Institutionalist political economy

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Institutionalist political economy, also known as institutional political economy or IPE, refers to a body of political economy, thought to stem from the works of institutionalists such as Thorstein Veblen [1] , John Commons [2] , Wesley Mitchell and John Dewey. It emphasizes the impact of historical and socio-political factors on the evolution of economic practices, often opposing more rational approaches. [3] In the political sense, this implies the influences actors like the state have on socio-economic practices and the shaping of institutions via political decision-making. [4]

Political economy Study of production, buying, and selling, and their relations with law, custom, and government

Political economy is the study of production and trade and their relations with law, custom and government; and with the distribution of national income and wealth. As a discipline, political economy originated in moral philosophy, in the 18th century, to explore the administration of states' wealth, with "political" signifying the Greek word polity and "economy" signifying the Greek word "okonomie". The earliest works of political economy are usually attributed to the British scholars Adam Smith, Thomas Malthus, and David Ricardo, although they were preceded by the work of the French physiocrats, such as François Quesnay (1694–1774) and Anne-Robert-Jacques Turgot (1727–1781).

Thorstein Veblen American academic

Thorstein Veblen was a Norwegian-American economist and sociologist, who during his lifetime emerged as a well-known critic of capitalism.

John Dewey American philosopher, psychologist, and educational reformer

John Dewey was an American philosopher, psychologist, and educational reformer whose ideas have been influential in education and social reform. He is regarded as one of the most prominent American scholars in the first half of the twentieth century.


Relevant variables for the study of political institutions include the structures that indicate voting rules, the political system, preferences and ideological leanings of leaders. [5]


The institutionalist political economics perspective builds upon core theories from institutional economics and further apply them to the field of contemporary political economy. Wesley Mitchell originally differentiated the institutionalist approach to economics from previous schools of economic thought by emphasizing its focus on the cumulative process of evolutionary change in economics. Contemporary theorists further expand this definition by emphasizing the effects of the historical shift from the classical system of laissez-faire capitalism to contemporary or neoliberal capitalism in the current international economic society, in which various institutions are major actors. [6]

Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the other. Its name and core elements trace back to a 1919 American Economic Review article by Walton H. Hamilton. Institutional economics emphasizes a broader study of institutions and views markets as a result of the complex interaction of these various institutions. The earlier tradition continues today as a leading heterodox approach to economics.

Economics Social science that analyzes the production, distribution, and consumption of goods and services

Economics is the social science that studies the production, distribution, and consumption of goods and services.

Laissez-faire is an economic system in which transactions between private parties are free from any form of government intervention such as regulation, privileges, imperialism, tariffs and subsidies. Proponents of laissez faire argue for a complete separation of government from the economic sector. The phrase laissez-faire is part of a larger French phrase and literally translates to 'let [it/them] do'; however, in this context, the phrase usually means 'let go'.

The institutional basis of the rights-obligations structure classically assumed of the market is also examined. This includes processes deciding how legitimate actors and legitimate objects of exchange are determined. At their core, proponents of this school of thought maintain that economics cannot be divorced from the social and political context since the market itself is an institution, which is to say is politically constructed. In this sense institutionalist political economists place themselves in opposition to neoclassical economists who assert that the market is an autonomous, apolitical domain. They also differ from proponents of the new institutional economics perspective in that institutions are viewed as being able to fundamentally shape the individual rather than as merely placing constraints on the theoretically pre-defined and unchanging individual. [3]

Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory, a theory that has come under considerable question in recent years.

New institutional economics (NIE) is an economic perspective that attempts to extend economics by focusing on the social and legal norms and rules that underlie economic activity and with analysis beyond earlier institutional economics and neoclassical economics. It can be seen as a broadening step to include aspects excluded in neoclassical economics. It rediscovers aspects of classical political economy.


J. R. Commons had discussed how institutions were the result of past choices made on the individual level. These choices then decide the structure in which the institutions operate, and how they enable and constrain market actors. The element of evolution returns by institutions changing in terms of workability, marking his pragmatist influence on the subject. Commons therefore separates himself from other institutionalists by implementing this notion of workability, absent in Veblen. [2] The political implications here mainly effect the way in which political parties interact with private collectives in which parties maximize power and collectives maximize their own organisational efficiencies. Here reasonability is decisive for outcome according to Commons. [2] The political dimension of these institutions lies in the way they exercise control over individual action, along with formal and informal rules and customs. [2]

Pragmatism Philosophical movement

Pragmatism is a philosophical tradition that began in the United States around 1870. Its origins are often attributed to the philosophers Charles Sanders Peirce, William James, and John Dewey. Peirce later described it in his pragmatic maxim: "Consider the practical effects of the objects of your conception. Then, your conception of those effects is the whole of your conception of the object."

