Everything about Institutional Economics totally explained
Institutional economics, known by some as
Institutional political economy, focuses on understanding the role of human-made institutions in shaping economic behavior. Aspects of institutional economics are part of mainstream economics -- in particular the so-called
new institutional economics that focuses on the role of institutions in reducing transaction costs.
Heterodox institutional economics emphasizes a broader study of institutions and views markets as a result of the complex interaction of these various institutions (for example individuals, firms, states, social norms). Law and economics has been a major theme since the publication of the
Legal Foundation of Capitalism by John R. Commons in 1924.
Behavioral economics is another hallmark of institutional economics based on what is known about psychology and cognitive science, rather than simple assumptions of economic behavior.
Early institutional economics
Institutional economics focuses on learning, bounded rationality, and evolution (rather than assume stable preferences, rationality and equilibrium). It was once the main school of economics in the United States, including such famous but diverse economists as
Thorstein Veblen,
Wesley Mitchell, and
John R. Commons. Some institutionalists see
Karl Marx as belonging to the institutionalist tradition because he described
capitalism as a historically bounded social system; other institutionalist economists disagree with Marx's definition of capitalism, instead seeing defining features such as markets, money and the private ownership of production as evolving over time, as a result of the purposive actions of individuals.
"Traditional" institutionalism
(External Link
) rejects the
reduction of institutions to simply tastes,
technology, and nature (see
naturalistic fallacy). Tastes, along with expectations of the future, habits, and motivations, not only determine the nature of institutions but are limited and shaped by them. If people live and work in institutions on a regular basis, it shapes their world-views. Fundamentally, this traditional institutionalism (and its modern counter-part
institutionalist political economy) emphasizes the legal foundations of an economy (see
John R. Commons) and the evolutionary, habituated, and volitional processes by which institutions are erected and then changed (see
John Dewey,
Thorstein Veblen, and
Daniel Bromley.) The vacillations of institutions are necessarily a result of the very incentives created by such institutions, and are thus
endogenous. Emphatically, traditional institutionalism is in many ways a response to the current economic orthodoxy; its reintroduction in the form of
institutionalist political economy is thus an explicit challenge to
neoclassical economics, since it's based on the fundamental premise
that neoclassicists oppose: that economics can't be separated from the political and social system within which it's embedded. Some of the authors associated with this school include Robert Frank, Warren J. Samuels, Mark R. Tool,
Geoffrey Hodgson, Daniel Bromley,
Jonathan Nitzan,
Shimshon Bichler, Elinor Ostrom, Anne Mayhew,
John Kenneth Galbraith and
Gunnar Myrdal, but even the
sociologist
C. Wright Mills was highly influenced by the institutionalist approach in his major studies.
New institutional economics
» See also main article.
With the development of theories of
asymmetric and
distributed information an attempt was made to integrate institutionalism into mainstream
neoclassical economics, under the title
new institutional economics. However, this latter variant of institutionalism failed to supersede the classical school, because heterodox economists argue it was heir to what they perceive as the flaws of
neoclassical economics. Specifically,
new institutional economics failed to avoid criticisms of reductionism and lack of realism: these were leveled at
neoclassical economics for effectively ignoring institutions, and at
new institutional economics for attempting to reduce institutions to 'rational' and 'efficient' resolutions to the problem of
transaction costs.
Institutionalism today
Modern institutionalism is thus sharply divided between
new institutional economics represented by people like Nobel Prize winner
Douglass North and institutional political economy and "old" or "critical" institutionalism (an approach radically opposed to mainstream
neoclassical economics) associated with the Cambridge economist
Ha-Joon Chang, Daniel Bromley (
University of Wisconsin-Madison), Warren Samuels (
Michigan State University), and
Geoffrey Hodgson from University of Hertfordshire. The penetration of institutional economics into the mainstream can be seen in the work of Nobel Prize winners such as
Daniel Kahneman,
Thomas Schelling,
Gunnar Myrdal, and
Herbert Simon.
Some Sources
- Bromley, Daniel. Sufficient Reason: Volitional Pragmatism and the Meaning of Economic Institutions, Princeton University Press (2006).
- North, Douglass C. "Institutions, Institutional Change and Economic Performance", Cambridge University Press (1990).
- Commons, John. "Institutional Economics," American Economic Review Vol. 21 (1931): pp. 648-657.
- Hodgson, Geoffrey M., "The Approach of Institutional Economics," Journal of Economic Literature v36, n1 (March 1998): 166-92.
- Chang, Ha-Joon, "Globalization, Economic Development and the Role of the State", Zed Books (2002)
- Cheung, Steven N. S., "The Structure of a Contract & the Theory of a Non-Exclusive Resource," J. of Law and Economics 13:49-70 (1970).
- Schmid, A. Allan, Conflict & Cooperation: Institutional & Behavioral Economics, Blackwell (2004).
- Keaney, Michael., "Critical Institutionalism: From American Exceptionalism to International Relevance", in "Understanding Capitalism: Critical Analysis From Karl Marx to Amartya Sen", ed. Doug Dowd, Pluto Press, 2002.
- Samuels, Warren J., "The Legal-Economic Nexus," Routledge (2007).
-
, “Why Is Economics Not Yet a Pluralistic Science?”, Post-autistic Economics Review, issue no. 43, 15 September 2007, pp. 43-51.
- Hodgson, Samuels, & Tool, The Elgar Companion to Institutional & Evolutionary Economics, Edward Elgar 1994.
Journals include
Journal of Economic Issues and
Journal of Institutional Economics.
Further Information
Get more info on 'Institutional Economics'.
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