ABSTRACT
For more than six decades, neoclassical economics has been criticized for neglecting the social institutions that form the framework in which the neoclassical economy functions. In North America the criticisms have come from those economists who huddle under the banner of ‘institutional economics’ and focus on the problem of explaining institutional change. This chapter discusses the role of institutions in neoclassical economics. Whether there is a problem with how neoclassical economics explains the evolution of institutions is a question open to debate. Proponents of neoclassical economics argue that since one can explain any institutional setting and its evolution as merely the consequences of the logic of choice (i.e. of optimization facing given constraints), our understanding of institutions is merely another example of neoclassical analysis (e.g. James Buchanan, Gordon Tullock and Douglass North).
