Institutionalist Economics

Authors: Andreas Dimmelmeier und Frederik Heussner | 18th of December 2016 (Updated: 30.07.2018)
Patron and academic review: Prof. Dr. Wolfram Elsner

Thanks to Dr. Sebastian Thieme, Francisco Ebeling Barros and Guido Baldi for their helpful comments and additions.

1. Core elements

Institutional economics denotes a variety of traditions in economics that are concerned with the social institutions linked to the production, distribution and consumption of goods (Hodgson 2001, 345–346) as well as the corresponding social relations. As such it has a very broad scope of inquiry and has close ties with other disciplines, like economic sociology and economic history, but also with psychology, political science, anthropology, business and management studies, and biology, physical science, and nowadays also cognitive, neuro and brain sciences. Since institutional economics is a very diverse church, a crisp classification of “the” perspective of institutional economics is impossible. Therefore, in the following we will focus mostly on the set of theories and analyses that have been elaborated by the German Historical School(s) and the Original Institutional Economics (OIE), which is also known as American Institutionalism, Radical Institutionalism, Old Institutionalism, Institutional Political Economy or evolutionary-institutional economic. As will be shown later (section 1 below and section 8) this definition of institutionalism differs strongly with the New Institutional Economics and its emphasis of the individual. Hence, when we will talk below about institutional economics or institutionalism it is the (mostly) OIE perspective we are referring to. It is also important to note that other strands of Institutionalism have emerged outside of the realm of Economics, such as Historical Institutionalism and Discursive Institutionalism. Those will be dealt with in Section 7.

Most institutional economists understand the economy as a system of (formal and informal) social organization related to the production, distribution and consumption of goods, or, in a traditional institutionalist wording: for the provision of the means of socio-economic life and its reproduction. Rather than presupposing certain universal features rooted in human nature, the crucial insight is that the concrete characteristics of societies and forms of economic organisation considerably vary across space and time. Pursuing this view of the economy, institutional economists attempt to understand the concrete socio-historical factors that shape the functioning of the economy. One key feature for understanding the social and historical nature of economic organization is to identify social institutions. In their broadest sense institutions can be defined as “the regular, patterned behaviour of people in a society and (...) the ideas and values associated with these regularities” (Neale 1994, 402).

The loose definition of institutions allows for the analysis of factors as varied as behavioral consumption and production patterns on the one hand and belief systems, on the other. The latter include, for example, religious beliefs or other “enabling myths,” under which Veblen understands a set of beliefs such as racism, sexism or social Darwinism that enable certain (normatively bad) forms of economic organization to persist. Furthermore, patterns of state regulation or technology application as well as the complex arrangement of such factors in the socio-economy are investigated. Given this openness, all sorts of economic phenomena can serve as objects of investigation, which enables institutional economists to pose a wide range of different questions. The knowledge of the changing nature of institutions implies also that many scholars develop a critical attitude towards the necessary existence of the status quo, since this might easily change. Institutional scholars attempt to understand how certain economic phenomena emerge and develop over time (for the systematic of institutional research questions, see e.g. Elsner 1987; 1986). Examples would be the transformation of capitalism from Fordist to Post-Fordist production over time or the relative stability of certain behavioral regularities (e.g. in consumption, leisure or mobility) or state arrangements. Comparative scholars set out to understand differences or similarities between entities and their institutional arrangements (Elsner 1987), for example, the GDP differential between (so-called) developed and developing economies or organizational convergence between companies in different locations, and the different multi-dimensionalities of economic development in general.

Institutional economists, thus, also reject the use of deductively derived assumptions and models and instead often produce very detailed and contextualized accounts that attempt to do justice to the specificity of the situation.

Different strands of institutionalist economics were amongst the leading economic traditions from the late 19th century until the Second World War with Germany and the United States being the strongholds of institutionalist theorizing. Afterwards institutionalist analysis was relegated to the margins as more formalistic and abstract “universal” theories became dominant in economics (Milonakis and Fine 2009, 297–300; Hodgson 2001, 57–59). In the 1970s and 1980s, renewed interest in economic institutions was sparked by the contributions of the mainstream (marginalist) New Institutionalist Economics (NIE) and its comparison with OIE (Elsner 1986). Researchers in the NIE field have especially focused on themes such as transaction costs and game theoretic interactions amongst individuals and organizations within a constant or comparative-static (rather than evolutionary) institutional environment. However, more macro-oriented institutional topics like the emergence and development of capitalism have also been the subject of NIE (e.g. North 1990). Although NIE and OIE as well as the German Historical School, as treated here, share some elements and research interests, NIE is primarily based on the neoclassical conception of rational (short-run maximizing) economic behaviour (for a critical assessment of NIE, see Samuels 1995, 578 and Groenewegen et al. 2010). As a consequence, contributions by NIE will be dealt with shortly in section 8 below, but the emphasis of this site will rest on the works of the OIE, the German Historical School and to a lesser extent the socio-economic tradition that is associated with Max Weber amongst others. The German Historical School can be considered to have started in 1843 with the publication of the Grundriss by Wilhelm Roscher and its presence in academia ended with the death of Werner Sombart in 1941, even though the ideas of historicists have been rediscovered and expanded on since (Hodgson 2001, 59). The inception of OIE is often associated with Thorstein Veblen’s (1857–1929) contributions and flourished in the US from the late 19th century until the mid-20th century.  

