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2015 | OriginalPaper | Chapter

Demand for Wealth-Reducing Institutional Change: The Role of Ideas and Interests

Author : Thráinn Eggertsson

Published in: The Political Economy of Governance

Publisher: Springer International Publishing

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Abstract

Rodrik (Journal of Economic Perspectives 28(1):189–208, Winter 2014), in a recent paper, calls on economists to recognize the role of ideas in institutional change. This chapter takes up the challenge by considering ideas about how the world works and ideas about the legitimacy of social arrangements, distinguishing between instrumental models (the relations between instruments and outcomes) and moral models (issues of legitimacy). I then explore an empirical case, the efforts by the government of Iceland 2009–2013 to dismantle the country’s regulatory system of ocean fisheries, which is based on individual transferable quotas and widely seen as the most efficient system of its kind in Europe. The exports of fish products have for more than a century been Iceland’s engine of growth. The attempts at introducing inefficient institutions came in the wake of, and even as a response to the country’s dramatic 2008 financial collapse. I identify seven instrumental and moral theories that were crucial for the reform process. The decision makers’ varying understanding and acceptance of these ideas gave substance to the traditional variables of power and interests and influenced how the agents responded to individual transferable quotas.

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next chapter Cultural Legacies: Persistence and Transmission

See Kuran (1995) on preference falsification. We may theorize about types of environments that are most likely to stimulate creativity but obviously we do not foresee new ideas.

The distinction between the top-down and bottom-up paradigms bears a superficial but misleading resemblance to the macroeconomics and microeconomics distinction in economic theory. The content of mainstream economics changes as the ideological pendulum swings between the two paradigms. In the bottom-up phase, macroeconomics takes on the appearance of microeconomics.

Bhagwati (1978), in an early recognition of the limits to reform, refers to the implications of endogenous policy as the “determinacy paradox.” Eggertsson (2005, 142–145) discusses the determinacy paradox.

The authorities in China maintained existing planning quotas but allowed economic agents to produce for the market once they had met the assigned planning targets, thus creating opportunities for the agents to profit. The dual-track system, at least in theory, came close to meeting the marginal efficiency conditions of neoclassical economics (Qian 2003).

Instruments of policy are visible and unambiguous but the related outcomes are not, for instance, in the case of the death penalty. Uncertainty about outcomes creates an opportunity for competing social entrepreneurs to make their cases for and against particular institutions.

The same agent can be simultaneously both material and moral duty bearer, although empirically it may be impossible to measure the impact of each component on behavior.

In theory, a fisheries ministry could complement a TAC with a long list of constraints intended to prevent indirect open access. The industry would then be micromanaged by the ministry. Such attempts have not been successful.

In 2011 the fishing industry employed some 5 % of the Icelandic labor force. The industry contributed 11 % to GDP and 38 % to the country’s goods exports. The export share underestimates the importance of the fisheries because the other major export item is primary aluminum and ferrosilicon made from imported metallic minerals. The producers use the country’s abundant geothermal and hydroelectric energy to power their smelters.

On the EU fisheries policy, see Khalilian et al. (2010).

Eggertsson (1990) discusses these models in greater detail and provides basic references.

The industry’s average EBITDA was 7 % in 1980–1984, 15 % in 1984–1992, and 21 % in 1992–2010. The rise and fall of the exchange value of the króna have also influenced EBITDA Íslandsbanki 2012, Figure 11). Note that Iceland caught 430,000 tons of cod in 1980 and only 157,000 in 2012. Currently the cod stocks appear to be recovering fast. The allowed catch for the 2013–2014 season is 215,000 tons.

The fishing industry, of course, contributes toward the war chests of the Independence Party.

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Title: Demand for Wealth-Reducing Institutional Change: The Role of Ideas and Interests
Author: Thráinn Eggertsson
Publisher: Springer International Publishing
Book: The Political Economy of Governance
Print ISBN: 978-3-319-15550-0

Electronic ISBN: 978-3-319-15551-7

Copyright Year: 2015
DOI: https://doi.org/10.1007/978-3-319-15551-7_1