Accoding to Oliver E. Williamson, the new institutional economics turned on two propositions: "institutions do matter," and "the determinants of institutions are susceptible to analysis by the tools of economic theory."
One very important contribution brought by Williamson is the use of the four levels of social analysis relevant in the study of institutions:
The top level is the social embededness level. This is where the norms, customs, traditions, etc. are located. Religion plays a large role at this level. Level 1 is taken as given by most institutional economists. Institutions at this level change very slowly--on the order of centuries or millenia. The concept of "embededness," both at the level of society and in the context of ongoing network relations, has been advanced to help explicate one major issue: "What is it about informal constraints that gives them such a pervasive influence upon the long-run character of economies?" Now, different kinds of embeddedness should be distinguished--cognitive, cultural, structural, and political. Still, the concept of embededness remains in need of greater theoretical specification. An identification and explication of the mechanisms through which informal institutions arise and are maintained would especially help to understand the slow change in Level 1 institutions. Informal institutions have mainly spontaneous origins--which is to say that deliberative choice of calculative kind is minimally implicated. Given these evolutionary origins, they are "adopted" and thereafter display a great deal of inertia: some because they are functional (as with conventions); others take on symbolic value with a coteric of true beleivers; and many are pervasively linked with complementary institutions (both formal and informal). Be that as it may, the resulting instituions have a lasting grip on the way a society conducts itself. One thing to remember, though: insular societies often take measures to protect themselves against "alien values."
The second level is referred to as the institutional environment. The structures observed here are partly the product of evolutionary processes but design opportunities are also posed. Going beyond the "informal constraints" (sanctions, taboos, customs, traditions, and codes of conduct) of a Level 1 kind, we now introduce "formal rules" (constitutions, laws, property rights, etc.). This opens up the opportunity for first-order economizing: get the formal rules of the game right. Constrained by the shadow of the past (influenced by Level 1 factors), the design instruments at Level 2 include the executive, legislative, judicial, and bureaucratic functions of government, as well as the distribution of powers across different levels of government (federalism). The definition and enforcement of property rights and of contract laws are important features. Although such first-order choices are unarguably important to the economic productivity of an economy, [cumulative] change of a progressive kind is very difficult to orchestrate. Massive discontent--civil wars, foregin occupations, perceived threats, breakdowns, military coup, or financial crisis--will, occasionally, produce a sharp break from established procedures. Rare windows of opportunity to effect broad reform are thereby opened. Such "defining moments" are nevertheless the exception rather than the rule. At least partly because of our primitive understanding, the response to such opportunities is often one of "failure."
The third level is where the institutions of governance are located. Although property remains important, a perfectly functioning legal system for defining contract laws and enforcing contracts is not contemplated. Since it is costly t o settle disputes in court, much of the contract management and dispute settlement action is dealt with directly by the parties--through private ordering. The need to come to terms with contract laws (plural) rather than an all-purpose law of contracts (singular) is posed. The governance of contractual relations becomes the focus of analysis. So conceived, a governance structure obviously reshapes incentives. Any issue that arises as or can be reformulated as a contracting issue can be examined to advantage in transaction cost economizing terms. A huge number of phenomena turn out to be contractual variations on a common theme. This second-order economizing--get the governance structures right--is realized at Level 3. The possible reorganization of transactions among governance structures is re-examined periodically on the order of a year to a decade, often at contract renewal or equipment renewal intervals.
The fourth and final level is that which neoclassical analysis works. Optimal apparatus, often marginal analysis, is employed, and the firm for these purposes is typically described as a production function. Adjustments to prices and output occur more or less continuously. Agency theory, which emphasizes ex ante incentive alignment and efficient risk bearing rather than ex post governance, nonetheless makes provision for non-neoclassical complications. One area that needs to be developed, though, as compared with technological innovation, the study of organizational innovation has been comparatively neglected. New institutional economics has attempted to rectify this: the idea being that "truly among man's innovations, the use of organization to accomplish his ends is among both his greatest and his earliest."
Source:
Oliver E. Williamson. 2000. "The new institutional economics: Taking stock, looking ahead."