2. Terms, analysis, and conception of the economy

As the name “institutional economics” implies, the term institution is central for this research tradition. Going a little beyond the view of institutions as patterned behaviour, we might specify them as social rules that structure social interaction (Hodgson 2001, 294). These rules enable meaningful social action by giving people a template of how to make sense of other people's behaviour in a certain setting, in this way empowering individuals to undertake problem-solving and reasonable innovation. Only shared understandings of learned social rules allow, for instance, stock (or horse) traders to conclude contracts by hand signs, and only shared social rules allow for the teaching in a classroom to work as the teacher and the students act according to their roles. As a consequence, apart from enabling social action, institutions also restrict certain forms of behaviour. Different ways of how to conceptualize institutions are also provided in Box 1.

It is possible to delineate various types of institutions. On the one hand, there are formal institutions that are specified, codified and whose violation is often sanctioned explicitly. Examples of such formal institutions are contracts, organizational statutes or legal regulations. Formal institutions are complemented, and often underpinned and substantiated, by informal institutions, which are more emergent and diffuse. Even though informal institutions can be observable, they are often taken for granted, and thus are not recognized by participants, who might even consider them as natural or given. Examples of such “natural” informal institutions would be certain categories that delineate groups in terms of e.g. gender or ethnicity but also routinized (“cultural”) practices such as not working on weekends. Another way of separating between formal and informal institutions is by treating the former as binding and the latter as non-binding rules (Khalil 1994, 255).

For informal institutions another distinction becomes important, namely between beliefs and regular practices. Beliefs can be further differentiated into normative beliefs (i.e. rules become norms in a historical process) and cognitive beliefs. The former can be conceived of, for example, as answers to the questions: What is right? What ought to be done?, whereas the latter consist of the answers to factual questions such as: How is the world? Why do things happen? as well as of statements such as: markets exist and manifest themselves in this or that manner. Loose money causes inflation. Consequently, a belief system reinforces an institution, when it is shared as a norm or a “truth” in society.

Beliefs can be distinguished from regular practices, such as habits, customs or routines. Habits are tendencies or psychological propensities (dispositions) to engage in a previously adopted or acquired form of action (Camic 1986, 1004, quoted in Hodgson 1994, 302). Habits unlike institutions refer to the individual. They are non-deliberative dispositions for repeated actions performed by individuals. Yet, habits can be consciously acquired as in the case of learning a particular work technique, which rests on a particular practice and know-how. According to Thorstein Veblen, shared habits and the process of increasing habituation will lead to the creation of institutions on the societal level. Routines, by contrast, relate to a group (e.g. a firm, as in Nelson and Winter 1982) and not to an individual. An example of a routine would be the routine of how a team of workers organizes the operation of a machine and achieves a truce among conflicting interests (e.g. sharing individual knowledge to facilitate the innovation process). They will arrange the inputs of the production process in a certain spatial way and distribute the tasks amongst the workers as well as the sequence when to perform which task. The nightshift might arrange these things differently than the day shift. Hence they engage in different routines. 

Both practices and beliefs differ from instincts, like Thorstein Veblen’s famous references to instincts of workmanship, parental bend and idle curiosity. These positive instincts are contrasted by predatory instincts that induce a minority to exploit the labour of others and dedicate themselves to war, religion, and wasteful consumption. For Veblen both classes of instincts have some trans-historical validity, even though they manifest themselves in different ways depending on the historical context.[1]  .

Institutionalist economists apply these and other concepts to economic phenomena. This means that they research economic institutions and entire complex sets of institutions which define and embed mechanisms or organizations like “markets” or firms. Furthermore, they analyze institutions that provide for the social conditions for “the economy” to function. Examples of the latter are both legal codes and cultural norms. Lastly, the effect of “the economy” on non-economic parts of society like the effect of capitalist property relations on political systems is another field that can be analysed. Again, it is noteworthy that the historical specificity of these institutions is emphasised. Consequently, there is no such thing as “the market” but a variety of markets defined broadly by arrangements of institutions, which embed decentralized exchange. To give an example, a trade fair in medieval Europe is analytically a very different thing compared to today’s Chicago Mercantile Exchange (a big stock exchange where e.g. options and futures are traded) even though both fall under the broad – yet without further qualifications rather uninformative – category of a “market” (cf. Hodgson 2001, 250–257).

This also implies that the boundary between economic and non-economic phenomena is often transgressed in practice. As a matter of fact, institutional accounts have to analyze their subject matter as a complex arrangement of economic, political and cultural factors. Lastly, institutions can be seen both as positive (“instrumental”, problem-solving) things that emancipate people and better their lives, as well as negative (“ceremonial”) things that are used for repression and the preservation of power, status and wealth in hands of the already powerful. Institutionalists like Thorstein Veblen and later Clarence E. Ayres, J. Fagg Foster and P.D. Bush (1987) have referred to this double role of institutions as the dichotomy between instrumental and ceremonial institutions (Elsner 2012; Reuter 1996, 264–268). See also ceremonial encapsulation in section 7 below.

Box 1: Three definitions of an “institution” (See Hindriks and Guala [2015, 2] for how these conceptions relate and can be framed in terms of one another, see the entire paper.)

3. Ontology

Institutionalists subscribe to a social ontology that understands humans as social beings who derive preferences and value orientations from the social context they are embedded in as well as from direct interactions with other people. Those interactions do not fall within the category of market-price interactions between suppliers and demanders. Thus, rather than taking the individual and certain universal predispositions as the ultimate starting point of explanations, emphasis is given to the system dimension. Historically, institutionalist scholars have made reference to a population-based (phylogenetic) evolutionary ontology and (methodological) holism, whereas more recent scholarship has further developed a more nuanced relationship between individual actors and the structure in which they are situated.[2] This position has also been labelled as interactionism (Nooteboom 2007).

