Political economy has always shown a keen interest in the role of institutions in the process of economic development. Class, the division of labour (social and technological), the extent of the market, and competition, all feature prominently in classical political economy in general, and Adam Smith in particular. In Marx, class, capital, wage labour, intra- and inter-capitalist competition, are elevated to the utmost importance as central factors in the process of capitalist development and capital accumulation. For the German historical school and the American Institutionalists, institutions in general become the central focus of attention, although they lacked a common and coherent theoretical corpus.
Following the marginalist revolution, however, mainstream economics through its focus on the individual, rational choice and optimisation, has either treated institutions as if individuals (firms, households etc.), or else has totally exorcised them into the exogenously given (non-rational) background to be examined by other social sciences. This theoretical development has led to the gross undervaluation of the role of institutions in economic development. This is most evident in the failure of the Washington Consensus policies which can, to a considerable extent, be attributed to this very inability of neoliberalism and mainstream economics to address the specific institutional context and the historical trajectory of each individual country, and to acknowledge in an explicit way the pivotal role played by some central institutions (e.g. the state) in the process of economic development. Similar considerations apply to the tragic fate of most post-socialist countries especially in the early stages of the transition to the market economy. Again, neither the institutional context nor the historical heritage was taken into account in devising the neoliberal policies followed in most of these countries.
The last few decades have witnessed a revival of interest in the role of institutions in economic development even within mainstream economics. The latter has addressed its deficiency in addressing institutions within its own terms of reference, with the addition of transaction costs, imperfect information, etc, to endogenise institutions. Hence the firm is now seen as the result of individual maximising action in order to reduce transaction costs associated with the market, the emergence of (private) property rights as the result of a rational choice by individuals striving to maximise their welfare etc. Power and conflict are either totally absent in this Panglossian world, or else are treated within an individualistic bargaining game-theoretic context. Coase, North and Williamson have played a founding role in this venture. Attempts have also been made to apply this theoretical framework to both developing countries and transition economies with very faint results.
Institutions by their very (social) nature require interdisciplinarity to be studied. They also involve power and conflict as endemic features. Hence political economy, with its interdisciplinary character and the centrality assumed by the latter concepts and class relations within its theoretical corpus, is best suited to offer fuller theoretical analyses of these social entities and their role in economic development and social welfare.
The IIPPE working group on the political economy of institutions seeks to address the following themes:
Other organisations and websites on the political economy of institutions include:
To apply to join IIPPE Political Economy of Institutions group, email email@example.com.