The Revival of Veblenian Institutional Economics
Hodgson, Geoffrey M., Journal of Economic Issues
The novelties of today are a ... later generation of the commonplaces of the day before yesterday.
Thorstein Veblen, Absentee Ownership (1923)
Institutional economics is more than a century old. After a period of interwar hegemony in the United States, it suffered from decline and fragmentation, leading to its estrangement from the mainstream of economics (Hodgson 2004). By the 1990s, however, some institutional and evolutionary ideas had re-emerged in mainstream theory and elsewhere. Today, discussion of the role and nature of institutions in economics is commonplace (North 1991; 1994; Schotter 1981; Williamson 1975; 2000). The revival of evolutionary economics was much inspired by the work of Richard Nelson and Sidney Winter (1982), who have since acknowledged Veblen's contribution (Winter 1990; Nelson 1995). More particularly, writing in this journal, Mauricio Villena and Marcelo Villena (2004) have explored some similarities between modern evolutionary game theory and Veblen's evolutionary approach. Overall, there seem to be new opportunities for the revival of a Veblenian institutional and evolutionary economics.
Seven sections follow. In turn they address: key developments in the new institutional economics; some developments in mainstream economics; revised ideas on the human agent and rationality; the reemergence of endogenous preferences; and the recognition of bounded rationality and program-based behavior. Another section situates the new Veblenian economics in the wider context of economic theory. The conclusion outlines a research agenda for the early twenty-first century.
Evolution in the New Institutional Economics
In the 1970s and 1980s, a prominent theoretical project in the "new institutional economics" was 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. The attempted explanatory movement is from individuals to institutions, ostensibly taking individuals as primary and given, in an initial institution-free "state of nature."
However, this research program could not provide a complete general theory of the emergence and evolution of institutions. Alexander Field (1979; 1981; 1984) argued that the new institutional economics always has to presume given individuals acting in the context of governing rules of behavior. In the original, hypothetical, "state of nature" from which institutions are seen to have emerged, a number of weighty rules, institutions and cultural and social norms have already and unavoidably been presumed.
For example, in attempts to explain the origin of institutions through game theory, some norms and rules must be presumed at the start, 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 meta-game, with a structure and payoffs, must be assumed at the outset.
Williamson (1975, 20) famously proposed that "in the beginning there were markets." Some individuals then go on to create firms and hierarchies, which endure if they involve lower transaction costs. However, the market itself is an institution, involving complex rules. In reality, markets involve social norms and customs, instituted exchange relations, and information networks that have to be explained (Hodgson 1988; McMillan 2002; Vanberg 2001). Markets are not an institution-free beginning.
The institution of private property also requires explanation. It has been argued that it can generally arise spontaneously through individual interactions, involving reputation and other effects (North 1991). However, these theoretical arguments break down with large numbers or radical uncertainty. The possibility of property rights emerging in a complex society without any role for the state has been challenged by writers even within the new institutionalist tradition (Sened 1997; Mantzavinos 2001). …