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Complexity and Institutions: Markets, Norms and Corporations (International Economic Association)

Aoki, Masahiko, Binmore, Kenneth, Deakin, Simon and Gintis, Herbert (eds.)
Palgrave Macmillan Ltd.: Houndmills, Basingstoke, Hampshire, 2012
ISBN 9781137034205 (pb)

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Reviewed by Balazs Kovacs
Institute of Management, University of Lugano

Cover of book This volume is a part of the Palgrave Macmillan series that publishes papers presented at the 2011 World Congress of the International Economic Association. The papers in this volume explore the complexity of economic transactions and bring together various approaches, such as game theory, agent-based modelling, law, complexity studies and institutional research.

The book opens with an introduction that tries to connect the volume's papers by asking "How do the agents in society deal with the complex reality in order to pursue their own materialistic and other possible preferences?" Other questions follow, such as "What are the relationships between social order and individual rationality?” or "What is the role of institutions?" These are very important questions that might interest most JASSS readers.

The book contains chapters that provide variations on the above themes. The first paper is a philosophy of science essay by M. Kandori - "Theory and Reality in Economics: Insights from Three Allegories" - where the author returns to the classic question of "models vs. reality" in the social sciences and discusses unequivocal examples of prediction failure of mainstream economic models and the need for a complexity approach. This contribution sets the tone for the whole book by suggesting that society is more complex than what is generally assumed in standard economic modelling.

The second part of the book - "Agent-based Models of Complex Market Exchange" - includes three papers that examine markets as a network of interacting firms and agents. In "The Dynamics of Pure Market Exchange", H. Gintis presents a multi-agent Walrasian system modelled as a Markov process in which each agent has private prices that are updated by information exchange through agent interaction. The second paper - "Analytical Solution for Agent-Based Models" by C. Guilmi, M. Gallegati, S. Landini and J. Stiglitz - presents a model of the credit market that is based on statistical mechanics models. The third paper - "The EURACE Macroeconomic Model and Simulator" by S. Cincotti, M. Roberto and A. Teglio - describes an agent-based macroeconomic framework that simulates a macro-level economy consisting of the real economy, the financial sector and the public sector. Results of this model show that banks with high rates of leverage might drastically increase the fragility of the financial system.

The third part of the book - "Social Norms as Coordinating Devices" - includes three game theory papers on the evolution of social norms. The first one - "Aspects of Naturalising the Social Contract" by B. Skyrms - explores how social norms can act as equilibrium selection devices. The second one - "The Role of Salience in the Emergence and Reproduction of Norms" by R. Sugden - discusses the role of salience in choosing between multiple equilibria and analyzes a particular traffic game called the "Right Turn Problem". The last chapter of this part - "Fairness as an Equilibrium Selection Device" by K. Binmore - presents the author’s evolutionary theory of fairness.

The fourth part of the book - "Corporate Organization and Governance" - revolves around the role of organizations and governance and their connection to social norms. Masahiko Aoki analyzes the corporation as a system of associational cognition. He asserts that human cognition can take place at the group level and argues that shareholders, managers and workers may respectively enact their cognitive and physical roles as if they were team members while they are actually pursuing their own individualistic payoffs. "On the Plasticity of the Corporate Form", by , analyzes organizations from a law and economics perspective. The final two papers discuss corporate governance. In "An End to Consensus? The Selective Impact of Corporate Law Reform on Financial Development", S. Deakin, P. Sarkar and A. Singh track the diffusion of hostile takeover bids in the last two decades. They show that the impact of hostile takeover on financial development has not been univocal. The final paper presents an empirical analysis of the developmental properties of government-owned banks. In this paper - "Government Banks and Growth: Theory and Evidence" - S. Andianova, P. Demetriades and A. Shortland show that government ownership was associated with higher long-run growth rates in the years prior to the onset of the global financial crisis.

It is hard to review and evaluate a collection of conference papers, especially if the papers are so wide-ranging. Most social scientists, including me, would fully agree with the idea that the world is more complex than what we find in standard economic models. Embracing complexity and the role of norms, networks and institutions is crucial. The papers in this volume address certain possibilities in this direction and this is undoubtedly an important contribution. Therefore, readers interested in these topics will find food for thought in specific chapters. Unfortunately, the volume lacks a coherent framework that connects the various essays. If the goal is to convince mainstream economists to consider complexity, interactions and networks more seriously, then a more focused, systematic approach is needed and this hardly can be found in conference books.


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