Efficiency of Institutions NEW2 - From the Perspective of New Institutional Economics with Emphasis on Knighting Uncertainty

The efficiency of institutions, understood in the neoclassical sense, i.e., as the result of constraint optimization of a neoclassical economy is pointless from the perspective of the New Institutional Economics, because the latter assumes incomplete foresight. For such a world one cannot use Newton's celestial mechanics (Richter 2017). To act under conditions of deficient foresight requires four properties: First, proper institutions or rules of behavior, like contractual obligations or private property (Hume 1969). Second a qualified individual leadership (Knight 1921). Third, a healthy endowment of social capital that permits self-organizing (Fukuyama 1995). Prudent economists have no choice but to use the analytic style of the social sciences – as practiced in the NIE literature – and to be aware of the limits of social engineering. Taking this into account, we discuss stepwise the economic effectiveness of the following four economic institutions of capitalism: Competitive markets, money, contracts, and firms. Their efficiency under incomplete foresight depends not only on the adaptability of institutions to unforeseen events but also on the level of trust among its users (their corporate or national culture) and the skills of entrepreneurial or political leadership. Top executive salaries contain a speculative element. To cap them makes only sense if one caps also increases in share prices. There exists no mathematical concept of economic efficiency of institutions like Pareto efficiency. All we can do is to be aware that we are dealing with complex adaptive social systems that, in a sense, maybe ‘adaptive efficient' (North 1980)