Institutional stream in modern economics: NeoIE versus NewIE

1
Institutional stream in modern economics NeoIE
versus NewIE
2
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
• Critique of the definition of economics as a
  science within the mainstreram economics, and, in
  particular ofv broadly understood neoclassical or
  neo-neoclassical economics
• 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

3
NeoIE versus NewIE origins and main
methodological and cognitive differencesNeoinstit
utional 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

4
NeoIE versus NewIE origins and main
methodological and cognitive differencesNeoinstit
utional Economics

• Specific way of intrpretation of economic
  system, as evolutionary process whose main part
  is culture
• Most important dychotomy of human being (Veblen)
  contradiction between the instinct of good work
  and the instinct of posession
• Subsequent dychotomic contradictions
• Between physical flow (flow of useful goods) and
  financial flow
• Between world (class) of industry and world
  of posession (leisure class))
• 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

5
NeoIE versus NewIE origins and main
methodological and cognitive differencesNeoinstit
utional Economics

• 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 basis
• Rejection 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
  technology
• Social pesimism of Veblen and its rejection by
  his followers - postveblenian economists,
  neoinstitutionalists

6
NeoIE versus NewIE origins and main
methodological and cognitive differencesNeoinstit
utional Economics

• Rejection of neoclassical way of understanding
  the economic equlibrium
• 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
• Galbraith equlibrium as process (and not the
  state) resulting from the action of
  countervailing powers corporations,trade unions,
  the state as intermediary agent

7
NeoIE versus NewIE origins and main
methodological and cognitive differences New
Institutional Economics

• Two manners od interpreting NIE
• As an integral part of widely understood
  neoclassical economics, as neoclassical theory of
  institutions (the so called theoretical
  institutionalism, as opposed to postveblenian
  one)
• As a new paradigm in contemporary economics
• Genesis of NIE (decades of 70. and 80. of XX
  century)
• External critique of institutional deficit of
  NCE
• 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

8
NeoIE versus NewIE origins and main
methodological and cognitive differences New
Institutional Economics

• Origins and development of theoretical
  foundations
• Theory of transactions costs (R. Coase as the
  founder/precursor and O.E. Williamson as main
  follower)
• 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

9
New Institutional Economics basic categories
and assertions

• Property rights (economic approach)
• 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)
• 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

10
New Institutional Economics basic categories
and assertions

• Property rights (economic approach) cont.
• Internalization requires changes in
  legal-institutional arrangements (in the so
  called informal institutions).Their analysis
  becomes subject to economic analysis
• Fundamental function of PR is to create
  incentives for increasing the scope of
  internalization of external effects

11
New Institutional Economics basic categories
and assertions

• 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)
• TC related to seeking and processing information
  which is necessary for shaping market prices of
  goods
• TC related to negotiations of contracts
  (agreements) (producers purchasers, purchasers
  - deliverers, etc.)
• TC linked to the control of execution of contracts

12
New Institutional Economics basic categories
and assertions

• TC in broad approach
• Costst of coordination of various forms of
  economic activity (coordination by state versus
  coordination by market)
• Costs which are necessary for the emergence and
  development of markets

13
New Institutional Economics basic categories
and assertions

• TC and PR - interdependence
• Inaccurate 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.

14
New Institutional Economics basic categories
and assertions

• 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)

15
New Institutional Economics basic categories
and assertions

• Nature of the transformation process from the
  point of view of NIE
• General definition transition from socialist CC
  economy towards a market economy as politically
  and economically determined institutional change
• Definition based on the TK/PR theories
  transition from socialist CC 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

16
New Institutional Economics basic categories
and assertions

• Criterion of minimization of TC
• General criterion of the growth of economic
  efficiency
• It theoretically allows for answering two
  fundamental questions
• What is optimal size of the enterprise
  (equalizing of marginal costs of transactions
  carried out within the enterprise
  intra-enterprise transactions - and marginal
  costs of market transactions)
• Why exist enterprises and the market as
  alternative co-ordinative mechanisms

17
New Institutional Economics basic categories
and assertions

• New Economic History (NEH) and New Political
  Economy (NPE) analysis of TC in the long-run
  (secular) perspective
• Criterion of minimization of TC as a general
  foundation for expaining how varoius
  legal-institutional and economic systems change
  in long time periods
• Effective institutional order is characterized by
  the existence of such property rights regime and
  microeconomic incentives system, as well as
  co-ordination mechanisms, which permit the owners
  of production factors to appriopriate benefits
  resulting from the use of those factors (thus
  minimizing the scope of occurrence of external
  effects and free-rider behavior)

