Institutional economics, old and new

Institutionalism as an approach to economic analysis has made a rather vigorous comeback in recent decades. Originally associated with the economic sociology of Thorstein Veblen, whose work focuses on the consumption patterns of the US nouveaux riche and the distortion by the profit motive of the potential of industrial society, a strong institutionalist tradition developed in North America in the early decades of the twentieth century (Stilwell, 2013, pp xxx). With the mathematisation of the subject after the second world war, however, driven by the practical emphasis of Keynesianism on the development of national income accounting for practical policy purposes on the macroeconomic side and by the emphasis on marginalist techniques of neo-classical microeconomics (Blackmore, History of Economic Thought), this institutional economic tradition of institutionalism lost ground.

For the earlier version of institutionalism, we may take as representative Walton Hamilton’s definition of institutions as “a way of thought or action of some prevalence or permanence, which is embedded in the habits of a group or customs of a people” (quoted in Hodgson, 1998, p. 179). For the later version, we can use Douglas North’s somewhat tighter (although less flexible?) definition of institutions for the formal and informal rules governing individual behaviour, but aiding co-operation (Douarin and Mickiewicz, 2017, p. 13). The theory of institutional prosperity outlined in chapter 3 of this study belongs this second group. Examples of institutions include markets, firms and the state, but also money, language and traffic rules.

Both versions nevertheless adopt a rather broad view of institutions subsuming within them organisations and social norms. They are not exactly the same, however. For instance, while “new” institutionalism incorporates into its analytical framework a key assumption of neo-classicism—namely, the figure of the rational, utility-maximising individual with fixed consumption preferences—the older version rejects this explicitly. Instead of explaining the emergence of institutions from the interactions of rational individuals (an approach that is called methodological individualism), therefore, “old” institutionalism envisages a more circular process, centred on the concept of habit, which Hodgson defines as “self-sustaining, non-reflective behaviour that arises in repetitive situations” (Hodgson, 1998, p. 179). In this process, the actions of individuals, informed by habit, cohere through imitation into routines and social customs, and then into larger, evolving institutional structures, which in turn feed into individuals’ habit formation, including of intellectual habits, such as the process of rational calculation. This means that for “old” institutionalism, i) individuals’ habits and institutions are “mutually constitutive”; and ii) that the rational actor is an outcome of institutional development, rather than an assumption leading to institutional emergence, as for the “new” school.

In contrast, neo-classicism proper, while placing “consumer sovereignty” at the heart of its theory, does not usually consider the process of formation of consumer tastes as falling within the remit of economics. Rather, as the “science of rational choice", it focuses on what happens once consumers’ tastes are already formed. Similarly, we saw in an earlier chapter that the theory’s focus on factors affecting the allocation of capital assumed that the process of wealth distribution had already taken place, somewhere off stage. This reflects the (very successful) hegemonising strategy of neo-classical economics of presenting its own approach to the study of the economy as “economics” per se (Stilwell; Hodgson P189; Why economists disagree).

It can be seen from this that institutional economics offers a specific take on the “agent-structure” problem, with which social theory more broadly has been wrestling since its inception in the nineteenth century, attempting to develop a credible general formulation for the two-way relation between individual freewill on the one hand, and the social conditioning of individuals by economic and cultural structures/forces/ factors on the other. As such, institutionalism in highly reminiscent of certain ideas still current social theory—namely, the structuration theory of Pierre Bourdieu and some aspects of the post-structuralist ideas of Michel Foucault. In particular, in his structured phenomenology, Bourdieu distinguishes between the concepts of practical from discursive consciousness. Practical conscious governs the performance of everyday actions, of which the individual may only be vaguely aware. Discursive consciousness, by contrast, is knowledge that has been fully articulated or expressed. Moreover, institutionalism's emphasis of the constitution of individuals’ mental framework by institutional structures echoes/ chimes with, but perhaps does not go as far as, Foucault on the relationship of discourses of knowledge to identity formation, in the creation and recreation of how we see ourselves. 

The key concepts of “old” institutionalism—habits, customs, routines, institutions, action-information loops—are thus quite different from the neoclassicism familiar from undergraduate microeconomic texts, so that that its typical methods of analysis are different too. An outline of its approach will offer some useful ideas on how in practice we might research and analyse the “extractive” economic schemes of the Ukrainian oligarchy, which are the topic of this chapter.