The NIE assume that individuals are rational and that they seek to maximize their preferences, but that they also have cognitive limitations, lack complete information and have difficulties monitoring and enforcing agreements. As a result, institutions form in large part as an effective way to deal with transaction costs.[2]
NIE rejects that the state is a neutral actor (rather, it can hinder or facilitate effective institutions), that there are zero transaction costs, and that actors have fixed preferences.[3]
Analyses are now built on a more complex set of methodological principles and criteria. They work within a modified neoclassical framework in considering both efficiency and distribution issues, in contrast to "traditional", "old" or "original" institutional economics, which is critical of mainstream neoclassical economics.[4]
Herbert A. Simon criticized NIE for solely explaining organizations through market mechanisms and concepts drawn from neoclassical economics.[24] He argued that this led to "seriously incomplete" understandings of organizations.[24]Jack Knight and Terry Moe have criticized the functionalist components of NIE, arguing that NIE misses the coercion and power politics involved in establishing and maintaining institutions.[25][26][27]
Institutional levels
Although no single, universally accepted set of definitions has been developed, most scholars doing research under the methodological principles and criteria follow Douglass North's demarcation between institutions and organizations. Institutions are the "rules of the game", both the formal legal rules and the informal social norms that govern individual behavior and structure social interactions (institutional frameworks).
Organizations, by contrast, are those groups of people and the governance arrangements that they create to co-ordinate their team action against other teams performing also as organizations. To enhance their chance of survival, actions taken by organizations attempt to acquire skill sets that offer the highest return on objective goals, such as profit maximization or voter turnout.[28]Firms, universities, clubs, medical associations, and unions are some examples.
Oliver Williamson characterizes four levels of social analysis. The first concerns itself with social theory, specifically the level of embeddedness and informal rules. The second is focused on the institutional environment and formal rules. It uses the economics of property rights and positive political theory. The third focuses on governance and the interactions of actors within transaction cost economics, "the play of the game". Williamson gives the example of contracts between groups to explain it. Finally, the fourth is governed by neoclassical economics, it is the allocation of resources and employment. New Institutional Economics is focused on levels two and three.[29]
Because some institutional frameworks are realities always "nested" inside other broader institutional frameworks, the clear demarcation is always blurred. A case in point is a university. When the average quality of its teaching services must be evaluated, for example, a university may be approached as an organization with its people, physical capital, the general governing rules common to all that were passed by its governing bodies etc. However, if the task consists of evaluating people's performance in a specific teaching department, for example, along with their own internal formal and informal rules, it, as a whole, enters the picture as an institution. General rules, then, form part of the broader institutional framework influencing the people's performance at the said teaching department.
^Malcolm Rutherford (2001). "Institutional Economics: Then and Now," Journal of Economic Perspectives, 15(3), pp. 185-90 (173-194). L. J. Alston, (2008). "new institutional economics," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
^M. Klaes (2008). "transaction costs, history of," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
^Harold Demsetz (1967). "Toward a Theory of Property Rights," American Economic Review, 57(2), pp. 347-359[dead link].
^Harold Demsetz (1969) "Information and Efficiency: Another Viewpoint," Journal of Law and Economics, 12(1), pp. [1][dead link].
^Steven N. S. Cheung (1970). "The Structure of a Contract and the Theory of a Non-Exclusive Resource," Journal of Law and Economics, 13(1), pp. 49-70.
^S. N. S. Cheung (1973). "The Fable of the Bees: An Economic Investigation," Journal of Law and Economics, 16(1), pp. 11-33.
^Ronald Coase (1998). "The New Institutional Economics," American Economic Review, 88(2), pp. 72-74.
^R. H. Coase (1991). "The Institutional Structure of Production," Nobel Prize Lecture PDF, reprinted in 1992, American Economic Review, 82(4), pp. 713-719.
^Douglass C. North (1990). Institutions, Institutional Change and Economic Performance, Cambridge University Press.
^Douglass C. North (1995). "The New Institutional Economics and Third World Development," in The New Institutional Economics and Third World Development, J. Harriss, J. Hunter, and C. M. Lewis, ed., pp. 17-26.
^Elinor Ostrom (2005). "Doing Institutional Analysis: Digging Deeper than Markets and Hierarchies," Handbook of New Institutional Economics, C. Ménard and M. Shirley, eds. Handbook of New Institutional Economics, pp. 819-848. Springer.
^North, Douglass C. "Transaction Costs, institutions, and Economic Performance." International Center for Economic Growth (n.d.): n. pag. Khousachonine.ucoz.com. Web.
^Williamson, Oliver (2000). "The 'New Institutional Economics: Taking Stock, Looking Ahead". Journal of Economic Literature. 38 (3): 595–613. CiteSeerX10.1.1.128.7824. doi:10.1257/jel.38.3.595.
Further reading
Eggertsson, Thráinn (2005). Imperfect Institutions: Possibilities and Limits of Reform. Ann Arbor: University of Michigan Press. ISBN978-0472114566.
Furubotn, Eirik G.; Richter, Rudolf (2005). Institutions and Economic Theory: The Contribution of the New Institutional Economics (2nd ed.). Ann Arbor: University of Michigan Press. ISBN978-0472030255.