An important aspect of actors within institutional approaches is their potential for morally grounded decision making, which marks a difference from rational approaches. [4] Institutionalist approaches often consider situations in which actors act against their predicted most profitable way of action. This is where institutionalists argue that concepts like habit evolution via institutions come in. Institutionalist accounts have been used to criticize neo-liberal accounts, as it is the institutions that influence how certain actions are understood. [3] The assumption that maximizing profits is the main goal behind incentive-making is widely held in many paradigms, including regulation theory and comparative political economy. [4] This distinction between actors is therefore important for identifying institutional approaches.

Institutionalist economics in political case studies

The 'East Asian Tigers', considered to be successful examples of developmental states East Asian Tigers.png
The 'East Asian Tigers', considered to be successful examples of developmental states

Studies of developmental states, countries with recent, fast economic development, have identified common traits that can be classified as institutional. Some of these institutionalist characteristics include elite- and bureaucracy-led intervention and weak civil society, all with the intent of creating institutions that are designed to further bolster economic and human developmental performance. [7] The way states actively participate in the creation of institutions is therefore object of study, and how they might accomplish the structural changes within the institutions that are necessary to bring about economic development, downplaying the role of the free market. [7]

Case studies of states have identified traits belonging to institutionalist theory, such as historical influences on present situations and socio-political contestation over policies. [7] [8] In a study of Latin American countries economic underperformance has been linked to institutional durability, due to established elites clinging onto arrangements detrimental to national resources. [8] In addition, dominance of these elites has been linked to their relative organizational strength, compared to the weak national elites of various Latin American countries. [8]

See also

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Evolutionary economics is part of mainstream economics as well as a heterodox school of economic thought that is inspired by evolutionary biology. Much like mainstream economics, it stresses complex interdependencies, competition, growth, structural change, and resource constraints but differs in the approaches which are used to analyze these phenomena.

Conspicuous consumption Concept in sociology and economy

Conspicuous consumption is the spending of money on and the acquiring of luxury goods and services to publicly display economic power—of the income or of the accumulated wealth of the buyer. To the conspicuous consumer, such a public display of discretionary economic power is a means of either attaining or maintaining a given social status.

<i>The Theory of the Leisure Class</i> book by Thorstein Veblen

The Theory of the Leisure Class: An Economic Study of Institutions (1899), by Thorstein Veblen, is a treatise on economics and a detailed, social critique of conspicuous consumption, as a function of social class and of consumerism, derived from the social stratification of people and the division of labour, which are the social institutions of the feudal period that have continued to the modern era.

New institutionalism or neo-institutionalism is a school of thought focused on developing a sociological view of institutions—the way they interact and how they affect society. It provides a way of viewing institutions outside of the traditional views of economics by explaining why and how institutions emerge in a certain way within a given context. This institutional view argues that institutions have developed to become similar across organizations even though they evolved in different ways, and has studied how institutions shape the behavior of actors. Sociological new institutionalism is distinguished from, though related to, the new institutional economics and new institutionalism in political science.

Wesley Clair Mitchell American statistician

Wesley Clair Mitchell was an American economist known for his empirical work on business cycles and for guiding the National Bureau of Economic Research in its first decades.

Heterodox economics schools of economic thought or methodologies that are outside "mainstream economics", contrasting with or going beyond neoclassical economics

Heterodoxy is a term that may be used in contrast with orthodoxy in schools of economic thought or methodologies, that may be beyond neoclassical economics. Heterodoxy is an umbrella term that can cover various schools of thought or theories. These might for example include institutional, evolutionary, Georgist, Austrian, feminist, social, post-Keynesian, ecological, Marxian, socialist and anarchist economics, among others.

In the study of international relations, neoliberalism refers to a school of thought which believes that states are, or at least should be, concerned first and foremost with absolute gains rather than relative gains to other states. Neoliberalism is a revised version of liberalism.

Geoffrey Hodgson British economist

Geoffrey Martin Hodgson is a Professor in Management at the London campus of Loughborough University, and also the editor-in-chief of the Journal of Institutional Economics.

