equality too, over this period. What was enunciated in the U.S. Declaration of Independence is now widely accepted: “We hold these Truths to be self-evident, that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the Pursuit of Happiness.” It was often due to the breakdown of these rights over the centuries that theories of the socialist school of economics come into being, in which political equality was equated with economic equality, thus mixing up two essentially distinct concepts.
Today, with political rights being widely accepted, the economic principles that govern a well-functioning economy are becoming more clear. We are able to see that the frequent failure in eliminating poverty from amongst various minority groups is a failure not caused by market forces, as socialists would have us believe, but by their absence and by deeper, underlying political causes including the institutional structure of governance and society which frequently need political cures. This is not to say that no dent has been made on poverty. The poor today live a life better than the poor of yesterday, in terms of health, education and food, even in developing countries, but this does not absolve us of the responsibility of resolving the pain of those of us who continue to suffer from hunger, pain and disease, apart from other disabilities or absence of opportunities. Today the problem facing us is the continuance of this poverty, misery, and man-made calamities such as famine which occur despite the availability of sufficient knowledge and abundant resources to ameliorate this unhappy situation. There is a large gap between what is feasible and what is real. Development economics and the economics of growth have often failed to translate their key message for a policy or a law maker. We need to give more attention to this problem of bridging the gap. The common view of this is rather pessimistic. Robert Samuelson informed that “Despite his advocacy, Friedman doubts that intellectuals can initiate political change. The ‘tyranny’ of the status quo is too strong. ‘Only a crisis – actual or perceived – produces real change,’ he once wrote”. This “throwing up of our hands” syndrome points to a fundamental weakness of theory that we need to examine. Do we have no more powerful instrument than this to bridge the gap? If something could be done to propel the desired change, even in the absence of crises, we would see a smoother transition toward a more equitable and prosperous society. This requires the introduction of a managerial or corporatist approach into economics which enables economists to help initiate change. The policy tools developed over the past 20 years are a good place to begin with.
This paper outlines a proposed process of challenging the status quo. In Section 2, I re-visit the catch-up hypothesis and its implications. In Section 3, I review some of the theoretical principles that might drive an actual “catch-up”. Section 4 outlines the role that economists can play in the speeding up this process.
2. Catch-up revisited
Showing a vision to a society is a fundamental task before us. One of the reasons why ‘unsuccessful’ countries have not achieved rapid growth is because they have not even set their goals clearly. The problem is often rooted in attitudes and definitions, than in the physical, capital, or knowledge, constraints alone. Good CEOs declare a vision in order to define exactly what they wish to achieve. In most developing countries this is missing. There is talk of achieving something this year or the next, but no sense of the magnitude of the task at hand.
The first step is to make explicit a long-term vision for each nation. Developing countries have to bear in mind that the present lag between them and the developed world was not always there. About 250 years ago, real per capita incomes in the now “developing” and “developed” nations were of a similar order of magnitude (see Easterlin, 1996, for example). The following chart, taken from Heilbroner (1988) speaks for itself.
Table 1: Changes in per capita GNP of developed (capitalist) and less developed
(noncapitalist) countries over the past 250 years (GNP per capita in 1960 dollars)
Presently developed Presently less developed
Around 1750 180 180-190
Around 1930 780 190
Around 1980 3000 410
Source: Heilbroner, Robert L. (1988). Behind the Veil of Economics: Essays in the Worldly Philosophy. New York: W.W. Norton & Company, p. 54.
Till 1830, India’s share in world’s manufacture was 17.6% against the U.K. share of 9.5% and U.S. share of 2.4%. By 1900, India’s share was down to 1.7% while the U.K. share went up to 18.5% and the U.S. share to 23.6% (Kennedy: 149). Now, we also know that “catch-up” or “absolute convergence” has been found to be not taking place in most cases (Barro), particularly in developing nations. It is one thing to find that there were ‘epochs’ in the past (Easterlin, 1996) when this kind of ‘catch-up’ actually took place over a large expanse of time, but quite another thing to discover that this phenomenon might now not take place on its own, since complexity and organisation drives differences across nations, and has become almost unfathomable.
2.1 Cross Over Point as the Key Vision
A crossover point is that point in time, space and per capita income, at which two moving national trajectories coincide. With reference to developing countries, the cross over should be the point when their incomes finally catch up with those of developed nations. The determination of this point should be the basic policy target for developing nation policy makers. I calculate this below in the illustrative case of India.
