Institutional Economics

Bernard Chavance

• Publisher: Taylor & Francis
• Year: 2008
• Print ISBN: 9780415449113
• eBook ISBN: 9781134059881
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

This introduction to institutional economics, follows the history of the field since the early 20th century until the present day. It concentrates on influential authors in the main schools of institutional economics.

Institutional economics is defined as economic thought that considers institutions to be relevant for economic theory, and consequently criticizes the neoclassical mainstream for having pushed them out of the discipline; it deals specially with the nature, the origin, the change of institutions, and their effects on economic performance. It is a family of different theories that were initially influential in economics, then lost much of their weight in the middle half of the 20th century, and eventually recovered significant creative vitality and impact in the last twenty years. The book puts the recent developments in historical perspective by showing how important themes like the importance of habits, the role of formal and informal rules, the relation of organizations and institutions, the hierarchy and complementarity of institutions, the evolutionary character of institutional change, have been explored by various authors or schools.

1
Introduction

The institutionalist families in economics

Institutional economics can be regarded as a family of theories that share the thesis that ‘institutions matter’ in the study of economics, that they even constitute an essential subject of reflection. This family is therefore distinct from theories in which economics as a discipline does not have to take account of institutions, on the grounds that these fall under other disciplines such as political science, sociology or history.

Although the classical English school, whose influence predominated throughout almost all the nineteenth century, took an interest in economic institutions such as ownership, which determined the class structure, or the desirable scope and nature of government legislation, it was the currents of thought contesting the classical tradition that were the first to devise an institutional approach to economics. These were the German historical school and American institutionalism, the international influence of which was considerable at the end of the nineteenth century and during the first three decades of the twentieth century, especially in the United States, where institutionalism aroused significant interest, both in the academic world and in connection with the New Deal. However, from its origins the Austrian school had also developed an institutional dimension in its long-running dispute with the historical school.

Starting in the 1940s, however, the ‘neo-classical’ movement was to acquire undisputed international hegemony, based in the United States, and would virtually crowd out the institutionalist inheritance. According to this approach, which finally came to dominate the whole of the twentieth century, the central theme of economics as a discipline is the market: analysis was based on equilibrium involving the action of rational, calculating and utilitarian individuals and was concerned mainly with efficiency. Institutional questions and the historic dimension of economic processes were reduced to a minimum, sometimes totally eliminated. Although institutional themes continued to be heard in numerous sub-disciplines, such as labour economics or the study of industrial relations, the analysis of large corporations or development economics, it is no exaggeration to say that the dominant school of economics in the second half of the twentieth century deliberately almost entirely ignored institutions.

In the final 20 years of the century, however, a gradual change took place in the complex relationships between different economic theories (Hodgson, 1994). A vigorous school known as ‘new institutional economics’, of neoclassical descent and again originating in America, emerged. This school distanced itself from the earlier dominant school by stressing the importance of institutions such as property rights or alternative ‘modes of governance’ like the market and the hierarchy of firms. About the same time, there was a revival of the first institutionalist school (the ‘old institutional economics’), again operating from an American base but developing mainly in Europe. Moreover, several innovative currents of thought, such as evolutionary economics, showed a manifest affinity with this tradition. Lastly, the resurgence of the Austrian school that accompanied the major neo-liberal revival at the end of the twentieth century led to the reactivation of another long-forgotten branch of institutional economics. Obviously, the historical context had much to do with this evolution, with the scale of the institutional changes taking place in the capitalist world starting in the 1980s, the crisis and subsequent transformation of the socialist systems and the considerable differentiation of the developing economies constituting upheavals calling for institutional analysis of a kind that the paradigm of equilibrium and the conventional ceteris paribus hypothesis were hardly capable of handling. Furthermore, following an undeniable running out of steam of its research programme and under the impact of the renewed institutional approaches, even the neo-classical family has been doing more to extend its method and concepts to institutional questions, as shown by the theories of ‘public choice’, property rights, ‘law and economics’, constitutional economics, contract economics, agency economics, etc.

At the beginning of the twenty-first century, the theoretical and methodological conflicts between the various currents of economic thought concerning the role of institutions have therefore taken on a quite different form. A new and fairly broad consensus now predominates, namely that ‘institutions matter’. An economist who declared himself to be institutionalist 20 or 30 years ago had to be prepared to face sarcasm; today, institutionalism is rather fashionable. Certainly, differences of approach, method and conceptualization remain important, often irreducible, but we are also seeing a redrawing of frontiers between currents of thought, between orthodoxy and various types of heterodoxy and, in general, the vitality of the various currents working in the same field of ‘economics with institutions’ is a relatively encouraging sign, given the current malaise of economic thought that characterizes the times we live in (Chavance, 2001).

This book has been designed as an introduction to the various significant strands of institutional economics, and as an invitation to a more thorough reading of the authors and currents that make up this composite family within economic theory. It is clearly not exhaustive and suggestions for additional reading are to be found in the Bibliography. The method adopted consists of focusing successively on certain significant authors or currents of thought.

Chapter 2 deals with original institutionalism, the historical school through Schmoller, American institutional economics through Veblen, Hamilton and Commons, along with Polanyi. Chapter 3 considers the Austrian school through Menger and Hayek, as well as Eucken’s ‘ordoliberalism’. The American ‘new institutional economics’ is presented in Chapter 4 through the work of Williamson and North, as well as of two authors basing themselves on game theory (Aoki and Greif). Chapter 5 covers certain contemporary European currents of thought: the theory of regulation, the school of conventions and Hodgson’s evolutionary institutionalism. Finally, Chapter 6 discusses the questions of unity and diversity within the family or the field of institutional economics.

