Institutional economics

From Wikipedia, the free encyclopedia

 This article or section is missing citations or needs footnotes.
Using inline citations helps guard against copyright violations and factual inaccuracies. (October 2007)

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 (e.g. 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.

Contents

[edit] 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 indeed evolving over time, but as a result of the purposive actions of individuals.

"Traditional" institutionalism [1] 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 is based on the fundamental premise that neoclassicists oppose: that economics cannot be separated from the political and social system within which it is 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.

[edit] 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.

[edit] Institutionalism today

Modern institutionalism thus contains diverse strains, including the 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.

[edit] Some Sources

  • Bromley, Daniel. Sufficient Reason: Volitional Pragmatism and the Meaning of Economic Institutions, Princeton University Press (2006).
  • 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).
  • Commons, John. "Institutional Economics," American Economic Review Vol. 21 (1931): pp. 648-657.
  • Davis, John B. * "The Nature of Heterodox Economics," Post-autistic Economics Review, issue no. 40.[2]
  • _____, “Why Is Economics Not Yet a Pluralistic Science?”, Post-autistic Economics Review, issue no. 43, 15 September 2007, pp. 43-51.
  • Galbraith, John Kenneth, "Power & the Useful Economist," American Economic Review 63:1-11 (1973).
  • Hodgson, Geoffrey M., "The Approach of Institutional Economics," Journal of Economic Literature v36, n1 (March 1998): 166-92.
  • Hodgson, Geoffrey M. The Evolution of Institutional Economics: Agency, Structure and Darwinism in American Institutionalism, London and New York: Routledge (2004) .
  • Hodgson, Samuels, & Tool, The Elgar Companion to Institutional & Evolutionary Economics, Edward Elgar 1994.
  • 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.
  • North, Douglass C. Institutions, Institutional Change and Economic Performance, Cambridge University Press (1990).
  • Schmid, A. Allan, Conflict & Cooperation: Institutional & Behavioral Economics, Blackwell (2004).
  • Samuels, Warren J., The Legal-Economic Nexus, Routledge (2007).
  • _____, “Institutional Economics," The New Palgrave: A Dictionary of Economics, v. 2 (1987). pp. 866-64.

Journals include Journal of Economic Issues and Journal of Institutional Economics.

[edit] External links

v • d • e
Schools of economics
Pre-modern
Early modern
Modern
20th century
Related