Given that India has a per capita GNP of $1 today while the USA has a per capita of $20 (based on PPP calculations), then, the following holds true.
Table of Growth Rates of Per Capita Income needed by India to Cross-Over the USA
Assumed US Years needed to cross over
growth rate the USA
50 100 150 200 250
1.5 7.8 4.6 3.6 3 2.7
2.0 8.3 5.1 4.1 3.5 3.2
2.5 8.8 5.6 4.6 4 3.7
3 .0 9.4 6.1 5.1 4.5 4.2
If India could grow at 9.4% p.a. for only 50 years, it would be able to cross over the USA, even if the latter were growing at 3% p.a. This does not appear feasible, though based historical experience. Also, the USA is perhaps unlikely to grow at more than 2.5% p.a. for the next 50 years. Therefore the target growth rate that makes sense for India, for catching up with USA in a hundred years, if the US grows at 2.5%, is 5.6%. Once more, experience tells us that this rate is unsustainable for a hundred years at a stretch. What needs to be done then is to target very high growth rates initially, at over 10% for about 20 years, and then allow for a tapering off in growth to about 2% p.a. in the end.
Are these proposed target rates feasible? That would be our second step as a policy analyst. I tend to believe that there is sufficient knowledge available today to systematically move toward an explicit cross-over. We know, for example, that we have to set up minimally regulated markets, and encourage free enterprise, trade, and competition. We have of course to Banish Bureaucracy (cite). China’s success in the past 20 years or so, in achieving rates of over 9% p.a. in succession indicates that even large economies like India can actually do it. Indeed, countries such as South Korea have achieved growth rates as high as 6.7% for sustained periods of time, up to 30 years.
The question then is: how do we organize a sustained and systematic effort in this direction? It is in the self-interest of those who know that this catch-up is feasible (the academic community), to not join the competition in political power, but to wait patiently for crises to emerge, a la Friedman, when economists are often suddenly in great demand. Also, this becomes a collective action problem. The marginal benefit to the small minority which knows how to implement these changes, of getting the required changes implemented, is very small. They might expect a 10% growth in their per capita income perhaps. But they are generally able to do better than that by simply leaving the developing country in which they find themselves born. The marginal cost to this minority of risking their careers by political competition, is much higher than the potential personal gain. Simultaneously, the marginal gain to the existing beneficiaries of the socialistic system (controls, planning, rigid bureaucracy, populism by politicians who need to be elected) from the existing system is higher than its alternative. Therefore, the system remains in a state of suspended animation, having achieved a 1.7% growth in per capita over the years 1960-90, and barely doing a little better thereafter. That is truly the tyranny of the status quo, when all stakeholders are in a dysfunctional equilibrium.
The key message of this paper is that this is not quite the tyranny of the status quo but of our inability to work out mechanisms to bell the cat.
3. Bureaucrats can completely skip planning
The corporatist visionary – the policy-maker – needs to understand first – in a very broad way – what is the essential mechanism that will lead to the desired change. Policy-makers in developing nations – for reasons rooted in the history of economic developemnt of these nations – often find the concept of markets to be both ill-defined and difficult to understand, and on this I speak from personal experience, having not only been a fairly senior bureaucrat myself but also a teacher of bureaucrats. Markets tend to be clubbed with the ill-functioning marketplace which is vitiated by varieties of political and other barriers.
Even in the discipline of economics, it is not quite obvious what markets really are. Only after a very vast and an eclectic reading, is it possible to understand this concept somewhat clearly. Else, is very easy to trivialize the markets by equating a social planner’s solution to the market solution, as an average graduate student learns in the first year of macroeconomics, or by debating the alternative forms of ‘market imperfection,’ in micro-economic courses.
The citizens of a free nation, when voluntarily exchanging goods and services, and valuing these goods and services through their interaction are said to constitute a market. In this mode of interaction, individual choice is given full respect. Clearly we see that a market is not a mere economic concept but a political one, too. The fact that we often did not have freedom, voluntarism or choice, in interaction, for the past 200 years, always obfuscated the underlying principle of the market economy
To make a market comprehensible, we can compare this interaction of billions of human brains with Heisenberg’s Uncertainty Principle. The uncertainty principle states that one can never measure both the momentum and the exact position of a sub-atomic particle. This sounds odd: In the macroscopic world, we can easily look at a car and tell its momentum as well as position (that’ how the California Highway Patrol issued my first and hopefully only speeding ticket!). But the breakdown is at a more subtle, quantum mechanic level that only those who have understood the quantum nature of the atom can fathom.
