Institutional Economic Thought Research Paper

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1. Introduction

As the term suggests, ‘institutional economics’ addresses the nature and role of social institutions in economic life. Such institutions include the firm, the state, money, property, and the family. Institutional economists have been concerned with explaining the nature and origin of these institutions, the reasons for their existence and persistence, and the ways in which they can improve economic efficiency. Other important issues faced by institutional economists include the understanding of the dynamics of institutional change, the relationship between institutions, culture and technology, and the comparative efficiency of different institutions in different cultures or contexts.

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In fact, the term ‘institutional economics’ appeared twice in the twentieth century, each time to cover a broad and distinct stream of economic thought. However, the methodological approaches involved in the two streams are quite different.

The more recent and more familiar usage dates from Oliver Williamson (1975). He coined the term ‘new institutional economics’ to refer to his seminal transaction cost analysis of the nature and structure of the firm. By the end of the century, the term ‘new institutional economics’ was in widespread use and was associated with a vast literature. Nobel prizes were given to ‘new’ institutional economists Ronald Coase in 1991, and Robert Fogel and Douglass North in 1993. Coase had developed the original transaction cost concept in 1937 and was an important influence upon Williamson. Fogel and North had developed quantitative and other methods to analyze institutional change in economic history. Other leading names associated with the ‘new’ institutional economics are Masahiko Aoki, Mancur Olson, and Richard Posner. There are now prominent economics textbooks dominated by ‘new institutionalist’ thinking such as those by Paul Milgrom and John Roberts (1992), Andrew Schotter (1994), and Eirik Furubotn and Rudolph Richter (1997).

The unifying project in the ‘new institutional economics’ is to explain the existence of political, legal, or social institutions by reference to a model of given, individual behavior, tracing out its consequences in terms of human interactions.

Outside economics, the term ‘new institutionalism’ is used in different and sometimes confusing ways. In particular there is a approach described as ‘new institutionalism’ in organizational analysis, associated with names such as James March, Walter Powell, and Paul DiMaggio. The methodology and assumptions involved in their works are quite different from those of the ‘new institutional economics.’

The original term ‘institutional economics’ emanates from Walton Hamilton in an address to the American Economic Association in 1918. The ‘old’ American institutional economics was much influenced by the nineteenth-century German historical school, which emphasized the role of institutions in the economy and stressed that economic analysis had to take account of historically specific circumstances.

The ‘old’ institutionalism actually became dominant in economics departments in American academia just after the First World War. Seven out of the 20 presidents of the American Economic Association in the years 1924–43 were declared institutionalists: namely Wesley Mitchell, Thomas S. Adams, John Maurice Clark, Frederick C. Mills, Sumner H. Slichter, Edwin G. Nourse, and Albert B. Wolfe. Furthermore, the influence of the ‘old’ institutionalism persisted for some time even after the Second World War. At least eight institutionalists have been elected President of the American Economic Association since 1945: Calvin B. Hoover, Simon Kuznets, Edwin E. Witte, Morris Copeland, George W. Stocking, Arthur F. Burns, Joseph Spengler, and John Kenneth Galbraith. Elected sympathizers included Frank Knight, Kenneth Boulding, and Robert A. Gordon. In addition, the ‘old’ institutionalists Simon Kuznets and Gunnar Myrdal received Nobel Prizes in 1971 and 1974, respectively.

Other schools of thought resemble the ‘old’ institutional economics. For example, in the 1960s and 1970s much of the economics in Cambridge, UK had a strong institutionalist flavor, particularly in the works of Nicholas Kaldor and Joan Robinson. The more recent work of Robert Boyer, Michel Aglietta, and other members of the French regulation school also has strong institutionalist affinities.

A prominent and unifying theme of the ‘old’ institutionalism is that economic analysis had to be grounded on the specific cultural and economic circumstances of each case. In particular, it is held that individual motives and behavior are often molded by such circumstances, including the institutions involved. This contrast with the ‘new’ institutionalism will be discussed in greater detail below.

Characterizations of the ‘old’ institutionalism as purely descriptive or antitheoretical do not bear up to close scrutiny. In the writings of Veblen, Commons, Mitchell, Clark, and others there was an emphasis on the importance of theoretical explanation and theoretical development. Whatever their limitations, the early institutionalists addressed crucial theoretical issues. Some of these are discussed in Sect. 3.