In this view, institutions are understood as social entities and thus understood as emergent social structure. This, however, does not mean that they are the results of purposeful or strategic action or even reducible to individual human actors altogether. Institutions are not merely seen as an instrument used by individuals to achieve their goals. Rather institutions are understood as existing (at least potentially) independently of individual humans who have generated them. They are therefore crucial factors shaping the economy in their own right and stand in the center of attention (Reuter 1996, 137). As a consequence, research is mostly centered on emergent meso- and macro-level phenomena, rather than on individual action (Elsner 2007, 2009). This does not mean that institutions and actors are understood as independent from one another. Rather actors and institutions are understood as “mutually constitutive” or co-evolving. Hence, institutions shape the context in which actors operate, yet at the same time actors reproduce and change – intentionally or not – the institutional context they inhabit (Samuels 1995, 573). Also in that context O´Neill (2007, p. 67) argues that in this version of institutionalism the individuals´ preferences are explained by reference to the institutional context in which they operate. Hence, it becomes a  normative question to determine which institutions should be created or revoked as for individuals to develop their desired preferences.

This implies that, rather than pursuing static analysis of a (specific) institutional setting, most institutionalist economists understand economic phenomena as processes situated in time and space and attribute great importance to the questions of stability, change and differential replication in populations (i.e. evolution). Consistent with the emphasis of historical specificity, institutional change is not geared towards any final or teleological ideal or equilibrium state. Instead, it is dependent on the contingent interdependencies and the evolutionary processes that occur at a specific time and space. Although institutions are by their very nature understood as relatively durable and thus relatively stable over time, understanding change and the processes by which it occurs is a central preoccupation of institutionalists (Samuels 1995, 580). Their theory of institutional change (Elsner 2012; Bush 1987) looks closely at those interdependent dynamics between instrumental and ceremonial institutions and their justifications. Against this background institutional analysis does not provide a simplistic monolithic view of human nature, but rather a historicized understanding of human nature. It thus rejects reductionist understandings of human actors and emphasizes the role of context in shaping human action. Nevertheless, this does not mean that there is no view on human nature at all. Rather, humans are perceived as cultural beings that live, work and consume in communities, which imbues them with a sense of purpose and meaning.

This historicized understanding of both humans and institutions makes, as said, the development over time both in terms of stability or change one of the central topics of institutionalist economics. Yet institutionalist scholars have also often focused on power and dominance related to the degeneration and (ab)use of institutions in order to formalize power imbalances and inequalities (Reuter 1996, 178). Indeed, power has been a major focus of the work of the famous institutionalist John Commons, reflected in his analyses of the distributions of specific rights and duties in transactions. A further sign that hints to the importance of power for institutional analysis is that ‘power’ was the focus of two entries in the Elgar Companion to Institutional and Evolutionary Economics, a fact that is justified by its centrality in institutionalist thought (1994, XV). Also scarcity (e.g. in some of Max Weber’s work, cf. Hodgson 2001, 122) and uncertainty (e.g. in the work of Cliffe Leslie, cf. Hodgson 2001, 70–71) have featured in analyses of scholars associated with the institutional perspective. However, institutionalist scholars such as Clarence Ayres and John Commons have virulently denied scarcity as an ontological given and have treated resources and thus scarcity as a function of culture and technology as well. (Reuter 1996, 275; Peach 1994, 167–168).

4. Epistemology

Institutional Economics is an object-driven (as opposed to theory- or method-driven) research program that tries to understand social institutions and their implications in so far as they relate to the economy (Hodgson 2015, 2). Hence, the work of institutionalist economists attempts to understand the complexities associated with concrete time-space-bound phenomena. As such there is less of a preoccupation with theory but instead a search for patterns. Nevertheless, this does not mean that institutional economists are a-theoretical. Rather, they aspire to a medium degree of generalization in the form of so called mid-range theories. These are then evaluated not in reference to the uncovering of some “eternal truth” (such as, e.g. the law of gravitation; cf. Hodgson 2001, 14–16, on the limited usefulness of general theories in economics), but according to their practical value for understanding and influencing real-world phenomena through institutional design, regulations and policy intervention.

The focus on concrete phenomena and an oftentimes inductive research strategy also means that ahistorical, metaphysical truth is mostly rejected. Hence, a historicized understanding of scientific knowledge is the basis of institutionalist theorizing. Even though there is some tradition of positivist research – which mostly stems from some early institutionalists’ empiricism and their skepticism towards general theories, rooted in a background in the German Historical School – within institutional economics, the perspective as a whole can arguably be credited with acknowledging the epistemological problem of getting access to the real world. The themes of social construction and interpretation receive special attention in the more culturalist works of the socioeconomic traditions (cf. contributions in Heise and Deumelandt 2015; Hedtke (Ed.) 2015 for examples). This does not mean that institutionalists are radical constructivists or full-scale cultural relativists, yet the degree of privileged access to knowledge afforded to researchers is considered to be limited. As a consequence, they pursue a philosophically pragmatist understanding of knowledge (after Charles S. Peirce and John Dewey), which problematizes the social nature of cognition and knowledge and is committed to a participatory notion of science (Reuter 1996, 75–76). This means that institutionalists often engage in a form of scientific practice that attempts to immerse itself – at least to a certain degree – into the subject that they aspire to understand, by reconstructing the representations and experiences of participants through archival or interview research or even participating themselves. Inquiry, research, cognition and knowledge, thus, are considered participatory processes of social interest, which have to be evaluated according to their impact and usefulness to society.

