This paper offers an alternative to the view of the routines literature provided by T. Felin and N. J. Foss, ‘The Endogenous Origins of Experience, Routines and Organizational Capabilities: The Poverty of Stimulus’, published by the Journal of Institutional Economics. The emphasis here is on practice-based theories of organizational routines that are grounded in close, ethnographic observation of real routines. While this literature may be unfamiliar to some readers, it is relevant here because it specifically contradicts the core assertions made by Felin and Foss. Further, this literature provides a clear theoretical foundation for subsequent research on problems such as stability and change in routines, the nature of capabilities and dynamic capabilities, and complex ecologies of routines.

This paper shows that in classical Athens, values and institutions encouraged many types of entrepreneurship. Successful entrepreneurs received social and political distinctions, and some entrepreneurial slaves gained their freedom. However, to deter extreme individualism, success in business was judged by the means used to acquire wealth, rather than simply the amount of wealth acquired. The system encouraged those entrepreneurs who were esteemed socially, to work hard, use ethical means, not to consume their wealth conspicuously but to share it with the rest of the people by undertaking public expenditures, and to abide by the laws and ordinances of the city-state.

This paper reviews the assessment of the routines and capabilities literature provided by T. Felin and N. J. Foss, ‘The Endogenous Origins of Experience, Routines and Organizational Capabilities: The Poverty of Stimulus’, published by the Journal of Institutional Economics. Although valuable points are raised, the assessment is largely off target because it is fixated on the implausible view that the literature assessed is strongly shaped by the tradition of behavioral psychology (B. F. Skinner and others). At the same time, important portions of the routines and capabilities literature that are highly relevant to the authors’ substantive concerns, and which are plainly inconsistent with the main interpretive claim, are not considered.

The issue of firm ownership is an ongoing debate. For several decades, contractarian theory has undoubtedly shaped the academic debate in both law and economics. Proponents of this approach suggest that shareholders can legitimately be considered the owners of a firm because they hold shares. This approach, though attractive, is legally incorrect. Legal scholars have noted that a corporation cannot legally belong to shareholders or other stakeholders; no one owns the firm (and a corporation). The question of firm ownership masks the following crucial issue: Who should govern the firm? In this article, after returning to the theoretical debate on firm ownership and explaining why a firm cannot be owned, we shall analyze power as the core of firm governance. This approach is a potentially relevant and accurate way to address the problems of specific human investment, collective creation and productive (consummate) cooperation in modern firms.

This paper analyses the origin of innovation using institutional economic theory. Because of distributed information and fundamental uncertainty, an efficient institutional context for the economic organization of innovation in its early stages is often that of a common pool resource. The theory of the innovation commons draws upon Hayek, Williamson and Ostrom to present the innovation problem as a combined knowledge problem, implicit contracting problem and collective action governance problem. Innovation commons theory also implies that Kirzner's model of entrepreneurial opportunity discovery extends to higher-order groups, suggesting a multilevel selection model of economic evolution.

More than 40 years ago, Elinor Ostrom began her adventures with the police. In order to combat the conventional view that ‘bigger means better’, Ostrom pioneered a fieldwork-based framework for measuring police services that utilized consumer surveys and thereby created a community-centered model of analysis for public services. In this paper, we contend that although Ostrom's career demonstrated the importance of employing multiple methods, her most enduring contributions and legacy came from on-the-ground research. Her case studies and fieldwork proved to be necessary for examining complex systems beyond the state–market dichotomy, and these methods of analysis should be defended as critical for inquiry into the variety of institutional arrangements.

In a seminal 1989 article, Douglass North and Barry Weingast argued that by making the monarch more answerable to Parliament, the Glorious Revolution of 1688 helped to secure property rights in England and stimulate the rise of capitalism. Similarly, Daron Acemoglu, Simon Johnson, and James Robinson later wrote that in the English Middle Ages there was a ‘lack of property rights for landowners, merchants and proto-industrialists’ and the ‘strengthening’ of property rights in the late 17th century ‘spurred a process of financial and commercial expansion’. There are several problems with these arguments. Property rights in England were relatively secure from the 13th century. A major developmental problem was not the security of rights but their feudal nature, including widespread ‘entails’ and ‘strict settlements’. 1688 had no obvious direct effect on property rights. Given these criticisms, what changes promoted the rise of capitalism? A more plausible answer is found by addressing the post-1688 Financial and Administrative Revolutions, which were pressured by the enhanced needs of war and Britain's expanding global role. Guided by a more powerful Parliament, this new financial system stimulated reforms to landed property rights, the growth of collateralizable property and saleable debt, and thus enabled the Industrial Revolution.

