Clarence Ayres Memorial Lecture (2007): Evolutionary Institutional Economics

By Potts, Jason | Journal of Economic Issues, June 2007 | Go to article overview

Clarence Ayres Memorial Lecture (2007): Evolutionary Institutional Economics


Potts, Jason, Journal of Economic Issues


The economic system is not ultimately made of resources, but of institutions. And because economic systems differ in their institutions, their comparative performance can be (partially) explained by these differences. Moreover, institutional differences are the outcome of an evolutionary process, implying that as institutions evolve, so do economic systems. Institutional significance, institutional difference, and the causal connection to economic growth and development are all therefore central to the revival of Veblenian institutional economics (Brette 2006; Hodgson 2007).

Yet, this will require more than just a refurbishment of "original" institutional economics with new micro insights from evolutionary psychology, experimental and behavioral economics, complexity theory, replicator dynamics, and game theory. Why? Because as Brette and Mehier (2005) also argue, it is better to begin with a general theory of economic evolution and locate institutions within this, than to start with institutions and derive a theory of the economy.

Toward this end, I propose an evolutionary theory of economic institutions derived from the rule-based analytic framework of micro meso macro recently developed by Dopfer, Foster and Potts (2004); Dopfer (2005); and Dopfer and Potts (2004; 2007). In this framework, an institution is defined as a stable (meso) rule population as the outcome of a (meso) trajectory. The central analytic implication of the evolutionary theory of institutions is that an institution is essentially a meso--not a micro or macro--concept. A meso-centered theory of institutions may provide, in this view, a useful map of the various schools of institutional economics in terms of the different aspects of the meso unit they represent.

What is an Institution?

"Institution" is a well-defined concept in modern economic analysis. Unfortunately, however, it runs to multiple definitions. Worse, they range not only over how institutions function, or how they emerge and change, but extend to seemingly incommensurable definitions of what institutions actually are. The theory of economic institutions is certainly not in conceptual disarray, but it is still well short of a unified analytic framework.

Instead, what currently exists are a number of distinct schools of institutional thought. These draw on different analytic foundations derived from distinct ontological commitments, theoretical models and empirical methods (e.g., Veblen 1899; Commons 1931; Ayres 1944; Williamson 1985; Schotter 1981; Hodgson 1988; 1997; Heiner 1990; North 1990; Vanberg 1994; Young 1998; Loasby 1999; Gintis 2000; Aoki 2001; Greif 2006). In all cases, institutions are of fundamental importance to economic analysis, yet their specific analytic nature remains a point of serious contention.

I shall not rehearse these methodological (or even ideological) differences in detail here (see Rutherford 1994; Dequech 2002; Hodgson 2006), but rather shall seek to unpack only the broad analytic distinctions between original and new institutional economics, along with Austrian, Schumpeterian and game theoretic approaches to the theory of institutions. The purpose of this is to show how they might all then be re-constituted with respect to a general evolutionary analysis based about the micro-meso-macro framework (Dopfer and Potts 2007). I shall argue that "an institution is a 'meso 3' phenomenon," and that many different aspects of this have already been captured across the otherwise disparate schools of institutional economic analysis.

Our starting point is the four points of agreement that connect all institutional analysis:

1) Institutions are artificial in being human artifacts, but also natural in being widely self-organizing and emergent.

2) Institutions are individual in that they relate to human action, but also social in that they are transactions between a system of agents that produce coordination. …

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