Understanding the New Economic Institutionalism in an Era of Global Interdependence

Abstract

In reaction to the constrained individualistic viewpoints prevalent in sociology, political science, and economics, new institutionalism emerged in the 1980s. Conventional neo-classical economics and behavioralists saw collective political and economic activity as the total outcome of individual decisions, and they considered institutions as epiphenomenal, just the aggregation of individual-level features. Following a long history, modern institutionalists utilize institutionalist approaches to explain significant macro outcomes and long-term secular change. They contend that rules, conventions, and customs—which are sometimes arbitrary and artificial—structure human interaction. While this paper focuses on the new economic institutionalism, it should be noted that earlier forms of institutionalism, which go back at least as far as the seventeenth century, are the source of all current institutionalist variations. Consideration of how institutions influence individual behavior and collective action has a distinguished history. This paper continues as follows. It first examines how earlier generations of institutionalists, the classical political economists, provided the scaffolding necessary to address the puzzle of underdevelopment. It explores how the ancestors of the new economic institutionalism imagined new worlds where none had existed before, and outlined foundations for secular authority, liberalism, and capitalism, despite the fact that religiously justified rule, disorder, absolutism, and illiberalism were the only game in town. This paper argues that they fashioned a more primitive, yet visionary, articulation of the question of where development comes from; in doing so, they bestowed on the next generation of institutionalists a fruitful research agenda. It then turns to the new economic institutionalists and explores how they marry the study of economics to the study of politics to generate clear, falsifiable predictions about where order, liberalism, and development come from, and how this equilibrium is sustained. It concludes with a question: How do we make sense of a world in which many of the practical problems first diagnosed by the classical political economists endure, even though knowledge of what institutions contribute to development has become widely available?