Human communities and ego-centric social networks have a distinct size that reflects a generic relationship between relative neocortex volume and social group size that is characteristic of primates in general (the ‘social brain hypothesis’). Human networks are structured into layers that reflect both differences in the frequency of contact and levels of emotional closeness. The rate of decay in the frequency of contact across network layers is very steep, and we might expect this to have a very significant effect on the likelihood of Ego finding out some novel fact when information flow is limited to face-to-face interaction. I use an analytical model parameterized by these contact frequencies to show that there may be little advantage in having a network larger than ~150 for the purposes of information exchange. I then present a Monte Carlo simulation model to show that structure significantly impedes the rate of information flow in structured communities.

This paper is based on the premise that at any point in time, macroeconomic performance is best understood in terms of certain ‘fundamental’ features of the income-generating process that are embedded in a relatively enduring institutional framework, that both affects and is affected by macroeconomic outcomes themselves. This results in the evolution of capitalist economies through a succession of discrete, medium-term episodes of macroeconomic performance. The purpose of the paper is to apply this vision to the explanation of inflation and the functional distribution of income in the post-war US economy. A conflicting claims model of inflation is developed, in which inflation is the result of conflict over the functional distribution of income. It is then shown how an account of the different, relatively enduring institutions within which this ‘fundamental’ macroeconomic process has been embedded over the past 50 years can be used to calibrate the analytical model, giving rise to an explanation of inflation and the functional distribution of income in the US as having evolved through three discrete episodes. Moreover, once the institutional context of macroeconomic performance is properly recognized in this manner, inflation and the functional distribution of income in the US over the past 50 years are seen to be explained by the rise, decline, and rise of successive incomes policies.

The articles collected in Chicago Price Theory illustrate elements of continuity and change in the development of the Chicago School of Economics. The editors stress a continuity in the Chicago tradition that runs from Frank Knight to Gary Becker. Our contribution in this essay is to emphasize the discontinuity in the evolution of the Chicago price theory tradition. We argue that a logical continuity runs not from the Knight/Viner/Simons generation to the Friedman/Stigler/Becker generation, but to a branch of the Chicago tradition best exemplified by the Alchian/Buchanan/Coase generation of Chicago price theory. The continuity we stress is understanding price theory as a study of market adjustment and adaptation under alternative institutional arrangements.

We study the effects of institutional instability on growth. Using principal components analysis, we construct measures of institutional quality and instability from the political risk index of the International Country Risk Guide. A panel-data analysis of 132 countries during 1984–2004 reveals that institutional quality, especially with regard to the legal system and the protection of property rights, is positively linked to growth. As for institutional instability, we find evidence of a positive relationship in rich countries but a negative link in poor countries, suggesting that instability may reduce problems of institutional sclerosis in the former and that instability primarily entails an increase in transactions costs and uncertainty in the latter.

This paper introduces the notion of ‘cognitive’ institution and discusses its relevance to institutional economics. Cognitive institutions are conceptually founded on the philosophy of mind notion of extended mind, broadened to also include the distinctly social, institutional, and normative dimensions. Cognitive institutions are defined as institutions that not just allow agents to perform certain cognitive processes in the social domain but, more importantly, without which some of the agents' cognitive processes would not exist or even be possible. The externalist point of view of the extended mind has already had some influence in institutional economics: Arthur Denzau and Douglass North first introduced the notion of institution understood in terms of ‘shared mental models’, and relatedly philosopher Andy Clark introduced the notion of ‘scaffolding institution’. We discuss shared mental models and scaffolding institutions and go a step further by showing that the notion of cognitive institution can capture more fundamental and salient aspects of economic institutions. In particular, we focus on the market as an economic cognitive institution.

