The Persistence of Inefficient Institutions: On Thrainn Eggertsson’s Book

Abstract

The paper presents an overview derived from the Russian translation of Thra’inn Eggertsson’s book “Imperfect Institutions: Possibilities and Limits of Reform.” Eggertson, who is a professor at the University of Iceland and Hertie School in Berlin, employs the methodology and achievements of the new institutional economics to survey the factors which affect the sustainability of institutions that are inefficient in terms of economic development. He describes and discusses the history of some norms that were preserved for several centuries in Iceland to regulate agriculture, in particular cattle breeding and fishing, as well as to provide mutual assistance within local communities. Eggertsson shows that for a long time these norms were a source of the island’s economic backwardness; and he explains why Icelandic society’s farming elite not only did not seek to change those norms despite their seemingly obvious imperfection and harmful consequences, but instead carefully protected them and avoided even thinking about any changes. The historical example of Iceland’s persistent loyalty to inefficient institutions is supplemented by a theoretical discussion of the role of institutions in economic development. Eggertson argues that neither an accumulation of factors of production nor the development of technologies are sufficient for economic growth without the development of social technologies and institutions in particular. At the same time, the evolution of institutions as ways for economic entities to interact is linked to the evolution of social models, behavioral patterns, and the rules people follow; this linkage underlines the importance of learning and persuasion in the course of any institutional changes. The book also contains a discussion of various aspects of institutional reforms that can affect their success or failure.