2
Original institutionalism

Schmoller and the German historical school

Gustav von Schmoller (1838–1917), the leading figure in the ‘younger German historical school’, is an essential but sometimes overlooked source of institutionalist currents of thought. He was a promoter of the approach based on the ‘national economy’ (Volkswirtschaft), and a defender of the social reforms carried out by an enlightened monarch, in his case the Prussian king, and an opponent of both Manchester school liberalism and socialism. In the history of thought he is mainly remembered for his dispute with Menger at the time of the Methodenstreit (quarrel over methods), and his thinking has often been caricatured or forgotten.

Institutions and organs

In his Grundriss der allgemeinen Volkswirthschaftslehre (Principles of Political Economy, 1900–1904), Schmoller posits that the comparative study of the political economies of different nations at different periods must concentrate on ‘institutions and organs’ (the latter term being close to the notion of organization), alongside natural and technical conditions. ‘The study of the organ and the institution is, for the knowledge of the social body, what anatomy is for the physical body.’ The ‘old’ political economy that concentrates on prices and the circulation resembles ‘a physiology of economic humours that is not preceded by an anatomy of the social body’ (Schmoller, 1900:156).

By institutions, of a political, legal or economic nature, we mean an arrangement at a particular point in the life of the community, serving set objectives, that has attained its own existence and development and which forms a framework or mould for the action of successive generations over hundreds or thousands of years.

(Schmoller, 1900:156)

Examples of institutions include property, slavery, serfdom, marriage, the market, money and industrial freedom (1990:149). An institution therefore represents ‘a set of habits and rules of morals, custom and law, which have a common centre or goal, which are consistent with each other and which constitute a system’ (1900:150). The concept of organ (or organic formation) is directly linked to that of the institution.

By constituted organ (Organbildung) we mean the personal aspect of the institution: marriage is the institution, the family is the organ (Organ). Social organs are the constant forms taken by the union of persons and goods with a view to the attainment of given objectives: the gens, the family, associations, corporations, confraternities, communes, firms, the State, these are the essential organs of social life.

(1900:150)

The first organs in history are those of communities such as the tribe, the Sippe, the family. Originally, these embrace all the objectives that, following differentiation and separation, give birth to other social organs, such as spatial organizations (village-level, town-level, national), having objectives serving the public interest and private enterprises aimed at making profits. The development of culture is accompanied by an extension of various organs ‘and most frequently there emerge alongside the spontaneous organs, organs stemming from an intervention of human will’¹ (1900:150).

The more complex society becomes,

the greater the possibility for a man to be member of a number of extremely diverse social organs, to which he belongs sometimes for ever and sometimes only for a certain time, which sometimes relate to his entire interest and sometimes only to a small fraction of his interest.

(1900:151)

Within organs relationships of domination and dependence or relationships of confraternity are built up. But in the large organs there are authorities that are superior to the individual, these authorities persist regardless of the replacement and turnover of their members and this gives the organs substantial durability. Schmoller notes, from a methodological viewpoint, ‘when one looks at the whole [of society], at order, at general orientation, one has to take into consideration the social organs no less than the individuals’ (1900:132).

Institutions, freedom and progress

The different sciences dealing with the State and with the law, as well as those dealing with society and the economy, had tended to either over or underestimate the role of institutions and organic formations. Mercantilism and cameralism, as well as individual thinkers like Hobbes or Frederick the Great, gave precedence to institutions, the State and the law. Revolution reversed this approach and the liberal doctrine opposed the individual and his freedom to the State and to state institutions. But this individualist liberalism confused the rejection of outdated institutions with the desire not to have any durable institutions. While it is true that the contract has often supplanted the institution, it also remains true that alongside the former one sees ‘the mass birth of new organic formations and social institutions’ (1900:155), a tendency that Schmoller says should be welcomed. As for socialism, it initially attached exaggerated value to voluntary institutions and organic formations, before rejecting, in utopian fashion, the existing State and its institutions in conformity with the doctrine of socialist democracy.

For Schmoller, the desirable social state is the one in which institutions are not an obstacle but a stimulus,

where the fixed institutions and the free interplay of individual forces complement each other … through a just reciprocity, where institutions do not without reason prevent freedom’s advance but, on the contrary, operate in the desired direction of development.

(1900:155)

In the end, he puts forward a fairly positive vision of institutions: ‘they are the materialization of objective methods, they are the maxims embodying all that the wisdom of centuries has deemed to be best regarding the rational and just handling of practical relations’ (1900:155).

While it is true that the historic progress of the economy is characterized by greater abundance of economic goods, it remains true that ‘this only takes place with better institutions and increasingly complicated organic formations’ (1900:156). The great periods of progress are those of the reform of instituti...

Table of contents

• Routledge Frontiers of Political Economy
• Contents
• Tables
• 1 Introduction
• 2 Original institutionalism
• 3 The Austrian school and ‘ordoliberalism’
• 4 The new institutional economics
• 5 Contemporary European currents of thought
• 6 Unity and diversity of institutionalisms
• Notes
• Bibliography
• Index