Academic journal article Journal of Economic Issues

On Integrating New and Old Institutionalism: Douglass North Building Bridges

Academic journal article Journal of Economic Issues

On Integrating New and Old Institutionalism: Douglass North Building Bridges

Article excerpt

In institutional economics, the explanandum is the institution. Definitions of institution refer to a framework of behavior: institutions direct, channel, or guide behavior. We prefer to distinguish values as the underlying systems of belief about right and wrong from the more concrete institutional structure of norms, rules, and structures. In economics, it is important to study the influence of the institutional structure on behavior in order to understand better the performance of firms, markets, and economies in different settings. For instance: with respect to take-overs, norms in Japan differ from the American ones; legal rules of competition differ in the United States from those in France, and the structure of market and firms differ between sectors, which influences behavior of management with respect to diversification, networking, and the like.

Central questions in institutional economics are why institutions come into existence, why they develop in specific ways, and what can be said about their efficiency? In economics, these questions are approached from different perspectives within the schools of new and old institutionalism. These schools differ in respect to their problem definition (explanandum), to their explanatory variables (explanantia), and to their methodology of inquiry. The differences can be illustrated with the three-layer schema of Williamson [1993] (see Figure 1).

In Figure 1, the explanandum is the governance structure, and the explanantia (solid arrows) are the institutional environment, the individual, and the "life of the governance structure on its own."

The Old Institutionalism (OIE)

Institutionalism(1) has had institutional change as its paramount object of study for a century. The central problem has not been the influence of a given set of institutions on economic behavior, but understanding the process of institutional change itself. With respect to the explanantia, it is important to stress the use of a collectivistic point of view. The structure of social and economic reality is seen as complex, functional, and interdependent while the dynamics of this structure are described in evolutionary terms. However, a serious problem of coherence is apparent. In fact, there are two general approaches, one based on Veblen and the other on Commons. The differences between them are remarkably broad. For instance, whereas in Veblenian thinking the individual is carrying out the exigencies of big cultural forces placed in a Darwinian perspective, Commons pictures a voluntaristic world of collective rules. In contrast to the materialistic and collective institutionalism of Veblen, the regulative and collective institutionalism of Commons assumes a man-made social order with a high degree of constructivism. In the development of old institutionalism to modern neo-institutionalism (see note 1), there has been a shift from Veblenian thinking to that of Commons.

Among the explanantia, the predominant factor in shaping institutions has been technology. As technology evolves, new configurations of social structure are bound to emerge, always accompanied, however, by conflicts. In solving conflicts between societal values (higher efficiency) and individual values (lower efficiency), we have witnessed a development from irreconciliable forces (Veblen) to appeasing rule-making by means of democratic procedure (Commons). In Commons's point of view, conflicts of interest render certain institutions socially inefficient; institutionalization then is an (artificial) process of selection of (increasing) efficient and reasonable rules. As a consequence, the strict Veblenian interpretation of institutions as inherently conservative, or even hostile, to community life has been largely abandoned. Institutions can be efficient for tasks at band [for a discussion on ceremonial and instrumental institutions, see Bush 1987].

The actors in the process of institutional change are collective in character. …

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