Why Institutions Are Important in Economics

(Mike Segar/Reuters)
They promote and embody knowledge, practices, and norms that don’t show up in statistics.

Institutions matter. In his latest book, A Time to Build, Yuval Levin outlines the importance of institutions for providing cultural structure. He offers a handy definition of institutions: “the durable forms of our common life. They are the frameworks and structures that we do together.” According to Levin, many of these institutions have withered, which has led to increased social turmoil and political anxiety.

Various non-state institutions help ensure a diffusion of power and provide crucial contexts for the flourishing and self-understanding of individuals. The fate of institutions also relates to contemporary debates about policy reform on the right. Current-day “populists” or “nationalists” often position themselves against neoliberalism; they build in many ways on reform conservatism (and neoconservatism). One way of looking at “populist” or “nationalist” conservatism is to see it as a mode of conservatism that is attuned to the importance of institutions; it also fears that the current structures of the market serve certain key institutions poorly.

The family and a national infrastructure are especially pressing concerns for this effort, though there are other ones, too (such as the web of institutions in Rust Belt towns ravaged by China shock). The dangers of institutional decay are a major theme in Marco Rubio’s and Josh Hawley’s critiques of the policy status quo. Tellingly, Oren Cass argues that one of the goals of his new American Compass project is an “economic consensus that emphasizes the importance of family, community, and industry to the nation’s liberty and prosperity.” This hoped-for consensus would thus use economic policy to reinforce the institutions of civil society and a greater industrial infrastructure.

Many debates about “industrial policy” these days allude to the institutional stakes of economic practices. Renewed interest in supply chains, access to strategic resources, and the conditions of the workforce is informed by the idea that economic activity is not infinitely and instantaneously fluid. Instead, it takes a certain amount of institutional knowledge and resources to, say, mass-produce a computer or a vaccine. Because of the importance of such institutional capital, part of policymaking consists of attending to those economic institutions that serve the public good.

For instance, in recent years the United States has offshored a significant portion of its medical supplies (both component parts and finished products) to the People’s Republic of China. In the wake of the coronavirus’s shock to the PRC, there is now a risk (and right now it is only a risk, not a guarantee) of shortages of key medical products. Of course, there are other suppliers, and over the medium to long term, other producers could be found for most medical supplies. But invocations of the long term won’t provide much comfort to someone who needs antibiotics now. This issue of medical supplies reveals in miniature some of the real personal, social, and economic stakes for supply chains — and it suggests why it might be in a nation’s interest to protect and promote certain industries as a way of promoting public welfare.

The institutional effects of economic trends have other implications, too. As the past two decades have demonstrated, the loss of a major employer — such as a factory — can do significant social damage to the surrounding region. The “creative destruction” of the market can sometimes leave broken communities behind. The fact that churn can leave some behind is not a reason to embrace economic stasis, but it does offer one reason for government policy to try to cushion the blows of major disruptions.

Disruption often accompanies growth. For instance, the transition from an agricultural to a manufacturing economy in the United States was disruptive, but it also led to massive growth, even as the U.S. continued to feed itself. Manufacturing didn’t replace agriculture so much as it supplemented it. However, disruption isn’t synonymous with growth. In many ways, the trends of the high neoliberal era seem more mixed. Institutional enrichment serves more than a defensive purpose. Because institutional knowledge often helps spur innovation, maintaining key industrial institutions can be a way of promoting new technologies. In the 19th century, America’s hands-on experience with manufacturing helped it become a laboratory of invention (combined, of course, with market-oriented policies that allowed its citizens to harness this innovative potential). A similar pattern can be seen in other nations. For instance, a recent Wall Street Journal story chronicled the way certain Chinese producers were able to leverage their experience with audio manufacturing to make advancements in audio design.

One might disagree with this project of using government policy to shore up institutions or believe that certain policies might be counterproductive toward those ends. But this effort itself is hardly radical. One of the central questions of American (and not only American) political thought is the dependence of self-government on broader cultural resources and some geopolitical infrastructure. That dependence was an animating topic of debates during the Founding, in Tocqueville’s Democracy in America, during the New Deal, and, yes, even in movement conservatism in the 20th century. Different political orientations might emphasize different elements of this institutional importance, but concern with this topic can be seen across the political spectrum.

Across American history, policy played an important role in addressing those ends. Hamilton’s Report on Manufactures, Henry Clay’s “American system,” Lincoln’s industrial policies, the Homestead Acts, the various investments in infrastructure and technology during the world wars of the 20th century — all these testify to the longstanding interest in using government policy to promote certain political ends. The goals of such policy efforts might vary, from ensuring an industrial base so that the nation can compete in great-power politics abroad to promoting a freeholding middle class at home. But these efforts all took seriously the role of certain institutions in promoting the public good and political liberty.

As suggested above, movement conservatives — for all their denunciations of “statism” — very much believed that active government policy (and not just the absence of government effort) could nurture the conditions of freedom. By and large, proponents of an assertive stance in the Cold War did not exert much effort demanding that the United States government issue letters of marque to various private businesses to wage war against Communist tyranny. Instead, they pushed for extensive state investment in military bases, new technologies, and armaments. They called for the creation of a network of international alliances. For Cold Warriors, the promotion of liberty at home and abroad depended upon massive state effort.

Luckily, we no longer live teetering on the tip of a nuclear warhead, and the Cold War is over. But that task of nurturing the infrastructure of liberty persists, even if the conditions have changed. Conservative proponents of an institutionally informed economics might support a variety of tactics, from infrastructure projects to industrial policy to financial reform to efforts to tighten the labor market. A unifying thread of such efforts would be attention paid to the way economic policy serves not just private industry or individual paychecks but certain key institutional supports for the American republic.

There’s much to be said on behalf of the market and the prosperity that a well-regulated capitalism can generate. The failure of totalitarian central planning in the 20th century is indeed instructive. Command-and-control economies might be economically inefficient and lead to terrible abuses of power (the Gulag, reeducation camps, and so forth), but, as Samuel Hammond has noted, not every exertion of government policy is a stage on the way to some Great Leap Forward. Instead, government can provide some of the infrastructure for a dynamic market — by ensuring a certain level of social stability, disrupting monopolies, investing in infrastructure, and so forth.

This has a bearing on the wars over “liberalism” in American politics right now. Some critics and some proponents of “liberalism” assume that the tradition of modern liberty springs from the Enlightenment and the project of the radical emancipation of the will. According to this assumption, any efforts to place limits on the exercise of the will curtails liberty. Thus, an economic policy of laissez-faire is the only one in accord with freedom. (Never mind that pure laissez-faire is impossible in a world of governments.)

Fortunately, though, the American tradition of liberty does not have Enlightenment dogmatics as its sole foundation. While some of the works of the Enlightenment have obviously informed American constitutional statecraft, this mode of liberty also draws from the supple practices of lived compromise nurtured over generations (both in England and in what is now the United States), from deep religious and classical traditions and norms, from the improvisations of settlers and pioneers, and from many other places. These various sources offer broader grounds for the defense of liberty than mere individual autonomy, and they help direct the exercise of individual liberty so that it does not contribute just to selfish enrichment but also to the common good.

From this more enriched perspective, nurturing certain institutions is a key component of maintaining liberty. In part because different patterns of economic growth reward different factions and encourage different tendencies within a regime, sustaining a constitutional republic requires some attention to how to strike a balance between those factions and to nurture those traditions that make a lived liberty possible.

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