New Institutional Economics ppt

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New Institutional Economics Concepts
Application By Md. Shamsul Arefin Joint
Secretary Ministry of Public Administration Govern
ment of the peoples Republic of Bangladesh The
lecture note is prepared for the 134 Foundation
Course organized by NAEM, Dhaka
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What is Institutional Economics?

• Focus on understanding the role of human-made
  institutions in shaping economic behavior
• Institutions may include the family, the
  corporation, the trade union, the financial
  system, the legal system, the state (government)
• Economics cannot be separated from the political
  and social system within which it is embedded.

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• Concepts - Institutional Economics
• Institutional economics focuses on understanding
  the role of the evolutionary process and the role
  of institutions in shaping economic behaviour.
  Its original focus lay in Thorstein Veblen's
  instinct-oriented dichotomy between technology on
  the one side and the "ceremonial" sphere of
  society on the other.
• Its name and core elements trace back to a 1919
  American Economic Review article by Walton H.
  Hamilton.
• 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).
• A significant variant is the new institutional
  economics from the later 20th century, which
  integrates later developments of neoclassical
  economics into the analysis.
• Law and economics has been a major theme since
  the publication of the Legal Foundations of
  Capitalism by John R. Commons in 1924.
• Behavioral economics is another hallmark of
  institutional economics based on what is known
  about psychology and cognitive science, rather
  than simple assumptions of economic behavior.

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Who are pioneers in this field ?

• Thorstein Veblen
• John R. Commons
• Wesley Mitchell
• Generally a diverse group of writers who have a
  few common themes

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What are these common themes?

• Critics of orthodox economics (Neoclassical)
• Objected to the notion that the "laws"
  constructed by Neoclassical economists were
  timeless generalizations and contended instead
  that the economic behavior of men, like any other
  human activity, had to be analyzed in terms of
  the social context in which it was imbedded

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Concepts Institutional Economics (contd)

• Focus on collective rather than individual action
• Preference for an evolutionary rather than a
  mechanistic approach to economics
• Emphasis on empirical observation over deductive
  reasoning
• Generally, institutionalists do not believe in
  the harmony of a market system and the policy of
  laissez faire

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Concepts Institutional Economics (contd)

• Neclassical economics studied allocation of
  scarce resources among alternative uses
• Institutionalists studied how the institutional
  structure evolved and how institutions reflected
  the prevailing social/political/economic structure

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Concepts New institutional economics

• Combines economics, law, organization theory,
  political science, sociology and anthropology to
  understand social, political and commercial
  (e.g., business) institutions. Its goal is to
  explain what institutions are, how they arise,
  what purpose they serve, how they change and
  reform-  Peter Klein at http//encyclo.findlaw.co
  m/0530book.pdf

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• What are institutions?
• Institutions are the rules of the game in a
  society are the humanly devised constraints that
  shape human interaction (North 1990, p. 3)
• Economic, political and social Interactions
• Informal institutions - informal constraints
  sanctions, taboos, customs, tradition and code of
  conduct
• Formal institutions - formal rules
  constitutions, laws, property rights

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• Different dimensions of institutional economics
  (Dixit, 2007)
• Protection of property rights
• Enforcement of voluntary contracts among
  individuals
• Provision of the physical and regulatory
  infrastructure
• The functioning of the first two categories

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• Different dimensions institutions (Dixit, 2007)
• The formal state institutions that enact and
  enforce the laws
• Legislature, police, judiciary, and regulatory
  agencies
• Institutions of private ordering that function
  under umbrella of state law
• Private for-profit institutions that provide
  information and enforcement
• Self-enforcement within social or ethnic groups
  and network

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• The New Institutional Economics (Williamson,
  2000)
• Formal rules of the game include
• Executive
• Legislative
• Judicial
• The definition and enforcement of property rights
  and of contract laws are important features

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• The New Institutional Economics (Williamson,
  2000)
• Institutions of Governance play of the game
• The governance of contractual relations becomes
  the focus of analysis
• A governance structure reshapes incentives
• Transactions costs economics
• Markets
• Vertical integration

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• Different measures of institutional Economics
  (World Bank)
• Voice and accountability
• Political stability and non- violent society
• Government effectiveness
• Regulatory quality
• Rule of law
• Control of corruption

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Thorstein Veblen

• American (1857-1929)
• PhD in Philosophy Yale
• Graduate studies in economics at Cornell
• Professor at Chicago, Stanford and University of
  Missouri
• Helped to find ideas of Institutional economics.

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Veblen's criticism of Neoclassical theory

• Classical and neoclassical assumptions are
  unscientific
• He also believed this to be true of Marxism
  thoughts of School
• He did not believe that there was harmony in a
  market system it did not conform to natural
  laws
• He did not believe that market outcomes were
  necessarily good or desirable

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Veblen's criticism of Neoclassical theory
(continued)

• He charged that Classical and neoclassical
  economics was pre-Darwinian in that it was moving
  toward some determined end (long run equilibrium)
  rather than constantly evolving in response to
  environmental forces (Darwin lived 1809-1882) 
• Did not like static analysis, too many factors
  are held responsible.
• Did not believe that self interest would promote
  the public good

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Veblen's criticism of Neoclassical theory
(continued)

• He criticized the idea that making profits is
  the same as making goods this may have been
  true in Smiths time, but not in a more advanced
  industrial society where production is separated
  from ownership. 
• Large corporations may reduce output in the quest
  for profits (monopoly power) 
• Part of this came from Veblens farm background,
  where agrarian populists were against big
  businesses (Railroads, banks, etc.)

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Veblen's criticism of Neoclassical theory
(continued)

• Veblen believed that big industrialists were
  anti-competitive so that the whole assumption of
  perfectly competitive markets was completely
  wrong
• He also called for more empirical work to test
  the neo-classical models

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John R. Commons

• American (1862-1945)
• Wisconsin School
• Labor economist
• Helped write social reform legislation
• Not a socialist, but believed in laws to correct
  problems with laissez-faire capitalism

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Application

• Regulation of public utilities
• Industrial Safety Laws
• Child Labor Laws
• Minimum wage laws for women
• Unemployment compensation laws

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Conclusion Since it focuses on understanding the
role of the evolutionary process and the role of
institutions in shaping economic behavior,
therefore it is essential for us to know and
react according to need of the institutional
economics in our public transactions.
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Questions

• 1. What do you think about New Institutional
  Economics? Put your arguments in favour of the
  concept?
• 2. How it works ?

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Thank You All for the Patient Hearing Email
s2arefin_at_yahoo.com Cell 01741329408