An Overview

“ The attempt to isolate economics from other disciplines-

notably politics, history, philosophy, finance, constitutional
theory and sociology-has fatally disabled its power to explain
what is happening in the world” – Will Hutton
 The differences between mainstream economics and the broad
and inclusive alternative outlook(evolutionary/institutional
economics) are not always clear-cut.
 In some cases there are significant intermediate positions.
 Furthermore, there is significant disagreement among non-
mainstream economists on many points.
 Following are the main areas of differences between the two:
Mainstream Economics
- As a discipline, economics is defined in terms of a set of
specific core assumptions and analytical techniques.
- Because of the alleged power of these assumptions/techniques,
economists need not learn from other disciplines.
- Instead, these techniques can be applied to other zones of
enquiry
Institutional Economics
- Understanding the economy requires an appreciation of the
psychological and other mechanisms behind human decision-
making.
- Other disciplines such as sociology, politics and history
provide vital insights on how economic institutions work.
- It is important to understand historically specific economic
institutions.
- Generally, ideas from other disciplines should be adopted if
they help our understanding of economic phenomena.
Mainstream Economics
- The best way of understanding a phenomenon is to build a model of it, with simplified
assumptions.
Institutional Economics
- Models can be useful but their value is limited, especially when the phenomena are highly
complex.
- With complex phenomena and non-linear transactions, the possibilities for prediction are
limited.
- Precision in a mathematical sense is a supreme virtue.

- But precision over central concepts such as markets and firms is inessential.
- A rich knowledge and understanding of economic and institutional history is often of
greater value than a mathematical model.
Mainstream Economics
- The training of economists is principally a matter of learning
and developing mathematical models and techniques.
- The history of economics is inessential because all valid past
theories are incorporated into existing theory.
- The history of economics adds nothing more than a narrative of
mistakes.
Institutional Economics
- Without the history of economics, we cannot understand the meaning and
limitations of existing theory.
- Much of the new theory replicates past theories without acknowledging
them.
- We can often learn from the errors and critiques of the past.
- Understanding and questioning of basic assumptions is vital, hence the
philosophy and history of economics are essential for the development of
the discipline.
Mainstream Economics
- The individual is taken as the centre of analysis.

- All analysis in social science must start from individuals and relations between individuals.
- Rationality is the foundation stone of economics.

- It is typically defined in terms of consistency of behavior, and often more narrowly in terms
of self-interested behavior.
- Despite emphasis on individualism, individuals are mostly treated as similar/identical for
mathematical tractability.
- Information problems are sometimes recognized but confined to probabilistic risk.

- Uncertainty is excluded because it does not fit into mathematical models

Institutional Economics
- The is abundant evidence that humans are not entirely self interested, even in the business
sphere.
- The rhetoric of rationality is a diversion from the complex analysis of psychological and
other dispositions and mechanisms that drive human behavior.
- The idea that we are born with a given preference function at birth, or act as if we had one,
is unwarranted.
- We cannot understand economic phenomena adequately without taking into account the
diversity within populations of human characteristics and dispositions.
- In dealing with the complexity of the world, human decision making and computational
capacities are highly limited.
Mainstream Economics
- Institutions are taken as given, or as emerging spontaneously from
interactions of rational individuals.
- Technology is typically taken as given.
- The market is the universal context of all human interaction- it had
existed since time immemorial.
- Financial markets are generally self-regulating and efficient.
Institutional Economics
- Whether spontaneous or designed, the creation of institutions is difficult
and costly in terms of time and resources.
- Markets are historically specific social institutions that organize ongoing
exchange- they differ in terms of trading rules and outcomes.
- Markets are difficult and costly to create, and they require a number of
cultural and other major institutional preconditions.
- Financial markets are prone to instability, owing to problems of uncertainty
and bounded rationality.
Mainstream Economics
- Free trade is generally beneficial for both developing and developed
countries.
- Economic development is principally a consequence of the spread of free
markets.
- The individual is the best judge of his or her interests.
- All welfare recommendations must be Pareto efficient
- All relevant moral issues are reducible to matters of individual preference
or utility.
Institutional Economics
- When the now-developed countries were developing, they did not
practice free trade.
- Economic development requires a robust system of administration, state-
backed monetary and legal institutions-no significant market system is
possible otherwise.
- Because of differential and limited access to information, and differential
and limited cognitive capabilities, the individual is not always the best
judge of his or her interests.
- The Pareto criterion is not the only standard of welfare.