Given this situated understanding of scientific practice, it is understandable that many institutionalists have claimed that a separation of values from descriptive science is neither feasible, nor necessarily desirable. Indeed, the evaluation of scientific practice with a view toward its practical value already indicates that institutionalists consider their work in relation to society more generally. Whereas Max Weber – who is sometimes subsumed as an institutionalist – has supported at least the aspiration of valueless social science (Rieter 2002, 152–153), most other institutionalists have rejected a clear-cut separation between scientific and normative considerations (Milonakis and Fine 2009, 94, 198; Reuter 1996, 134) This has meant that institutionalists do not shy away from getting involved in politics or practices of social design and change. Evidence for this is given by the direct involvement in politics that has been characteristic for many scholars associated with American Institutionalism. The institutionalist John Commons, for example, was involved in many industrial inquiry commissions as well as in the drafting the New Deal and US labour and welfare legislation at both federal and state levels (Elsner 2006). Wesley Mitchell, another important institutionalist, founded the National Bureau of Economic Statistics in the US (NBER) and his disciple Arthur F. Burns later became part of Eisenhower's Council of economic advisors and served as a Federal Reserve Chairman under the Nixon administration (Reuter 1996, 300–310). Institutionalists Gardiner C. Means and Adolph A. Berle were famous US Senate economists developing the theory of the industrial corporation and of mark-up pricing and inflation in their famous Senate reports in the late 1920 and 1930s (Elsner 2011).

This collapse of an absolute boundary between scientific and other forms of practice also works the other way around: Many institutionalists follow a democratic ideal of science that encourages broad participation in scientific practice (Reuter 1996, 80–84). Marc Tool, for example, has argued for an “instrumental value principle,” which should inform the public in their value judgements to favor a smooth reproduction of the social life process (Tool 1977). Also, science should strive to enhance human dignity and reproduce (and not radically alter) the continuity of human communities with gradual improvements (Reuter 1996, 322–326), in accordance with the principle of minimal dislocation (John F. Foster). Examples of such advances could be building measures that cushion the instabilities of the economic process as well as enhancing social and economic equalization, fostering rationality, or improving levels of living, including nutrition, health and housing, and fostering the rise of productivity (cf. Kapp 1976).

5. Methodology

Methodologically speaking, institutionalists do mostly reject the deductive-nomological perspective. Institutionalist economists attempt to understand the complexities associated with concrete time-space-bound phenomena.

If one were to use the deductive–inductive dichotomy – not as an adequate description of how science is done but as a heuristic allowing for comparability– the institutionalist approach due to its relative emphasis on empirical work can be considered to be closer to the inductive camp. Nonetheless there are also many instances of institutionalist scholarship, which could be more aptly placed in a middle category between deduction and induction. An example would be the abductive approach suggested by pragmatist philosopher Charles S. Peirce and the German historicist Arthur Spiethoff regarding the elaboration of new types from empirical data (Thieme 2015, 147 in Heise ed. 2015). Still, it can be stated that institutionalists reject grand deductive theorizing and long chains of reasoning. Instead, they aim, as said, for mid-range theory, where qualitative boundaries are specified with regard to which actions are deemed possible inside an institution or a structure (Dugger 1979, 905).

What this means in practice is that Institutionalists start their analysis by identifying one or a small group of institutions which they consider particularly relevant for the event they want to explain, and from there they build their explanatory edifice. This method is by some called “concessive holism” (see O´Hara, 2000). Contrary to conventional institutionalism, which always puts the rational-egoistic individual, maximizing behavior and the protection of property rights at the center of the explanation, an Original Institutional Economist may argue that the developmental state, the law, an organization or another important institution is the most relevant one, from which to start the explanation.

Regarding the choice of concrete methods, scholars often rely on case studies and questionnaires (Dugger 1979, 906–907). These methods can be said to be privileged in certain forms of empirical research, where the aim is to analyze a specific phenomenon with a high degree of detail. Yet far from confining methods to a rigid set associated with the perspective, the object of research determines the methods and strategies that scholars draw upon and can include both qualitative and quantitative research methods. Qualitative interviews, field observation, participative research and archival research, exist alongside econometrics, game-theoretic modeling, and quasi-experimental methods (see also Hodgson 2015, 2). Furthermore, whereas scholars work with a variety of different methods, they also draw heavily upon secondary literature, which is integrated with findings from primary research. This does not mean that anything goes. Methods such as laboratory experiments and highly abstract formal-deductive modelling are generally uncommon. Nevertheless, institutionalist scholars working close to complexity science have incorporated mathematical and game-theoretic models, social network analysis, agent-based modeling and computational simulations (cf. Elsner et al 2015).

Another important method of institutionalist theorizing is the identification of types by virtue of which institutional arrangements (a state or a firm), periods (e.g. Classical Antiquity or Feudalism) or geographically specific forms of organization (e.g. German or Japanese Capitalism) can be categorized in a way that conveys meaning and information (Hodgson 2015, 2). Examples of such types are the stages of developments of states (e.g. industrialized economy, emerging economy, newly industrialized economy, least developed country) and the position of an economy on the state–market continuum from planned and regulated economy to “neoliberal” de-regulated (free) market economy.

It is important to notice in this context that categories will always be impure and fuzzy. For instance, characteristics of forms of feudal slave labour are still present in modern capitalism and some kind of “black markets” have coexisted in the planned and regulated economies of the state-socialist countries (Hodgson 2001, 333–334). Furthermore, while the categories or types are attempts at distillations of some essential properties of the analyzed phenomena, they do so at the epistemological level, which faces the problem of being fallible. Also, changes on the ontological level might make old typologies obsolete (cf. Sayer 1994, 162–165). On the other hand, the ongoing development of theories of these different types makes it possible to engage in theory building regarding possible transitions from one dominant type to another in a historically and spatially confined setting.

