Old and New Institutionalism in Economics

Old and New Institutionalism in Economics

Abstract

The original (or old) and the new institutionalisms are alive in economics. Both are heterogeneous, dynamic, and thus difficult to define. In addition, despite some important differences, there are also some similarities between them, as well as some complementarity. Consequently the intellectual demarcation between the old and the new institutional economics is not always clear-cut. Sociologically, the original institutionalism has been marginalized in the profession for several decades, whereas some subsets of the new institutionalism have managed to penetrate mainstream economics, partly, but not only, because of a greater degree of mathematical formalization. Furthermore, other approaches that emphasize institutions are also relevant.

Introduction

Although institutions - mostly by other names - had been discussed since the days of Adam Smith and other political economists, institutional economics as such was born in the United States in the early twentieth century, with Thorstein Veblen, Wesley Mitchell, and John Commons as its founding fathers.

According to Malcolm Rutherford, this early institutionalism "became a significant element in American economics in the interwar period, only to decline rapidly in position and prestige after World War Two." In other words, it became part of - and later was excluded from - what was mainstream economics in America, if one adopts the following definition: "mainstream economics is that which is taught in the most prestigious universities and colleges, gets published in the most prestigious journals, receives funds from the most important research foundations, and wins the most prestigious awards." Also part of American mainstream economics at that time was neoclassical economics, which had emerged in the eighteen seventies in Europe and is a school of economic thought defined by its reliance on the assumptions of one, utility maximization, as a criterion for rationality, and two, equilibrium, as the state in which the micro or macro economic system under study is or tends to be. It may seem obvious, especially in the eyes of other social scientists, that institutions matter greatly in economic issues, but, for several decades, this was not part of the consensus among economists. Neoclassical economics, in particular, emulated physics and often did not treat economics as an explicitly social science. After World War Two, its prominence grew, together with its degree of mathematical formalization. Indeed, it can be argued that its influence grew - at the expense of the original institutionalism, in the case of the United States - largely because it became more mathematical. In the nineteen fifties and nineteen sixties, a specific subset of neoclassical economics, namely standard general equilibrium theory, represented by the Arrow-Debreu model, was very influential and prestigious. This model is substantially ahistorical and noninstitutional, at least in its explicit hypotheses. In one of the possible interpretations, the Arrow-Debreu model is intended to be applicable to any economy, in any place and at any moment in