Academic journal article
By McFarling, Bruce R.
Journal of Economic Issues , Vol. 38, No. 2
Institutional economics is an approach that recognizes the importance of culture. This is an exploration of the question of how central culture is for institutionalist theory. The strategy for this exploration is to begin outside of institutionalist theory with the aim of reconstructing a theory of culture and to consider whether the process brings us closer to an institutionalist theory. The argument is that, for the specific cases examined where it is, in some sense, possible to reconstruct a theory of culture, the process does indeed bring us into contact with institutionalist theory. Recognition of the importance of culture is, therefore, more than a stance of institutionalist practitioners--it appears to be an intrinsic facet of institutionalist theory.
The original point of departure for this journey was provided by Robert Posner (1995), in the chapter in his book Overcoming Law where he addressed the overlap and conflicts between the economics and law and new institutional "movements." In introducing the new institutional economics, Posner acknowledged that an older institutional economics once existed. He even went so far as to acknowledge that it continues to exist, though one gains the distinct impression that this continued existence is for no clear reason and certainly should excite no further interest. But of course his backhanded acknowledgment of actual institutional economics is not why this effort by Posner provides the point of departure for this argument.
Posner's take on new institutional economics is a version of the well-rehearsed "new and true" critique--that most of what is valuable and presented as new in new institutional economics is a restatement of standard applied economics in new terms. For example, he asked, "Does 'bounded rationality' ... mean anything more than that economic actors have and must (rationally) act on less than full information?" (1995, 435)--and then eventually answers this query in the negative:
The biggest gulf between the two movements arises from the new institutionalists' skeptical attitude toward rational utility maximisation. Coase rejects this cornerstone of modern economic theory--he has called it "meaningless"--yet at the same time says that his own approach is guided by the assumption that people prefer more to less. So if I am offered a choice between 3 and 2, I will prefer 3. But what if I have another opportunity, worth 4? Then I will prefer it.... And so on--until I have maximised my utility. (441-442)
Here is the first element of my point of departure, because here Posner demonstrated his unit of analysis. Obviously not all of out actions are preceded by an evaluation. The standard response to this is that if acting without choice led to persistent biases, there would be gains available from making more evaluations, until the result would be "as if" all actions were preceded by an evaluation, with a random, unbiased error term added. Under bounded rationality (Coase 1984), one does not always gain an advantage by making a selection from alternatives, so this "as if" argument is invalid. Since Posner only enquired as to what bounded rationality would yield when a choice is made from alternatives, it is clear that his unit of analysis is a selection from alternatives followed by performance. This is the exact unit of analysis that leaves the user blind to the difference between bounded rationality and utility maximization under incomplete information.
The second element in my point of departure is Posner's argument that "[w]e should be pragmatic about theory. It is a tool, rather than a glimpse of absolute truth, and the criterion of a tool is its utility" (1995, 431). If we attempt to apply Posner's unit of analysis to the reconstruction of culture, the effort is futile. If this reconstruction of culture is in some sense an essential task, then the pragmatic response is to insist on having another tool available. …