1 New Institutional Economics Concepts Application By Md. Shamsul Arefin Joint Secretary Ministry of Public Administration Govern ment of the peoples Republic of Bangladesh The lecture note is prepared for the 134 Foundation Course organized by NAEM Dhaka 2 What is Institutional Economics
Focus on understanding the role of human-made institutions in shaping economic behavior
Institutions may include the family the corporation the trade union the financial system the legal system the state (government)
Economics cannot be separated from the political and social system within which it is embedded.
Concepts - Institutional Economics
Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour. Its original focus lay in Thorstein Veblens instinct-oriented dichotomy between technology on the one side and the ceremonial sphere of society on the other.
Its name and core elements trace back to a 1919 American Economic Review article by Walton H. Hamilton.
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).
A significant variant is the new institutional economics from the later 20th century which integrates later developments of neoclassical economics into the analysis.
Law and economics has been a major theme since the publication of the Legal Foundations of Capitalism by John R. Commons in 1924.
Behavioral economics is another hallmark of institutional economics based on what is known about psychology and cognitive science rather than simple assumptions of economic behavior.
4 (No Transcript) 5 Who are pioneers in this field
John R. Commons
Generally a diverse group of writers who have a few common themes
6 What are these common themes
Critics of orthodox economics (Neoclassical)
Objected to the notion that the laws constructed by Neoclassical economists were timeless generalizations and contended instead that the economic behavior of men like any other human activity had to be analyzed in terms of the social context in which it was imbedded
7 Concepts Institutional Economics (contd)
Focus on collective rather than individual action
Preference for an evolutionary rather than a mechanistic approach to economics
Emphasis on empirical observation over deductive reasoning
Generally institutionalists do not believe in the harmony of a market system and the policy of laissez faire
8 Concepts Institutional Economics (contd)
Neclassical economics studied allocation of scarce resources among alternative uses
Institutionalists studied how the institutional structure evolved and how institutions reflected the prevailing social/political/economic structure
9 Concepts New institutional economics
Combines economics law organization theory political science sociology and anthropology to understand social political and commercial (e.g. business) institutions. Its goal is to explain what institutions are how they arise what purpose they serve how they change and reform- Peter Klein at http//encyclo.findlaw.co m/0530book.pdf
What are institutions
Institutions are the rules of the game in a society are the humanly devised constraints that shape human interaction (North 1990 p. 3)
Economic political and social Interactions
Informal institutions - informal constraints sanctions taboos customs tradition and code of conduct
Formal institutions - formal rules constitutions laws property rights
Different dimensions of institutional economics (Dixit 2007)
Protection of property rights
Enforcement of voluntary contracts among individuals
Provision of the physical and regulatory infrastructure
The functioning of the first two categories
Different dimensions institutions (Dixit 2007)
The formal state institutions that enact and enforce the laws
Legislature police judiciary and regulatory agencies
Institutions of private ordering that function under umbrella of state law
Private for-profit institutions that provide information and enforcement
Self-enforcement within social or ethnic groups and network
The New Institutional Economics (Williamson 2000)
Formal rules of the game include
The definition and enforcement of property rights and of contract laws are important features
The New Institutional Economics (Williamson 2000)
Institutions of Governance play of the game
The governance of contractual relations becomes the focus of analysis
A governance structure reshapes incentives
Transactions costs economics
Different measures of institutional Economics (World Bank)
Voice and accountability
Political stability and non- violent society
Rule of law
Control of corruption
16 Thorstein Veblen
PhD in Philosophy Yale
Graduate studies in economics at Cornell
Professor at Chicago Stanford and University of Missouri
Helped to find ideas of Institutional economics.
17 Veblens criticism of Neoclassical theory
Classical and neoclassical assumptions are unscientific
He also believed this to be true of Marxism thoughts of School
He did not believe that there was harmony in a market system it did not conform to natural laws
He did not believe that market outcomes were necessarily good or desirable
18 Veblens criticism of Neoclassical theory (continued)
He charged that Classical and neoclassical economics was pre-Darwinian in that it was moving toward some determined end (long run equilibrium) rather than constantly evolving in response to environmental forces (Darwin lived 1809-1882)
Did not like static analysis too many factors are held responsible.
Did not believe that self interest would promote the public good
19 Veblens criticism of Neoclassical theory (continued)
He criticized the idea that making profits is the same as making goods this may have been true in Smiths time but not in a more advanced industrial society where production is separated from ownership.
Large corporations may reduce output in the quest for profits (monopoly power)
Part of this came from Veblens farm background where agrarian populists were against big businesses (Railroads banks etc.)
20 Veblens criticism of Neoclassical theory (continued)
Veblen believed that big industrialists were anti-competitive so that the whole assumption of perfectly competitive markets was completely wrong
He also called for more empirical work to test the neo-classical models
21 John R. Commons
Helped write social reform legislation
Not a socialist but believed in laws to correct problems with laissez-faire capitalism
Regulation of public utilities
Industrial Safety Laws
Child Labor Laws
Minimum wage laws for women
Unemployment compensation laws
23 Conclusion Since it focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behavior therefore it is essential for us to know and react according to need of the institutional economics in our public transactions. 24 Questions
1. What do you think about New Institutional Economics Put your arguments in favour of the concept
2. How it works
25 Thank You All for the Patient Hearing Email s2arefin_at_yahoo.com Cell 01741329408
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