ABSTRACT
For many decades, mainstream economic analysis ignored the relevance of institutions to economic behaviour. Microeconomics was in reality the analysis of market behaviour. Although micro-economists talked about the ‘theory of the firm’, analytically firms were nothing more than the boundary between product markets and factor markets. Entrepreneurs selected input and output quantities in response to prices in product and factor markets. In the early 1970s, this began to change with the evolution of what became known as New Institutional Economics (NIE). Building on earlier work on transaction costs by Ronald Coase (1937), Oliver Williamson (1975, 1985) developed a transaction cost-based explanation of the firm. At around the same time, Douglass North (1991) also wrote on the role of institutions in economic growth. The work of these three writers subsequently developed into New Institutional Economics (NIE). The importance of these developments was recognised by the award of the Nobel Prize for Economic Science to Coase in 1991, North in 1993 and Williamson (along with Elinor Ostrom) in 2009.