Nevertheless, ever since Veblen there has been a failure of the ‘old’ institutionalists to agree upon, let alone develop, a systematic theoretical core. The ‘old’ American institutionalism bequeathed no integrated theoretical system of the stature or scope of that of Karl Marx, Alfred Marshall, Leon Walras, or Vilfredo Pareto. The reasons for this failure cannot be discussed here, save to note that it was not because of a naive and unsustainable belief that economics can proceed with data alone, and without any theory. Although several ‘old’ institutionalists put their faith in data, they all retained some degree of belief in the importance of an ongoing theoretical project.

The primary reasons for the failure of institutionalism lie elsewhere. In particular, the old institutionalism was partially disabled by a combined result of the profound shifts in social science in the 1910–40 period and of the rise of a mathematical style of neoclassical economics in the depression-stricken 1930s. Behaviorist psychology and positivist philosophy displaced the instinct psychology and pragmatist philosophy upon which the early institutionalism had been built. With their use of formal techniques, mathematical economists caught the imagination of both theorists and policy-makers. In comparison, institutionalism was regarded as technically less rigorous, and thereby inferior (Hodgson 1999).

2. The Essential Distinction Between The ‘Old’ And The ‘New’ Institutional Economics

What is the essential difference between the ‘old’ and the ‘new’ institutional economics? Answering this question is made more difficult because there is no unanimity, even among its adherents, as to what is precisely to be included in the ‘new’ variety. Furthermore, within both the ‘new’ and the ‘old’ institutionalism there are differences of view concerning policy matters, such as the place and role of markets. Nevertheless, an answer to this question is possible if we focus on the common theoretical core of some of the most prominent and influential ‘new’ institutionalist writings, such as by Douglass North, Richard Posner, Andrew Schotter, and Oliver Williamson. Despite analytical and policy differences, there are some common presumptions behind all their works.

Examining these, it is clear that the characteristic ‘new’ institutionalist project is the attempt to explain the emergence of institutions, such as the firm or the state, by reference to a model of rational individual behavior, tracing out the unintended consequences in terms of human interactions. An initial, institutionfree, ‘state of nature’ is assumed. The explanatory movement is from individuals to institutions, taking individuals as given. This explanatory approach is often described as ‘methodological individualism’ (Hodgson 1988).

A much earlier precedent exists for work along these lines. Towards the end of the nineteenth century, the Austrian economist Carl Menger considered the nature and origin of social institutions such as money. He is thus recognized as one of the early forerunners of the ‘new’ institutional economics. Menger attacked a notion attributed to the German historical school, that institutions could be explained by examining historical data alone.

Menger saw the institution of money as emanating in an undesigned manner from the communications and interactions of individual agents. Traders look for a convenient and frequently exchanged commodity to use in their exchanges with others. Once such regularities become prominent, a circular process of institutional self-reinforcement takes place. Emerging to overcome the difficulties of barter, money is chosen because it is convenient, and it is convenient because it is chosen.

Apart from the emergence of money, other examples in this literature inspired by Menger include driving on one side of the road, and traffic conventions at road junctions. For example, once the majority of car drivers stick to the right-hand side of the road, it is clearly rational for all drivers to follow the same rule. Accordingly, the emergent convention is reinforced and institutionalized by imitation, and by efficient use of the available information. The role of information in signaling information to actors is emphasized in this approach. This important core theme of an action– information loop is clearly evident, for example, in North’s (1981) theory of the development of capitalism, Williamson’s (1975, 1985) transaction cost analysis of the firm, and Schotter’s (1981) game- theoretic analysis of institutions. This core idea is valuable and important.

However, despite its temporal adjective, the ‘new’ institutionalism is built upon some very old assumptions concerning the human agent, derived from the individualism of the Enlightenment. In this 300-year tradition, a key idea is the notion that the individual can, in a sense, be ‘taken for granted.’ Accordingly, the individual is taken as the elemental building block in economic theory. Strictly, it is not a question of whether or not a theorist is found to admit that individuals—or their wants and preferences—are changed by circumstances. Indeed, many economists admit that individuals might so be changed. What is crucial is that the individualistic economist assumes, for the purposes of economic enquiry, that individuals and their preference functions should be taken as given. Thus the demarcating criterion is not the matter of individual malleability per se, but the willingness, or otherwise, to consider this issue as an important or legitimate matter for economic analysis. The commonplace statement by mainstream economists that tastes and preferences are not the explananda of economics thus derives directly from the individualist tradition. Likewise, the conception of economics as ‘the science of choice’ takes the choosing individual and her preference functions as given. Unlike the ‘old’ institutionalism, the ‘new’ institutionalism has also taken such individualistic presuppositions on board.

