Modern Institutionalism
Old institutionalist perspectives were pursued after World War II by different authors: Ayres, in a Veblenian tradition (see the entry “Institutionalism”), and Galbraith, who added Keynesian to Veblenian economics.
In The Affluent Society, Galbraith (1955) dismissed the encouragement of private consumption at the expense of public spending (“private affluence, public squalor”) whereas the government has a role to play in economic success. American Capitalism (Galbraith 1952) argued that planning is also essential to the functioning of the private sector: the development of technology entails large investments and therefore important risks that only large corporations can take, and which they try to reduce by controlling their environment, including by involving themselves in political activities. Technical change and innovations through research and development departments of large corporations are also at the centre of The New Industrial State (Galbraith 1967), which developed another institutionalist theme: the shaping of preferences by institutions, here large corporations, through advertisement.Since the 1970s, numerous and diverse authors have claimed old institutionalism as their inspiration, presenting their approach as complementary or opposed to neoclassical economics and NIE. They envisage the individual and his preferences not as given, but as resulting from learning, which involves dynamics and collective processes, and which is incorporated in habits or routines. They retain Knightian uncertainty and the impossibility to contract over judgement capacities. They view interactions as not only contractual, even in the case of a market exchange; the market itself is an institution, a set of rules, embedded in other institutions. Conflict is first; individuals and institutions interact in an evolutionary process; technology is decisive.
Interdisciplinarity is conceived as importing into economics insights from social sciences rather than exporting neoclassical tools. Regarding economic policy, they, too, use the Coasean comparative institutional method, but with a criterion broader than the maximization of wealth, or even than economic efficiency. All this differentiates the authors of the second group from the first.Modern institutionalism is evolutionary in the sense employed by Thorstein Veblen (1899) and Joseph Schumpeter (1911 [1934]). The work of Richard Nelson and Sidney Winter (1982) became central to its recent developments, even if it can be argued that this does not strictly belong to the lineage of old institutionalism. Nelson and Winter draw from Charles Darwin’s process of evolution and selection, Alfred Marshall’s focus on industry and dynamics, Schumpeter’s view of innovation as disequilibrium and the source of growth, and Simon’s theory of rationality. In their perspective, agents do not optimize, but follow habits, which depend on skills. A skill is a sequence of actions usually efficient in the same context; it is a tacit knowledge learnt from experience. A routine is an organizational skill, a collective habit, incorporating the memory of the organization. Routines are the equivalent of genes and are replicated; mutations result from research activities and exceptional events. Selection by the environment operates, since an organization with better performances tends to grow and replicates its routines rather than changing them, and vice versa. Consequently, better adaptive routines tend to be more frequent. This model allows the study of the evolution of a population of firms, and of the adaptation of a firm or industry to a shift in market conditions or a technical change. It endogenously explains industrial structure and its evolution. The diversity of capabilities, learning and innovative efforts explains the diversity and evolution of knowledge, institutions (including firms) and technologies, which become the object of analysis rather than being exogenously given (for example, Metcalfe 1994).