New institutional economics
Encyclopedia
New institutional economics (NIE) is an economic perspective that attempts to extend economics by focusing on the social
and legal norms
and rules that underlie economic activity.
, "The Nature of the Firm
" (1937) and "The Problem of Social Cost
" (1960). In the latter, the Coase Theorem
(subsequently so termed) maintains that without transaction costs alternative property right assignments can equivalently internalize conflicts and externalities. Therefore, comparative institutional analysis arising from such assignments is required to make recommendations about efficient internalization of externalities and institutional design, including Law and Economics
.
At present NIE analyses are built on a more complex
set of methodological principles and criteria. They work within a modified Neoclassical
framework in considering both efficiency and distribution issues, in contrast to "traditional," "old" or "original" institutional economics
, which is critical of mainstream
neoclassical economics.
The term 'new institutional economics' was coined by Oliver Williamson in 1975.
Among the many aspects in current NIE analyses are these: organizational arrangements, property rights,
transaction costs, credible commitments, modes of governance
, persuasive abilities, social norms, ideological values
, decisive perceptions, gained control, enforcement mechanism, asset specificity
, human assets, social capital
, asymmetric information, strategic behavior, bounded rationality
, opportunism
, adverse selection
, moral hazard
, contractual safeguard
s, surrounding uncertainty
, monitoring
cost
s, incentives to collude, hierarchical structures, bargaining
strength, etc.
Major scholars associated with the subject include Harold Demsetz
, Avner Greif
, Claude Menard and four Nobel laureates — Ronald Coase
, Douglass North
, Elinor Ostrom
and Oliver Williamson. A convergence of such researchers resulted in founding the International Society for New Institutional Economics in 1997.
's demarcation between institution
s and organizations. Institutions are the "rules of the game", consisting of both the formal legal rules and the informal social norms that govern individual behavior and structure social interactions (institutional frameworks).
Organizations, by contrast, are those groups of people and the governance arrangements they create to coordinate their team
action against other teams performing also as organizations. Firms, Universities, club
s, medical association
s, unions etc. are some examples.
Because some institutional frameworks are realities always "nested" inside other broader institutional frameworks, this clear demarcation is always blurred in actual situations. A case in point is a University. When the average quality of its teaching services must be evaluated, for example, a University may be approached as an organization with its people, physical capital
, the general governing rules common to all that were passed by the University governing bodies etc. However, if the task consists of evaluating people's performance in a specific teaching department, for example, along with their own internal formal and informal rules, then the University as a whole enters the picture as an institution. General University rules, then, form part of the broader institutional framework influencing people's performance at the said teaching department.
Sociology
Sociology is the study of society. It is a social science—a term with which it is sometimes synonymous—which uses various methods of empirical investigation and critical analysis to develop a body of knowledge about human social activity...
and legal norms
Norm (sociology)
Social norms are the accepted behaviors within a society or group. This sociological and social psychological term has been defined as "the rules that a group uses for appropriate and inappropriate values, beliefs, attitudes and behaviors. These rules may be explicit or implicit...
and rules that underlie economic activity.
Overview
NIE has its roots in two articles by Ronald CoaseRonald Coase
Ronald Harry Coase is a British-born, American-based economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics, where he took...
, "The Nature of the Firm
The Nature of the Firm
The Nature of the Firm 4 Economica 386–405, is an influential article by Ronald Coase. It offered an economic explanation of why individuals choose to form partnerships, companies and other business entities rather than trading bilaterally through contracts on a market.-Summary:Given that...
" (1937) and "The Problem of Social Cost
The Problem of Social Cost
The Problem of Social Cost by Ronald Coase is an article dealing with economic problem of externalities. It draws from a number of English legal cases and statutes to illustrate Coase's belief that legal rules are only justified by reference to a cost benefit analysis, and that nuisances that are...
" (1960). In the latter, the Coase Theorem
Coase theorem
In law and economics, the Coase theorem , attributed to Ronald Coase, describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are no transaction costs, bargaining will lead to...
(subsequently so termed) maintains that without transaction costs alternative property right assignments can equivalently internalize conflicts and externalities. Therefore, comparative institutional analysis arising from such assignments is required to make recommendations about efficient internalization of externalities and institutional design, including Law and Economics
Law and economics
The economic analysis of law is an analysis of law applying methods of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated.-Relationship to other disciplines and...
.
At present NIE analyses are built on a more complex
Complexity
In general usage, complexity tends to be used to characterize something with many parts in intricate arrangement. The study of these complex linkages is the main goal of complex systems theory. In science there are at this time a number of approaches to characterizing complexity, many of which are...
set of methodological principles and criteria. They work within a modified Neoclassical
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
framework in considering both efficiency and distribution issues, in contrast to "traditional," "old" or "original" institutional economics
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...
, which is critical of mainstream
Mainstream economics
Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...
neoclassical economics.
The term 'new institutional economics' was coined by Oliver Williamson in 1975.
Among the many aspects in current NIE analyses are these: organizational arrangements, property rights,
transaction costs, credible commitments, modes of governance
Governance
Governance is the act of governing. It relates to decisions that define expectations, grant power, or verify performance. It consists of either a separate process or part of management or leadership processes...
, persuasive abilities, social norms, ideological values
Ideology
An ideology is a set of ideas that constitutes one's goals, expectations, and actions. An ideology can be thought of as a comprehensive vision, as a way of looking at things , as in common sense and several philosophical tendencies , or a set of ideas proposed by the dominant class of a society to...
, decisive perceptions, gained control, enforcement mechanism, asset specificity
Asset specificity
Asset specificity is a term related to the inter-party relationships of a transaction. It is usually defined as the extent to which the investments made to support a particular transaction have a higher value to that transaction than they would have if they were redeployed for any other purpose...