18
New Institutional Economics basic categories
and assertions

• NEH and i NPE cont.
• Economic theory of state the concept of J.
  Buchannan
• Pre-state period (pre-constitutive order)
• Its main feature is a very high level of
  uncertainty of economic activity (transactions,
  contracts, etc.). Principal task of the emerging
  state is therefore to establish the so called
  pre-constitutive property rights and formal
  institutions corresponding/related to them. The
  state has also to ensure that adequate rules of
  game (informal institutiuons) are observed in
  order to diminish the level of general
  uncertainty in the economy and to exclude (or
  radically confine) the possibility of attaining
  economic benefits through the robbery This way,
  the protective state (in Buchannans approach) is
  crreated

19
New Institutional Economics basic categories
and assertions

• Economic theory of state the concept of J.
  Buchannan
• Post-constitutive property rights emerge as the
  outcome of market exchange of goods. If those
  exchange contracts are to be effective and
  complete, it is necessary to
• 1) liberalize (to free from state control)
  prices and trade,
• 2) gradually introduce (allow for) both domestic
  and foreign competition
• 3) establish capital (financial) markets
• All this is possible when the statet creates
  foundations of sound macroeconomic regime, as
  well as when the state follows the regulation
  policy which is cnsistent with general principles
  of market economy. This way, the so called
  regulative state emerges

20
New Institutional Economics basic categories
and assertions

• Economic theory of state the concept of J.
  Buchannan
• As in any market economy, also in emerging market
  economies the state has also to produce or to
  provide public goods or ,at least, to finance
  the costs of their production and distribution.
  This means, respectively, the emergence of
  productive state.

21
New Institutional Economics basic categories
and assertions

• State from the NIE perspective (with special
  reference to New Political Economy) a general
  approach
• NIE, and TCT and PRT in particular, provide
  theoretical arguments which allow for answering a
  fundamental question why there exist the state
  and the market as alternative mechanisms of
  economic co-ordination and opimization (Coase
  criterion)

22
New Institutional Economics basic categories
and assertions

• NIE, and NPE in particular, identify economic and
  social mechanisms which underlay the process of
  working out and and accepting specific solutions
  within the macroeconomic and sectoral policies,
  as well as within the public regulation.
  Furthermore, NIE helps to explain the
  contradictions between those policies
• NIE pays attention to the necessity of ongoing
  active role of the state in the sphere of shaping
  legal-constitutional foundations of economic
  order

23
New Institutional Economics basic categories
and assertions

• NEH and NPE cont.
• Economic theory of public regulation in the
  market economy
• Point of reference interpretation of public
  regulation as specific commodity and the need to
  define the supply of and demand on this commodity
• Differently from the so called normative
  regulation theory, the economic theory of public
  regulation assumes that the regulation is
  (mostly) designed for attaining goals of specific
  interest groups

24
New Institutional Economics basic categories
and assertions

• Economic theory of public regulation in the
  market economy cont.
• Basic assertions of ET of PR
• Main resource of the state is the power to coerce
• Utility function of politicians (policy makers)
  achieving and/or maintaining the (political)
  power
• Regulation is usually more advantageous for
  producers than for consumers

25
New Institutional Economics basic categories
and assertions

• Basic assertions of ET of PR cont.
• The game of group interests leads usually to
  optimal distribution of benefits from the
  regulation between entrepreneurs (deliverers of
  goods and commodities), politicians (as
  legislators) and regulatory institutions
  (regulators)
• Examples of ET of PR capture theory of
  regulation), theory of regulation based on the
  concept of agent and principal
• Ecclectic theory of PR

26
New Institutional Economics basic categories
and assertions

• General definition of NIE Based on criteria of
  economic rationality, as well on the assumptions
  of methodological individualism
• analysis of formal and informal institutions of
  economic and political life.
• Analysis in terms of economic rationality of
  different socio-political orders and
  interdependencies between those orders and the
  performance of the economic system

27
New Institutional Economics basic categories
and assertions

• Basic components of broadly understood NIE
• Neoinstitutional theory of the firm Coase,
  Williamson
• Economic theory of politics (New Political
  Economy or Theory of Public Choice) Buchannan,
  Tullock
• Analysis /theory of long-run (secular) dynamics
  (changeability) of socio-economic systems (New
  Economic History) North, Thomas
• New Economic Gegraphy (application of NIE to the
  analysis of spatial aspects of economic
  performance and the change of economic structures
  over time)