ABSTRACT
The importance of the new institutional economics (NIE) has been confirmed by the award of the Nobel Prize for Economics first in 1991 to Ronald Coase, whose seminal papers on ‘The Nature of the Firm’ (1937) and on ‘The Problem of Social Cost’ (1960) are widely referred to here, and then in 1993 to Douglass C.North, who contributes the following chapter in this book. The ‘new institutionalism’ is important for perhaps three reasons above all. First, it is an emerging body of theory which starts out within the frame of neo-classical economics, but offers answers to what have otherwise remained as puzzles in neo-classical theory. One of these puzzles, which, as Toye explains in his chapter, ‘acted as a catalyst of the NIE’, is the problem of the existence of the firm as an administrative and financial organisation-to which Coase offered an answer in his essay of 1937. So the NIE is important as a major development within the dominant paradigm of modern economics. Second, it is important in the context of economic policy in the 1990s because it has challenged the dominant role ascribed to the market by the orthodoxies of the last ten years or so. Thus, as Bates puts it in his chapter in this book, ‘[Those] who had emphasised the importance of market failure in development economics find in the new institutionalism new justification for their interventionist beliefs.’ However, the NIE does not simply reintroduce the state and revive the sterile confrontation between ‘state’ and ‘market’. Rather-as Toye explains-it shows that neither state nor market is invariably the best way in which to organise the provision of goods and services. Also, it offers ‘a set of tools to inform institutional design’. Herein lies much of the importance of the new institutionalism for the study of development. Third, its significance for development studies relates to another factor which underlies the contemporary prominence of NIE. In a period in which ‘grand theory’ in the social sciences has generally been on the retreat, it claims to offer just such a grand theory of social and economic change-a theory of development in terms of appropriate institutional change (which fosters further economic growth).
