INSTITUTIONAL ECONOMICS:

SURVEYING THE "OLD" AND THE "NEW"

  1. The "Old" Institutionalism (OI) was a prominent paradigm in the 1920s and the 1930s, by 1960s the era of OI was all over. The main representatives of this school were T. Veblen, J. Kommons, W. C. Mitchell and others.

  2. The main feature of OI is rejection of the ontological and methodological presumptions of classic liberalism; individual is no longer taken as given.

  3. The ancestor of OI - Thorstein Veblen – criticized the concept of ‘rational economic man’ and paying too much attention to the question of equilibrium in "static state". Instead he put stress on the processes of economic evolution and technological transformation. He thought that individuals act as being influenced by relations of an institutional nature.

  4. He emphasized inertia and habit instead of calculating agent of neoclassical theory. Institutions by Veblen are ‘settled habits of thought common to the generality of men’.

  5. He attempted to construct an ‘evolutionary’ economics and saw instincts, habits and institutions in economic evolution as analogous to genes in biology but with more stable and inert quality.

  6. He wrote that the economic life history of the individual is a cumulative process of adaptation, all elements can change in a process of cumulative causation. In Veblen’s view the economic system is not a ‘self-balancing mechanism’, but a ‘cumulatively unfolding process’.

  7. To summarize the main ideas of Veblen were that the individual is not taken as given, preferences are endogenous and that his tacit research program tries to explore the implication of biological ideas of economic science.

  8. As for weak points of the OI, although it established the importance of institutions and proclaimed the need for evolutionary economics, later it proceeded in more descriptive direction, leaving core theoretical questions unanswered.

  9. The "New" Institutionalism (NI) occurred in the mid-1970s. The representatives and their fields of investigation are K. Arrow and W. Niskanen (organizations and bureaucracy), M. Olson (collective actions), E. Furubotn and S. Pejovich (economics of property rights and rent seeking), Richard Posner (economics and law) and so on.

  10. There is a variety of different approaches, but the prominent NI theme is to explain the existence of political, legal and social institutions by reference to a model of individual behaviour, tracing out its consequences in terms of human interactions. Much of the core assumptions of mainstream economics are left unchanged.

  11. Some of new institutionalists are closer to the neoclassical theory, some are not. Even with the many important differences, all types of new Institutionalism share some common premises. They assume that individuals and their preference function are taken as given like in the classic liberal economics. This is the main distinction between NI and OI.

  12. The notion of abstract individual relates to the doctrine of methodological individualism, that is to say, all social phenomena are explained only in terms of individuals – their properties, goals and beliefs. But there is no reason to exclude the idea that some human intentions have prior causes. Here we have infinite regress, like the puzzle "who came first: chicken or the egg". The key point is that neither individual nor social factors have primacy.

  13. Taking the individual "for granted", NI attempted to explain the emergence, existence and performance of social institutions. Once institutions have emerged they are considered as providing external constraints to individuals taken as given.

  14. As for game-theoretic approach to institutions, to explain the origin of social institutions, NI along with the assumption of given individuals presumes given rules of behavioural governing their interactions. Thus A. Field points out that rules must be presumed at the start, that’s why game theory can’t explain the elemental rules themselves.

  15. Neoclassical theory doesn’t conceive of the market in institutional terms. NI assumed that market had a prior existence as an institution-free "state of nature" (Williamson). Some other authors considered market as social institution, governed by set of rules (V. Vanberg). The old institutionalist K.Polanyi argued that market is embedded in other social institutions such as state and even can be created by conscious design. C. Menger made a distinction between ‘organic’ and ‘pragmatic’ institutions. But in reality there is always the mixture of these two types.

  16. Regarding the theory of firm and the work of Williamson we can say that his break from the neoclassical theory is partial and incomplete, he claims to be influenced by H. Simon and the behaviouralist school, but in his work "economizing on transactional costs" is inconsistent with Simon’s idea of bounded rationality, because it is part of the cost-minimizing behaviour, which is the analogue to the orthodox assumption of maximizing.

  17. Despite big differences in analytical methods and policy conclusions, all varieties of NI are united by the assumption that individual preferences and purposes are exogenous.

 

 

 

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