By contrast, a common thread in the literature of ‘old’ institutionalism, from Veblen through Commons and Mitchell, to Myrdal and Galbraith, is the idea that in economic analysis the individual should not always be taken as given. The general use of given preference functions to model individuals and their behavior is rejected by these institutionalists. As well as individuals interacting to form institutions, individual purposes or preferences are molded by socioeconomic conditions. The individual is both a producer and a product of her circumstances.

Mitchell (1937) argued that the evolution of money cannot be understood simply in terms of cost reduction and individual convenience. He maintained that money ‘stamps its pattern upon wayward human nature, makes us all react in standard ways to the standard stimuli it offers, and affects our very ideals of what is good, beautiful and true’ (Mitchell 1937, p. 371). Accordingly, the evolution of money changed the mentality, preferences, and way of thinking of individuals themselves. This does not mean that Menger’s core idea of an action–information loop is wrong, but that it has to be supplemented by an account of how institutions can change individual perceptions and preferences.

Such ideas pervade and endure through the ‘old’ institutional economics. They were emphasized by Veblen and Commons. They persist in the ‘old’ institutionalist tradition, throughout the twentieth century. For instance, writing as an ‘old’ institutionalist, John Kenneth Galbraith (1969, p. 152) insisted that individual ‘wants can be synthesized by advertising, catalyzed by salesmanship, and shaped by the discreet manipulations of the persuaders.’ Again we find an emphasis on the malleability of preferences and an abandonment of the notion of a fixed and given individual.

The ‘old’ institutional economics is thus distinguished from both mainstream economics and the ‘new institutional economics’ precisely for the reason that it does not assume an individual with given purposes or preference functions. Instead of a bedrock of given individuals, presumed by the mainstream and new institutional economics, the old institutionalism holds to the idea of interactive and partially malleable agents, mutually entwined in a web of partially durable and self-reinforcing institutions. This distinction holds despite important theoretical and policy differences within both the new and the old institutionalist camps.

3. The Theoretical Legacy Of The ‘Old’ Institutional Economics

Although it never provided a systematic theoretical legacy, the achievements and influence of the ‘old’ institutional economics have been considerable (Rutherford 1994, Yonay 1998).

For example, Veblen (1899, 1919) was the first social scientist to attempt to develop a theory of economic and institutional evolution along essentially Darwinian lines (Hodgson 1993). Veblen’s work shares common features with the much later attempts by economists to use evolutionary metaphors from biology by Armen Alchian, Kenneth Boulding, Friedrich Hayek, and Richard Nelson and Sidney Winter. However, Veblen never regarded evolutionary processes as necessarily optimal or progressive. Although he did not use the term, his writings are replete with examples of path dependent evolution, almost a century before that concept became fashionable (Hodgson 1993).

Veblen’s writings are brimming with ideas, many of which have subsequently been taken up by others. In the 1970s the Cambridge economist Joan Robinson recognized the importance of his theoretical contribution to the critique of standard capital theory. Veblen (1919, pp. 185–200) criticized the conflation of ‘capital goods’ with ‘capital.’ He rejected the ‘factors of production’ approach in its entirety, seeing production as much to do with ‘the accumulated, habitual knowledge of the ways and means involved … the outcome of long experience and experimentation’ (Veblen 1919, pp. 185–6). Veblen’s emphasis on the role of knowledge and learning in economic growth is perhaps, simultaneously, his most important and most neglected theoretical contribution.

In his Theory of Business Enterprise (1904), Veblen discussed not only the conflict between a pecuniary and an industrial culture but also its manifestation in the separation of ownership and control, made famous later by Adolph Berle and Gardiner Means in their highly influential book on The Modern Corporation and Private Property (1932). Furthermore, in the same volume, Veblen (1904, pp. 46–8) hinted at the idea of transaction costs, long before Coase and Williamson.

A number of commentators have perceived similarities between the works of Veblen and John Maynard Keynes, and their joint parallels in President Roosevelt’s New Deal policies. Writing after the Second World War, James Duesenberry in his Income, Sa ing and the Theory of Consumer Behavior (1949) accepted Veblen’s influence in building a theory of the consumption function upon habitual behavior and Harvey Leibenstein also acknowledged the founder of institutionalism with his ‘Veblen effects’ in the theory of consumer behavior.