Regarding the testing of theories and concepts for their validity, a unique epistemologically justified scientific method is rejected in favour of a pragmatic approach, which generally asks which insights are provided for a particular political response to a socially relevant problem. Henceforth, as already noted in the previous section, a kind of what-works-best methodology is chosen that links science to practice.

6. Ideology and political goals

Although – as noted above – institutionalists require the knowledge they produce to be socially useful, it is difficult to identify a specific policy agenda. This does not mean that they are not political: Historically speaking, scholars affiliated with the institutionalist schools have been overtly normative and policy-oriented. Whereas some US Institutionalists have been very active in the New Deal period (Elsner et al 2015, 351; Elsner 2011), some members of the German Historical School produced elaborate plans for the national development of Germany. Some German historicists such as Friedrich List and Bruno Hildebrand, who apart from their scientific work, served in political office (Rieter 2002, 143–144). Specific policy positions have varied widely, but some general traits are identifiable: Most scholars take a skeptical position towards the development of capitalist economies and advocate social and political intervention in the economy (Milonakis and Fine 2009, 75–78, 114, 186; Elsner 2001). Interventions have often been advocated with reference to the nation state (Milonakis and Fine 2009, 75), even though approaches advocating the mobilisation of social groups or classes also exist. Nevertheless, despite this more or less anti-capitalist viewpoint, institutionalists’ political agenda is reform-oriented and not revolutionary. Viewing social and institutional change as slow and often also path-dependent – meaning that initial conditions which often might be random will define trajectories that are non-reversible – as well as the economic system as fundamentally embodied within broader social structures, revolutionary change seems to be an unlikely and risky option. The focus on specific time-and-space-bound phenomena suggests a preoccupation with concrete improvements, rather than systemic questions, while the “democratic ideal” suggests a commitment to dialogical-inclusive, rather than to radical, positions. Despite these common traits, specific policy proposals vary widely: Whereas some aspire to develop “society”, “the common good” or “the nation” by creating institutions that can harness the potential of capitalism, more radical institutionalists, or Marxian-Veblenians, such as W. Dugger, H. Sherman or P. A. O’Hara, take a more confrontational stance and advocate for classes, the state or civil society to reign in economic processes. Beyond these general orientations, more concrete proposals vary even further given that institutionalists attempt to formulate policy in accordance with the concrete situation and context rather than based on abstract principles.

7. Current debates and analyses

Maybe as a result of the aversion of institutionalist scholarship to developing one great “universal” theory or to solving the trans-historical economic problem, there is a huge variety of themes and analyses that have been present throughout the history of the perspective. In the following, some exemplary research themes are presented regarding both the historical antecedents as well as more recent investigations. Other research themes that cannot be explored here for reasons of space include the dominance of ceremonial institutions and related economic and social instability; uneven distribution; crises and injustice in race, ethnicity and gender; the theory of the firm; innovation and technological change; or economic democracy.

Embeddedness

One research theme that is closely related to the work of Karl Polanyi is the question of embeddedness. According to this concept, economic activities and the market are embedded into a larger set of social arrangements and institutions such as culture, customs, law or the state. If policymakers, however, decide to apply the market logic of monetary gain and commodification to society as a whole this will have disastrous consequences (Polanyi 1944). Variants of this argument can already be found in Adam Smith’s Theory of Moral Sentiments (Watson 2005; Elsner 1989) and his Wealth of Nations as well. More recently the concept of embeddedness has been taken up by the economic sociologist Mark Granovetter (1985), who stresses the importance of social networks regarding economic decision making. As a consequence, some research has turned away from “the market” as an abstract concept towards empirical investigations of concrete “markets”, societies, and the actors and institutions that create and shape them (e.g. Garcia-Parpet 1986).  The book “Contemporary Capitalism”, edited by J. Rogers Hollingsworth and Robert Boyer (Hollingsworth and Boyer, 1997), elaborates on the critique of the market as the default economic institution by arguing that there is no single best institutional arrangement for organizing modern societies, and that markets should not regarded as the ideal and universal arrangement for coordinating economic activity. The authors of that volume find that the successful capitalist experiences have been those in which markets have been embedded in social institutions such as networks.

Historically the relation between law (formal institutions) and economics has received special emphasis in this context (e.g. in the work of Commons, see above). Today, work on property rights in general and intellectual property rights in particular continues this train of thought (Elsner et al 2015, 468; Hodgson 2001, 311–313; Elsner 1986). More recently, Hodgson has presented the foundations of “Legal Institutionalism” (Hodgson, 2015).

Ecology

Scholars associated with the OIE perspective also have ties with ecological economics and have integrated work on institutions with issues related to environmental degradation; the works of Nicolas Georgescu-Roegen and Karl W. Kapp are examples of this integration. Their analyses pointed to the externalization of entropy created by the business enterprise and the capitalist “market” system in general, which would offload its waste onto other subsystems such as society and the environment. Kapp (1950) focused on the issue of the limited liability of corporations, which would allow them to enjoy the profits of their undertakings while shifting the costs to other systems. In this context, direct physical and biological analogies are employed to human society and the “market” system, particularly analyzing humans and the economy as open, metabolic systems (Elsner et al 2015, 347–350; Berger and Elsner 2007). Important contributions to the subject have also been delivered by O´Hara (2000) and by Vatn (2015). While the former frames the problem of environmental destruction into the “Principles of Institutional-Evolutionary Political Economy”, the latter delivers a full-fledged theory of Environmental Governance, along the lines of Institutional Political Economy.