The Lange model is a neoclassical economic model for a hypothetical socialist economy based on public ownership of the means of production and a trial-and-error approach to determining output targets and achieving economic equilibrium and Pareto efficiency. In this model, the state owns non-labor factors of production, and markets allocate final goods and consumer goods. The Lange model states that if all production is performed by a public body such as the state, and there is a functioning price mechanism, this economy will be Pareto-efficient, like a hypothetical market economy under perfect competition. Unlike models of capitalism, the Lange model is based on direct allocation, by directing enterprise managers to set price equal to marginal cost in order to achieve Pareto efficiency. By contrast, in a capitalist economy managers are instructed to maximize profits for private owners, while competitive pressures are relied on to indirectly lower the price to equal marginal cost.

Historical institutionalism (HI) is a new institutionalist social science method that uses institutions to find sequences of social, political, economic behavior and change across time. It is a comparative approach to the study of all aspects of human organizations and does so by relying heavily on case studies.

Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to heterodox economics, which encompasses various schools or approaches that are only accepted by their proponents, but not by economists in general.

Herbert J. Davenport American economist

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European Association for Evolutionary Political Economy organization

The European Association for Evolutionary Political Economy (EAEPE) is a pluralist forum of social scientists that brings together institutional and evolutionary economists broadly defined. EAEPE members are scholars working on realistic approaches to economic theory and economic policy. With a membership of about 500, EAEPE is now the foremost European association for heterodox economists and the second-largest association for economists in Europe.

Kenneth Herald Parsons (1903–1998) was a Professor of Agricultural economics at the University of Wisconsin–Madison.

Vivien A. Schmidt American academic

Vivien A. Schmidt is an American academic of political science and international relations. At Boston University, she is the Jean Monnet Chair of European Integration Professor of International Relations in the Pardee School of Global Studies, and Professor of Political Science. She is known for her work on political economy, policy analysis, democratic theory, and new institutionalism. She is a 2018 recipient of a Guggenheim Fellowship and has been named a Chevalier in the French Legion of Honor.

Institutional liberalism or liberal institutionalism is a modern theory of international relations which claims that international institutions and organizations such as the United Nations (UN), NATO and the European Union (EU) can increase and aid cooperation between states. It means that states can help each other in a positive way, through institutions such as etc. The theory can be compared to idealism, the international relations theory which emerged after the First World War when the League of Nations was founded. Like political realism, institutional liberalism is utilitarian and rationalistic. States are treated as rational actors operating in an international political system in which hierarchy cannot be enforced.

The Association for Evolutionary Economics (AFEE) is an international organization of economists working in the institutionalist and evolutionary traditions of Thorstein Veblen, John R. Commons and Wesley Mitchell. It is part of the Allied Social Sciences Association (ASSA), a group of approximately 55 organizations including the American Economics Association (AEA), that holds a three-day meeting each January.


  1. D.R. Scott, "Veblen not an Institutional Economist." The American Economic Review. Vol. 23. No.2. June 1933. pp. 274–77.
  2. 1 2 3 4 Rutherford, Malcolm (1983). "J. R. Commons's Institutional Economics". Journal of Economic Issues. 17 (3): 721–744. doi:10.1080/00213624.1983.11504151. JSTOR   4225342.
  3. 1 2 3 Chang, Ha-Joon (2002). "'Breaking the Mould – An Institutionalist Political Economy Alternative to the Neo-Liberal Theory of the Market and the State" (PDF). Cambridge Journal of Economics. 26 (5).
  4. 1 2 3 Campbell, John (2007). "Why Would Corporations Behave in Socially Responsible Ways? An Institutional Theory of Corporate Social Responsibility". Academy of Management Review. 32 (3): 946–967. doi:10.5465/amr.2007.25275684. JSTOR   20159343.
  5. Beck, Thorsten; Clarke, George; Groff, Alberto; Keefer, Philip; Walsh, Patrick (2001). "New Tools in Comparative Political Economy: The Database of Political Institutions". The World Bank Economic Review. 15 (1): 165–176. doi:10.1093/wber/15.1.165. JSTOR   3990075.
  6. Elliot, John (March 1978). "Institutionalism as an Approach to Political Economy". Journal of Economic Issues. XII (1): 91–114. doi:10.1080/00213624.1978.11503506. JSTOR   4224666.
  7. 1 2 3 4 Swilling, Mark; Musango, Josephine; Wakeford, Jeremy (2016). "Developmental States and Sustainability Transitions: Prospects of a Just Transition in South Africa". Environmental Policy & Planning. 18 (5): 650–672. doi:10.1080/1523908x.2015.1107716.
  8. 1 2 3 Cypher, James (2018). "Interpreting Contemporary Latin America through the Hypotheses of Institutional Political Economy". Journal of Economic Issues. 52 (4): 947–986. doi:10.1080/00213624.2018.1527580.