Think Out Loud

"We do not learn from experience, we learn from reflecting on experience." -John Dewey

What “New Institutional Economics” might have to say about Social Policy

New Institutional Economics came about near the beginning of the twentieth century with Ronald Coase’s 1937 study “The Nature of the Firm”.  Coase contradicted the prevailing wisdom by asserting that the motivation to create firms stems from the incentive to reduce transaction costs and minimize uncertainty.  Transaction costs can include any expense of time, energy, and money necessary to make a deal or generate something for the market.  Prior to his writing, many scholars held fast to their belief that the supply-and-demand based price mechanism and sufficiently informed, rational decision-making guided economic transactions.  Thus, Coase’s thesis helped call into question the all-important role of the “invisible hand” in shaping market economies; firms and other economically-driven institutions had more concerns than merely responding to fluctuations in supply and demand.

From Coase’s work sprung a whole new strain of economic research about institutions and how they operate and make decisions.  Soon “New Institutional Economics” (henceforth “NIE”) began treading into interdisciplinary waters, incorporating sociological, psychological, and even cognitive research to explain the behavior of firms.

What does NIE have to offer Social Policy research?  Well, governments are one among many kinds of institutions that perform economic tasks and make market-based decisions.  The fact that many varieties of capitalism exist globally supports the idea that government institutions differ significantly in the factors that influence their economic policy-making.  Examining the role of culture, religion, or rhetoric about national values, for example, might help us determine which social policies are culturally feasible in a given country or government administration.

In the US, for instance, the welfare budgets of states across the country have been repeatedly slashed since high-powered “tough love” rhetoric rocked the nation during the 90s economic boom.  This rhetoric is holding fast along with widespread public resentment towards “undeserving” consumers of social services, even amidst the current economic downturn and widespread joblessness.  Indeed, any pragmatic social policy researcher in the United States must confront these intransigent cultural values if their program advocacy is to go anywhere.

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