Institutional Economics
Summary of all lectures
Radboud University Nijmegen
Yoël Guijt
, Lecture 1
Introduction to Institutional Economics
Why institutional Economics?
* To complement to neoclassical economics and reduce failures of neoclassical economics
* Methodological individualism and reductionism => we look at individuals and than
aggregates
* Exogenous preferences => Individual preferences are given, doesn’t change
* Instrumental Rationality => Perfect rationality, all behave in certain way, maximizing utility!
* Perfect information => To make this perfect cost/bene t analysis
Perception of institutions in neoclassical economics:
* Static equilibrium, institutions not needed/external to economic system
Neoclassical Economics:
* Actors are hyper rational
* Markets always exist & never fail
* Prices re ect only relevant information (no transaction costs)
* Individuals try to maximize under certain constraints
* Everything will be sorted out by the market
* Everything besides markets are irrelevant!
* Standard Macro: investment > capital accumulation > productivity > growth + development
* BUT… countries have di erent developments and growth
* So, neoclassical economics not enough to understand complex reality…
Institutional Economics: Context matters! To understand complexity of real-life exchange
* In reality …
* Economic actors are embedded in particular institutional environments
* Not perfectly rational
* Free markets are far from being perfect
* Not fully rational => Bounded rationality
* Not all prices re ect only relevant information, also Transaction Costs
* Developing and changing world, not just static
* It is about social relations between individuals with di erent preferences/values/interest …
* Markets cannot manage everything, we need governance of exchanges and thus institutions
So, what are institutions?
* Institutions are Systems of man-made rules that structure behavior and social interaction…
* All banks, government, rms, university, rules and laws …
* As North says… ‘The Rules of The Game’
* Institutions are social structures enabling meaningful social interaction
* Institutions act as incentives structure of a society
* Institutions are shaping human constraints and structure human interactions !
* There are Political + Economic + Value institutions
Formal Institutions:
* Public rules of behavior that …
* Are designed by a public authority with legislative power
* Are enforced by a public authority with executive power
* Are a judiciary power that has the right and power to penalize an individual or organization for
breaking the rule
fl fl fiff fffi
Summary of all lectures
Radboud University Nijmegen
Yoël Guijt
, Lecture 1
Introduction to Institutional Economics
Why institutional Economics?
* To complement to neoclassical economics and reduce failures of neoclassical economics
* Methodological individualism and reductionism => we look at individuals and than
aggregates
* Exogenous preferences => Individual preferences are given, doesn’t change
* Instrumental Rationality => Perfect rationality, all behave in certain way, maximizing utility!
* Perfect information => To make this perfect cost/bene t analysis
Perception of institutions in neoclassical economics:
* Static equilibrium, institutions not needed/external to economic system
Neoclassical Economics:
* Actors are hyper rational
* Markets always exist & never fail
* Prices re ect only relevant information (no transaction costs)
* Individuals try to maximize under certain constraints
* Everything will be sorted out by the market
* Everything besides markets are irrelevant!
* Standard Macro: investment > capital accumulation > productivity > growth + development
* BUT… countries have di erent developments and growth
* So, neoclassical economics not enough to understand complex reality…
Institutional Economics: Context matters! To understand complexity of real-life exchange
* In reality …
* Economic actors are embedded in particular institutional environments
* Not perfectly rational
* Free markets are far from being perfect
* Not fully rational => Bounded rationality
* Not all prices re ect only relevant information, also Transaction Costs
* Developing and changing world, not just static
* It is about social relations between individuals with di erent preferences/values/interest …
* Markets cannot manage everything, we need governance of exchanges and thus institutions
So, what are institutions?
* Institutions are Systems of man-made rules that structure behavior and social interaction…
* All banks, government, rms, university, rules and laws …
* As North says… ‘The Rules of The Game’
* Institutions are social structures enabling meaningful social interaction
* Institutions act as incentives structure of a society
* Institutions are shaping human constraints and structure human interactions !
* There are Political + Economic + Value institutions
Formal Institutions:
* Public rules of behavior that …
* Are designed by a public authority with legislative power
* Are enforced by a public authority with executive power
* Are a judiciary power that has the right and power to penalize an individual or organization for
breaking the rule
fl fl fiff fffi