John Commons (1924, 1934) has been acknowledged as a major influence on the behavioral economics of Herbert Simon and the ‘new’ institutionalism of Oliver Williamson (1975, 1985). Overall, Commons made a major theoretical contribution, including the development of the concept of asymmetric information in contracts (Commons 1924). Indeed, Commons pioneered the whole modern research program in economics and law. Relevant modern ideas, such as the notion that the money supply is endogenous rather than exogenous, have also been credited to Commons. Commons and his students were also highly influential in the development of the subdiscipline of labor economics.

Nobel Laureate Herbert Simon’s idea of bounded rationality was also prefigured in the writings of the ‘old’ institutionalist John Maurice Clark (Rutherford 1994). Clark influenced other leading economic theorists, notably Frank Knight. In fact, Clark super- vised the production of Knight’s classic work Risk, Uncertainty and Profit (1921).

Clark also shared responsibility for another important theoretical development. In a paper published in the Journal of Political Economy in 1917, he was one of the first to elaborate the idea of the interaction of the multiplier and the accelerator, seeing it as a driving mechanism in the generation of economic fluctuations. Paul Samuelsonand others later replicated this idea.

The Nobel Laureate Milton Friedman was a student of Mitchell. Friedman acknowledged the influence of both Veblen and Mitchell on business cycle theory, and even translated some of Mitchell’s theoretical work into a mathematical model.

There are several important links between institutionalism and the development of Keynesianism. One was the innovation of national income accounting, in which the work of Mitchell played a vital part. Inheriting the German historical school view of the economy as an organic whole, institutionalism thereby developed and sanctioned the conceptualization and measurement of economic aggregates. The theoretical and empirical work involved here was of major importance in the development of twentieth-century economics.

Mitchell was thus one of the fathers of modern macroeconomics. His work is notable for its implicit antireductionist thrust and its consequent contribution to the development of Keynesianism. In the 1920s and 1930s, Mitchell and his colleagues in the National Bureau for Economic Research played a vital role in the development of national income accounting, suggesting that aggregate, macroeconomic phenomena have an ontological and empirical legitimacy. Through the development of national income accounting, the work of Mitchell and his colleagues influenced and inspired the macroeconomics of Keynes.

The ‘old’ institutionalists also developed a number of theories of pricing behavior in imperfectly competitive markets (Tool 1991). Traces of the surviving influence of ‘old’ institutionalist ideas are found in many other areas of theoretical and applied economics.

4. Development Of The ‘New’ Institutional Economics

Since the coining of the term ‘new institutional economics’ in 1975, this school of thought has been responsible for an enormous amount of valuable theoretical and empirical work on the nature and development of economic institutions. Institutions that were previously regarded as mysterious ‘black boxes’ are now opened up and examined in forensic detail. Not only have the ‘new’ institutionalists put institutions back on the agenda, they have prompted important and stimulating theoretical debates. With important developments such as transaction cost analysis and the economics of property rights, important insights have been gained. The face of economics as a whole has been transformed.

However, within the ‘new’ institutional economics there are not only important differences of approach, there are also some common and fundamental problems. In this section it is argued that attempts to explain the origin and sustenance of institutions on the basis of the assumption of given individuals have internal flaws and inconsistencies. Accordingly, attempts to explain institutions in this way may have to be abandoned. The door is opened to a more openended and evolutionary approach, redolent of the earlier institutionalists.

In broad terms, two opposite types of error are possible. ‘Cultural determinists’ place too much stress on the molding of individuals by institutions. Some members of the ‘old’ institutionalist school, notably Clarence Ayres, committed this error. Such ‘oversocialized’ views of human behavior have been widely criticized. At the opposite end of the spectrum, the ‘new institutional economics’ gives no more than weak stress to the processes of institutional conditioning, and focuses primarily on the emergence of institutions out of the interactions of given individuals. This section explores the problems that may arise if exclusive stress is put on the latter direction of causality.

The distinctive ‘new’ institutionalist project has been identified as the attempt to explain the existence of institutions by reference to a given model of individual behavior, and on the basis of an initial institution-free ‘state of nature.’ The procedure is to start with given individuals and to move on to explain institutions.