Using data from 1972 to 2011 on 109 countries, this paper empirically studies the impact of economic freedom on human capital investment. Enrollment in secondary education is used as a proxy for such investments. Controlling for a large number of other determinants of education, it finds that, over the sample period, economic freedom had a substantial positive effect. This is probably because more economic freedom increases the return on investing in human capital, enables people to keep a larger share of the return, and, by facilitating the operation of credit markets, makes it easier for them to undertake such investments in the first place.

Political theories of property rights are less optimistic than self-governance perspectives regarding the ability of non-state organizations to supply private property institutions. Despite offering different answers to the question of where property rights come from, these diverse perspectives share a concern with organizational capacity, constraints, and legitimacy as explanations why organizations are able to supply private property rights. We use these shared concerns as a point of departure to investigate formal and informal private property rights in rural Afghanistan. We find that informal private property rights are more effective than formal private property rights because customary organizations fare better than the state on the dimensions of capacity, constraints, and legitimacy. More generally, these ‘political’ features of formal and informal organizations explain why self-governance works, as well as provide insight into the challenges confronting efforts in fragile states to establish formal private property institutions.

In the present paper we contribute to the previous literature on de facto enforcing mechanisms, by focusing on the role of judicial institutions and their performance and measurement. We propose both theoretical and empirical evidence supporting the necessity of a clear distinction between two measures of judicial performance, efficiency and efficacy, which have often been confused in previous literature. Not only might economic actors not be affected to the same extent by these two indicators, but we show that these measures do not even correlate significantly with each other. We also bring evidence against the alleged trade-off between the quality of justice and judicial performance in its quantitative dimension, showing that this relationship is much more complicated than is claimed by some legal scholars.

Skepticism prevails among a substantial number of economists over a possible connection between civil liberties and the level of economic activity. Until now, empirical research on economic growth has found mixed evidence on the influence of civil liberties. Disaggregation of the Freedom House Civil Liberties Index allows a fresh empirical look at the effect of human rights on long-term growth or economic development. Our results show that one of the four subcategories of the index outperforms all available indicators of property rights institutions in explaining long-term economic growth. This subcategory, Personal Autonomy and Individual Rights, captures the level of second generation human rights that affect the mobility of individuals with respect to housing, employment and university education, as well as the level of protection of property rights. This result is robust with respect to reverse causation, important omitted variables such as geography and human capital, as well as to a variety of sensitivity tests. We also discuss in our conceptual framework how civil liberties work as an indicator of the prevalence of the rule of law and how the latter affects growth or development as an essential public input.

Every economic explanation assumes maximization. How strange, then, that few economists accept one of maximization's most straightforward implications: every observed institution is efficient. My aim is to persuade economists of this fact and thus to dissuade them from making illogical claims about social welfare. To frame my argument, I consider the “property rights approach” to institutions developed by Yoram Barzel. I speculate that economists resist what maximization implies about institutional efficiency because they think that efficiency-always precludes them from improving the world, and hope of improving the world is what attracted them to economics in the first place. But, besides being inconsistent, resistance is unnecessary: efficiency-always does not preclude economists, or anyone else, from improving the world.

Income inequality is often attributed to declines in income mobility following the Great Gatsby curve, but this relationship is of secondary importance in determining the factors of income mobility if one considers that changing rules is more important than changing outcomes under defined rules. Rather, improvements in institutional quality are hypothesized to increase income mobility by allowing entrepreneurs the freedom to pursue their dreams. This paper is the first to empirically analyze the institutional determinants behind entrepreneurship, and their effect on income mobility. The findings from a cross-country analysis suggest that secure property rights and less corruption are associated with less income persistence, leading to higher income mobility, independent of the Great Gatsby effect. This suggests that reducing corruption and protection of property rights increase income mobility through the channels of entrepreneurship.

There have been repeated claims that informal institutions play an important or even crucial role in economic development. Yet measuring informal institutions entails serious challenges. This paper identifies the difficulties in measuring informal institutions, critically discusses some attempts hitherto taken and encourages the more intensive use of experiments to measure them.

The design of incentive systems is a central issue in the economics of organization. This paper argues that very often the ideal incentive systems to use within firms will involve low-powered incentives. Five particular circumstances leading to weak incentives being optimal are examined.