1 institutional stream in modern economics: neoie versus newie

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Institutional stream in modern economics: NeoIE versus NewIE

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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

1. Critique of the definition of economics as a science within the mainstreram economics, and, in particular ofv broadly understood neoclassical or neo-neoclassical economics

2. 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

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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

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Specific way of intrpretation of „economic system”, as evolutionary process whose main part is „culture”

1. Most important dychotomy of human being (Veblen): contradiction between the instinct of good work and the instinct of posession

2. Subsequent dychotomic contradictions:a) Between physical flow (flow of useful goods) and financial flowb) Between „world (class) of industry” and „world of posession”

(leisure class))c) 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

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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 basisRejection 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 technologySocial pesimism of Veblen and its rejection by his followers - postveblenian economists, neoinstitutionalists

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Rejection of neoclassical way of understanding the economic equlibrium;

1. 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”;

2. Galbraith: equlibrium as process (and not the state) resulting from the action of countervailing powers: corporations,trade unions, the state as intermediary agent


New Institutional Economics

Two manners od interpreting NIE1. As an integral part of widely understood neoclassical

economics, as neoclassical theory of institutions (the so called theoretical institutionalism, as opposed to postveblenian one)

2. As a new paradigm in contemporary economicsGenesis of NIE (decades of 70. and 80. of XX century)

1. „External” critique of „institutional deficit” of NCE 2. 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

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New Institutional Economics

Origins and development of theoretical foundations:

1. Theory of transactions costs (R. Coase as the founder/precursor and O.E. Williamson as main follower)

2. 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

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New Institutional Economics – basic categories and assertions

Property rights (economic approach)1. 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)

2. 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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Property rights (economic approach) – cont.

3. Internalization requires changes in legal-institutional arrangements (in the so called informal institutions).Their analysis becomes subject to economic analysis

4. Fundamental function of PR is to create incentives for increasing the scope of internalization of external effects

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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. TC related to seeking and processing information which is

necessary for shaping market prices of goods

2. TC related to negotiations of contracts (agreements) (producers – purchasers, purchasers - deliverers, etc.)

3. TC linked to the control of execution of contracts


TC in broad approach:1. Costst of coordination of various forms

of economic activity (coordination by state versus coordination by market)

2. Costs which are necessary for the emergence and development of markets

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TC and PR - interdependenceInaccurate 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.

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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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Nature of the transformation process from the point of view of NIE:

1. General definition: transition from socialist C&C economy towards a market economy as politically and economically determined institutional change

2. 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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1 institutional stream in modern economics: neoie versus newie

Documents

newie origins

later neoie

methodological foundation

methodological indiwidualism

economic system

socioeconomic development

economic equlibrium

cognitive differences1