Admittedly, substantial heuristic and other insights have been gained on the basis of this approach. The main problem is the incompleteness of the research program in its attempt to provide a general theory of the emergence and evolution of institutions. Some moves towards an ‘evolutionary’ approach to solving this problem are addressed at the end of this section.

Alexander Field (1979) has exposed a key problem in the new institutionalist project. In trying to explain the origin of social institutions from given individuals alone, the ‘new’ institutional economics has to presume a social framework governing their interaction. In any original, hypothetical ‘state of nature’ from which institutions are seen to have emerged, a number of rules and cultural and social norms are already presumed. No ‘thought experiment’ involving an institution-free ‘state of nature’ has yet been postulated without them. For example, in game theoretic presentations of the emergence of institutions or norms (Schotter 1981), take the individual ‘for granted’ as an agent unambiguously maximizing his or her expected payoff. Yet there can be no games without prior rules, and game theory can never explain the elemental rules themselves. Even in a sequence of repeated games, or of games about other (nested) games, at least one game or metagame, with a structure and payoffs, must be assumed at the outset. Any such attempt to deal with history in terms of sequential or nested games is thus involved in a problem of infinite regress. As another example, Williamson’s transaction cost theory of the firm takes its original state of nature as the market. He writes that ‘in the beginning there were markets’ (Williamson 1975, p. 20). This starting point is characteristic of his approach. From this original context, some individuals go on to create firms and hierarchies. He argues that these endure if they involve lower transaction costs. However, the market itself is a social institution. The market involves social norms, customs, instituted exchange relations, and—sometimes consciously organised— information networks that themselves have to be explained (Hodgson 1988). Market and exchange relations themselves involve complex rules. In particular, the institution of private property itself requires explanation. Markets are not an institutionfree beginning. Hence Williamson fails to explain the firm from an institution-free ‘state of nature.’ In a type of comparative static approach, he assumes one institutional framework and derives another. Accordingly, the ‘new’ institutionalist project of starting simply from given individuals is abandoned.

There are good reasons why such a starting point is generally misconceived. Before an individual may choose, he or she requires a conceptual framework to make sense of the world. The reception of information requires a paradigm or cognitive frame to process and make sense of it. Further, our interaction with others requires the use of the institution of language. We cannot understand the world without concepts and we cannot communicate without some form of language. As the ‘old’ institutionalists argue, the transmission of information from institution to individual is impossible without a coextensive process of enculturation, in which the individual learns the meaning and value of the sense-data that is communicated. Any communication of information always and necessarily involves such a process of enculturation. Information cannot be received unless the individual has been enculturated to some degree, through prior engagement with institutions. Communication requires an institutionalized individual.

In the ‘old’ institutional economics, cognition and habit have a central place. Knowledge and learning are stressed. There is also an insistence that the perception of information is not possible without prior habits of thought to endow it with meaning. Without such habits, agents cannot perceive or make use of the data received by their senses. Habits thus have a crucial cognitive role: ‘All facts of observation are necessarily seen in the light of the observer’s habits of thought’ (Veblen 1914, p. 53). Such habits are acquired through involvement in institutions.

The central ‘new’ institutionalist project of explaining institutions from individuals alone is thus misconceived. The problem of infinite regress identified here undermines any ‘new institutionalist’ claim that the explanation of the emergence of institutions can start from some kind of original, institution-free ensemble of (rational) individuals, in which there is supposedly no rule or institution to be explained. At the very minimum, ‘new’ institutionalist stories of the development of institutions depend on interpersonal communication of information. The communication of information itself requires shared concepts, conventions, rules, routines, and norms. These, in turn, have to be explained.

What is being contested here is the possibility of using given individuals as the institution-free starting point in the explanation. It is not possible to understand how institutions are constructed without seeing individuals as embedded in a culture made up of many interacting institutions. Institutions not only constrain but also influence individuals. Accordingly, if there are institutional influences on individuals and their goals, then these are worthy of explanation. In turn, the explanation of those may be in terms of other purposeful individuals. But where should the analysis stop The purposes of an individual could be partly explained by relevant institutions, culture, and so on. These, in their turn, would be partly explained in terms of other individuals. But these individual purposes and actions could then be partly explained by cultural and institutional factors, and so on, indefinitely.

