Institutional Change and Economic Efficiency

Abstract

The conventional view of institutional change is that it is either in the interest of economic efficiency, or it merely redistributes income.' Rent-seeking behavior is regarded as but an example of income redistribution, and economic inefficiency is the expected result.2 I will here argue that this traditional view-which reflects the orthodox distinction between and equity-is both conceptually flawed, and too restrictive with respect to the economist's participation in public policy analysis. The institutional arrangements of an economy-Commons' working rules of going concerns-are in need of constant refinement. For the economist to regard such dynamics as in the interest of economic efficiency, or as merely lining the pockets of the special pleaders, trivializes the bulk of public policy where few Pareto-safe options exist. Institutional change is motivated by circumstances and conditions that cannot be understood and explained by a model of institutional change that regards a new law as either contributing to economic efficiency or as simply redistributing income. During the Indus