According to common perception among economists, the idea of institutional economics
started with Ronald Coarse's article, "The Nature of the Firm" (1937) where the concepts of
transaction costs and economic analysis were first introduced (Coarse, 1998, p. 71). Since then,
the field of New Institutional Economics (NIE) has come a long way and attracted more and
more prominent economists such as Oliver Williamson, Douglas North, Harold Demsetz, and
Steven Cheung as well an extensive array of representatives of various other social sciences such
as law, political science, sociology and anthropology. The need for a "new" way of thinking
about economics is what Oliver Williamson expressed by coining the phrase "new institutional
economics" in an attempt to distinguish the subject from "old institutional economics". The latter,
as Coarse states was "anti-theoretical" and without a theoretical background to explain facts, the
economists belonging to the "old" school of institutional economics were unable to bring the field
to the forefront of economic analysis (1998, p. 72). Hence, important conclusions about the role
of institutions, their origins, development and functioning, were slow to enter mainstream
economics, which according to the proponents of NIE, has a general disregard for the working of
real economies but rather focuses on the hypothetical situations (Coarse, 1998, p. 72).
[...] The NIE provided economists with the much needed new ways of looking at development by allowing them to combine theory with institutions, an aspect previous institutional economic approches had lacked (Nabli and Nurgent p. 1336). Thus, the major areas of potential for NIE can be defined as being able to successfully explain the importance of cultural, ethnic, family and vertically interrelated groups' activities by critically analysing the transaction costs involved in those activites and the extent to which the government plays an active role versus a mediating one. [...]
[...] In order to understand the implications of institutions for economic development and their overall role in the general scheme of things, Oliver Williamson proposes the sketching of four levels of social analysis: Embeddedness Institutional environment Governance Resource allocation and employment (L4). See table below. Table is reproduced from Williamson: The New Institutional Economics p L1 is the level at which social embeddedness occurs and social phenomena such as traditions, customs, and religion develop. According to the Handbook of Economic Sociology, the different levels of embeddedness can be divided into: cognitive, cultural, structural and political (1994, p. [...]
[...] Hence, in the spirit of New Growth Theory, “under this view, if when one marshals but does not innovate and learn, development does not follow” (Nelson and Pack p. 434). Works Cited: Bardhan, Pranab. "The New Institutional Eonomics and Development Theory: A Brief Critical Assessment." World Development 17(1989): 1389-1395. Coarse, Ronald. "The New Institutional Economics." The American Economic Review 88(1998): Cortright, Joseph. "New Growth Theory, Technology and Learning: A Practitioner." Reviews of Economic Development and Practice 4(2001): Furubotn, E.G. and Richter, R. “Editorial Preface”, in: [...]
[...] It had then become clear that the development rate at which the Eastern European countries were progressing was not all equal across their institutional environments as experessed here: "Setbacks in economic stabilization in 1996 and 1997 can often be traced to delays and inconsistencies in enterprise and institutional reform" (Stern 1998, p. 5). The process of privatization in particular was not executed in a manner encouraging economic growth, but rather was characterized by the too common to many governments practices of corruption, nepotism and lack of institutional transparency. [...]
[...] Table reproduced from Michael Woolck and Deepa Narayan, “Social Capital Implications for Development Theory, Research, and Policy” p To conclude, the social capital theory of development proposes to bridge sociological and economic perspectives in tackling issues such as poverty and inequality “where poor communities have direct input into the design, implementation, management and evaluation of projects, returns on investments and the sustainability of the project are anhanced” (in Woolcok and Narayan p. 237). II. Case Study: El Salvador Social capital theory's promising success could be best measured in a region where the struggle to develop economically has undergone many stages and has been characterized by big successes and horrible failures Latin America. [...]
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