Institutional stream in modern economics: NeoIE versus NewIE

1
Institutional stream in modern economics NeoIE
versus NewIE
2
NeoIE versus NewIE origins and main
methodological and cognitive differences

• 1. New Institutional Economics (NeoIE)
• Generally, alike the classical institutionalism
  (T. Veblen, J. R. Commons, W.C. Mitchell, J. M.
  Clark) rejection of basic methodological
  assumptions of NCE, and methodological
  indiwidualism in particular
• Critique of the definition of economics as a
  science within the mainstreram economics, and, in
  particular ofv broadly understood neoclassical or
  neo-neoclassical economics
• In general approach, NeoIE,, alike Veblenian
  institutionalism, is a critique of the manner in
  which the whole process of economic development,
  and of development of capitralist economy, is
  understood. (rejectiing, however, the sociaal
  pesimism of Veblen). According to NeoIE, the
  economic development is an evolutionary social
  process and not neoclassically interpretred
  process of equilibrium grfowth

3
NeoIE versus NewIE origins and main
methodological and cognitive differencesNeoinstit
utional Economics

• Rejection of hedonism (as philosophical and
  methodological foundation for research on
  microeconomic behavior) and the UMH (hypothesis
  of micrtoeconomic rationality. Implicitly,
  rejection of the homo oeconomicus concept
• Adoption of psychology of instincts (Veblen),
  and later (NeoIE C.Ayres, J. M. Clark,
  Galbraith, Myrdal)) of philsophy of pragmatism
  (J. Dewey pragmatic value theory of Ayres,
  concept of reasonable values of Mitchell) and
  behavioral psychology as foundations for the
  epxlanation of microeconomic activities

4
NeoIE versus NewIE origins and main
methodological and cognitive differencesNeoinstit
utional Economics

• Specific way of intrpretation of economic
  system, as evolutionary process whose main part
  is culture
• Most important dychotomy of human being (Veblen)
  contradiction between the instinct of good work
  and the instinct of posession
• Subsequent dychotomic contradictions
• Between physical flow (flow of useful goods) and
  financial flow
• Between world (class) of industry and world
  of posession (leisure class))
• Conflict between those two worlds means also
  conflict between cultural institutions which
  are useful or futile (useless) form the point of
  view of social and economic development

5
NeoIE versus NewIE origins and main
methodological and cognitive differencesNeoinstit
utional Economics

• Rejection of economic determinism and adoption of
  the view that develoment is mostly determined by
  science and technology, with inert character of
  culture and institutional basis
• Rejection of the concept of objective laws or
  regularities in socio-economic development one
  can speak only of a certain logics of development
  (Galbraith, Myrdal). It consist in plausible, but
  not necessary, adjustments of culture and
  institutions to the imperatives brought about by
  permanently developing (changing) science and
  technology
• Social pesimism of Veblen and its rejection by
  his followers - postveblenian economists,
  neoinstitutionalists

6
NeoIE versus NewIE origins and main
methodological and cognitive differencesNeoinstit
utional Economics

• Rejection of neoclassical way of understanding
  the economic equlibrium
• Commons equlibrium (reasonable economy) as an
  optimal allocation of scarce resources which is
  attained not through market competition but as
  the outcome of collective actions and control
• Galbraith equlibrium as process (and not the
  state) resulting from the action of
  countervailing powers corporations,trade unions,
  the state as intermediary agent

7
NeoIE versus NewIE origins and main
methodological and cognitive differences New
Institutional Economics

• Two manners od interpreting NIE
• As an integral part of widely understood
  neoclassical economics, as neoclassical theory of
  institutions (the so called theoretical
  institutionalism, as opposed to postveblenian
  one)
• As a new paradigm in contemporary economics
• Genesis of NIE (decades of 70. and 80. of XX
  century)
• External critique of institutional deficit of
  NCE
• Increasing empirical knowledge on the
  significance of institutions both informal and
  formal in modern economic and technological
  development and subsequent necessity of
  theoretical reflection on them

8
NeoIE versus NewIE origins and main
methodological and cognitive differences New
Institutional Economics

• Origins and development of theoretical
  foundations
• Theory of transactions costs (R. Coase as the
  founder/precursor and O.E. Williamson as main
  follower)
• Theory of property rights (main theoreticians H.
  Demsetz and A.A. Alchian)
• TR and PR theories are two principal
  methodological and theoretical foundations within
  the main stream economics for investigations on
  the role of institutions in modern economies

9
New Institutional Economics basic categories
and assertions

• Property rights (economic approach)
• Entitlements (rights), shaped in the historical
  process by law (normative), customs and
  morality, which define and confine (with regard
  to other persons) the scope of appropriating and
  using economic resources and goods (in other
  words laws of disposal)
• Since most goods are not pure private goods,
  there occur many direct (technological) external
  effects in the economy and there appears the
  necessity of their internalization

10
New Institutional Economics basic categories
and assertions

• Property rights (economic approach) cont.
• Internalization requires changes in
  legal-institutional arrangements (in the so
  called informal institutions).Their analysis
  becomes subject to economic analysis
• Fundamental function of PR is to create
  incentives for increasing the scope of
  internalization of external effects

11
New Institutional Economics basic categories
and assertions

• Transaction costs (KT) in narrow approach (COASE,
  WILLIAMSON)
• In broadest interpretation, TC are the costs of
  using the price (market) mechanism
• Types of transaction costs (Coase)
• TC related to seeking and processing information
  which is necessary for shaping market prices of
  goods
• TC related to negotiations of contracts
  (agreements) (producers purchasers, purchasers
  - deliverers, etc.)
• TC linked to the control of execution of contracts

12
New Institutional Economics basic categories
and assertions

• TC in broad approach
• Costst of coordination of various forms of
  economic activity (coordination by state versus
  coordination by market)
• Costs which are necessary for the emergence and
  development of markets

13
New Institutional Economics basic categories
and assertions

• TC and PR - interdependence
• Inaccurate definition and/or attenuation of
  propert rights, and incapability of internalizing
  (apprioprating) benefits related to them in
  particular, must result in increasing transaction
  costs in the economy, weakening of the system
  of microeconomic incentives, and this way in
  general decline of the level of economic
  rationality or efficiency.

14
New Institutional Economics basic categories
and assertions

• Reasons for high level and types of TC in the
  countries with command-and-control system (the
  countries of the so called real socialism)
• High TC linked to the central macroeconomic
  planning
• High TC related to a broad scope of non-market
  distribution of public goods
• High TC of extensive system of social transfers
• Attenuation of PR as the reason for broad
  occurence of rent seeking behavior in the sphere
  of functional distribution of social product
• Rent seeking as standard (routine) behavior for
  menagerial staff of state owned enetrprises and
  their employees
• High positional and bureaucratic rents (menagers
  of SOEs and political nomenclature)

15
New Institutional Economics basic categories
and assertions

• Nature of the transformation process from the
  point of view of NIE
• General definition transition from socialist CC
  economy towards a market economy as politically
  and economically determined institutional change
• Definition based on the TK/PR theories
  transition from socialist CC economy towards a
  market economy as a gradual transformation of the
  system which is characterized by predomination of
  rent seeking microeconomic behavior towards the
  system within which prevail the efficiency-driven
  activities of human beings and social groups