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POLITICAL ECONOMY vs. INSTITUTIONAL ECONOMICS

This is my translation of a publication by Russian economist Vladislav I. Loskutov. The post deals with political economy and institutional economics, their difference and compatibility.

As is well-known, institutionalists focus their research on economic institutions, their origin, their evolution, and their role in determining economic behavior of individuals and social groups, as well as governmental policies.

The term “institute”, which gave the name to this school, is defined quite broadly. It includes public organizations, customs, patterns of behavior in social groups, mental stereotypes, and public consciousness. Peculiarities typical of specific institutional systems manifest themselves in economic behavior of social groups as well as interactions in the process of production, distribution, exchange and consumption. Institutionalists rightfully think that, as societies develop, institutions develop with them.

As T. Veblen, the founder of institutionalism, legitimately claims that there is a considerable gap between the marginalist theory and the economic reality. While the theory focuses on harmony and economic equilibrium, the reality sees constant evolution often implemented in the form of a fierce fight for survival. The model of homo economicus – a person constantly comparing utility of various goods with their acquisition costs – is outdated beyond any hope. In fact, human economic behavior depends on many factors and is internally contradictory. It is affected by traditions, patterns of behavior as well as strife for prestige. Thus, scientific economic analysis must consider various forms of “institutes” (norms solidified by traditions) and “institutions” (patterns enforced by law and various establishments). “Institutions” include state, family, moral and legal norms, etc. The main economic institution of the 20-century capitalism, according to Т. Veblen, was a large industrial corporation.

Modern institutionalists see institutions as “rules of the game” – political social and legal norms that create institutional (or normative) conditions for economic activity. Douglass North decidedly separates “institutes” from “organizations”. Institutes are constructions created by human consciousness and designed to regulate human interactions. They create a system of motives and stimuli for interactions in all spheres of human activity.

Organizations, according to D. North, are something different. They also regulate people’s interactions, but these are far away from being “rules of the game” – they are players themselves with their own strategies.

In the process of development, institutionalism has moved very close to classical political economy. Thus, having turned to Karl Marx’s ideas, R. Heilbroner used to emphasize that he relied on concepts from the Marxist theory. He expressed regret at the fact that “most educated Americans as well as most scientists, sociologists and economists are familiar with neither the language nor the basic premises of Marx’s works” [33, page 198].

“The recognition of the influence of environment on individual thinking brings Nort’s position very close to (and even equates it with) the “old” institutionalists”, affirms Hodgson [90, page 11]. But this also brings his position close to that of classical Marxism.

D. North thinks that the key to understanding historical development is institutional changes. Based on that realization, he poses a problem of “developing the authentic science of political economy” [78, page 221], which could help the society to establish property rights (which determine the structure of stimuli for an economic system), and control their enforcement.

The substantiation of the leading role of institutions in determining behavior of individuals and social groups is the most important achievement of institutionalism. But it fails to explain reasons for their emergence and durability. It is obvious, however, that neither people’s desire nor their arbitrary will are enough to bring institutions about. Only the classical Marxist political economy provides that explanation.

Economic institutions, as they are defined by institutionalists, are economic social relations deliberately embraced by people and maintained for a considerably long time. By implication, they are close to “economic relations”, an important concept of political economy, but with the only difference that institutions are products of human consciousness, while economic relations are factors, which are not only unaffected by human will and consciousness, but are also a predeterminant of any deliberate activity.
This does not imply that people engage in economic relations unconsciously. This implies that people under the influence of circumstances create institutions that meet their needs without any information as to what those institutions should be like, thus acting at random, intuitively, gradually, step by step, by trial and error.

“Any order is a relation”, said Aristotle [7, page 224]. Economic relations are an important part of scientific knowledge about the society because in their entirety they represent nothing else but a public order, with which people must coordinate their behavior. In practice, economic relations are developed based on the common rules for creating order in unconscious nature, i.e. by means of accidental collisions of multidirectional particles. Friedrich Engels has described this process as follows: «In history, collisions of innumerable intentions and actions cause a condition identical to that of unconscious nature. While actions have a known and desired objective, results, in fact ensuing from these actions, are not at all desired. At first results do obviously match desired objectives, but they may not all be desired. Thus, we see by and large that chance determines historical phenomena as well”.

The function of consciousness in this world of chances conditioned by an incalculable combination of multitudes of objective factors and collisions of multidirectional forces is to grasp objective laws, which stand behind the visible chaos since each time “a game chance is visible on the surface, the chance itself turns out to be subject to hidden internal laws. The point is to discover those laws.” [98, page 306].

Therefore, the ultimate objective of economic sciences is to perceive objective economic laws as profoundly and minutely as possible thus providing the societal practice with opportunities for bringing about economic institutions with the least amount of trials and errors along the way.

Vladislav I. Loskutov
Translated by Boris Anisimov

The Russian version can be found at http://www.loskutov.org/FET/chapt_1.htm.

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