We are involved in an apparently infinite regress, similar to the puzzle ‘which came first, the chicken or the egg?’ Such an analysis never reaches an end point. It is simply arbitrary to stop at one particular stage in the explanation and say ‘it is all reducible to individuals’ just as much as to say it is ‘all social and institutional.’ The key point is that in this infinite regress, neither individual nor institutional factors have complete explanatory primacy. The idea that all explanations have ultimately to be in terms of individuals (or institutions) alone is thus unfounded.

We have seen that the new institutionalist project to explain the emergence of institutions on the basis of given individuals runs into difficulties, particularly with regard to the conceptualization of the initial state from which institutions are supposed to emerge. This does not mean that all ‘new’ institutionalist research is without value, but it indicates that the starting point of explanations cannot be institution-free: the main project has to be reformulated as just a part of a wider theoretical analysis of institutions.

In a major work, Masahiko Aoki (in press) recognizes the seriousness of the problem of infinite regress within the ‘new’ institutional economics. He attempts to deal with this problem both by taking individuals as given and assuming a historically-given bedrock of institutions. The focus in this approach is then on the further development of those institutions. This marks an important watershed in the development of the ‘new’ institutionalism. At least in strict terms, methodological individualism is abandoned. No longer is an attempt made to explain the emergence and evolution of institutions in terms of individuals alone. He adds a given institutional context to the story.

Aoki’s work can be seen as a partial step in the direction of a fully-fledged evolutionary account of the growth and development of institutions. This would stress the evolution of institutions, in part from other institutions, rather than from a hypothetical, institution-free ‘state of nature.’ What is required is a theory of process, evolution, and learning, rather than a theory that proceeds from an original, institution-free, ‘state of nature’ that is both artificial and untenable.

The ‘comparative statics’ character of many ‘new’ institutionalist explanations is obvious. However, one of the reasons for the rise of ‘evolutionary’ thinking in economics since the early 1980s has been an attempt to break the constraints of this mode of explanation with its two fixed end points. Because there is no answer to the chicken-or-egg question, the question itself has to be changed. The question should no longer be ‘which came first?’ but ‘what processes explain the development of both of them?’ Again this implies a movement away from comparative statics and towards a more evolutionary and open-ended framework of analysis. Some moves in this direction by two prominent ‘new’ institutionalists have already led to a degree of convergence with the evolutionary and open-ended ideas of the ‘old’ institutionalists. This is apparent, for example, in the later writings of North (1990).

Such evolutionary explanations involve the search for ‘a theory of the process of consecutive change, realized to be self-continuing or self-propagating and to have no final term’ (Veblen 1919, p. 37). Emphatically, abandoning the attempt to explain all institutions in terms of given individuals does not mean the abandonment of theoretical explanation. Instead, the origins and development of organizations and institutions are seen as an evolutionary process. Today, there is a substantial amount of work going on in this area, with extensive use being made of evolutionary metaphors taken from biology.

5. A Research Agenda For Institutional Economics

Today there are lively and growing research activities within both the ‘new’ and the ‘old’ institutional economics (Hodgson et al. 1994). Substantial benefits can be anticipated from an intensive dialog between these two schools. The ‘new’ institutionalists can learn from the evolutionary, historical, culturally-grounded, and technologically-oriented studies of the ‘old’ institutionalists. The ‘old’ institutionalists can usefully devote more attention to the development of a systematic institutional approach to economic theory. In this they can learn from the achievements and mistakes of the ‘new’ institutional economics.

The philosophical foundations of the social sciences have been shaken in recent years. Debates in philosophy and social theory have questioned many of the standard assumptions and approaches. The future development of institutional economics must address some of these underling philosophical problems, posed by philosophical realists on the one hand and postmodernists on the other. One of the tasks of institutional economics is to address some of the underlying philosophical issues—particularly those relating to the social ontology and nature of institutions (Searle 1995)—and bring useful insights into their work. Evolutionary thinking is once again on the ascendancy in economics (Hodgson 1993). However, the detailed development and explication of a theory of institutional evolution—a task envisaged by Veblen more than 100 years ago—still remains incomplete. One of the impediments to progress in this area is the lack of a consensus on key terms and methodological approaches. The solution to this problem lies through open and extended conversation and debate between the different points of view involved. Only then will it be possible to establish a sufficient consensus on key definitions and terms.

The promise for the future development of institutional economics lies in a fully interdisciplinary approach, using insights from other disciplines such as philosophy, sociology, anthropology, geography, history, psychology, and biology. Such insights have to be woven together in a well-founded theoretical structure, using insights from both the ‘old’ and the new institutional economics.


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