3 - Microtheory and recent developments in the study of economic institutions through economic history

Summary

INTRODUCTION

Adam Smith ([1776] 1937) argued that the “propensity to truck, barter, and exchange” is in human nature (p. 13) and proceeded to examine how institutions impact the efficiency implications of this tendency. Arguably, institutions impact efficiency since they influence the allocation of resources to and by economic agents and the set of exchange relations that these agents are willing to assume. The diversity of economic environments and institutions utilized throughout history provides a unique source for examining the nature and implications of institutions. Indeed, a distinctive feature of economic history has always been its concentration on the examination of institutions, their origins, natures, and implications.

This chapter provides a brief survey of the three approaches within economic history - the neoclassical (section 1), the new institutional economic history (section 2), and the historical institutional analysis (section 3) - that utilize microeconomic theory for the study of institutions and their efficiency implications. Each of these complementary approaches focuses on different sets of institutions, utilizes different theoretical frameworks to analyze them, and advances different methodologies to integrate theoretical and historical analyses.

Owing to space limitation this chapter concentrates on highlighting the methodology of and interrelations with microeconomic theory adopted by these approaches, and gives some of their insights with respect the study of economic institutions. Since historical analysis is the most recent development in the study of economic institutions through economic history, most of the survey is devoted to this approach.