Sources of Institutions
The Scottish Enlightenment
The term Scottish Enlightenment refers to moral philosophers and economists (such as David Hume and Adam Smith) who wrote predominantly in the eighteenth century.
- They explored what basic institutions a functioning capitalist economy needs; namely the rule of law, private property, and the freedom of contract.
- They castigated the deleterious consequences of Mercantilism (selective trade protectionism and the preferment of specific groups, reliance on public enterprise, powerful coalitions between ruler and established merchant interests).
- They advocated a minimal state and self-responsibility of the individual citizen.
Different from contemporary economic theorists, the classic social scientists of the eighteenth and early nineteenth centuries understood the central importance of institutions Opens in new window. The Scottish moral philosophers and economists of the eighteenth century were particularly aware of institutions Opens in new window.
Adam Smith’s famous invisible hand Opens in new window mechanism — which describes how self-seeking individuals are coordinated by competition in markets — cannot be comprehended as anything other than an ordering institutional system.
Adam Smith’s Scottish contemporary Adam Ferguson stressed the evolution of institutions over time, and his friend David Hume explored the institutional foundations on which the capitalist market economy is built and how these foundations are placed into the intellectual, cultural, and political life of a nation.
Both Ferguson’s focus on institutions ‘of human action, but not of human design’ and Hume’s identification of the institutions of property, contract and consent as providing the foundation for civilized society are still of great relevance in contemporary institutional economics.
A slightly under-appreciated aspect among contemporary institutional economists, but an idea fundamental to the moral philosophers of the Scottish Enlightenment was that of developing a robust political economy — a concept revived recently by Boettke and Leeson (2004), as well as Boettke (2012).
Smith and his contemporaries sought to develop a political economy where bad men could do least harm if they were to rise to power. The institutional system of checks and balances should be so strong that it would hold the ambitious and rapacious in check. Rather than empower the good and the wise to rule, as the French Enlightenment Opens in new window thinkers sought, the Scottish Enlightenment argued that the institutions of government should be designed, as Hume put it, with the presumption that all men are knaves.
Human nature, from this perspective, was treated as neither benevolent nor omniscient, but instead as sometimes good and often bad; sometimes smart, but more often stupid.
And the questions is what institutional configuration could utilize man’s basic instincts and channel them in a productive direction to realize the gains from social cooperation by the division of labor.
The great eighteenth century discovery of the Scottish moral philosophers, and then developed during the eighteenth and nineteenth centuries by classical political economists, was that private property and free markets provided such an institutional configuration (Boettke and Leeson, 2004; Leeson and Subrick, 2006).