Chaos Theory and Institutional Economics: Metaphor or Model?

By Staveren, Irene van | Journal of Economic Issues, March 1999 | Go to article overview

Chaos Theory and Institutional Economics: Metaphor or Model?


Staveren, Irene van, Journal of Economic Issues


The growth and mutations of the institutional fabric are an outcome of the conduct of the individual members of the group, since it is out of the experience of the individuals, through the habituation of the individuals, that institutions arise; and it is in this same experience that these institutions act to direct and define the aims and end of conduct.

- Thorstein Veblen, 1961

In classical dynamics the "quality" of information is disregarded. This, in a sense, is quite logical if you deal with systems with a finite number of degrees of freedom. For example, we may deal with the system sun-earth-moon. The sun speaks to the moon, the moon speaks to the earth; there is no information escaping from these three actors. But LPS [Large Poincare Systems or unstable dynamical systems] correspond to multiactor systems where the information is transmitted from one degree to another and finally disappears in a sea of highly multiple conditions.

- Ilya Prigogine, 1993

The Veblenian tradition of institutional economics is, unlike neoclassical, Marxist, or new institutional economics, firmly embedded in social, cultural, and political life. The tradition lends itself to rich descriptive analyses, recognizing the interplay of economic behavior with social, cultural, moral, and political domains of life and its institutions. This old institutional economics therefore is difficult to catch in mathematical terms, let alone in linear algebra. However, with recent developments in the natural sciences and mathematics (quantum mechanics, systems theory), it might become relevant to consider anew whether mathematical relationships could illustrate and support the theoretical endeavors of institutional economics.(1) This paper intends to provide some suggestions of how institutional economics might profit from mathematical metaphors or even models derived from chaos theory.

Although it is held that "there is a relatively common set of beliefs that unite the work of institutionalists . . ." [Samuels 1995, 571], institutional economics is not built upon a fixed set of assumptions as neoclassical economics is. The common set of beliefs held by institutional economists could be summarized in a very sketchy and highly incomplete manner, with the following characteristics.(2) Institutional economists recognize the complexity of economic life and the ambiguities and social, cultural, normative, and political character of economic behavior as essentially a process of interaction among persons based on values and habits that shape and reshape institutions. The assumption of methodological individualism central to many other economic theories is rejected. This position implies that economic processes cannot be explained in terms of the aggregated result of individual actions assuming fixed preferences, utility maximization, and (im)perfect information on market prices. Institutional economics, and especially evolutionary economics, concerns itself with dynamics, not with comparative statics. Economic change in institutional economics is considered to be historical and contextual, influenced by and shaping institutions. The process of change hence is irreversible. Also, institutionalists generally regard change as involving a transformation of structures, not as an outside shock to a structure. The economy is viewed as a moving system without determinate optimum equilibrium solutions. Means and ends, causes and effects, are often unstable and difficult to distinguish. "Institutionalists have been holistic . . . Pursuit of the mechanics of price determination trivialises what the economy is all about, and excludes considerations of social control and social change and all that they entail" [Samuels 1995, 575]. This implies that institutionalists regard interaction in the economy not only as complex, but also as highly interdependent, which calls for a holistic explanation of economic phenomena.

Writings in institutional economics have been mainly theoretical, explaining economic behavior with descriptions, historical narratives, and with the help of ad hoc illustrative metaphors. …

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Chaos Theory and Institutional Economics: Metaphor or Model?
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