Institutional stream in modern
economics: NeoIE versus NewIE
1
NeoIE versus NewIE – origins and main
methodological and cognitive differences
1. Neo-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 of 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
social pesimism of Veblen). According to NeoIE, the
economic development is an evolutionary social process and
not neoclassically interpretred process of equilibrium
growth
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 microeconomic rationality. Implicitly, rejection of
the homo oeconomicus concept
Adoption of psychology of instincts (Veblen), and
later on (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
5
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
6
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. Some
economists consider also the principal-agent
theory as one of those foundations
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 in any economy most private goods are not
pure private goods, and there are many public or
semi-public goods as well,there occur many direct
(technological) external effects in the economy
which brings about the necessity of their
internalization
9
New Institutional Economics – basic
categories and assertions
3.
4.
Property rights (economic approach) – cont.
Internalization requires changes in legalinstitutional arrangements (in the so called
formal institutions).Their analysis becomes
then subject to economic analysis (e.g.
economic theory of law (creation and
enforcement)
Fundamental function of PR consists in
creating incentives for increasing the scope of
internalization of external effects (the role of
privatization and economic or market oriented
internalization methods
10
New Institutional Economics – basic
categories and assertions
Transaction costs (KT) in narrow approach (COASE,
WILLIAMSON)
In most general 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
Agency costs as transaction costs (connected with the
principal – agent problem)
11
New Institutional Economics – basic
categories and assertions
Agency costs as transaction costs connected with the
principal – agent problem
The costs inherently associated with using an agent (e.g., the
risk that agents will use organizational resource for their own
benefit) and
The costs of techniques used to mitigate the problems
associated with using an agent—gathering more information
Information asymmetry between the principal and the agent as
contributing to moral hazard and adverse selection problems.
Agency costs mainly arise due to contracting costs and the
divergence of control, separation of ownership and control
and the different objectives of owners (shareholders) and
agents (managers).
12
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
13
New Institutional Economics – basic
categories and assertions

TC and PR - interdependence
Inaccurate definition and/or attenuation of
property 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
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)
15
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 (driven) 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 the efficiency-driven
activities of human
beings and social groups prevail
16
New Institutional Economics – basic
categories and assertions
Criterion of minimization of TC
1.
2.
General criterion of the growth of economic
efficiency
It theoretically allows for answering two
fundamental questions:
What is optimal size of the enterprise (equalizing
of marginal costs of transactions carried out within
the enterprise – intra-enterprise transactions - and
marginal costs of market transactions)
Why exist enterprises and the market as
alternative co-ordinative mechanisms
17
New Institutional Economics – basic
categories and assertions
New Economic History (NEH) and New Political
Economy (NPE) – analysis of TC in the longrun (secular) perspective
1.
2.
3.
Criterion of minimization of TC as a general
foundation for explaining how various legal-institutional
and economic systems (arrangements) change in long
time periods
Effective institutional order is characterized by the
existence of such property rights regime and
microeconomic incentives system, as well as coordination mechanisms, which permit the owners of
production factors to appriopriate benefits resulting from
the use of those factors (thus minimizing the scope of
occurrence of external effects, free-rider and rentseeking behavior pattern)
18
Institutional equlibrium
New Institutional Economics – basic
categories and assertions
3.

NEH and i NPE – cont.
Economic theory of state – the concept of J.
Buchannan
Pre-state period (pre-constitutive) order
Its main feature is a very high level of uncertainty of
economic activity (transactions, contracts, etc.).
Principal task of the emerging state is therefore to
establish the so called pre-constitutive property
rights and formal institutions corresponding/related to
them. The state has also to ensure that adequate „rules
of game” (informal institutiuons) are observed in
order to diminish the level of general uncertainty in the
economy and to exclude (or radically confine) the
possibility of attaining economic benefits through the
„robbery” This way, the protective state (in
19
Buchannan’s approach) is crreated
New Institutional Economics – basic
categories and assertions
3.
Economic theory of state – the concept of J.
Buchannan

Post-constitutive property rights emerge as the outcome
of market exchange of goods and production factors. If
those exchange contracts are to be effective and complete, it
is necessary to:
1) liberalize (to free from state control) prices and trade,
2) gradually introduce (allow for) both domestic and foreign
competition
3) establish capital (financial) markets
All this is possible when the statet creates foundations of
„sound macroeconomic regime”, as well as when the state
follows the regulation policy which is cnsistent with general
principles of market economy. This way, the so called
regulative state emerges
20
New Institutional Economics – basic
categories and assertions
3.


