Institutional economics

Institutional economics is a school of heterodox economics, with a focus going beyond economic's usual concentration on markets to the exclusion of all else. Instead it looks more closely at human-made institutions and views markets as a result of the complex interaction of these various insitutions (e.g. individuals, firms, states, social norms etc) . With the development of theories of asymmetric and distributed information an attempt was made to integrate institutionalism into neoclassical economics, under the title new institutional economics. However, this latter variant of institutionalism failed to superseed the classical school, because (heterodox economists argue) it was heir to all the flaws of neoclassical economics. Specifically, new institutional economics failed to avoid criticisms of reductionism and lack of realism: these were levelled 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 transactions costs. Modern institutionalism is thus sharply divided between new institutional economics represented by people like Nobel Prizewinner Douglass North and institutional political economy (an approach opposed to neoclassical economics and its political adjunct neoliberalism chiefly associated with the Berkley sociologist Peter Evans and the Cambridge economist Ha-Joon Chang.

Institutional economics was once the dominant school of economics in the United States, including such famous but diverse economists as Thorstein Veblen, Wesley Mitchell, and John R. Commons. While 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 naturally arising over time, 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 economic orthodoxy of present; 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 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, and Anne Mayhew.

Some Sources

• 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)