Session 2
Session 2
## Key Insights
7. Institutional Design
The emphasis on rules is also about the
principles of institutional design. Effective
institutions are those that create rules which
promote desirable economic behaviors and
outcomes. This involves careful consideration of
how rules are formulated, implemented, and
enforced to ensure they serve the intended
purpose
Vanberg integrates insights from public choice theory, which applies economic principles to political
processes. This theory suggests that political actors, like economic agents, are motivated by self-
interest. Understanding this can help in designing better political and economic institutions.
Vanberg highlights the role of constitutions in shaping economic and political behavior. Constitutions
are seen as the fundamental rules that govern society, and their design can significantly impact the
efficiency and fairness of economic systems.
The lecture underscores the importance of methodological individualism, the principle that social
phenomena can be explained by analyzing the actions and interactions of individuals. This approach
is crucial in both economics and political science for understanding how collective outcomes emerge
from individual behaviors.
Vanberg discusses the principles of institutional design, stressing that institutions should be designed
to align individual incentives with collective goals. This involves creating rules that encourage
cooperation and discourage opportunistic behavior.
An evolutionary perspective is also presented, suggesting that institutions evolve over time through a
process of trial and error. This perspective implies that institutional change is often gradual and path-
dependent, influenced by historical contexts and previous developments.
The lecture advocates for an interdisciplinary approach, combining insights from economics, political
science, law, and sociology to understand and improve institutional frameworks. This holistic view is
necessary for addressing complex social and economic issues.
The primary focus is on the legal and institutional framework necessary for a
Core Focus functioning market economy.
The Freiburg School critiques laissez-faire liberalism for its lack of attention
Critique of Laissez- to the institutional framework and the potential for market failures without
Faire proper regulation.
Role of the State Active role in providing social policies State's role is to create and enforce
and ensuring fair distribution of wealth. rules that ensure fair competition
Aspect Social Market Economy Ordoliberalism
Integral part of the system, including Recognizes the need for social
income redistribution and social security policies but primarily focuses on
Social Policies measures. maintaining competition.
Emphasizes a legal and moral order that Strong emphasis on a legal and moral
Legal and Moral supports both economic efficiency and order to support the functioning of
Order social justice. the market economy.
TUTORIAL
unhampered markets
According to Ludwig von Mises, the idea of unhampered markets is central to his economic
philosophy. Here are the key points about his view on unhampered markets:
The unhampered market economy, based on private property rights and free
exchange, is the only economic system that provides freedom and personal choice to
all members of society while coordinating the actions of billions of people in the
most economically rational manner.
In an unhampered market, there is no compulsion or coercion - individuals freely
cooperate through voluntary exchanges directed by market prices, without
interference from the state beyond protecting property rights and contracts.
The market process, driven by the interplay of individual actions under the division
of labor, directs resources to their most highly valued uses to satisfy consumer
demands in the most efficient way.
Government intervention that distorts market prices, such as through taxation,
regulations or monetary manipulation, always results in misdirection of resources
and malinvestments.
The unhampered market is not an accidental phenomenon but the product of a long
evolutionary process, emerging as the strategy that allowed humans to progress
from savagery to civilization by adjusting to economic realities.
Mises argued that the unhampered market economy ultimately serves as the
foundation of civilization itself, outdistancing any government-planned system.
Refeudalization
Refeudalization refers to the process or phenomenon of recovering or reintroducing political
mechanisms, relationships, and structures that were characteristic of the feudal system in medieval
Europe. Here are the key points about the meaning of refeudalization:
In a narrow sense, refeudalization means the literal restoration of an original feudal order,
with the return of feudal forms of organizing politics, economy, and society.
More broadly, it refers to the introduction of mechanisms and relationships in the modern
economic phase that are reminiscent of European feudalism or an idealized feudal model,
even if not exactly replicating historical feudalism.
It describes policies or trends that give special privileges to organized groups like NGOs,
corporations or wealthy individuals, akin to the nobility under feudalism.
Historians have used the term to explain the social conditions behind events like the
Neapolitan Revolt of 1647, where the peasantry revolted against the feudal aristocracy and
financiers who had been granted noble titles and tax exemptions by the monarchy.
Sociologists apply the concept to critique aspects of neoliberal globalization, such as the
privatization of public goods, extreme social polarization, unequal land distribution, and the
merger of economic and political power reminiscent of feudal lords.
Jürgen Habermas used the German term "Refeudalisierung" to describe the colonization of
the public sphere by private interests and consumer capitalism, eroding the democratic
public space gained in previous centuries