Typologies of different forms of economic organization

Whereas scholars of the German Historical School were concerned with different stages of economies, which often would develop historically from less advanced to more complex arrangements, more recent literature has focused on different economic configurations from a more descriptive and less teleological standpoint. The Varieties of Capitalism literature (Hall and Soskice 2001) exemplifies this, as it separates economies into “liberal market economies” (e.g. US, UK) and “coordinated market economies” (e.g. Japan, Germany). Each of these ideal types is characterized by a specific institutional setup regarding, for example, labour regulations, education and vocational training and the relations between government, trade unions and industry. Hall and Soskice´s approach, which originates from a branch from Political Science called “Historical Institutionalism”, is an excellent example of the enormous potential that exists in  combining economics with other branches of knowledge. Whereas Fine and Milonakis (2009) have argued that Institutional Economics has been “economically imperialist” by introducing concepts such as the rational-maximizing individual into other schools of thought such as Political Science, Original Institutional Economics recognizes that looking the other way around might bring relevant knowledge to the field of Economics. In particular, the Varieties of Capitalism school has highlighted the importance of “Institutional Complementarities” for the success of a national economy; in other, words, of the relevance of the embeddedness of economic activity.  Hall and Soskice´s approach has been enriched by Vivien Schmidt”s (2007) work on “Discursive Institutionalism”. Schmidt introduced a third variety of typology of capitalism, the State-Influenced Market Economies (SMEs), whose paradigmatic example is the french variety of capitalism.The popularity of Institutionalism in Social Sciences has led to the emergence of an “Institutional Turn” (see Jessop, 2001; Skocpol et al, 1985), an experience that the mainstream of the Economics profession has also undergone with the popularization of New Institutionalism.

The French Regulation School, a variant of institutionalism stemming from Marxism, has always delved deeper into such different institutional constellations making up varieties of capitalism. Another classification that has a similar analytical focus, which also stresses cultural aspects is the further differentiation into Anglo-Saxon, Continental and Asian economies (Kesting and Nielsen 2008; Groenewegen et al 2007, 88–91). In that field, the groundbreaking contribution has been delivered by Michel Aglietta, who presented a historical theory of the  whole development of US capitalism through the lenses of Regulation Theory (Aglietta, 2000). Also worth mentioning is Boyer´s work (2001), and Amable´s (2004) perspective of “Social Systems of Innovation and Production”.

Corporate sector

Another major theme of OIE is the role of big corporations. The concern with giant corporations arose from the reality that institutionalists found themselves in during the Gilded Age. Institutional analyses of the firm began with Veblen’s famous Theory of the Business Enterprise (1904). The early decades of the 20th century in the US were characterized by corporates, such as US Steel, JP Morgan, and Standard Oil, dominating huge parts of the economy. Institutionalists Gardiner C. Means and Adolph A. Berle were the leading figures of the empirical analysis of the new corporate realities and their micro- and macro-consequences from the 1920s through the 1940s. Research concerning the nature and role of big, often transnational, corporations (TNCs or MNCs) then flourished again in the 1950s and 1960s and further elaborated on the topics of cartelization, administered pricing (instead of “market” pricing), the separation of labour markets into corporate jobs and market-mediated jobs as well as business networks in terms of ownership, control and personal ties of executives of big corporations. The leading figure of analyzing such planned capitalism was John K. Galbraith with his books, among them the New Industrial State.[3] Additionally, empirical analyses of corporate interlocks were also prominently made by institutionalists Alfred Chandler, John Munkirs and F. Gregory Hayden.

In the following decades the relevance of big corporations seemed to fade as small enterprises gained importance and flexible and entrepreneurial firms were celebrated, while giant bureaucratic corporations were considered to become obsolete (Amin 1994, 85–90). Yet this assessment turned out to be premature. In September 2016 The Economist ran a special report on giant corporations remarking that “the share of GDP generated by America’s 100 biggest companies rose from about 33% in 1994 to 46% in 2013. The five largest banks account for 45% of banking assets, up from 25% in 2000.[4]” Network research on ownership also shows that the importance and the interlinkages of big enterprises are once again at very high levels with 737 entities holding 80% of the value of all transnational corporations (see the important recent corporate network analysis of Vitali et al 2011).

A corollary to this is corporate hegemony theory as developed by William Dugger. This theory argues that a powerful corporate sector will thwart the pluralism of beliefs and a variety of social institutions such as the school, the family or religious associations. If the beliefs, the practices and the necessities of the corporate sector are emulated by other institutions and hence crowd out competing beliefs and practices, this leads to a hegemonic social structure (Dugger 1994, 91–95).

Encapsulation

Encapsulation, as mentioned, refers to the process, by which an institution that was initially created to help in the solution of a problem (e.g. reducing uncertainty or overcoming a collective-action problem) becomes “captured” by agents who seek “invidious distinction.” This means that such agents seek to uphold an institution that is no longer capable of responding to changed circumstances, in order to preserve their own benefits, which can, for example, consist of high material income or of status and recognition. Elsner et al. (2015) demonstrate the effects of encapsulation from a game theoretic perspective using the example of hierarchical corporate routines that initially served to lower transaction costs but whose motivation might be encapsulated by the drives of senior staff to preserve their status thus possibly leading to an inadequate response when external circumstances change (2015, 403–411; further: Elsner 2012; Bush 1987).  Further, Dugger and Sherman (2002) also highlight how “ceremonial encapsulation” hinders economic growth by diverting innovative activities away from the most socially justified uses. In this context it is important to note the distinction between an ‘instrumental practice’ justification of an institution, where an institution is argued to be justified because it solves a problem, and the ceremonial justification of an institution which appeals to traditional values or myths.

