Economic theory

Nielsen, Klaus (2016) Economic theory. In: Ansell, C. and Torfing, J. (eds.) Handbook on Theories of Governance. Cheltenham, UK: Edward Elgar, pp. 340-352. ISBN 9781782548492.

Abstract

Economic theory is about coordination of decision making. Markets, corporate hierarchies and governments are seen as the most important governance mechanisms, and economics is about the proper role and scope of each mechanism. Decision making is coordinated by means of a proper division of labour between each mechanism. Some tasks are seen as best accomplished by the market, others by corporate hierarchies, and others again by the government. Some economic theories also stress the importance of proper institutions for effective coordination of the decision making. In sum, coordination takes the form of institutional framing and division of labour between governance mechanisms that are mostly seen as functioning in isolation and according to their own respective rationales. On the other hand, discursive framing of decentralized decision making and mixture of governance mechanisms as a result of direct interaction, joint decision making and negotiations between actors are beyond the theoretical perspective of economics. One of the metaphors being used for such forms of governance is the handshake. In this contribution the handshake will be used as a metaphor to represent contributions with important common elements even if only a few of them use the concept themselves. Instead of coordination directed by either the invisible hand of market forces or the visible hand of superiors in hierarchies handshakes represent coordination by agreement, bending of will and/or consensus. Handshakes can be visible or invisible. Visible handshakes are formal whereas invisible handshakes are informal. Visible handshakes are being fleshed out through direct interaction within institutional frameworks established for formal coordination and aiming for compromise. Invisible handshakes are informal coordination through means such as trust, social relationships, affinity and a common frame of meaning aiming for consensus. Because of the important role of mainstream economics in relation to the traditional forms of coordination this contribution starts off by specifying in more detail how mainstream economic theory has contributed to this traditional understanding. First, the rationale of the invisible hand with no need for interactive coordination is presented. The economic rationale of the diametrically opposite approach in the form of central state planning (the clinched fist) is presented next. Then follows an outline of micro- and macroeconomic theories that suggest the need for supplementing the invisible hand with a helping hand in order to counteract market failure, stabilize the macro economy and redistribute income. Then the focus shifts to the governance of the firm starting with the visible hand of managerial coordination followed by economizing on transaction costs, and the trends of globalization and outsourcing (the vanishing hand). Whereas the preceding sections concern theories with a focus on coordination of governance mechanisms in accordance with the generic definition of governance, the concluding sections give a more detailed account of economic theories that contribute important insight to the understanding of governance more narrowly understood as societal steering toward collectively negotiated objectives though interactive processes. A review of contributions that provide an economic theoretical rationale for formal interaction between market actors, governments and associations (visible handshakes) is presented first, followed by an outline of contributions about informal coordination in networks, by means of social capital and through discursive interaction (invisible handshakes). Finally, economic theory of the governance of common pool resources is presented as a combination of visible and invisible handshakes followed by a conclusion.

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