Institutional Economics - origins and main schools

1. Institutional Economics - origins and main schools Prof. Jerzy Wilkin

2. Institutional economics - origins American institutionalism – main representatives: • T. Veblen (1857-1929) – „The Theory of Leisure Class” and „The Theory of Business Enterprise” • W.C. Mitchell (1874-1948) – „Business Cycles”, The Rationality of Economic Activity” • J.R. Commons (1862-1945) – „Legal Fundations of Capitalism”, „Institutional Economics” • J.K. Galbraith (1908-2006) „The Affluent Society”, „The New Industrial State” • G. Myrdal (1898-1987) – „An American Dillema”, „Asian Drama: An Inquiry into Poverty of Nations”

3. New institutional economics R. Coase – „The Nature of the Firm” (1937) O. Williamson – „Markets and Hierachies”(1975), „Economic Institutions of Capitalism” (1985) D.C. North – „Structure and Change in Economic History” (1981), „Institutions, Institutional Change and Economic Performance” (1990)

4. Main streams of new institutional economics • Transaction costs economics • Property rights economics • Public choice theory • New economic history • Law and economics

5. American institutionalism: Contestation of neoclassical paradigm in economics; Holism; Interdisciplinary approach New institutional economics: Utilizes achievements of neoclassical economics; Methodological individualism; Interdisciplinary approach Two approaches to the study of institutions in economics

6. The meaning of institutions • American institutionalism: • „Intitutions – regular patterned behaviour of people in a society and the ideas and values associated with these regularities”, • „widely prevalent highly standardized social habits, way of thought or action embedded in the habits of a group of customs of people.” • „Rules: who may, who must, who may not do something”

7. Institutions … • New institutional economics: • Norms, markets, organizations • D. North: „Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange, whether political, social, or economic. Institutionional change shapes the way societies evolve through time and hence is the key to understanding historical change.” • „Institutions reduce uncertainty by providing a structure to everyday life.”

8. Institutions in social sciences • Institutions as a subject of studies in: • Sociology • Economics • Social Psychology • Cultural Anthroplogy • Law • Political Sciences • Study of institutions as an integrating element in social sciences

9. The role of institutions • The work of invisible hand can be accelerated: „The invisible hand, if unaided by supporting institutions, tends to work slowly and at high costs” (Furuboth & Richter) • Institutions determine transaction costs which contribute up to 50% of GDP in developed countries