1. What is institutional economics?
Institutional economics is a branch of economics which is used to have a clear perception about the creation as well as role of institutions in shaping economic behavior. It is used to study the role of institutions as well as markets due to the complex relationships which take place between the different institutions like firms, individuals, states etc. It formed a vital aspect of American economic thinking in the early 20th century. Economists like Thorstein Veblen as well John. R.Commons was its major proponents of this school of thought.
2. Traditional institutionalism
Traditional institutionalism doesn't regard the concept that institutions are influenced by tastes, technology and their immediate environment. Tastes, along with changes in the habits, trends and expectations not only determine the functioning of these institutions but are shaped and influenced by them. The views of people who work in these institutions are to a great extent shaped by their surroundings. Traditional institutions emphasize on the legal foundations of the economy as well as the evolutionary process through which institution gets established and changes over a period of time. John R.Commons laid more stress on the legal foundations of a economy as compared to others. Traditional economic issues are used to form an opinion which takes into account the influence social as well as cultural factors in the economic process.
3. New institutional economics
New institutional economics attempts to explain the various problems which crop up within the economy from an angle which takes into account the legal as well as social norms. The origins of new institutional economics lies in two major articles of Roanld Coase-'' The Nature of the Firm'' and '' The Problem of Social Cost''. In the latter article, Coase explains that without transaction costs, the assignments of alternative property rights can incorporate externalities as well as conflicts. So, institutional analysis made from these types of assignments is needed to enhance the efficiency of law, economics as well as institutions. Within its ambit, new institutional economics