Institutionalism: Characteristics and Its Evaluation

In this article we will discuss about features and evaluation of institutionalism.

Characteristic Features of Institutionalism:

The following are the main features of institutionalism:

(1) The Institutional school emphasises the role of institutions in economic life. The term “institution” includes customs, social habits, laws, way of living, and mode of thinking. According to the Institutional school, economic life is regulated by economic institutions and not by economic laws. Naturally the institutionalists are interested in analysing and reforming the institutions of credit, monopoly, distribution of national income and so on.

(2) They believe that group behaviour, not price should be the central theme of economics.

(3) They recognise that human behaviour is constantly changing and economic generalisations should be relative to time and place.

(4) They emphasise custom, habit and law as modes of organising economic life.

(5) They hold that important motives which influence individuals cannot be measured.

(6) They believe that the economy must be studied as a whole. It is in contrast to the “atomistic” approach of the marginal school.

(7) They advocate the evolutionary approach in economic analysis. The study of the evolution and functioning of economic institutions should be the central theme in economics.

(8) They reject the idea of “normal equilibrium”. According to them, mal-adjustments in economic life are not departures from normal equilibrium but are themselves normal.

(9) Economic laws are not of universal application. They are relative to time and place. In other words, they believe in the doctrine of relativity.

(10) They reject the classical assumption of harmony of interests. They recognise class conflict.

(11) They advocate inductive method.

(12) They rejected the pleasure-pain psychology of the marginalists.

Evaluation of Institutionalism:

With the exception of Veblen, no one has added anything material to the body of economic science. They have made valuable descriptive studies and criticisms but they have neither said anything new nor they have provided any scientific basis for the reconstruction of the science.

As critics, the institutionalists have exposed the weaknesses of classical economics, unreal assumptions and the abstract method. But they have emphasised the usefulness of the role played by institutions. Their emphasis on evolutionary process had been fruitful.

Its Weaknesses:

Prof. Haney has pointed out the following weaknesses in the institutional thought:

(1) In certain respects, institutionalism is abstract and is based on unreal assumptions which render it unsatisfactory to the scientist.

(2) Like the classical economists, the “economic man” of the institutionalists does seem to be real. They have treated man as a mere creature of habits.

(3) While making use of the words such as “effective”, “serviceable”, “workmanlike”, “futile”, they have not prescribed any criteria for the measurement of these. Their thought is full of abstractions and unrealistic.

(4) Their thought leads to the adoption of the test of “survival” which is not only a strong materialistic concept but is vague.

(5) Their thought contains important deductions which cannot be verified. For example, their statement that present conditions are bad and they can be improved by changing “institutions” appears to be a mere assumption, because it is difficult to know what institutions are good and what are bad.

(6) Their thought suggests a sort of “Kinematics” to the extent that they conceive of economics as dealing with ever moving bodies governed by no casual forces and tending towards no equilibrium.

(7) The relation between “Instincts” and “reason” and the part played by “institutions” are not all clear. Their plan lacks uniformity and a specific goal.