So also, it might appear that a planner can measure both the demand and the supply of a particular commodity by capturing, empirically, the elasticities, input-output coefficients (a la’ Leonteif), and other macro-variables. The problem is that this is an seriously uncertain measurement of a highly dynamic process. The human mind behaves much more randomly than a sub-atomic particle. The demand and supply both are shifting imperceptibly every moment, in each individual, so that the uncertainty involved in this process (leading often to the creative destruction of Schumpeter through the apparently sudden emergence of a dramatic new innovation) makes it impossible to use past data to make future predictions of the economy. In fact till today thousands of economists have been completely foxed by this impossibility, and yet like Don Quixotes, they keep on trying to predict business cycles, and so on. If they can’t, they simply write the whole thing off as an ‘external shock,’ blaming our lack of understanding of the secrets of the economy.
Somewhere in the range of 90% of the workers today use technology that was not even in existence 50 years ago. Similarly, human demand (need) has always stepped in to fulfil the increased incomes that people have gained over the years. An economist working on the input output coefficients of 1940 would have failed 100% in predicting the pattern of consumption of 1990. 100% failure in prediction. No one can therefore even remotely hope to measure, by any static means, the quantum mechanics of the human mind which is what markets amount to, essentially.
On the other hand, these billions of people, interacting with each other, can and do determine the instantaneous price of any particular commodity. Hayek (1945) is not saying that markets are complete, or perfect, or whatever. But that there is no human being in the world who can even closely approximate the ability of the price system operating through minimally regulated markets. Therefore we do not want planners. We want intelligent people who will create the background institutions needed for market to function properly.
Dave Hsia, my room-mate in my Economics Department. office, had an even better representation – the 6 billion people on earth – resemble chaos rather than the sub-atomic particles. The reason why you cannot predict weather clearly in the long run (beyond 2 days or so) is because of the Brownian motion of particles caused by the infinite interactions each moment. You cannot ever get hold of the ‘local knowledge’ of each interaction, and here the ‘mind’ is completely absent as a factor. Therefore, in a very remote case, it is possible for a butterfly fluttering its wings in Waltham, to “cause” a rain storm in New Zealand. The point is that the future is completely “determined” by these infinite interactions, and science will never be able to plan (not simply predict with a margin of error) the next year’s weather on the 18th of June in Los Angeles, downtown, based on whatever data they have collected.
Markets are a worse case of chaos than this, for apart from all these natural factors (weather, butterflies, and the sun) which impact the supply of many commodities, there is this human mind which generates thoughts and plans and commitments and opportunism at an amazingly rapid rate. In other words, what you and I do and even think, impacts everyone else today and in the future, in ways completely undetermined and unknown.
In consequence of historical factors as well as most random, chance factors, as well as volition, we might or might not see the emergence of a Ramanujam or a Bill Gates or a Voltaire, people who change the world in dramatic ways. These are only the larger ‘cloud’ formations. Then there are ordinary mortals like us who change their mind whether to eat cereal or fruit for breakfast, and who suddenly become smarter or have these surges of brilliance in which we create the Benzene molecule out of thin thought and sleep, thus randomly changing the supply and demand both of commodities and of resources, in the world. This then, is the ‘local information’ that Hayek talks about. Something that is as local as the way we use our toothbrush, and the amount of milk we put in our tea.
In economics you would say that since no planner can know either the Social Welfare function (social utility function) nor the production function, therefore the social planner who tries to solve the “social planner’s problem” is a fool at best and a charlaton at worst. It is the repeated and clear fate of such folks to get perennially surprised by ‘the East Asian Miracle’ one day and the ‘East Asian debacle’ the next, by the ‘great success of Russian planning’ one day and ‘the sudden collapse of the USSR the next.’ Bounded rationality of a severe nature afflicts man. How can a planner solve the market’s problem?
Essential point to learn for the corporate strategist: no one, but no one, can replace the usual task of interacting with each other and doing what we want, to solve the problem of optimal allocation of a society’s resources. We can even generalize this to the problem of existence, itself. Nobody can know best for me, in the ultimate analysis, than me, myself. I can take everyone’s advice, but I will have to do something (like brush my teeth or take up a particular job) myself. No planner can tell me what is the best time, place, equipment, and strategy for me to brush my teeth.
