The Old and New Institutionalism: Can Bridges Be Built?

By Rutherford, Malcolm | Journal of Economic Issues, June 1995 | Go to article overview

The Old and New Institutionalism: Can Bridges Be Built?


Rutherford, Malcolm, Journal of Economic Issues


The old and the new institutionalism are both programs of research that arose out of a concern with the almost complete lack of consideration given to institutions in conventional neoclassical economics. That institutions matter in shaping economic behavior and economic performance is a central tenet of both the old and the new institutionalism, as is the recognition that institutions themselves change over time and often respond to economic factors. This shared concern with incorporating institutions within economics is not, however, reflected in a common approach to the problem. For old institutionalists, the neoclassical approach with its emphasis on the rational economic actor is to be abandoned in favor of one that places economic behavior in its cultural context. For new institutionalists, or at least a good number of them,l the standard neoclassical approach based on the rational choice model is to be extended, perhaps modified, but not abandoned.

In previous discussions of old and new institutionalism, much has been made of this basic difference. Mayhew [1989] contrasts the "mankind as a product of culture" focus of old institutionalists with the "mankind as rational chooser" focus of the new. Hodgson [1993] claims the new institutionalism takes the self-interested, maximizing individual as a given though this is exactly what was rejected by Veblen and other old institutionalists. Eggertsson [1990] makes a similar point in his survey of what he calls "neo-institutional" economics. Many other points of contrast are closely related. Obvious examples are the "holism" and anti-formalism of the old as opposed to the methodological individualism and greater formalism of the new,(2) but the basic difference in outlook also shows up in the tendency of new institutionalists to see the development and functioning of institutions largely in efficiency and economizing terms (rational individuals are "economizing" in behavior), as opposed to the old institutionalist who tends to see many other social and political factors (status, group identity, ideology, and economic and political power) as also involved.

It is both tempting and very easy to turn these differences into a set of methodological incommensurabilities that would seem to rule out the possibility of useful communication. Indeed, new institutionalists have often dismissed the old institutionalism as lacking in theoretical rigor and containing few, if any, interesting insights, while old institutionalists have tended to be equally dismissive of the new institutionalism, finding it based on the same set of basic neoclassical assumptions they rejected long ago. Nevertheless, and as I have argued elsewhere [Rutherford 1994], the differences between the old and the new can, on closer examination, be revealed as less sharp than usually supposed. Moreover, certain key issues and problems are linked to the nature of the subject matter itself and tend to emerge regardless of the chosen initial approach or starting point. If attention is directed toward these common problem areas, a basis for dialogue is more likely to be found. The rest of this paper attempts to demonstrate this thesis through an examination of the history of the new institutionalist research program developed by Douglass North and a brief comparison of this material with that of some of the major contributors to the old institutionalism.

Douglass North: Rationality and Ideology

The obvious place to start in any consideration of North's institutional economic history is with The Rise of the Western World [North and Thomas 19731. As pointed out by Field [1981], this book attempts to endogenize institutions within a neoclassical framework. The implicit model is that institutions derive from the optimizing decisions of individuals and respond to changes in the set of relative prices that individuals face. Thus, under the conditions of the early Middle Ages, the manorial system was an "efficient institutional arrangement," but with population growth and the growth of trade it ultimately "involved lower transactions costs to set up a system of wages, rents, or shares by contract" [North and Thomas 1973, 22]. …

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