Industrial Policy and the Developmental State

An important theme that has been tackled by scholars of Original Institutional Economics is the importance of industrial policy and the Developmental State as powerful institutions to support economic change. Looking at the economic history of developed nations, Ha-Joon Chang argues that those nations in general have pursued a developmentalist/comprehensive industrial policy approach almost from the very beginning of their trajectories (Chang, 2004). In the same direction, another important conclusion is that, contrary to the mainstream view, who sees those successful experiences as irreplicable due to the vested interests of local political elites, pro-growth institutions can be molded if, in a certain critical juncture, those political elites show the necessary political will to do it (Chang and Evans, 2000). When that will exists - for instance as was the case of South Korea - a big variety of possible combinations of developmental institutions can be crafted. In that vein, Evans (2003) makes the case for looking beyond the "institutional monocropping" that is so dominant in mainstream reasoning.

8. Delineation: subschools, other economic theories, and other disciplines

First of all, the relation of the institutional (OIE) approach outlined here with New Institutional Economics shall be explored. Prominent representatives of NIE are Ronald Coase, Douglass North and Oliver Williamson (Hodgson 2015, 5). The main separation of this approach is ontological as it starts from the presumption that individuals with their predefined preference sets build institutions in order to reduce transaction costs or commitment problems (cf. North 1990, 27–35). This does not have to result in socially efficient institutions, since certain individuals in prominent positions such as rulers might have incentives to create inefficient (ceremonially dominated) institutions from which they derive extra rents. Also, lock-in effects and uncertainty about the payoffs of institutional changes may discourage efficient institutional change as actors’ conceptions of opportunities and payoffs are modelled on the current institutions (North 1990, 4–8). In summary, though sometimes modifications in the direction of greater influence of culture or beliefs are made, by choosing to start and abstract from the individual, NIE might more aptly be grouped within neoclassical economics, since one of the central tenets of neoclassical economics is methodological individualism and static marginalistic calculus (cf. Arnsperger and Varoufakis 2006, 7).

Another related yet separate field is cultural economics; this has close proximity to cultural studies and the humanities. Instead of understanding institutions broadly, cultural economics zooms in on cultural phenomena, while – at least relatively – neglecting the independent effects (or even existence of) material factors. Scholars working in this tradition either focus on (linguistic) or other forms of representation (e.g. various forms of discourses shaping economic structures) or focus on more corporal and aesthetic forms of practice, such as the role of emotions, experience or creativity in social action. Whereas, empirically many overlaps persist with institutionalist economists, larger differences persist in relation to epistemology and methodology. Cultural economists question and scrutinize the participant-observer link more radically, tend towards strong notions of constructivism and highlight the role of interpretation and subjectivity in empirical research. This means that they are more clearly rooted methodologically in an interpretative or hermeneutical framework.

Social economics or socio-economics (Sozialökonomie) denotes another very broad field that is closely related or even includes the kinds of institutionalist analysis that are discussed herein. Reinhold Hedtke identifies this field as being defined by a focus on the embeddedness of the economy in other systems, the existence of historicity or historical specificity, the multidimensional motivations of economic actors (i.e. utility maximization as well as social and moral considerations) and lastly an explicitly transdisciplinary orientation (Hedtke 2015, 15; on the relation of Institutionalism and Social Economics, see Elsner 2017).

Regarding interdisciplinarity, the focus on power relations that is also very often theorized in institutional economics is further expanded and exclusively focused on by political science (and international studies such as international relations/international political economy, cf. Cox 1981 for example). While some Institutionalists have emphasized the role of conflict and dominance in the economic sphere, where institutions such as laws, values and traditions are created to formalize power imbalances and hierarchies (Reuter 1996, 178), scholars from political science have taken this as their main or sole entry point to inquiry. The treatment of institutions and culture is of course also an issue in sociology and a clear-cut disciplinary boundary between institutional economics and economic sociology is often difficult to draw (cf. Kapp 1976, 213, who denies that a separation between the economic and the social is even possible, as the economy is the prototype of an open, metabolic (sub-) system, increasing its complexity at the expenses of the social and the natural sub-systems). The study on routines and habits has close ties also to psychology. When assessing formal institutions such as property rights, transactions and regulations, there is of course a close proximity to legal studies (in the tradition of J.R. Commons, as mentioned).

Lastly, it should be emphasized that Institutional Economics in general shares a common history and many concepts with Evolutionary Economics. American Institutionalism had its starting point, as mentioned, exactly in the very evolutionary idea (Veblen 1898). Modern evolutionary economics has put more emphasis on biological and complex physical (non-mechanical) metaphors and systems and populations. This is subject to another perspective site (link). Also, more recent work in Complexity Economics (link perspective site) often builds on analyses of institutionalists and adds new concepts and methods to earlier scholarship (e.g. Elsner et al. 2015).

9. Delineation from the mainstream

As already noted in the discussions on ontology and on the differences of Institutionalism (OIE) and NIE, one of the key differences of OIE is the focus on institutions as things that have an ontological existence independent of individuals and hence can be conceived as actors with their own powers. As such they do shape interdependently with individuals the ways in which economic activity is organized. This stands in strong opposition to the methodological individualism of much of mainstream economics. Another difference that is situated on the level of ontology is the emphasis on dynamics, evolution, history and the social and ecological spheres, each of which is essential to institutional analysis. Again, atomistic and static analyses that are often present in the mainstream can be clearly separated from such an understanding.

