New Institutional Economics, often abbreviated to NIE, is a type of economic perspective. The aim of NIE is to focus on the institutions that underlie economic activity in an attempt to extend economics, looking at the legal and social norms that underpin all forms of economic activity.
It includes aspects of neoclassical economics, institutional economics and classical political economy, but with a broader analysis. A definition of neoclassical economics can be found in the short video attachment to this post.
Domen Zavrl works in the finance industry and has an interest in economic theory, including NIE. A theory of institutions – including norms and customs as well as laws and rules – is incorporated into economics within New Institutional Economics. This movement unites empirical research and theoretical research to examine how institutions help or hinder economic growth.
The roots of modern NIE lie with Robert Coase and two articles he wrote, one in 1937 and the other in 1960. Robert Coase was an author and economist from Britain who lived between 1910 and 2013. You can learn more about the life of Robert Coase in the embedded PDF.
These two articles, titled ‘The Nature of the Firm’ and ‘The Problem of Societal Cost’, form the basis for what today is known as New Institutional Economics. The second article introduces what has subsequently become known as the Coase theorem. This theorem maintains that conflicts and externalities can be equivalently internalised within alternative property right assignments when there are no transaction costs.
This theorem can be used to describe how economically efficient an economic outcome or allocation can be when externalities are present.
A complex set of criteria and methodological principles underpin modern analyses using NIE. The framework has been modified from neoclassical theory as is considers both distribution issues and efficiency. This contrasts with institutional economics, which does not incorporate neoclassical economics.
Oliver Williamson was the first to coin the term ‘New Institutional Economics’ in 1975. There are many aspects to current NIE analyses. These include, but are not limited to: organisational arrangements, transaction costs, property rights, social norms, modes of governance, ideological values, social capital, human assets, credible commitments, contractual safeguards, bargaining strength, hierarchical structures, opportunism, strategic behaviour, and incentives to collude.
Institutions and Organisations
The American economist Douglass North, who won the Nobel Memorial Prize in Economic Sciences in 1993, defines the difference between an institution and an organisation in terms of economic analysis.
North states that the term ‘institution’ refers to the rules, which include informal social norms as well as formal legal regulations, which structure social interactions and govern the behaviour of the individual. These interactions can also be referred to as institutional frameworks.
Organisations, on the other hand, are defined as groups of people that have created governance arrangements so they can co-ordinate their own actions as a team, comparing those to the actions of other organisations or teams. Organisations increase their chance of survival by taking those actions that are best designed to help them meet their goals and objectives.
Analysing Government Regulation
One of the key areas in which Coase theorem is most often used in as part of any analysis of government regulation. Most modern analyses in this area will draw on Coase theorem as a way to help resolve legal disputes by legal scholars and jurists, especially in cases where there are externalities to consider.
Coase argues that comparing alternative institutional arrangements is always essential to properly evaluate efficiency and determine which arrangement would come closest to what he calls the ‘unattainable ideal’ of zero transaction costs.
The infographic attachment looks at some other popular economic theories.