New institutional economics

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The new institutional economics or neo-institutional economics is a school of economic thought that maintains that institutions are key to explaining the decisions of individuals. Therefore, factors such as the structure of the State cannot be excluded when analyzing reality.

The new institutional economics was born in response to the neoclassical school. Unlike this one, he doesn't care as much about mathematical models. Instead, it infers theories from observing statistical data.

Another peculiarity of the neo-institutional school is the contribution of sciences such as politics, sociology and psychology.

Origin of the new institutional economics

The origin of the new institutional economics is in the 1930s. In 1937 Ronald Coase expounded in the article ‘The Nature of the Firm’ on the role of norms and the structure of organizations in the allocation of prices.

Later, at the end of the last century, these ideas gained greater force with the work of economists such as Douglass North and Oliver Williamson. These authors also studied the role of institutions in creating competitive markets.

Postulates of the new institutional economics

The main postulates of the new institutional economics are the following:

  • Limited rationality: The individual does not have all the information when choosing because knowledge is limited. Nor is it possible to anticipate certain events that may affect the final outcome of decisions. We refer, for example, to unexpected changes in the laws.
  • Opportunism: Agents can sacrifice the potential gains of an exchange in order to obtain a greater personal benefit.
  • Transaction costs: They are those that hinder, in general, the functioning of the economic system. According to Oliver Williamson, we can classify them into two categories. First, the ex ante costs that come from the planning, negotiation and establishment of guarantees of a contract. Meanwhile, ex post costs come from poor adaptation, that is, when transactions move away from the initial agreement. Faced with this, additional payments must be incurred, for example, to a state entity to intervene and resolve the conflict.

Given these postulates, the existence of institutions that facilitate and enforce exchanges is necessary. For this reason, it is important, for example, that a country has a judicial system that ensures compliance with contracts. The government's ability to enforce laws is known as enforcement.

Tags:  bag administration Business 

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