I was recently asked to review a book proposal for Edward Elgar, and in exchange they offered to send me a couple of books. One of the books that I selected was Law, Informal Rules and Economic Performance: The Case for Common Law by Svetozar Pejovich. This book turned out to be the most readable introduction to institutional economics that I have come across: it’s clear, straightforward, and relatively short. The book seems simple, but in fact the underlying arguments are quite sophisticated, although sometimes you need to read between the lines.
Pejovich’s book is not only ideal as an introduction to (new) institutional economics; it also offers compelling arguments for English common law as opposed to continental European civil law, if one is prepared to accept the assertion that voluntary exchange is generally more efficient than governmental allocation of resources (yes, I am prepared to accept that assertion, for the simple fact that only voluntary exchanges can be relied upon to produce mutual ex ante gains from trade). Indeed, Pejovich’s definition of efficiency seems identical to Buchanan’s, who has argued forcefully to emphasize gains from trade rather than the “optimal” allocation of resources as the appropriate efficiency benchmark.
It thus comes as no surprise that Pejovich has included a brilliant little essay by Buchanan in the book, which discusses the various motivations behind the interventionist state. In that essay, he adds “parentalism” to the traditional categories of “managerial socialism,” paternalism, and redistribution. Parentalism refers to the desire of people to be looked after by the state, i.e. the state is seen as the source of jobs, product certification, a comfortable retirement, and a generally risk-free life. I certainly have met people who blames the government if they don’t have a job (especially in Europe) and others who blame the government from not preventing people from consuming dangerous imported goods (especially in Asia). It goes without saying that I share Buchanan’s and Pejovich’s dislike of “parental socialism”: I prefer decentralized entrepreneurial creation of jobs, parents as the source of parental security, and the freedom to choose whether to consume potentially dangerous goods (under the optional guidance of private regulators and experts such as scientists and physicians).
So Pejovich not only offers a basic introduction to the institutional ideas of Coase, North, and others; he also integrates the Buchanan-Tullock version of public choice theory. And when discussing entrepreneurship and uncertainty, there are strong Austrian (especially Hayekian) undercurrents. Especially valuable in this regard is the final part of the book, which discusses the role of entrepreneurial pathfinders in the evolution of informal institutions, and how the common law has the advantage of gradually absorbing informal institutions into the legal system.
This book is written in a way that should make it accessible to undergraduate students and the general college-educated reader. Unlike most popular books written by journalists, it is not a simplistic book. If you can read between the lines, there are obvious allusions to numerous sophisticated theoretical arguments, including (but not limited to) the work of Hayek on knowledge and cultural evolution; Coasean reasoning about transaction costs and externalities; Alchian-Demsetz propety rights theory; Schumpeterian and Kirznerian entrepreneurship; Knightian uncertainty; bounded rationality a la Simon, and the economic history of transaction costs as explored by North. Indeed, it refers (explicitly or implicitly) to almost all of my favorite economists!
While I like almost everything about this book, there is one thing that I don’t like. Reading between the lines again, it seems that Pejovich is a cold warrior, like so many classical liberals who were born in communist societies (Pejovich was born in Yugoslavia). How else can one explain his positive comments about Ronald Reagan (my view: Reagan wasted enormous amounts of money on an arms race with the USSR that was unnecessary since central planning ensures the eventual collapse of the affected society), and the assertion (in a footnote) that the US and the UK have a lower economic freedom score that they should have, since they spend a lot of money defending other countries (this is even more preposterous: why should British or American taxpayers “defend” other countries?; I think the ideal defense policy from a classical liberal point of view ranges from that of demilitarized Costa Rica to the armed neutrality of Switzerland).
But this is just a minor flaw. Overall, Pejovich’s short book is an outstanding introduction to institutional economics and public policy analysis.
