In a first of a three-part series, I will write something about the about who I consider the three major founders of the new institutional economics--the Triumvirs if you will. You see, I think of myself as a new institutional economist, and what better to revitalize this blog than by gracing it first with the main teachings of the Triumvirs and how they introduced this dynamic field. First off--Ronald Coase.
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Coase attributes the term "new institutional economics" to Oliver Williamson (another Triumvir). The term was intended to differentiate the relatively new field with another already existing economic field: the (old) institutional economics.
The economists from the old school were also, of course, men of great intellect. Coase pointed out, however, that the major weakness of the old school is that it does not have theoretical foundations that bind together the facts collected by the old school. The new school does, and the following is what Coase considers to be the basic theoretical framework within which the new school uses economic tools to study all the economic systems.
1. The welfare of the human society depends on the flow of goods and services.
2. The flow of goods and services depends on the productivity of the economic system.
3. Adam Smith also figures importantly in the new school. He explains that the productivity of the economic system depends on the division of labor (specialization).
4. Specialization is only possible if there is exchange.
5. The lower the cost of exchange, the more specialization there will be. This will also lead to greater productivity of the system.6. Finally, the cost of exchange depends on the institutions of a country. The institutions are either the legal system, the political system, the social system, the educational system, culture, etc.
So Coase stated it so clearly and precise:
"In effect, it is the institutions that govern the performance of an economy."
Of course, when we talk about performance of an economy, economic development is not far behind. The next Triumvir that I will discuss is Douglass North, and he has some excellent take on the new institutional economics and economic development.
Source:
Ronald Coase. 1998. "The new institutional economics."