, human assets, social capital
Social capital
Social capital is a sociological concept, which refers to connections within and between social networks. The concept of social capital highlights the value of social relations and the role of cooperation and confidence to get collective or economic results. The term social capital is frequently...
, asymmetric information, strategic behavior, bounded rationality
Bounded rationality
Bounded rationality is the idea that in decision making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision...
, opportunism
Opportunism
-General definition:Opportunism is the conscious policy and practice of taking selfish advantage of circumstances, with little regard for principles. Opportunist actions are expedient actions guided primarily by self-interested motives. The term can be applied to individuals, groups,...
, adverse selection
Adverse selection
Adverse selection, anti-selection, or negative selection is a term used in economics, insurance, statistics, and risk management. It refers to a market process in which "bad" results occur when buyers and sellers have asymmetric information : the "bad" products or services are more likely to be...
, moral hazard
Moral hazard
In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...
, contractual safeguard
Safeguard
In the technical language of the World Trade Organization system, a safeguard is used to restrain international trade in order to protect a certain home industry from foreign competition. A member may take a “safeguard” action In the technical language of the World Trade Organization (WTO)...
s, surrounding uncertainty
Uncertainty
Uncertainty is a term used in subtly different ways in a number of fields, including physics, philosophy, statistics, economics, finance, insurance, psychology, sociology, engineering, and information science...
, monitoring
Monitoring
To monitor or monitoring generally means to be aware of the state of a system. Below are specific examples:* to observe a situation for any changes which may occur over time, using a monitor or measuring device of some sort:...
cost
Cost
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...
s, incentives to collude, hierarchical structures, bargaining
Bargaining
Bargaining or haggling is a type of negotiation in which the buyer and seller of a good or service dispute the price which will be paid and the exact nature of the transaction that will take place, and eventually come to an agreement. Bargaining is an alternative pricing strategy to fixed prices...
strength, etc.
Major scholars associated with the subject include Harold Demsetz
Harold Demsetz
Harold Demsetz is a professor emeritus of economics at the University of California at Los Angeles .-Career:Demsetz includes a short intellectual autobiography....
, Avner Greif
Avner Greif
Avner Greif is an economics professor at Stanford University, Stanford, California. He holds a chaired professorship as Bowman Family Professor in the Humanities and Sciences....
, Claude Menard and four Nobel laureates — Ronald Coase
Ronald Coase
Ronald Harry Coase is a British-born, American-based economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics, where he took...
, Douglass North
Douglass North
Douglass Cecil North is an American economist known for his work in economic history. He is the co-recipient of the 1993 Nobel Memorial Prize in Economic Sciences...
, Elinor Ostrom
Elinor Ostrom
Elinor Ostrom is an American political economist. She was awarded the 2009 Nobel Memorial Prize in Economic Sciences, which she shared with Oliver E. Williamson, for "her analysis of economic governance, especially the commons." She was the first, and to date, the only woman to win the prize in...
and Oliver Williamson. A convergence of such researchers resulted in founding the International Society for New Institutional Economics in 1997.
Institutional levels
Although no single, universally accepted set of definitions has been developed, most scholars doing research under the NIE methodological principles and criteria follow Douglass NorthDouglass North
Douglass Cecil North is an American economist known for his work in economic history. He is the co-recipient of the 1993 Nobel Memorial Prize in Economic Sciences...
's demarcation between institution
Institution
An institution is any structure or mechanism of social order and cooperation governing the behavior of a set of individuals within a given human community...
s and organizations. Institutions are the "rules of the game", consisting of both the formal legal rules and the informal social norms that govern individual behavior and structure social interactions (institutional frameworks).
Organizations, by contrast, are those groups of people and the governance arrangements they create to coordinate their team
Team
A team comprises a group of people or animals linked in a common purpose. Teams are especially appropriate for conducting tasks that are high in complexity and have many interdependent subtasks.A group in itself does not necessarily constitute a team...
action against other teams performing also as organizations. Firms, Universities, club
Club
A club is an association of two or more people united by a common interest or goal. A service club, for example, exists for voluntary or charitable activities; there are clubs devoted to hobbies and sports, social activities clubs, political and religious clubs, and so forth.- History...
s, medical association
Medical association
A health association is a professional organization for health professionals. They are often based on specialty and are usually national, often with subnational or regional affiliates. Health associations usually offer conferences and continuing education...
s, unions etc. are some examples.
Because some institutional frameworks are realities always "nested" inside other broader institutional frameworks, this clear demarcation is always blurred in actual situations. A case in point is a University. When the average quality of its teaching services must be evaluated, for example, a University may be approached as an organization with its people, physical capital
Physical capital
In economics, physical capital or just 'capital' refers to any already-manufactured asset that is applied in production, such as machinery, buildings, or vehicles. In economic theory, physical capital is one of the three primary factors of production, also known as inputs in the production function...
, the general governing rules common to all that were passed by the University governing bodies etc. However, if the task consists of evaluating people's performance in a specific teaching department, for example, along with their own internal formal and informal rules, then the University as a whole enters the picture as an institution. General University rules, then, form part of the broader institutional framework influencing people's performance at the said teaching department.
External links
- Introduction to new institutional economics
- ISNIE - International Society for New Institutional Economics.
- ESNIE - European School on New Institutional Economics.
- Introductory Reading List in New Institutional Economics - The Ronald Coase Institute
- IRIS Center - Founded by Mancur Olson, University of Maryland.
- Contracting and Organizations Research Center University of Missouri
- Economics and Institutions WEBSITE - by prof. F. Toboso, University of Valencia, Spain.