Economic theory of state – the concept of J.
Buchannan
As in any market economy, also in emerging
market economies the state has also to produce
or to provide public goods or ,at least, to finance
the costs of their production and distribution
(delivering). This means, respectively, the
emergence of productive state.
Buchanan’s concept in the context of
interpreting the state as outcome of social
contract (Rousseau, Rawls and others)
21
New Institutional Economics – basic
categories and assertions
5.

State from the NIE perspective (with
special reference to New Political
Economy) – a general approach
NIE, and TCT and PRT in particular,
provide theoretical arguments which allow
for answering a fundamental question: why
there exist the state and the market as
alternative mechanisms of economic coordination and opimization (Coase criterion)
22
New Institutional Economics – basic
categories and assertions


NIE, and NPE in particular, identify economic
and social mechanisms which underlay the
process of working out and and accepting
specific solutions within the macroeconomic
and sectoral policies, as well as within the
public regulation. Furthermore, NIE helps to
explain the contradictions between those
policies
NIE pays attention to the necessity of ongoing
active role of the state in the sphere of shaping
legal-constitutional foundations of economic
order (NIE and ordoliberalism)
23
New Institutional Economics – basic
categories and assertions
4.
NEH and NPE – cont.
Economic theory of public regulation in the
market economy – general issues
Point of reference: interpretation of public regulation as
specific commodity and the need to define the supply
of and demand on this commodity (political market of
regulation)
Differently from the so called normative regulation
theory, the economic theory of public regulation
assumes that the regulation is (mostly) designed for
attaining goals of specific interest groups
Economic vs. social public regulation
Public regulation of real economy and of financial
24
sector
New Institutional Economics – basic
categories and assertions
5.


Basic assertions of ET of PR
Main resource of the state is the power to coerce
(through orders, bans, prohibitions, permits, allowances,
limits etc.)
legal-administrative and economic regulatory
measures: direct vs. indirect enforcement
Differences in enforcement regimes and tools as
resulting from specific features of areas (sectoral – e.g.
power plant sector,transport or media – and horizontal
ones – e.g. environmental protection and natural
resource use, education or R&D.science activities)
being subject to public regulation
25
New Institutional Economics – basic
categories and assertions
5.
Basic assertions of ET of PR

Diversification of utility function of particular groups
of interests

politicians (policy makers): achieving or
preserving the (political) power
regulators: strengthening of regulatory institutions
and their increasing independence from politicians
Economic and other entities being subject to
regulation: maximization of profits, consumer
surplus, social transfers, ecological benefits etc.
Regulation is usually more advantageous for
producers than for consumers



26
New Institutional Economics – basic
categories and assertions
5.

Basic assertions of ET of PR
The game of group interests leads usually to optimal
distribution of benefits from the regulation between
entrepreneurs (deliverers of goods and commodities),
politicians (as legislators) and regulatory institutions
(regulators)
 Regulatory game frequently (n the long run) leads to
personal flows between the politics (legislative,
executive/administrative and regulatory institutions) and
business communities
 Examples of ET of PR : capture theory of regulation,
theory of regulation based on the concept of agent and
principal
27
 Ecclectic theory of PR
New Institutional Economics – basic
categories and assertions
General definition of NIE: Based on criteria of
economic rationality, as well on the
assumptions of methodological individualism:
analysis of formal and informal institutions of
economic and political life.
Analysis – in terms of economic rationality – of
different socio-political orders and
interdependencies between those orders and the
performance of the economic system
28
New Institutional Economics – basic
categories and assertions
1.
2.
3.
4.
Basic components of broadly understood NIE
Neoinstitutional theory of the firm: Coase,
Williamson (a „special case”: allocative theory of
enterprise)
Economic theory of politics (New Political
Economy or Theory of Public Choice): Buchannan,
Tullock
Analysis /theory of long-run (secular) dynamics
(changeability) of socio-economic systems (New
Economic History): North, Thomas, Vogel
New Economic Gegraphy (application of NIE to the
analysis of spatial aspects of economic performance
and the change of economic structures over time) 29