As to the epistemological and methodological levels, William Dugger has elaborated on some of the differences. He focused on the differences between the pattern models constructed by OIEs and the predictive models of neoclassical economics. In his view:

‘A pattern model explains human behavior by carefully placing it in its institutional and cultural context. A predictive model explains human behavior by carefully stating assumptions and deducing implications (predictions) from them. (...) The predictive model is tested empirically by comparing deductions (quantitative predictions) with observations. The pattern model is tested empirically by comparing hypothesized institutional structures (qualitative patterns) with observations. (...) In summary, in the predictive mode, a theory is a set of predictions deduced or inferred from higher level principles or assumptions; in the pattern mode, a theory is a set of patterns which fit together. On the one hand, individual behavior is deduced from utility and income assumptions; on the other, individual behavior fits into an institutional structure, and institutional structure fits into a cultural context (...) In short, an understanding of the institutional structure in which Jones [meaning “somebody” here] is embedded does give the institutionalist some power to make general, qualitative predictions, but not specific, quantitative ones’ (Dugger 1979, 900–901, 905).

Finally, it is interesting to note that the mainstream version and the heterodox strand of Institutionalism indeed share some analytical conclusions. One clearcut example is the work by  Acemoglu and Robinson (2008) and by Acemoglu (2010). For instance, Acemoglu argues that “economic institutions that only protect the rights of a rich elite or the privileged will not achieve such equality of opportunity and will often create other distortions, potentially retarding economic growth.” (Acemoglu, 2010, p. 120). Further, according to the author the economic or political elite will only invest in public goods such as education if they expect to reap the benefits in the future. In that context, because there are conflicting preferences over institutions and policies, the distribution of political power in society plays an important role in determining which institutions and policies are chosen, also explaining why some non-growth enhancing institutions cannot be reformed (Acemoglu, 2010, p. 822). This is a line of reasoning that easily could be supported by the more heterodox strand of Institutionalism discussed here. There is, however, a difference in suggested policy recommendations. Whereas Acemoglu and his colleagues go on to suggest that, in general, liberalizing reforms inspired by the mainstream of the profession should be given preference, institutionalists of the heterodox tradition would defend a more case to case approach.

10. Further Information

Journals

Journal of Economic Issues (JEI)

Journal of Institutional Economics (JoIE)

Journal of Institutional and Theoretical Economics (JITE)

Evolutionary and Institutional Economics Review

Journal of Law and Economics

Journal of Socio-Economics

Economy and Society

Socio-Economic Review

Review of Social Economy (RoSE)

Forum for Social Economics (FSE)

Cambridge Journal of Economics (CJE)

Historical Representatives

German Historical Schools

• German Historism:  Friedrich List,
• German Historical School: Karl von Schütz, Bruno Hildebrand, Karl Knies, Albert Schäffle, Paul von Lilienfeld, Adolph Wagner, Gustav von Schmoller, Georg Knapp, Lujo Brentano, Karl Bücher,
• Neo Historism:  Werner Sombart, Arthur Spiethoff, Alfred Müller-Armack

British (and Irish) Historical School: T.E. Cliffe Leslie, Robert F. Hoxie, William Cunningham, John K. Ingram, Herbert Foxwell, Arnold Toynbee, William J. Ashley,

American Original Institutionalism: Thorstein Veblen, John R. Commons, Wesley Mitchell, Arthur F. Burns, Clarence E. Ayres, Richard T. Ely, Alan G. Gruchy, John K. Galbraith, Gunnar Myrdal.

New Institutional Economics: Douglass North, Oliver Williamson, Ronald Coase, Armen Alchian, Harold Demsetz.

Not sorted yet associated scholars: Karl Polanyi, Joseph A. Schumpeter, Albert O. Hirschman, Simon Kuznets; Robert Heilbroner, Elinor Ostrom, Max Weber

List of scholars Scholars who won the Veblen-Commons Award

List of former presidents of the AFEE

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Further Readings

Asso, P. F. and Fiorito, L. (2004) Human Nature and Economic Institutions: Instinct Psychology, Behaviorism, and the Development of American Institutionalism, Journal of the History of Economic Thought, 26: 445-477.

Galbraith, J. K. (1967) The New Industrial State, Penguin: London.

Harvey, J. T. (1994) Circular Causation and the Veblenian Dichotomy in the General Theory: An Introduction to Institutionalist Method, Journal of Post Keynesian Economics, (17).

Hodgson, G. M. (1998) The Approach of Institutional Economics, Journal of Economic Literature, 36: 166-192.

Hodgson, G. M. 2000. What is the Essence of Institutional Economics? Journal of Economic Issues, 34: 317-329.

Hodgson, G. M. (2004) The Evolution of Institutional Economics: Agency, Structure Darwinism in American Institutionalism, Routledge: London.

Hodgson, G. M. (2009) Institutional Economics into the Twenty-First Century’, Studi e Note di Economia, 24: 3-26

Latsis, J. (2010) Veblen on the Machine Process and Technological Change, Cambridge Journal of Economics, 34: 601-615.

Klump,  R.  [Hrsg.] (1996):  Wirtschaftskultur, Wirtschaftsstil und Wirtschaftsordnung. Marburg: Metropolis.

Rutherford, M. (2001) Institutional Economics: Then and Now, Journal of Economic Perspectives, 15: 173-194.

Samuels, W. J. (1995) The Present State of Institutional Economics, Cambridge Journal of Economics, (19).

Stanfield, J. R. and Carroll, M. (1997) The Monopoly Capital School and Original Institutional Economics, Journal of Economic Issues, 31: 481-489.

Twomey, P. (1998) Reviving Veblenian Economic Psychology, Cambridge Journal of Economics, 22: 433-448.

Veblen, T. B. (1898) Why is Economics Not an Evolutionary Science? Quarterly Journal of Economics, 12: 373-397