Two central insights guide inquiry in institutional economics. One, not unique to institutionalism, is that the purpose of inquiry is to produce causal explanations and guide efficacious action. The second is that all human behavior and knowledge are cultural. Human behavior, including inquiry, occurs within and simultaneously reconstructs the cultural meanings and standards of behavior. The process is self-reflexive and self- modifying; circumstances, processes, and understandings must cumulatively readapt. This sets the social sciences somewhat apart from the natural sciences, where study does not transform underlying causal processes studied. Such complications do not threaten the compatibility of the institutionalist insights noted, but they are significant. In this essay, we consider some instances where differences between natural and social processes, and knowledge of them, have not been sufficiently recognized and, consequently, where the two institutionalist insights have not been consistently applied.
The Self-Reflexivity of Knowledge and the Stratification of Reality
Ontologically, self-reflexivity implies that there is real human behavior in a real world; institutional economics must consequently be "realist."(2) Several epistemological positions are consistent with realist ontology, but not all accept the cultural conditions of knowledge insisted on by institutionalists. Here, we follow the "critical realism" of Roy Bhaskar [1979; 1986; 1989] and interpretations offered by Tony Lawson  and Andrew Collier .(3)
Critical realism asserts that there is a reality independent of our perception of it. That reality
is composed not only of events and our experience or impressions of
them, but also of (irreducible) structures and mechanisms, powers
and tendencies, etc., that, although perhaps not directly observable,
nevertheless underlie actual events that we experience and govern
or produce them ... [T]hree domains of reality are, from this perspective,
distinguished, namely the empirical (experience and impression)
the actual (events and states of affairs-i.e., the actual
objects of direct experience) and the "deep" (structures, mechanisms,
powers, and tendencies) [Lawson 1994, 262; emphasis in
original]. These domains are ontologically distinct and unsynchronized or out of phase with one another. The "deep" is the level of causal powers that are not in themselves observable; deep structures must be inferred through abduction to make sense of events and experiences. Events are complex and multiple and conflicting experiences of them are possible; tendencies and powers may not be manifested, and discretionary human actions can intervene. Further, "the world is composed, in part, of objects that are structured and . . . intransitive-structured in the sense of being irreducible to the events of experience, intransitive in the sense of existing and acting independently of their identification" [Lawson 1994, 263; emphasis in original].
That there is an intransitive situation, governed by enduring tendencies and powers, within which we act is necessary for inquiry to assist efficacious action and judgment. The structures of reality are stratified,(5) however.
Living things determine the conditions of applicability of the physical
laws to which they are subject, so that their properties cannot
be reduced to the latter; that is, that emergence characterizes both
the natural and the human world [Bhaskar 1979, 39].
Further, conceptualization is vital to the activities that constitute and recreate social structures. Self-reflexivity is the result of self- directed behavior; it is a feature of human/social tendencies and powers. Physical, biological, and social strata are distinguished by both the evolution of mechanisms (vs. events or outcomes) and the irreducibility of causal mechanisms on higher strata to mechanisms on lower strata.
Actual events are not stratified, but whole; they are complex amalgams of mechanisms at various levels. Experimental sciences succeed by isolating mechanisms as much as possible to induce "event regularities" that are not spontaneous features of reality. Thus, the open-endedness of reality is a necessary precondition for human interventions to create artificial "closure" (the isolation of mechanisms) in experimental settings.
Bhaskar views the role of philosophy as "underlaborer," illuminating the conditions for human inquiry, rather than authorizing particular substantive claims. Critical realism does, however, reject "closed," a historical, universalistic, noncultural, and excessively abstract social analyses such as those typical in the deductive formalisms of mainstream economics. It also suggests …