The New Institutional Economics

Author(s): Ronald H. Coase

Source: Zeitschrift fr die gesamte Staatswissenschaft / Journal of Institutional and
Theoretical Economics, Bd. 140, H. 1., The New Institutional Economics: A Symposium (Mrz
1984), pp. 229-231
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 Zeitschrift
frdiegesamteStaatswissenschaft
(ZgS) 140(1984),229-231
JournalofInstitutional
and Theoretical
Economics

The NewInstitutional
Economics
by
Ronald H. Coase

The term"The New Institutional Economics"was takenby RudolfRichter

fromOliverWilliamson.It describesverywell the subjectsdiscussedat this
seminar.I thoughtit would be appropriatein theseremarksmade at the
end of a verysuccessfulseminarto indicatesome of the importantfeatures
of the New Institutional Economics,as I see them.At firstsightthismight
appear to be a difficult
task havingregardto thestriking divergences in the
of
approach many of thepapers.But thisis to a largeextenta surfaceimpres-
sion.In manyimportant theirunderlying
respects, positionexhibitsconsidera-
ble harmony.
We shouldfirstnotethatalmostall papersshowa greatdeal of dissatisfac-
tionwithwhatmosteconomistshave been doing.Alchianwithconsiderable
restraint limitedhimselfto eightfailuresof presentday economists.Other
participantsadded to the list. However,nothingis perfectand we should
not abandon an old theoryin favorof a new one merelybecause the old
has defectsbut becausewe believethenewto be better.If we think,as many
participants at thisseminarundoubtedly do, thattheNew Institutional Eco-
nomicsshould replacethe existingapproach of economists,it is necessary
to specifyin whatwaysit is preferable.
Hutchisonpresenteda paper on "Institutionalist Economics: Old and
New". When I firstsaw the titleof Hutchison'spaper, I thoughtthat he
would comparethe approach of Adam Smithand JohnStuartMill, both
of whomweremuchconcernedwitheconomicinstitutions, and thatadopted
by thosemodern economists whose work constitutes the Modern Institutional
Economics,manyof whomcontributed to thisseminar.But Hutchisondid
notdo this.Insteadhe tookwhatmustbe concededto be an eminently reason-
able course,giventhetitleof his paper,and he discussedwhatcame between
Adam Smith,and Mill and the moderns:theAmericaninstitutionalists, the
GermanHistoricalSchool and theircritics.I knowlittleabout the German
HistoricalSchoolbutI gatherfromHutchisonthattheirpositionwas essential-
lythesameas thatoftheAmericaninstitutionalists. Americaninstitutionalism
is a drearysubjectand I don'tintendto dwellon iteventhoughtheinstitution-
alistspersonallywere anythingbut drearypeople. Stiglerin a recentissue
of theJournalofLaw and Economicssaid thatAmericaninstituionalism failed
becauseit had no positivedoctrines.All it had was a stanceof hostility to

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230 RonaldH. Coase ZgS

thestandardeconomictheory.It certainly led to nothing. Gfgenin thediscus-

sion suggestedthat the modernsuccessorto the Americaninstitutionalists
was Galbraithand perhapsthisis comment enough.The Americaninstitution-
alistswerenottheoretical butanti-theoretical, particularlywhereclassicaleco-
nomic theorywas concerned.Withouta theorytheyhad nothingto pass
on excepta mass of descriptive materialwaitingfora theory,or a fire.So
if themoderninstitutional economistshave antecedents, it is not whatwent
immediately before.
I have said thatthosemoderneconomistsclassifiedas institutionalists ex-
pressconsiderable dissatisfactionwithwhatmosteconomistshavebeendoing,
but,by and large,thisdissatisfaction is not withthe basic economictheory
itselfbut withhow it is used. The objectionessentiallyis that the theory
floatsin theair. It is as if one studiedthecirculationof the blood without
havinga body. Firmshave no substance.Marketsexistwithoutlaws and
therefore withoutany clear specification of whatis boughtand sold. What
distinguishes themodern institutionaleconomists is notthattheyspeakabout
institutions,the Americaninstitutionalists afterall did this,nor that they
have introduceda new economictheory,althoughtheymay have modified
the existingtheoryin variousways, but that theyuse standardeconomic
theoryto analysetheworkingof theseinstitutions and to discoverthe part
theyplayin theoperationof theeconomy.
It wouldbe interesting to comparehow Adam Smithand JohnStuartMill
handledproblemswithwhat is done by moderninstitutional economists.I
suspectthatifwe have any advantage,it is mainlydue to our havingbetter
analyticaltechniques.Of all the paperspresentedat the seminarI thought
thatby North,even thoughit concentrated on economichistory,indicated
best what moderninstitutional economicsis accomplishing, althoughthose
by Alchianand Williamsonwerealso veryenlightening. What is clearis that
we are beginning to understand the forces which shape economic institutions
and to assesstheirimpact.
Modern institutional economistsare also havingan importantinfluence
on normative economics.Untilcomparatively recently economiststendedto
devise theirproposalsforeconomicreformby comparingwhat is actually
done withwhatwouldhappenin an ideal state.Such a procedureis pointless.
We can carryout the operationsrequiredto bringabout the ideal stateon
a blackboardbut theyhave no counterpart in real life.In the real world,
to influenceeconomicpolicy,we set up or abolish an agency,amend the
law,changethepersonneland so on: we workthrough institutions. The choice
in economicpolicyis a choiceof institutions. And whatmattersis theeffects
thata modification in theseinstitutions willactuallymakein thereal world.
The difference betweenwhatthetreatment of regulation in theUnitedStates
by economistsused to be and whatit now is affordsa striking exampleof
thebeneficialeffectof thenew approach.What shouldcharacterise modern
institutionaleconomics, and does to a considerable extent, is that the problems

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140/1 ( 1984) TheNewInstitutional
Economics 231

tackledare thosethrownup by therealworld.In thisinstitutional economics

has beengreatlyhelpedbyitsassociationwithlaw. Legal cases relateto actual
businesspracticeswhereasmanyof theexamplesanalysedby economistsin
the past were imaginary.The resultof the infusionof legal materialinto
economicshas been both to forceeconomiststo analyse real choices and
to bringthemto realisetherichnessof institutional alternatives.
I havesaid thatto a largeextentmoderninstitutional economistsuse stand-
ard economictheory.Nor do I thinkthat it is wrongfor themto do so.
But thereis one respectin whichI hold a hereticalview. Most economists
make the assumptionthat man is a rationalutilitymaximiser.This seems
to mebothunnecessary I havesaid thatin moderninstitution-
and misleading.
al economicswe should startwithreal institutions. Let us also startwith
manas he is. I am notcallingintoquestionthatmoreis demandedifsomething
becomeseasier to get or that more will be suppliedif the price is raised.
But whatis beingmaximised?Some of mycolleaguesquote a statement of
Bentham'sto the effectthatmadmenalso calculate.This is a correctand,
I believe,a veryimportant But I would stop there.I do not think
statement.
thatwe shoulddrawtheconclusionthatmadmenare also rational.
Moderninstitutional economicsshould studyman as he is, actingwithin
theconstraints imposedby real institutions.
Moderninstitutional economics
is economicsas it oughtto be.

Professor RonaldH. Coase

TheLaw School
University ofChicago
IIII East 60thStreet
Chicago,Illinois60637
U.S.A.

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