Economic theories serve as blueprints for institutions, and faulty theories produce fragile ones

Evidence

Economic theory, for better or worse, provides us with the blueprints for the rules and institutions that we build to run the economy. For example, if you believe that VaR provides an adequate model of risk management, then you might argue that banks should be allowed to manage their own risks with their own models, as the so-called Basel II capital adequacy rules governing bank reserve capital requirements, which were largely written by the banks themselves, argued, and governments dutifully implemented. Or, if you think that the number-one economic problem is always and everywhere inflation, you will probably champion independent central banks to tie the hands of so-called time-inconsistent politicians who, mistakenly, tend to listen to the folks who elected them. But if those institutional blueprints are faulty or those rules are mistaken because the theory they are drawn from differs from how the world actually behaves, then our instruction sheets may produce institutions that are much more fragile than we appreciate. — Mark Blyth, Austerity, 120

Categorization

• XREF: The Basel II self-written rules and independent-central-bank dogmatism connect directly to the standard institutionalist critique of austerity in Mattei and broader political-economy literature. — connects to: Economic theories encode rival justifications for who should receive resources — Mark Blyth, Austerity: The History of a Dangerous…, 121; Economic ideas can blind policymakers to the flaws of their institutional designs — Mark Blyth, Austerity: The History of a Dangerous…, 252; Institutional reliability is often assumed by fiat rather than evidenced by data — Russell Hardin, Trust and Trustworthiness, 707 (+2 more)
• QUESTION: Worth confirming the claim that Basel II rules were largely written by the banks themselves - a stark factual claim central to the theory-as-blueprint argument.

Broader Connections

• Economic ideas can blind policymakers to the flaws of their institutional designs #expands (0.90) — Mark Blyth, Austerity, 252
• Institutional reliability is often assumed by fiat rather than evidenced by data #qualifies (0.80) — Russell Hardin, Trust and Trustworthiness, 707