What's Wrong with Economics? by Robert Skidelsky

Author:Robert Skidelsky
Language: eng
Format: epub
ISBN: 9780300249873
Publisher: Yale University Press

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INSTITUTIONAL ECONOMICS

The nature of the firm is not simply a minimizer of transaction costs, but a kind of protective enclave from the potentially volatile and sometimes destructive, ravaging speculation of a competitive market.

Geoffrey Hodgson, Economics and Institutions

Anglo-American thinkers of the Enlightenment had an intense suspicion of institutions, which they saw as impediments to the flowering of individual liberty. The economists shared this attitude and perpetuated it. They have been wont to explain the frequent lapses from full employment by the existence of institutional impediments to fully competitive markets. But this begs the question of why institutions exist. Could it not be that many of them exist to protect society against the market, as Polanyi suggested? This raises another question. What is the advantage of theorising as though institutions are absent? The only advantage would seem be to set up a standard to which institutions should conform. But to posit, for example, that wages are flexible, when in fact they are ‘sticky’, and that therefore unemployment is at best a fleeting disturbance, builds a false theoretical prospectus.

Institutionalism is economics’ nod to sociology. It took root in the first decades of the twentieth century when a society which could have been plausibly understood as one of small firms, individual contracts, and small states had morphed into one dominated by big businesses and trade unions, with a parallel growth in the size of the state and the scope of regulation. Institutional economics started out as an attempt to analyse the influence of big organisations on individual behaviour; it has subsided in a vigorous reaffirmation of market logic against institutional logic.

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