||An umbrella term describing a set of interrelated theoretical approaches that emphasize the centrality of social, cultural, and political institutions, and their interaction, in the constitution and maintenance of the economy. Typically inclined towards a form of political economy, the new institutional economics is a third way lying between, on the one hand, the more politically driven and theoretically closed Marxian economics, and, on the other, the more abstract and formal neo-classical economics with its often uncritical belief in the beneficence of the market.
Institutional economics originally arose with the work of the American maverick economist Thorstein Veblen (1857-1929). Reacting against both the increasing dominance of an imported European neo-classical economic theory, with its celebration of homo economicus (parodied by Veblen, 1919, p. 73, as a \'homogeneous globule of desire\'), and a domestic industrial system that spawned massive inequalities in levels of wealth and consumption, Veblen constructed a made-in-America theory of his own time and place, institutional economics. But theory travels. The cultural-historical sensibility Veblen brought to the analysis of economic life, along with his specific emphasis on the close relationship between behaviour and evolving institutions (defined as \'settled habits of thought\'; Veblen, 1919, p. 239), subsequently shaped the character of four contemporary new institutionalist approaches, each of which have influenced economic geographers to different degrees.
The most direct legacy of Veblen\'s work is found in Hodgson\'s (1988) and Mirowski\'s (1989) methodological criticisms of neo-classical economics, and especially of that school\'s representation of markets and value. They argue that neither markets nor value are spectral phenomena, the result of respectively an \'invisible hand\' or abstract \'n-dimensional consumer preference maps\', but they are a direct consequence of human institutions and their instantiated power. In addition, contemporary institutional economics remains vigorously empirical, examples of which are found in the school\'s flagship journal, Journal of Economic Issues. In geography, Martin (1994) discusses the applicability of Veblen\'s work, and Barnes (1997) Hodgson\'s and Mirowski\'s.
Evolutionary economics stems from Veblen\'s use of Darwinian theory; indeed, he labelled his work \'post-Darwinian economics\'. Drawing upon the Darwinian triad of individual variation, inheritance of characteristics, and natural selection, Nelson and Winter (1982) developed an influential evolutionary theory of the firm centring on technological choice. This work was subsequently refined by a number of writers who have emphasized the \'lock-in\' characteristic of such choice, and resulting \'path dependency\' (Arthur, 1989). In economic geography, Rigby and Essletzbichler (1996) draw directly on evolutionary economics in their discussion of technical change in the US, and Storper (1997) discusses and elaborates the ideas of technological \'lock-in\' and \'path dependency\' in a \'regional world\'.
Socio-economics or the new economic sociology is linked to Veblen\'s work by its emphasis on the social (and cultural) embeddedness of the economy. Initiated by Granovetter\'s (1985) now classic paper, socio-economics contends that all economic action is social action and socially situated, and that therefore all economic institutions are social institutions. Amin and Thrift (1995) provide geographical case studies.
A final approach, and different from the previous three, but the one for which the label \'the new institutional economics\' was originally coined, is Williamson\'s work on Markets and hierarchies (1975). Williamson\'s argument is that firms which operate in imperfect markets, a result of inherent uncertainty and bounded rationality (see satisficing behaviour), strive to minimize transaction costs by institutionally internalizing them through such strategies as establishing interior governance structures and hierarchies. In turn, according to Williamson, such strategies become the driving force behind the rise of large vertically integrated firms, the dominant form of business organization in the post-war period (cf. integration). On institutional structure Williamson\'s work is more subtle than conventional economic theory, which reduces it simply to the sum of individual decision-makers (methodological individualism). But there is still a strong sense in his work that governance structures and hierarchies are arrived at by rational choice, a supposition that would have been anathema to Veblen. In economic geography, the most well-known exponent of Williamson\'s work is Scott (1988) who makes it foundational for his \'post-Weberian\' location theory.Â (TJB)
References Amin, A. and Thrift, N.J. 1995: Institutional issues for European regions: from markets and plans to socioeconomics and powers of association. Economy and Society 24: 41-66.Â Arthur, W.B. 1989: Competing technologies, increasing returns, and lock-in by historical events. Economic Journal 99: 116-31.Â Barnes, T.J. 1997: Theories of accumulation and regulation: bringing life back into economic geography. In R. Lee and J. Wills, eds, Geographies of economies. London: Arnold, 231-48.Â Granovetter, M.S. 1985: Economic action and social structure: the problem of embeddedness. American Journal of Sociology 91: 481-510.Â Hodgson, G. 1988: Economics and institutions: a manifesto for a modern institutional economics. Cambridge: Polity.Â Martin, R.L. 1994: Economic theory and economic geography. In D. Gregory, R. Martin, and G. Smith, eds, Human geography: society, space and social science. London: Macmillan, 21-53.Â Mirowski, P. 1989: More heat than light. Economics as social physics, physics as nature\'s economics. Cambridge: Cambridge University Press.Â Nelson, R.R., and Winter, S.G. 1982: An evolutionary theory of economic change. Cambridge, MA: Harvard University Press.Â Rigby, D.L., and Essletzbichler, J. 1996: Evolution, process variety and regional trajectories of technological change in US manufacturing. Economic Geography 73: 269-84.Â Scott, A.J. 1988: Metropolis: From division of labor to urban form. Berkeley, CA: University of California Press.Â Storper, M. 1997: The regional world: territorial development in a global economy. New York: Guilford.Â Veblen, T. 1919: The place of science in modern civilization and other essays. New York: B.W. Huebsch.Â Williamson, O. 1975: Markets and hierarchies. New York: Free Press.
Suggested Reading Amin and Thrift (1995).Â Barnes (1997).