BridgeFrom 1899

Institutional economics

How do rules, norms and organisations shape what economies achieve?

The 30-second version

The rules of the game matter as much as the players. Property rights, courts, norms and organisations explain why some countries prosper and why firms exist at all. Once a critique of mainstream economics, it now wins Nobels, most recently in 2024.

Big questions it works on

Go deeperKey ideas, thinkers, evidence and where it stands today

Key ideas

Old institutionalism: habits, power and status drive behaviour (Veblen's “conspicuous consumption”, 1899).
Firms exist because using markets has transaction costs (Coase, 1937).
Institutions are “the rules of the game” (North).
Communities can manage shared resources without a state or a market (Ostrom).

Key thinkers

Thorstein Veblen, John R. Commons; Ronald Coase (Nobel 1991), Douglass North (1993), Elinor Ostrom and Oliver Williamson (2009); Daron Acemoglu, Simon Johnson and James Robinson (2024)

What it got right

Institutions explain a lot of why countries differ. The theory of the firm underpins courses on business strategy and organisation.

Main criticisms

“Institutions” can be stretched to explain anything, and are hard to measure. Causal claims are disputed: Albouy (2012) challenged the settler-mortality data behind Acemoglu, Johnson and Robinson's famous paper. Rival explanations stress geography or culture.

Evidence worth knowing

Acemoglu, Johnson and Robinson won the 2024 Nobel for showing how inclusive versus extractive institutions shape prosperity.

Where it stands today

The new institutional branch is fully mainstream.

Family line

Old school reacting against neoclassical abstraction. The new school uses neoclassical tools on institutional questions.

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