An opinion on Institutional Economics. Why they may count more

The institutions of a society are the rules of the game through which human transactions are defined. They consist not only of explicit formal provisions (such as civil law, which is the basis of any market economy), but also of a variety of implicit rules of behavior, which often even make people self-limiting. An example is the various ‘codes of honor’ in family networks, which make cheating unthinkable and where even a simple handshake can act as a contract. In addition to institutions, in every society there are also organizations, such as political parties, town councils, businesses, trade unions, educational institutions, etc. Institutions and organizations are in constant interaction: organizations are often driven by competitive forces to continuously improve and to become more and more skilled and efficient. This even leads to institutional changes. At other times, depending on the institutions, organizations may be left in a state of dormancy. The perceptions of the ‘economic players’ and the cooperation networks that they create also play an important role here. All of these factors together drive economic development – growth or, on the contrary, some kind of stagnation. The state, in short, is not a neutral and uninvolved spectator of the economic process, far from it, since the institutions that are built around it have a decisive influence on economic development. Institutional Economics, which has been established in the last decades, studies and highlights these very aspects of the economy: it sheds light on the development process in its own particular way, anchoring the market within society, in relation to political power, ideology, property rights, whether or not they are guaranteed. This way of thinking was pioneered, among others, by the American professor Douglass North (Nobel Prize in Economics 1993). His ambitious work on economic history (e.g. Structure and Change in Economic History) refers to political economy, including the Marxist view, from which he nevertheless distances himself. Interestingly, his approach is blatantly ‘eclectic’: selecting what he finds useful, he fishes out ideas and concepts from Marxist as well as classical and neoclassical economic theory to build and enrich his own original and fruitful view of economic events, of temporal stability and change. To this end, he uses concepts such as property rights, transaction costs and free rider. Additional factors that obviously fit into the institutional economics perspective are demographic trends and technological change. Particular emphasis is also placed on the (largely neglected by research) military technology and the organization of war, which historically influenced the power, size and economics of state structures.

In the same vein, D. Acemoglou and J. Robinson in their book “Why Nations Fail” argue that what differentiates countries is primarily the nature of their institutions. States succeed when they manage to develop ‘inclusive political and economic institutions’ and fail when their institutions become elitist and concentrate power and opportunity in the hands of a few. Successful institutions are those that unleash, enhance and protect the full potential of every citizen to innovate, invest and grow.

References

North D. C (1981) Structure and Change in Economic History. New York and London: W. W. Norton & Co.

Acemoglou D and Robinson J. (2012) Why Nations Fail: The Origins of Power, Prosperity, and Poverty.New York: Crown Business.

Stiglitz, J.E.(1993) Economics. New York: W.W. Norton & Company.