Institutional Economics into the Twenty-First Century*

This essay considers the nature and evolution of both the old and the new institutional economics and considers the possibility of dialogue or even con-vergence between these schools. It also considers shifts of thinking inside and outside mainstream economics that have altered the conception of the eco-nomic agent, even within mainstream theory. In particular, the stipulation of endogenous preferences, once a hallmark of the old institutionalism, is gain-ing legitimacy within mainstream economics. In this context, the new institu-tional economics is evolving in a direction that makes productive dialogue between the two institutionalist traditions more possible. (J.E.L.: B15, B25, B52) 1. We Are All Institutionalists Now Across the social sciences, there has been a revived interest in institutions and in various institutionalist approaches to theory1. A prominent sociologi-cal journal has noted “the current institutional turn across the social sciences” (Clemens and Cook 1999: 443-4) and similar references to an “institutional turn ” are found in economic geography (Amin 1999), political science (Jupille and Caporaso 1999) and elsewhere. Economists have been at the forefront of these developments. One of the most striking events has been the emergence of the “new institutional eco-nomics ” in the last quarter of the twentieth century. Explanations of economic growth and development used to focus on inputs, production functions and outputs, often neglecting the institutional structures that constrain or empower individuals, and frame their incentives and disincentives. The predominant mental model of economic activity, in both microeconomics and macroeconomics, was of factors of production – primarily capital and labour – as inputs into some mysterious production process, leading to flows of outputs. Accordingly, for a long time the fir