Institutional economics 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 - and 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). New institutional economics (NIE) may be characterized as a new perspective in economics. ... Heterodox economics refers to schools of economic thought which do not conform to the mainstream paradigm of neoclassical economics. ...

Early institutional economics

Institutional economics was once the gay sex rule 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 naturally arising over time, as a result of the purposive actions of individuals. Thorstein Bunde Veblen (born Tosten Bunde Veblen July 30, 1857 – August 3, 1929) was a Norwegian-American sociologist and economist and a founder, along with John R. Commons, of the Institutional economics movement, most famous for his Theory of the Leisure Class (1899). ... Wesley Clair Mitchell (August 5, 1874 – October 29, 1948) was an American economist known for his empirical work on business cycles and for guiding the National Bureau of Economic Research in its first decades. ... John Rogers Commons (1862–1945) was a well-known institutional economist at the University of Wisconsin. ... Karl Heinrich Marx (May 5, 1818, Trier, Germany – March 14, 1883, London) was a German philosopher, political economist, and revolutionary. ... Capitalism generally refers to an economic system in which the means of production are mostly privately[1] owned and operated for profit, and in which distribution, production and pricing of goods and services are determined in a largely free market. ...

"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, Roland Hoksbergen, Mark R. Tool, Geoffrey Hodgson, Daniel Bromley, and Anne Mayhew. By the mid 20th century humans had achieved a mastery of technology sufficient to leave the surface of the Earth for the first time and explore space. ... George Edward Moore The naturalistic fallacy is an alleged logical fallacy, delineated by British philosopher G. E. Moore in his seminal Principia Ethica (1903). ... Institutional political economy refers to a body of political economic thought stemming from the works of Thorstein Veblen, John Commons, Wesley Mitchell, John Dewey and more recent political economists such as Geoffrey Hodgson, Jonathan Nitzan and Shimshon Bichler. ... John Rogers Commons (1862–1945) was a well-known institutional economist at the University of Wisconsin. ... John Dewey (October 20, 1859 – June 1, 1952) was an American philosopher, psychologist, and educational reformer, whose thoughts and ideas have been greatly influential in the United States and around the world. ... Thorstein Bunde Veblen (born Tosten Bunde Veblen July 30, 1857 – August 3, 1929) was a Norwegian-American sociologist and economist and a founder, along with John R. Commons, of the Institutional economics movement, most famous for his Theory of the Leisure Class (1899). ... In an economic model, an endogenous change is one that comes from inside the model and is explained by the model itself. ... Institutional political economy refers to a body of political economic thought stemming from the works of Thorstein Veblen, John Commons, Wesley Mitchell, John Dewey and more recent political economists such as Geoffrey Hodgson, Jonathan Nitzan and Shimshon Bichler. ... Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ... Geoffrey M. Hodgson (born 28 July 1946) is a Research Professor of Business Studies in the University of Hertfordshire, and also the head of the Centre for Research in Institutional Economics. ...

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 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 transaction costs. New institutional economics (NIE) may be characterized as a new perspective in economics. ... In economics, information asymmetry occurs when one party to a transaction has more or better information than the other party. ... Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ... New institutional economics (NIE) may be characterized as a new perspective in economics. ... Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ... New institutional economics (NIE) may be characterized as a new perspective in economics. ... Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ... New institutional economics (NIE) may be characterized as a new perspective in economics. ... In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange. ...

Institutionalism today

Modern institutionalism is thus sharply divided between new institutional economics represented by people like Nobel Prizewinner Douglass North and institutional political economy and "old" or "critical" institutionalism (an approach radicaly opposed to mainstream neoclassical economics) chiefly associated with the Cambridge economist Ha-Joon Chang and Geoffrey Hodgson from University of Hertfordshire. New institutional economics (NIE) may be characterized as a new perspective in economics. ... Douglass Cecil North (born November 5, 1920) is co-recipient of the 1993 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. ... Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ... Ha-Joon Chang (b. ... Geoffrey M. Hodgson (born 28 July 1946) is a Research Professor of Business Studies in the University of Hertfordshire, and also the head of the Centre for Research in Institutional Economics. ...

Some Sources

• 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. * 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, 20002.
• Samuels, Warren J., "The Legal-Economic Nexus," George Washington Law Review, 57:1156-78 (1989).
• _____, “institutional economics," The New Palgrave: A Dictionary of Economics, v. 2 (1987). pp. 866-64.

Ronald Coase, Douglass North, and Steven Cheung are three of the top New Institutional economists still living. Ronald Coase (born December 29, 1910) is a British economist. ... Douglass Cecil North (born November 5, 1920) is co-recipient of the 1993 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. ... Steven Cheung is a member of Hong Kong cantopop duo, BoyZ. He was born on November 10, 1984. ...

External links

• Douglass North Nobel lecture
• Institutional & Behavioral Economics