Concept
Institutional economics
Overview
Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behavior. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the other. Its name and core elements trace back to a 1919 American Economic Review article by Walton H. Hamilton. 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). In general, the distinction of Institutional Economics is that, while Classical Economics focused on exchange between actors in markets or through macro level income flows and factors of production, Institution Economists placed their focus within productive units as organizations composed of people in societies. This gave Institutional Economics a broad purview within the social sciences, and an empirical focus on real world interactions to explain things abstract models based on homo economicus did not. The earlier tradition continues today as a leading heterodox approach to economics. Institutional Economics, particularly New Institutional Economics, also continues to contribute to a wide variety of disciplines, including Industrial Relations, Organizational Theory, Management Studies and Public Administration, among others.
"Traditional" institutionalism 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 counterpart 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). Institutional economics focuses on learning, bounded rationality, and evolution (rather than assuming stable preferences, rationality and equilibrium). It was a central part of American economics in the first part of the 20th century, 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.
A significant variant is the new institutional economics from the later 20th century, which integrates later developments of neoclassical economics into the analysis. Law and economics has been a major theme since the publication of the Legal Foundations of Capitalism by John R. Commons in 1924. Since then, there has been heated debate on the role of law (a formal institution) on economic growth. 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.
Some of the authors associated with this school include Daron Acemoglu, Robert H. Frank, Warren Samuels, Marc 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.
Overview adapted from Wikipedia (CC BY-SA 4.0; see the article history for authors).
Possible passages
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"Man is not a consumer of pleasures. He is a creator of life." With this claim of the distinctive, synthetic, character of the moral consciousness and of the impossibility of testing the worth of ideals by cosmic laws, or by gratification of particular wants as measured by pleasure, I have no issue. The analysis of the moral judgment made above points out just how it is that good is synthetic.
John Dewey, Creative Intelligence
States what Institutional economics is; the author is tied to Institutional economics in the knowledge graph.
And such an education will of itself tend to do away with the evils of the existing economic situation. In the degree in which men have an active concern in the ends that control their activity, their activity becomes free or voluntary and loses its externally enforced and servile quality, even though the physical aspect of behavior remain the same. In what is termed politics, democratic social organization makes…
John Dewey, Democracy and Education
States what Institutional economics is; the author is tied to Institutional economics in the knowledge graph.
Yet those who know the habits of the continent of Europe are aware how apparently small a motive often outweighs the desire of money getting, even in the operations which have money getting for their direct object. The more highly the science of ethology is cultivated, and the better the diversities of individual and national character are understood, the smaller, probably, will the number of propositions become…
John Stuart Mill, A System of Logic, Ratiocinative and Inductive
States what Institutional economics is.
Related ideas
- John Dewey
- Karl Marx
- New Deal
- Neoclassical economics
- Naturalistic fallacy
- Corporate governance
- Law and economics
- Technology
- University of Chicago
- Capitalism
- Penguin Books
Place in the tradition
Part of Philosophy and economics.