Volume 5, Issue 2 -

This article examines the relationship between the work of Yoram Barzel and Institutional Economics. Barzel has developed a property rights/transaction cost approach to economics and has written on topics ranging from car racing to slavery to Jewish lending to voting rules in condominium associations. Among his many ideas are those about racing to claim assets, multitasking, rationing by waiting, divided ownership of complex assets, measurement costs, and the economic orgins of democracy. In the process Barzel’s work unearthed the economic rationale for many institutions and offered a framework for analyzing them. Barzel holds an important place among all economists for expanding the scope of economic science in a way that focuses attention on the importance of property rights in understanding institutions and the economic logic of their variety. In this way he has been a crucial part of economic study of institutions.

My theme is of a Rise and a Fall of understanding, coming from a failure to measure ones understanding. Down to 1848 the new field of political economy was gradually coming to understand the system of market-tested betterment (lamentably called by its enemies “capitalism”). After 1848, however, more and more of the economists, as they increasingly called themselves, came gradually to mis understand it. Indeed, the political left and the middle came to treat the theories of exchange-tested betterment with angry contempt, such as Thorstein Veblen’s blast against English economics, with its allegedly necessary assumption of the «hedonistic conception of man… of a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli» (Veblen, Thorstein. 1898. “Why Is Economics Not an Evolutionary Science?,” Quarterly Journal of Economics 12(July): 373–397). “Imperfections” in the market took center stage in economics, and the understanding that had developed during the Rise was at best forgotten, or at worst condemned as “capitalist” propaganda, so obviously false that no actual measurement of its falsity need be offered.

Ronald Coase was a founding father of modern law and economics. Yet, Coase distanced himself from the economic analysis of law, which today dominates the law and economics scholarship, and proposed an alternative research program, which is referred to here as “law and the economy”. As market transaction presumes the delineation of rights, which are primarily defined and enforced by law, law obviously anchors the foundation of a market economy. Moreover, changes in the legal system are a main source of institutional change that reassigns rights and redraws constraints under which rights are exercised, thus fundamentally affecting transaction costs and how the economy works. “Law and the economy” recognizes the law as an integral part of the economy and calls for the study of the economic impact of law.

Ronald Coase (1937), in his article “Nature of the Firm,” argued that if the price mechanism is used, a factor of production (owner of the firm) would need to negotiate a series of contracts separately with each of the factors with whom he is co-operating; these contract negotiation costs could be reduced by organizing a firm because the owner-entrepreneur of the firm is able to direct resources within the firm, hence saving some transaction costs. Furthermore, Coase used a von Thünen concentric circles diagram to depict a single-product firm, as it expands, grows into a multi-product firm. My theory of the ethnically homogeneous [Chinese] middleman group/EHMG (Landa 1981), argued that the EHMG is an organization which reduces the transaction costs of contract enforcement. Using a von Thünen concentric circles diagram, I showed how a rational trader chooses his trading partners, moving from the innermost circle (most trusted partners) outwards to the ethnic boundary as he expands the size of this trading network. The aggregative result of all rational traders’ choice of trading partners is the spontaneous emergence of the EHMG. My 1981 papers together with subsequent published papers on the EHMG have been reprinted in my book, Economic Success of Chinese Merchants in Southeast Asia (Landa 2016); these papers created the “Economics of Identity,” a new subfield, while carrying on the Coasian transaction costs tradition.