The earlier approach was a central element of the US economy in the interwar period after 1919, but was marginalized from mainstream economics in the postwar period with the rise of neoclassical and Keynesian approaches. However, it continued as a leading heterodox approach to the critique of neoclassical economics and as an alternative research program in economics, particularly through the work of Ha-Joon Chang and Geoffrey Hodgson. Historically, the relationship between law (formal institutions) and economics has acquired particular importance in this context (e.g. in the work of Commons, see above). Today, work on property rights in general and intellectual property rights in particular continues this line of thinking (Elsner et al 2015, 468; Hodgson, 2001, pp. 311-313; Elsner, 1986). More recently, Hodgson has introduced the foundations of “legal institutionalism” (Hodgson, 2015). Hodgson GM (1988) Economy and Institutions: A Manifesto for a Modern Institutional Economy. University of Pennsylvania Press, Philadelphia Most institutional economists understand economics as a system of social organization (formal and informal) related to the production, distribution, and consumption of goods, or, in a traditional institutionalist formulation, to provide the means for socio-economic life and its reproduction. Rather than presupposing certain universal characteristics rooted in human nature, the crucial idea is that the concrete characteristics of societies and forms of economic organization vary considerably in space and time. In pursuing this vision of economics, institutional economists seek to understand the concrete socio-historical factors that shape the functioning of the economy. A key feature for understanding the social and historical nature of economic organization is the identification of social institutions. In a broad sense, institutions can be defined as “the regular and exemplary behaviour of people in a society and (…) the ideas and values associated with these laws” (Neale, 1994, p.
402). In contrast, by viewing the market as a “social institution that facilitates trade” (Coase 1988, p. 8), the new institutional economy starts from the recognition that markets are legal-institutional arrangements and that all we can compare and meaningfully choose are alternative legal-institutional frameworks, actual or potential. Wie Demsetz (1969, pp. 1) sums up the contrast: “The view that permeates much of public policy economy today implicitly represents the appropriate choice between an ideal norm and an existing `imperfect` institutional arrangement. This approach to nirvana differs considerably from a comparative institutional approach, where one has the choice between other real institutional arrangements. In practice, those who follow the Nirvana approach try to discover discrepancies between the ideal and the real, and when discrepancies are found, they conclude that the real is ineffective. Users of the comparative institutional approach attempt to assess which alternative real institutional structure seems best suited to deal with the economic problem. Neoclassical economics favoured a general approach (a metatheory) over supply- and demand-based economics. This, in turn, depended on the rational action of individuals (or any economic agent), each trying to maximize their individual benefit or gain by making decisions based on available information (North 1990).
Thus, by avoiding the issues that accompanied Coase`s approach, the new institutional economics was an attempt to reduce institutions to “rational” and “efficient” actors, thus not providing solutions to the problem of transaction costs. As indicated in the discussions on ontology and the differences between institutionalism (OIE) and NIE, one of the main differences of the OIE is the emphasis on institutions as things that have an ontological existence independent of individuals and can therefore be conceived as actors with their own strengths. As such, interdependent with individuals, they shape the way economic activities are organized. This is in stark contrast to the methodological individualism of much of mainstream economics. Another difference that lies at the ontology level is the emphasis on dynamics, evolution, history, and the social and ecological spheres, each of which is essential for institutional analysis. Here, too, atomistic and static analyses, which are often present in the mainstream, can be clearly separated from such an understanding. The smallest unit of institutional economists is a unit of activity – a transaction, with its participants: Kasper W, Streit ME (1998) Institutional economics: social order and public policy. Edward Elgar, Cheltenham Finally, it is interesting to note that the dominant version and heterodox current of institutionalism do share some analytical conclusions.
A clear example is the work of Acemoglu and Robinson (2008) and Acemoglu (2010). For example, Acemoglu argues that “economic institutions that only protect the rights of a wealthy or privileged elite do not achieve this equality of opportunity and often create other distortions that can stunt economic growth.” (Acemoglu, 2010, p. 120). Moreover, the economic or political elite will only invest in public goods such as education if they hope to benefit from them in the future. Given that there are conflicting preferences for institutions and policies, the distribution of political power in society plays an important role in the choice of institutions and policies, which also explains why some institutions that are not conducive to growth cannot be reformed (Acemoglu, 2010, p. 822). This is an argument that could easily be supported by the heterodox current of institutionalism discussed here. However, there is a difference in the proposed policy recommendations. While Acemoglu and his colleagues continue to propose a general preference for liberalization reforms inspired by the mainstream of the profession, institutionalists in the heterodox tradition would argue for a more case-by-case approach. Perhaps because of the reluctance of institutionalist science to develop a great “universal” theory or to solve the transhistorical economic problem, there are a variety of questions and analyses that have been present in the history of perspective.