Institutional stream in modern
economics: NeoIE versus NewIE
1
NeoIE versus NewIE – origins and main
methodological and cognitive differences
1. New Institutional Economics (NeoIE)
1.
2.
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
2
NeoIE versus NewIE – origins and main
methodological and cognitive differences
Neoinstitutional 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
3
NeoIE versus NewIE – origins and main
methodological and cognitive differences
Neoinstitutional Economics
Specific way of intrpretation of
„economic
system”, as evolutionary process whose main part
is „culture”
1.
2.
a)
b)
c)
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
4
development
NeoIE versus NewIE – origins and main
methodological and cognitive differences
Neoinstitutional 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
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NeoIE versus NewIE – origins and main
methodological and cognitive differences
Neoinstitutional Economics
1.
2.
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
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NeoIE versus NewIE – origins and main
methodological and cognitive differences
New Institutional Economics
1.
2.
1.
2.
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
NeoIE versus NewIE – origins and main
methodological and cognitive differences
New Institutional Economics
1.
2.
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
8
New Institutional Economics – basic
categories and assertions
1.
2.
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
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New Institutional Economics – basic
categories and assertions
3.
4.
Property rights (economic approach) – cont.
Internalization requires changes in legalinstitutional 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
10
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):
1.
2.
3.
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
11
New Institutional Economics – basic
categories and assertions
1.
2.
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
12
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.
13
New Institutional Economics – basic
categories and assertions
5.






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)
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New Institutional Economics – basic
categories and assertions
Nature of the transformation process from the
point of view of NIE:
1.
2.
General definition: transition from socialist C&C
economy towards a market economy as politically and
economically determined institutional change
Definition based on the TK/PR theories: transition
from socialist C&C 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
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