4. Approximating complete and perfect markets: Policy and Institutional Design
In principle it is clear now that the goal of achieving the cross-over cannot be accomplished by putting a bunch of planners in “control” of the economy, as has been done in many developing nations over the past 50 years. There is no doubt that markets are incomplete, liable to suffer from collusion, reputation effects might not always work, and so on. So, the question is that under the situation where markets and government are both grossly imperfect, what exactly can a government do?
“In Western societies over time, complex institutional structures have been devised (elaborately defined and effectively enforced property rights, formal contracts and guarantees, limited liability, bankruptcy laws, and so on) to constrain the participants, to reduce the uncertainty of social interaction, in general to prevent transactions from being too costly and thus to allow the productivity gains of larger scale and improved technology to be realized.” The issue before us is: These rules of the game evolved from the complex chaotic process discussed above, in which government was only one of the players. Can we create, for developing societies, rules that will approximate complete and perfect markets, even as it is clear that we cannot plan the interactions? To such a question, we note the key phrase above, “over time,” which indicates that the process is evolutionary and based essentially on competition. Dasgupta admits, “The transaction-cost and imperfect-information theories are equally murky on the mechanism through which new institutions and rights emerge. One gets the impression that more efficient institutions and governance structures evolve as the parties involved come to appreciate the new benefit-cost possibilities. The literature is marked by a certain ahistorical functionalism and even vulgar Darwinism on this point… One cannot get away from the enormity of the collective action problem that limits the ability of potential gainers to get their act together in bringing about institutional changes (ibid).” This more or less echoes the despair of Frieman who finds that intellectuals can do little to initiate political change. Of course, Keynesianism and Leonteifianism is out. The determination of a precise set of strategies to “fine-tune” an economy smacks of an arrogance that none can recommend today.
But using this kind of analysis to despair from being able to assist in the creation of more complete or more perfect markets, is a conclusion unwarranted, I would like to affirm. Being a practicing public administrator, it is clear that the evolution of institutions and structures does not take place on its own. It involves a competition of ideas. It involves what are commonly known in business parlance as project champions, people who believe in the validity of a particular mode of thinking and who are willing to champion the cause by investment of personal effort and time. As economists we are aware of, and yet oblivious, to the similarity of the problem faced by the household, producer and the government. The essential problem is of effective organization and overcoming the collective action dilemma – of motivating at least one other person to agree to one’s vision or even, decision. There is no essential difference between Bill Gates and Lenin, or even a common, successfully married husband, if this similarity is studied. Collective action is not an issue merely in the world of politics, but an issue in production of software, too, or in the production of a tennis playing son. Free rider and bargaining problems, moral hazard and opportunism, transaction costs and reputation effects, every single issue exists in a similar way in both cases.
The real problem now before us is of entrepreneurship, defined as the problem of organizing more than one person and a bunch of other physical and intangible assets into an ‘efficient local cloud-formation.’ As modern societies are reaching closer to their technical production frontiers, the felt need for economists is becoming lower. While we see an increasing demand for applied fields such as computer engineering and programming, the demand for theoretical disciplines like economics is getting confined to the academia. But the truth is that economics, today, has much to offer to business and government, both in developed and developed nations. A fertile area is booming in economics about which very few are aware of and even fewer are trained to do something about.
This is the nascent area of institutional economics. Institutions can be defined the way North (1990) has defined them or as Lin and Nugent (199..) have done so. I do not wish to review the literature in this field, except to mention again the work of some of the leaders in this discipline, such as Coase (1937, 1960), Williamson, North, Jensen and Meckling, Nugent, Grossman and Hart, Milgrom and Roberts, and others. There has been a substantial increase in our ability to understand the real-life behavior outside the simplistic, optimizing models of new classical economics or household economics. While many new hypotheses have been tested in this field (including recent ones by Grossman, Moore and Hart, and by Milgrom and Roberts), and a body of learning is now available, it has not found a structure in which it can find application to industry and government.
It is a tautology to say that the society is at an optimal level at each point. For, surely, the weather at a particular point is the only one that could have been. At the same time, it is obvious that due to the thought processes of human beings, there are tremendous opportunities emerging each day to improve the quality of life and the standard of living of the society. I believe that without in any way taking a deterministic approach, one can safely allow the interplay of institutional economists with the rest of the society to attempt a more ‘efficient’ market structure. I was tempted to call this kind of intervention, institutional engineering, but on second thought, let us simply call it institutional design. This represents the corporatist approach to economics that I spoke about, whereby the social savings (thorough better analysis of interactions) can lead to the laying down of better rules of the game at various levels of analysis. This is one area where a well-trained economist, as part of a team comprising experts from public administration, might excel.
