Before you read on: Nogales is split by the US-Mexico border, and its Arizona side is richer than its Sonora side. What explanation does the 2024 Nobel committee give?
The Nobel committee, describing the work of Daron Acemoglu, Simon Johnson and James Robinson, notes that climate and culture are much the same on both sides. What differs is the institutions each side inherited, such as secure property rights and free elections.
- When it emerged
- US, around 1900, at its height in the 1920s and 1930s; a new branch from the 1970s
- Old institutionalists
- Thorstein Veblen, John R. Commons and Wesley C. Mitchell
- New institutionalists
- Ronald Coase, Oliver Williamson, Douglass North; later Acemoglu, Johnson and Robinson
- Key works
- Veblen, The Theory of the Leisure Class (1899); Coase, "The Nature of the Firm" (1937); North, Institutions, Institutional Change and Economic Performance (1990)
- Nobel prizes
- Coase 1991; North 1993 (with Robert Fogel); Williamson 2009 (with Elinor Ostrom); Acemoglu, Johnson and Robinson 2024
- A link to the mainstream
- Veblen also gave neoclassical economics its name
What it was reacting to
Veblen saw the economics of his day as static. It pictured people as independent calculators, while he held that customs and institutions keep shaping what people want and do. The old institutionalists saw economic laws as products of a time and place.
From the 1970s the new institutionalists kept the standard tools of economics and turned them on institutions themselves. Coase had argued in 1937 that using a market has costs of its own. Williamson and North asked how those costs shape firms, contracts and whole economies.
The key ideas
Can you name the four key ideas of institutional economics?
Veblen's term, from 1899, for spending meant to show others your wealth or rank.
Can you think of an example?
A buyer pays far more for a watch with a famous name, though a cheap one keeps time as well.
The costs of using a market, such as searching for a partner, bargaining and enforcing a deal. Williamson added that firms tend to make for themselves specialised inputs of little use to anyone else, because a sole outside supplier could otherwise hold them to ransom.
Can you think of an example?
A drinks company needs bottles in its own patented shape. It moulds them in-house, since an outside maker that had built the moulds could then push up its price.
North's phrase for the rules that shape incentives in a society: formal laws and property rights, informal norms, and how well both are enforced.
Can you think of an example?
A farmer with secure title to her land has more reason to plant slow-growing fruit trees than one who could be evicted.
Acemoglu, Johnson and Robinson's labels. Inclusive institutions protect property rights and the rule of law for most people; extractive ones serve a narrow elite.
Can you think of an example?
Colonisers who found dense populations to exploit set up extractive systems; where they settled in numbers, they built more inclusive ones.