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Title: New Institutional Economics ppt


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.

3
  • 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 Veblen's
    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
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5
Who are pioneers in this field ?
  • Thorstein Veblen
  • John R. Commons
  • Wesley Mitchell
  • 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

10
  • 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

11
  • 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

12
  • 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

13
  • The New Institutional Economics (Williamson,
    2000)
  • Formal rules of the game include
  • Executive
  • Legislative
  • Judicial
  • The definition and enforcement of property rights
    and of contract laws are important features

14
  • 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
  • Markets
  • Vertical integration

15
  • Different measures of institutional Economics
    (World Bank)
  • Voice and accountability
  • Political stability and non- violent society
  • Government effectiveness
  • Regulatory quality
  • Rule of law
  • Control of corruption

16
Thorstein Veblen
  • American (1857-1929)
  • 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
Veblen's 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
Veblen's 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
Veblen's 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
Veblen's 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
  • American (1862-1945)
  • Wisconsin School
  • Labor economist
  • Helped write social reform legislation
  • Not a socialist, but believed in laws to correct
    problems with laissez-faire capitalism

22
Application
  • 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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