Let us look at this concept of institutional design in some greater detail. In the first place, this should not be taken to connote any planning activity. It should mean an analytical activity where the collective action and organizational problems are solved more efficiently. In common parlance, a successful institutional designer would be called an entrepreneur. A successful entrepreneur has to persuade a rather reluctant banker to part with his money, to persuade a worker to learn a new skill, to persuade the retailer to stock a new, untested product on the shelves, to persuade the consumer to try out the new product. A new invention is not a necessary part of the entrepreneur’s tool kit, though that might be necessary at times. The primary task is to build a new set of rules, a new set if relationships and incentives.
In a similar vein, a successful institutional designer at the societal level is often called a political visionary or a statesman. The act of consciously understanding human motivation and incentives and modifying the rules of the game, and the nature of transactions, in order to yield ‘better’ outcomes, has been undertaken at levels of great detail in the armed forces, whose job it is to provide incentives to soldiers to not only strictly obey their officers but to be prepared to die for an abstract cause – the nation – in times of need. The ultimate sacrifice is not easy – but through a detailed study of the psychology of incentives of the soldier, and how the soldier reacts to various forms of inducements and punishments, armies all over the world have created powerful forces which have devastated the world. These acts of entrepreneurship (such as those of Hitler’s or of Alexander the Great) are not essentially different from the act of starting a motor car factory.
The truth is that despite the tautological ‘optimality’ that we discussed earlier, dysfunctional institutions (in terms of promoting lower social well-being than could have been achieved with the existing resources) often persist for a very long period. I am advancing below a general method which is very tentative, but which can perhaps be used by economists, public administrators and policy makers in determining the validity of a particular set of constraints. The framework proposed here is distinct from the usual tools of policy analysis, such as cost-benefit analysis, including social costs benefit analysis. Macro-policy analysis tools such as input-output analysis and programming, as well as computable general equilibrium models, are also quite another thing, with rather suspect validity. The closest to this would be tools of strategic business management or of national armed defense.
In some cases it is possible that existing institutions might be so analyzed, whereas in other cases, it is possible that new institutions might have to be designed in order to solve the problem at hand.
What should an institutional designer do when faced with a given problem of organization or of collective action? While an organizational behavior specialist will consider the relationship between various members of the organization, an institutional designer will look at the incentive structure within an organization. Whereas an organizational behavior specialist will look into aspects such as training and job rotation, the institutional designer will look at the governance structure best suited to carry out a particular transaction. He will question the basic structure itself, rather than only the interrelationships between its components.
To that extent the institutional designer’s job is similar to that of a systems analyst. The systems analyst looks at the system, its flow chart and its decision mechanism. The institutional designer looks at transactions. The institutional designer is not a work study or industrial engineer, who looks for doing a particular activity most efficiently. He is not concerned with activity analysis but with transactions analysis.
Step 1: Write down the objectives of the institution and the overall ‘exchange’ involved in the economy.
Step 2: Break down this overall exchange in to the set of parallel or serial exchanges that occur both within and outside the organization. Flow charting is a necessary part of this exercise.
Step 3: Break each exchange down into transactions. Identify the parties to each transaction and, on a matrix of “information, behavioral assumptions and time available,” write down the incentive structure for each transaction in each exchange.
Step 4: First best case: Making the neo-classical assumption of perfect foresight and rationality, work out the net gainers in each exchange. Try to quantify the gain/ loss through field studies. Create a matrix with plus and minus sign representing the incentive structures of the parties involved in the transaction. Look for the conflict of interests and incentives in each exchange. For example, if the member of the public has to stand in line for 15 minutes on the average, subtract the opportunity cost of 15 minutes of time for that class of clientele from the gain to that member of the public.
Step 5: Now, shifting from the assumptions above, consider the boundedness of rationality of each actor, including the problem of imperfect information, asymmetric information, and other such issues. Solve each transaction for net gain.
Step 6: Finally, introduce the assumption of opportunism. Assign a ‘reasonable’ probability (based on surveys such as those by Transparency International), to the parties to the transaction, and work out the ‘rent’ available to the party who is the net gainer. Incorporate the ‘power’ of the net gainer into the model, and determine the PV of the ‘rent’ if the opportunistic party delays the exchange to the extent that he or she can. Subtract from this PV the costs of being caught, etc. That gives us the NPV of the rent.
