Institutional Economics

1. Institutional Economics Presenters Chang Liu Mingjun Wang Yuhang Zhao Runkun Wan

2. Institutional Economics • What is institution? • a method to rule people’s behavior • the constitution made by people • What is institutional economics? • Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behavior.

3. Institutional Economics • Mainstream economics Classical economics Neoclassical economics • Heterodox economics Where Institutional economics belongs

4. New Institutional Economics • The term 'new institutional economics' was coined by Oliver Williamson in 1975

5. New Institutional Economics • NIE has its roots in two articles by Ronald Coase, "The Nature of the Firm" (1937) and "The Problem of Social Cost" (1960). In the latter, the Coase Theorem (subsequently so termed) maintains that without transaction costs alternative property right assignments can equivalently internalize conflicts and externalities. Therefore, comparative institutional analysis arising from such assignments is required to make recommendations about efficient internalization of externalities and institutional design, including Law and Economics.

6. New Institutional Economics NIE: Focus on efficiency anddistribution Traditional Institutional Economics: critical of mainstream neoclassical economics

7. New Institutional Economics transaction cost theory Coase's Theory of Property The Enterprise Theory Institution Change Theory

8. transaction cost theory • According to Ronald Coase, people begin to organise their production in firms when the transaction cost of coordinating production through the market exchange, given imperfect information, is greater than within the firm.

9. Coase's Theory of Property • Transaction costs, however, could not be neglected, and therefore, the initial allocation of property rights often mattered. As a result, one normative conclusion sometimes drawn from the Coase theorem is that property rights should initially be assigned to the actors gaining the most utility from them.

10. The Enterprise Theory • Enterprise is a way to allocate resource which can be the substitution to the market.

11. Institution Change Theory • North defines institutions as “humanly devised constraints that structure political, economic and social interactions.” • According to North, Institution plays a pivotal role in deciding the growth of a country’s economy as well as the development of its society.

12. Thorstein Veblen • ----Father of American heterodoxy called institutionalism (1857-1929)

13. Biography • was born in Cato on July 30th ,1857, Wisconsin, of Norwegian American parents who had immigrated from Norway. • grew up in rural Minnesota. • Student of J.B. Clark (marginal analysis seminal thinker) at Carlton College • Yale Ph.D., Cornell post-doctoral fellowship at age 35 • Univ. of Chicago economics instructor & editor of Journal of Political Economy • Never became a full professor and moved from school to school • Refused presidency of American Economics Association in 1920s • died in 1929 of heart disease.

14. Criticisms of orthodox theory: • He completely rejected the theoretical structures of, Marxist political economy and the historical school. • Orthodox theory Focused on static aspects of the economy rather than evolution. • Assumptions of human behavior as driven by hedonistic psychology is incorrect. • Failed to reconcile the orthodox theory of the economy with the facts of the economy. • Asserted that the basic assumptions of orthodox, historical and Marxian economics were unscientific. Wanted to tear down entire theoretical structure and build a unified social science from economics, anthropology, sociology, psychology and history.

15. Criticisms of orthodox theory: • He completely rejected the theoretical structures of, Marxist political economy and the historical school. • Orthodox theory Focused on static aspects of the economy rather than evolution. • Assumptions of human behavior as driven by hedonistic psychology is incorrect. • Failed to reconcile the orthodox theory of the economy with the facts of the economy. • Asserted that the basic assumptions of orthodox, historical and Marxian economics were unscientific. Wanted to tear down entire theoretical structure and build a unified social science from economics, anthropology, sociology, psychology and history. Veblen---- Unserviceable institutions should keep evolving in order to meet the development of technology (serviceable tools. )

16. Theory of the Leisure Class (1899) --economic research on institutions Leisure class : The rich, so called because  they can afford not to work.

17. Veblen thought economics should be study of evolving institutional structure. • institutions- habits of thought that are accepted at any particular time • He sought to understand the complex set of interrelationships that developed between culture and the traits of human nature

18. What form the habits of thoughts? • Instincts- relatively fixed underlying traits of human behavior • Most important in shaping economic behavior: • *workmanship -desire to produce goods of high quality, to be proud of and to admire workmanship, and to be concerned with efficiency and economy in our work • *idle curiosity -leads us to ask questions and seek explanations for the world around us (desire for scientific knowledge) • *parental instinct -concern for family, tribe class, nation, and humankind

19. The historical origin of leisure class 1. Age of Barbarian: The prototype of the leisure class was an occupation of women and war trophies. 2. Early stage of savageness: The leisure class was ready to come out, which these upper-class occupations comprised under government, politics, warfare, religious observances. 3. Terminal Stage of savageness: In feudal Europe or feudal Japan, the upper class was diverged from production, engaged in honorable employments and plundered wealth on the basis of prowess—force or fraud. 4. Modern Society: Improved methods; the goal of leisure class: Non-Industrial employments while plundered; the simultaneously appearance of leisure class and private ownership.

