The Approach of Institutional Economics (March 1998)

T THE TERM “new institutional economics” is in widespread use and is associated with a vast literature. Clearly, the temporal adjective in the adopted title of this broad set of postwar theories and approaches has been intended to demarcate the “new institutional economics” from the “old” institutional economics of Thorstein Veblen, John Commons, and Wesley Mitchell. This earlier institutionalism had actually been dominant in economics departments in American universities just after the First World War.1 Despite this, little detailed reference has been made by leading exponents of the “new” institutional economics to this predecessor. Two factors may help to explain this oversight. The first is that the history of economic thought is currently a much neglected subdiscipline, and there is now widespread unfamiliarity with the “old” American institutionalism, despite its favored geographic location and accessible language. The second reason is that since its decline in America after 1930 the “old” institutionalism has been repeatedly written off, and is dismissed for failing to provide a systematic and viable approach to economic theory. It is also widely—and wrongly—believed that institutionalism was essentially anti-theoretical and descriptive. However, characterizations of the “old” institutionalism as purely descriptive or anti-theoretical do not bear up to close scrutiny. Particularly in the writings of Veblen and Commons, there is a strong emphasis on the importance and priority of the tasks of theoretical explanation and theoretical development. Whatever their limitations, the early institutionalists addressed crucial theoretical issues. For example, Veblen (1899, 1919) was the first social scientist to attempt to develop a theory of economic and institutional evolution along essentially 1 Throughout this article, the terms “institutionalism” and “institutional economics,” when without a temporal adjective, will be taken to refer to the institutionalism in the tradition of Veblen, Commons, and Mitchell.