By Henry E. Smith
As outgoing President of SIOE, I gave a brief Presidential Address this year at the meeting in Paris. Thanks again to Sergei Guriev for doing a wonderful job on the conference!
The slides are here. Let me say a few words on the topic.
Presidential addresses are meant to be occasions for presenting an idea that relates to our field – institutional and organizational economics. In this year’s address, I tried to mix the (apparently) old with the new: I argued that the analysis of property, although it has been central to institutional and organizational economics, requires some methodological openness in the future. Since the earliest days of institutional economics, Coase and others have, for good reasons of their own, adopted a very thin notion of property: who gets to do what with resources. This is sometimes known as the “bundle of rights” or “bundle of sticks” approach to property, which dates back to legal thought of the 1930s. Although this “bundle” picture is fine for some purposes, we need to go further.
We need to turn the tools of institutional economics back on the notion of property and the institutions of property and property law. Once we do this, it turns out that, among the many things property institutions accomplish, they manage a problem of great complexity. All the potential interactions among all the actors over all the actions with respect to every aspect of every resource form a complex system, and treating it in its full generality – with every link potentially active – leads quickly to intractability. Property institutions furnish shortcuts over this “complete” system and provide semi-transparent components –modules – that manage the complexity. Think, for example, of how much activity is irrelevant to a potential trespasser behind the boundary of a parcel of land or how little one needs to know in a parking lot about cars and their owners in order to avoid violating their rights. Think too about how many relations between the creditors (or creditors of creditors) of an actor are not relevant. Institutional detail is reserved for – and rationed to – specialized contexts like transfer.
This complexity problem has big implications for methodology, in my view. The economics of institutions tends to veer between two poles. We have two-party models for situations of contract, using what could be termed “analytical” techniques. On the other hand, we have statistical techniques to deal with average behavior of large groups of people. Property institutions often deal with “middle n” problems. The number of actors is often too large for analytical techniques, and yet because the actors may not be very numerous and may be able to respond to rules based on averages, statistical information is unavailable or too unstable to use directly. (Think about how it would work out if we announced that all theft would be “punished” with a payment of average-harm-based damages.) It is this “middle n” area that is recognized as the domain for systems theory (which includes cybernetics). In systems theory, notions of information flow, dynamic change, control, and feedback are central. These are exactly the tools we need if we are to make progress on the institutions of property. This should be welcome news, because the hallmark of our society and our research area has been methodological eclecticism and openness!