Handbook of New Institutional Economics<\/a>, Claude Menard and Mary Shirley explain that NIE abandons certain assumptions of neoclassical economics, specifically the assumptions that actors possess \u201cperfect information and unbounded rationality and that transactions are costless and instantaneous.\u201d<\/p>\nRather, \u201cNIE assumes instead that individuals
\nhave incomplete information and limited mental capacity and because
\nof this they face uncertainty about unforeseen events and outcomes and incur
\ntransaction costs to acquire information\u201d (1). Institutions, formal and informal, arise in an effort to reduce risks and transaction costs.<\/p>\n
Neoclassicism is not set aside entirely: \u201cWhile new institutionalists reject
\nthe neoclassical assumption of perfect information and instrumental rationality,
\nthey accept orthodox assumptions of scarcity and competition\u201d (2).<\/p>\n
According to the authors, this opens up new possibilities for economic theory. Summarizing an essay by Douglass North, they write that \u201cone of NIE\u2019s main inputs to economics
\nhas been to remove the fiction of the frictionless market by adding institutions,
\nbut . . . NIE has the potential to perform an equally, or more powerful service:
\nchanging neoclassical economics from a static to a dynamic theory.\u201d That is, it\u2019s not enough to know \u201cthe basic rules of the game or even customs, norms
\nand habits\u201d; it\u2019s also necessary to \u201cunderstand what people believe
\nand how they arrive at those beliefs\u2014how people learn\u201d (3).<\/p>\n
NIE also suggests new ways to understand the economic role of political institutions: \u201cpolitical institutions can play
\nan important role in reducing transaction costs by improving the security of
\nproperty rights and enforcement of contracts.\u201d States are not necessarily a threat to economic life, since the legal institutions \u201csupport market economies by enforcing contractual obligations and protecting private property from state predation\u201d (7). Needless to say, not all states do this; many are \u201can important threat to the security of property rights and a prime violator of contracts\u201d (4).\u00a0<\/p>\n
Summarizing another essay from the collection, they notes that NIE explores ways to steer past the paradox of state power: \u201cNIE \u00a0[drops] the traditional economic assumption of government
\nas benevolent and the opposite assumption of government as Leviathan, focusing
\ninstead on how different institutional arrangements affect the incentives
\nand performance of government. In particular NIE considers a fundamental
\ndilemma: investment increases when property rights are protected, but a state
\nstrong enough to protect property rights is also strong enough to expropriate
\nthem\u201d (5).<\/p>\n
Stressing the limits of knowledge and the reality of change, NIE insists that no one can know the \u201creality\u201d of the political and economic system, but that we do form elaborate beliefs about the way the system works. Dominant beliefs determine political and economic performance, and this institutional and epistemological matrix \u201cimposes severe constraints on the choice set of entrepreneurs\u201d (25).\u00a0<\/p>\n
Change is constant but incremental because it is \u201cpath dependent,\u201d dependent on choices already made and on beliefs formed and embodied in institutional patterns. Rules, norms, conventions, and beliefs form a \u201cscaffolding\u201d that constrains choices at any moment. Choices are constrained not only because of technology and resources but because the scaffolding of beliefs and norms and institutional conventions (26). Growth economics has highlighted certain features of development, but NIE argues that this literature misses \u201cthe incentive structure\u201d or \u201cmatrix\u201d that constrains how investments are made and thus how development takes place (28).<\/p>\n<\/body><\/html>\n","protected":false},"excerpt":{"rendered":"
What\u2019s new about New Institutional Economics (NIE)? In their editorial introduction to\u00a0Handbook of New Institutional Economics, Claude Menard and Mary Shirley explain that NIE abandons certain assumptions of neoclassical economics, specifically the assumptions that actors possess \u201cperfect information and unbounded rationality and that transactions are costless and instantaneous.\u201d Rather, \u201cNIE assumes instead that individuals have […]<\/p>\n","protected":false},"author":3021,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[264],"tags":[],"class_list":["post-15575","post","type-post","status-publish","format-standard","hentry","category-economics-new-institutional-economics"],"yoast_head":"\n
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