20. About leisure class: • Main Point 1: The leisure class is conservative, finding no reason to support changes, because they enjoy the status quo and are little affected by economic pressures. • Main Point 2: Conservatism is decorous and respectable. Innovation is vulgar. • Main Points 3: The example of the leisure class fosters conspicuous consumption, which diverts resources away from sustenance of the lower classes. • Main Point 4: Since the leisure class discourages change, it hinders evolutionary progress.

21. Veblen effect • Abnormal market behavior where consumers purchase the higher-priced goods whereas similar low-priced (but not identical) substitutes are available. • It is caused either by the belief that higher price means higher quality, or by the desire for conspicuous consumption (to be seen as buying an expensive, prestige item). • Named after its discoverer, the US social-critic ThorsteinBunde Veblen (1857-1929).

22. Veblen effect • Abnormal market behavior where consumers purchase the higher-priced goods whereas similar low-priced (but not identical) substitutes are available. • It is caused either by the belief that higher price means higher quality, or by the desire for conspicuous consumption (to be seen as buying an expensive, prestige item). • Named after its discoverer, the US social-critic ThorsteinBunde Veblen (1857-1929).

23. About leisure class: • Main Point 1: The leisure class is conservative, finding no reason to support changes, because they enjoy the status quo and are little affected by economic pressures. • Main Point 2: Conservatism is decorous and respectable. Innovation is vulgar. • Main Points 3: The example of the leisure class fosters conspicuous consumption, which diverts resources away from sustenance of the lower classes. • Main Point 4: Since the leisure class discourages change, it hinders evolutionary progress.

24. 凡勃伦的制度变迁理论 思维习惯或制度 支配因素 本能 发展 技术 冲突 改变 社会进步：在对制度阻力的不断克服中产生 环境

25. Wesley Clair Mitchell

27. Mitchelle’s thesis, published as A History of Greenbacks ---considered the consequences of the inconvertible paper regime established by the Union in the Civil War(1903) Gold Prices and Wages Under the Greenback Standard(1908) Business Cycles(1913) …

28. Michelle's view on the method of economic research Mitchelleis generally considered primarily an empirical scientist rather than a theorist. He thought that the development of economic would depend on more empirical study and less theoretical study.

29. Michelle's research on business cycle Four important empirical conclusion • Economic fluctuate emerged in monetary economy; • Business cycle widely distributed in the whole economy; • Economic fluctuate was determined by the profit outlook; • Economic fluctuate was caused by the own system of economy

30. Why will the prosperity end up with crisis? Why is the prosperity pregnant with depression? A typical business cycle

31. Douglass C. North 道格拉斯·C·诺斯

32. New Institutional Economics(新制度经济学) • 获得诺贝尔奖的学者（年份）： • 哈耶克（1974） • 布坎南（1986） • 科斯（1991） • 诺思（1993） • 维克里（1996） • 斯蒂格利茨（2001） • Douglass C. North（道格拉斯·C·诺斯） • Field: Economic history

33. Major publication • The Rise of the Western World: A New Economic History, 1973 《西方世界的兴起》 • Property right——Efficient institutions——Economy development • Structure and Change in Economic History,, 1981 《经济史中的结构与变迁》 • Institution Change Theory（制度变迁理论）

34. Institution Change Theory（制度变迁理论） • Institution Change Theory（制度变迁理论） • Old theory: Institution is exogenous, economy develop is the function of K, L & A • However, institution development decreases the transaction cost • 1、制度变迁中的产权理论 • 2、制度变迁中的国家理论 • 3、制度变迁中的意识形态理论

35. John Kenneth Galbraith 约翰·肯尼思·加尔布雷思

36. John Kenneth Galbraith • 1908—2006.4.29 • a Canadian-American economist • a Keynesian • an institutionalist • a leading proponent of 20th-century American liberalism

37. Books • 1958《The affluent Society(富裕的社会)》 • 1954 《 The Great Crash, 1929(1929年大崩盘)》 • 1967《The New Industrial State(新工业国家)》 • 1973《Economics and the Public Purpose(经济治国)》

38. Main ideas

39. Power Transition Theory 权力转移论 • The New Industrial State • Production Factor • Capital • Technology • Power of the Corporation • Capitalist • Technostructure of experts

40. Producer Paramountcy Theory 生产者主权论 • The Affluent Society • Opposite to the “Consumers Paramountcy Theory ” • Big businesses set their own terms in the marketplace, and use their combined resources for advertising programmes to support demand for their own products.

41. Binary system 二元体系 • Plan system 计划体系 • Power Transition • Producer Paramountcy • Market system 市场体系 • Profit Maximization • Consumers Paramountcy

42. New socialism 新社会主义 • Economics and the Public Purpose • Solution to the “poverty” of the capitalism • Convergence of the capitalism and socialism • Issue the importance of government

43. Other ideas • Reject the technical analyses and mathematical models of neoclassical economics as being divorced from reality • Believed that economic activity could not be distilled into inviolable laws • Believed that some important factors such as advertising, the influence of government and military spending had been largely neglected by most economists because they are not amenable to axiomatic descriptions • Care about the externality, environment

44. Thank you !