What is Institutional Economics?

Institutional economics is a discipline of economic theory that studies the developmental and evolutionary underpinnings of a culture's economic systems and behavior over a significant span of time. Institutional economics should not be confused with macroeconomics, which is the study of large, nation-level economic systems, though the two disciplines overlap in both theory and in practice. Institutional economics investigates how and why groups of people have developed particular economic systems, and the interrelationship between the development of the economy and the development of the culture in a particular case.

Institutional economics first appeared as a formal school of theory at the apogee of the Industrial Revolution, and many of the theories and tenets of the discipline's original scholarship were pivotal to the development of Western economics following the First World War. This, however, was the high water mark for the influence of the discipline. The Great Depression — and later World War II — created a shift in accepted economic practice that resulted in institutional economics being supplanted by Keynesianism and monetarism. It was not until the rise of interdisciplinary collaborations between psychology, cognitive sciences and economics that institutional economics would once again find academic favor.

Most mainstream economic disciplines center around the study of empirical data, believing that all relevant influences to economic movement will be found therein. Institutional economics is an axiomatic school of economy theory that takes into account the behavioral mechanisms at play in cultures and societies all over the globe. Institutional economics relies much more on non-empirical elements rather than on data concerning narrow market trends or currency rates. It focuses on the influences behind the mechanical movements of a given economic system. In this way, institutionalism relies more on logic and axioms rather than numbers and data sets, allowing a broad range of theories to be derived from its study.

Such economic thought is not considered overly useful with the oscillations of the world's markets, or for predicting the health of a particular market in the next quarter or in the next fiscal year. Rather, institutional economics is primarily useful for detailing how and why social and civic forces shape economics while simultaneously exploring how economic forces shape society. The interplay between the two is what primarily distinguishes institutionalism from orthodox schools of economic thought.