Organizations and Markets

New Institutional Economics: What My Students Ask

30 May 2006 at 7:49 am Peter G. Klein 10 comments

| Peter Klein |

At the September 2005 meeting of the International Society for New Institutional Economics (ISNIE) in Barcelona I participated in a roundtable organized by Claude Menard and Mary Shirley, “Challenges and New Directions in NIE,” celebrating the Handbook of New Institutional Economics (Springer, 2005). Because I teach a required first-year PhD course in the NIE, I thought it would be interesting to discuss how students react to the material as the seek to integrate it with what they are learning in the general economics curriculum. Many scholars research and teach aspects of the NIE, but only rarely step back and evaluate the entire field, as a whole. Preparing to teach this course for the first time last year gave me an opportunity to do so.

Here are the most common questions students ask about the NIE and my course, “Economics of Institutions and Organizations”:

1. Is this a tools course or a field course?

In other words, is the NIE foundational to all fields of economics (and, possibly management), or an applied field like industrial organization, labor economics, international trade, etc.?

Williamson treats it as a foundational field — “any issue that can be formulated as a contracting problem can be investigated to advantage in transaction cost economizing terms” — as does Coase, who talks about “revolutionizing economics” through the study of contracts. Personally, I tend to treat my course as a field course, the application of (more-or-less standard) economic reasoning to particular applied phenomena (firms, contracts, the institutional environment, etc.).

2. Is NIE an alternative to neoclassical economics?

My usual answer is to equivocate, pointing out that it depends who you ask. “Orthodoxy is my doxy; heterodoxy is another man’s doxy” (William Warburton). To put the question differently, is Williamson a neoclassical economist? Oliver Hart or Jean Tirole might say no, while Mark Granovetter or Jeffrey Pfeffer would surely say yes. More seriously, my sense is that most NIE practitioners see themselves not as opposing the neoclassical orthodoxy, but rather as applying orthodoxy to new topics and problems. On the other hand, it is true that some NIE economists embrace cognitive issues like bounded rationality (Williamson) and learning (North), and evolutionary, rather than equilibrium-based, approaches.

3. What ties the course topics together?

My syllabus topics include the legal environment and property rights; norms, culture, and social conventions; economic history, growth, and development; political economy; Coase and the nature of the firm; moral hazard and agency; transaction cost economics; the property-rights approach; resource-based theories; and innovation and organizational change. A potpourri or a systematic, unified treatment?

I used to think I could answer this question easily; institutions are man-made rules, or constraints, that guide individuals’ behavior; this includes two categories, the institutional environment (“orders,” in Hayek’s terminology, rules that are the “product of human action but not human design,” constraints the decision-maker takes as exogenous) and institutional arrangements (Hayek’s “organizations,” constraints deliberately designed by decision-makers to achieve particular ends). Lately, however, I’ve become more sensitive to the difficulty of drawing sharp distinctions among orders and organizations. Much of what is usually considered part of the institutional environment (e.g., political decision making) is clearly the result of human design (e.g., in legislatures), while many functions or routines that take place within institutional arrangements have an unplanned, “spontaneous order” aspect.

4. Why doesn’t the economics department offer this course?

My appointment is not in the Department of Economics, but in the Division of Applied Social Sciences in the College of Agriculture, Food, and Natural Resources. I think it is no coincidence that economics departments, which tend to be more rigid and less interested in institutions, organizations, strategy, etc., don’t offer many courses like this. To the extent that the NIE challenges the neoclassical orthodoxy, it will not gain much of a toe-hold in economics departments unless that orthodoxy is itself seriously challenged.

Entry filed under: - Klein -, Institutions, Teaching.