This is the starting point of the institutional re-design. Now that we know which party has the incentive to cheat, if any, and the expected NPV of the rent that the ‘cheater’ can extract, we need to look into alternative ways in which the institution must be redesigned in order to avoid the problem of cheating, and minimize the problem of imperfect information and asymmetric information. These three are related to each other. For example, in many cases, the problem of opportunism can be minimized by the introduction of more transparent procedures whereby the asymmetry of information is also simultaneously reduced.
Step 7: Go back to the flow chart and evaluate the feasibility of doing that transaction in the market, and its costs. Compare the costs to the NPV derived in Step 6. Alternatively, work out alternative ways to carry out the transaction within the organization, or through integration of two or more organizations, and determine the least costly method. One of the most profitable ways to solve the problem could be through collective action, and the constraint might be the free-rider problem. In that cases it is possible to devise institutions that will promote social capital and collective action. [Alternative ways could include: different set of contracts, different property rights, different laws, etc.]
Step 8: Create a set of rules representing the proposed institutional modification/ design.
Step 9: Test these rules in a simulated environment, or use survey, or role play, to determine the actual transactions that take place. It is quite possible that some other, vital, transaction might have not been considered in the design of the new institution, and with opportunism, that ‘un-considered’ transaction might impose new costs not considered earlier. If so, carry out step 7 to 9 again. Compare with the NPV at step 6, of the finally tested institution. If costs can be reduced, then the new institution is worth being considered for introduction.
Step 10: Work out the costs of change from the old to the new institution. Include social costs, if relevant. Subtract these costs from the NPV of the gain expected from the new institution. In this context it is vital to keep in mind that losers need to be compensated somehow. Else, particularly if they were relatively powerful earlier, they would not participate in the exercise.
I am sure this “methodology” sounds very primitive and full of serious loop-holes. That is what experience is meant for. To improve the learning process. The above suggested methodology can at best take us to a better starting point of analysis, after which it will be necessary to communicate the design in simple terms to the policy maker, who will then be motivated to introduce the necessary changes. Applied economics can be a rather difficult and rough terrain. There also remains the philosophical paradox of someone from outside coming in and knowing a “better” solution to the problem when the ‘insiders’ who are maximizing their utility, don’t have a ‘best’ solution. What really makes us eligible to create solutions for people? I really don’t think this is that big a problem. For example, the design of privatization through vouchers in Poland, or the design of the ‘volunteer system’ in US airlines by Julian Simon (cite: Freeman, Apr 1998) whereby overbooking is done and volunteers compensated generously if capacity is reached, are excellent examples of institutional design. Economists, widely trained and experienced, can make substantial innovations in institutional design.
Let us not forget that even the conceptualization of the market economy as efficient was part of institutional design. There is still ‘hope’ for economists who are out looking for jobs.
To recapitulate, economics needs to move into a more ‘active’ role, by spinning off a corporatist or managerial branch which seeks to continuously improve institutions. The act of corporatization must begin with a vision statement for the economy as well as for the particular organization that is being dealt with. I believe that the disciplines of management and public administration will in particular be greatly helped with this approach.
Osborne, David, and Peter Plastrik (1997). Banishing Bureaucracy: The Five Strategies for Reinventing Government. Reading, Mass. Addison-Wesley.
Kennedy, P. (1989). “The Rise and Fall of the Great Powers.” New York: Vintage Books.
 At times, possibly of the type demonstrated by Gandhi, Martin Luther King and Nelson Mandela  Kaushik Basu (Analytical Development Economics, p. 5, 1997) feels that though long-run growth is very important, “we still do not understand its mechanics very well.” Therefore, policy makers focus on the short-run, called “development economics”. It is surprising that even Basu does not touch upon Hayek in his book.  As pointed out by North and Olson, among others.  Samuelson, Robert J. (1998). “The Age of Friedman: America’s most influential living economist since World War II was once isolated and ignored,” in Newsweek, June 15, 1998.  In India, for example, there is much talk of becoming a “Super Power” in amazingly short time-spans.  Though one can always do with much more, since knowledge is a normal good,  Bardhan, Pranab (1989), “The New Institutional Economics and Development Theory,” in World Development 17 (9), in Meier leading issues: p. 104  E.g., the paper by Mui on judicial corruption.