Question

What is distinctive about institutional economics? How is Douglass North representative of this school of thought?

Answer 1

Institutional economics refers to a group of American economists in the early twentieth century who to greater or lesser extent dissented from the state of neoclassical economic theory. The most prominent thinker now associated. In the paper that definitively established 'institutional ' economics as the label attached to this school Hamilton outlines five criteria on which he thought any set of ideas that could be called economic theory ought to be judged.

Institutional economic thought:

The term institutional economics covers two stream of economic thought, both of which emerged at different times in the twentieth century. The essential distinction between the old and the new institutional economics. The distinction hinges on the theoretical treatment of the individual. In the new institutional economics the preferences or purposes of the individual are taken as given. In the old institutional economics they were seen as molded and reconstituted by social circumstances. A third section focuses on some of the theoretical achievements of the old institutional economics. A fourth section considers the merits and demerits of new institutional economics.

Problems with this approach include the under socialized human agent and the relapse into the problem of infinite explanatory regress.

Douglas North representative of school of thought:

• The main source of institutional change are variations in relative prices and in players' change.
• Changes in relative price include changes in the ratio of factor prices in the cost of information and technology.
• Institutions establish a structure of incentives that enables economic entrepreneurs to adjust while maximizing their utility.
• High returns for certain productive activities prompt economic actors to invest in them.
• While changes in relative prices provide the lone entrepreneur with the incentive to choose institutional change, the likelihood of achieving success is limited.
• Imperfect markets bound rationally, path dependency and ideological prejudices are all factors that account for the frequency of inefficient outcomes.
• The most important function of rulers is to specify, enforce and protect property rights.
• The entrepreneur is left with two unattractive choices , either to accept minor and unsatisfactory adjustments to the rules of the game or express dissatisfaction by refuse to comply with prevailing rules.
• Efficient political outcomes are also elusive. Indeed, they are exceptional since political markets are even less perfect than economic markets.