New Institutional Economics
Part of the series where I am trying to learn more about each of the major economic schools of thought.
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References
Notes
New Institutional Economics (NIE) is an economic perspective that attempts to extend economics by focusing on the institutions (that is to say the social and legal norms and rules) that underlie economic activity and with analysis beyond earlier institutional economics and neoclassical economics.
- The NIE assume that individuals are rational and that they seek to maximize their preferences, but they also have cognitive limitations, lack complete information and have difficulty monitoring and enforcing agreements. As a result, institutions form in large parge as an effective way to deal with transaction costs.
- NIE rejects that the state is a neutral actor, that there are zero transaction costs, and that actors have fixed preferences.
Overview
- It has its roots in two articles:
The Nature of the Firm
by Ronald Coase- The Problem of Social Cost by Ronald Coase
- In the latter, Coase theorem maintains that without transaction costs, alternative property right assignments can equivalently internalize conflicts and externalities
- In law and economics, Coase theorem describes an economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem is significant because, if true, the conclusion is that it is possible for private individuals to make choices that can solve the problem of market externalities. The theorem states that if the provision of a good or service results in an externality and trade in that good or service is possible, then bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property.
- In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's activity.
- Thus, comparative institutional analysis arising from such assignments is required to make a recommendation about efficient internalization of externalities and institutional design, including law and economics.
- Analyses are now 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 institutional economics, which is critical of neoclassical economics.
Institutional Levels
- Institutions are the
rules of the game
, both the formal legal rules and the informal social norms that govern individual behavior and structure social institutions (institutional frameworks). - Organizations, by contrast, are those groups of people and the governance arrangements that they create to co-ordinate their team action against other teams performing also as organizations. To enhance their chance of survival, actions taken by organizations attempts to acquire skill sets that offer the highest return on objective goals, such as profit maximization or voter turnout.
- Oliver Williamson characterizes four levels of social analysis (New Institutional economics is concerned with 2 and 3):
- Social Theory, specifically the level of embeddedness and informal rules
- Institutional environment and formal rules - it uses the economics of property rights and positive political theory
- Governance and the interactions of actors within transaction cost economics,
the play of the game
- The allocation of resources and employment, governed by neoclassical economics
- General rules form part of the broader institutional framework influencing the people's performance