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Institutional economics focuses on understanding the role of human-made institutions in shaping economic behavior. Aspects of institutional economics are part of mainstream economics - in particular the so-called new institutional economics - and focuses on the role of institutions in reducing transaction costs. Heterodox institutional economics emphasizes a broader study of institutions and views markets as a result of the complex interaction of these various institutions (e.g. individuals, firms, states, social norms).

Contents 1 Early institutional economics 2 New institutional economics 3 Institutionalism today 4 Some Sources 5 External links

Institutional economics was once the main school of economics in the United States, including such famous but diverse economists as Thorstein Veblen, Wesley Mitchell, and John R. Commons. Some institutionalists see Karl Marx as belonging to the institutionalist tradition because he described capitalism as a historically bounded social system; other institutionalist economists disagree with Marx's definition of capitalism, instead seeing defining features such as markets, money and the private ownership of production as naturally arising over time, as a result of the purposive actions of individuals.

"Traditional" institutionalism [1] rejects the reduction of institutions to simply tastes, technology, and nature (see naturalistic fallacy). Tastes, along with expectations of the future, habits, and motivations, not only determine the nature of institutions but are limited and shaped by them. If people live and work in institutions on a regular basis, it shapes their world-views. Fundamentally, this traditional institutionalism (and its modern counter-part institutionalist political economy) emphasizes the legal foundations of an economy (see John R. Commons) and the evolutionary, habituated, and volitional processes by which institutions are erected and then changed (see John Dewey, Thorstein Veblen, and Daniel Bromley.) The vacillations of institutions are necessarily a result of the very incentives created by such institutions, and are thus endogenous. Emphatically, traditional institutionalism is in many ways a response to the economic orthodoxy of present; its reintroduction in the form of institutionalist political economy is thus an explicit challenge to neoclassical economics, since it is based on the fundamental premise neoclassicists oppose: that economics cannot be separated from the political and social system within which it is embedded. Some of the authors associated with this school include Robert Frank, Warren J. Samuels, Roland Hoksbergen, Mark R. Tool, Geoffrey Hodgson, Daniel Bromley, and Anne Mayhew.

See also main article.

With the development of theories of asymmetric and distributed information an attempt was made to integrate institutionalism into mainstream neoclassical economics, under the title new institutional economics. However, this latter variant of institutionalism failed to supersede the classical school, because heterodox economists argue it was heir to what they perceive as the flaws of neoclassical economics. Specifically, new institutional economics failed to avoid criticisms of reductionism and lack of realism: these were levelled at neoclassical economics for effectively ignoring institutions, and at new institutional economics for attempting to reduce institutions to 'rational' and 'efficient' resolutions to the problem of transaction costs.

Modern institutionalism is thus sharply divided between new institutional economics represented by people like Nobel Prizewinner Douglass North and institutional political economy and "old" or "critical" institutionalism (an approach radicaly opposed to mainstream neoclassical economics) chiefly associated with the Cambridge economist Ha-Joon Chang and Geoffrey Hodgson from University of Hertfordshire.

• North, Douglass C. "Institutions, Institutional Change and Economic Performance", Cambridge University Press (1990).
• Commons, John. "Institutional Economics," American Economic Review Vol. 21 (1931): pp. 648-657.
• Hodgson, Geoffrey M., "The Approach of Institutional Economics," Journal of Economic Literature v36, n1 (March 1998): 166-92.
• Chang, Ha-Joon, "Globalization, Economic Development and the Role of the State", Zed Books (2002)
• Cheung, Steven N. S. * Schmid, A. Allan, Conflict & Cooperation: Institutional & Behavioral Economics, Blackwell (2004)
• Keaney, Michael., "Critical Institutionalism: From American Exceptionalism to International Relevance", in "Understanding Capitalism: Critical Analysis From Karl Marx to Amartya Sen", ed. Doug Dowd, Pluto Press, 20002.
• Samuels, Warren J., "The Legal-Economic Nexus," George Washington Law Review, 57:1156-78 (1989).
• _____, “institutional economics," The New Palgrave: A Dictionary of Economics, v. 2 (1987). pp. 866-64.

Ronald Coase, Douglass North, and Steven Cheung are three of the top New Institutional economists still living.

• Douglass North Nobel lecture
• Institutional & Behavioral Economics