The New Institutional Economics: Taking Stock, Looking Ahead (September 2000)

I OPEN MY DISCUSSION of the new institutional economics with a confession, an assertion, and a recommendation. The confession is that we are still very ignorant about institutions. The assertion is that the past quarter century has witnessed enormous progress in the study of institutions. The recommendation is that, awaiting a unified theory, we should be accepting of pluralism. Chief among the causes of ignorance is that institutions are very complex. That neoclassical economics was dismissive of institutions and that much of organization theory lacked scientific ambitions have also been contributing factors. As to progress, that is what most of this paper is about. There being many instructive lenses for studying complex institutions, pluralism is what holds promise for overcoming our ignorance. Speaking for myself, I subscribe to Jon Elster’s view that we work predominantly on partial mechanisms rather than general theories at this stage of development (1994, p. 75). In consideration, however, of the “splendid plausibility of error” to which Lord Acton refers,2 we need to sort the sheep from the goats. That is accomplished by asking each would-be theory to advance refutable implications to which the data are applied. R. C. O. Matthews, in his presidential address to the Royal Economic Society in 1986, pronounced that “the economics of institutions has become one of the liveliest areas in our discipline” (Matthews 1986, p. 903). Such a pronouncement was a surprise to most of the profession. Hadn’t institutional economics long since been relegated to the history of economic thought? Whence the vitality to which Matthews made reference? Matthews’ response was that the new institutional economics (NIE) turned on two propositions. First, “institutions do matter”; and second, “the determinants of institutions are susceptible to analysis by the tools of economic theory” (Matthews 1986, p. 903). The second of these is what distinguishes the NIE, it being the case that institutional economists of all kinds—old and new—are unanimous in the view that institutions matter. Indeed, although both the older and newer styles of institutional economics