Chapter 24: Institutional economics
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The old American institutionalism was part of the pluralist mainstream of the interwar period, but declined for various reasons. After World War II, economics, particularly in the United States, became more formalized, technical and uniform, began to give importance to rational choice and testing of predictions and became focused on the analysis of markets, expanding it to other domains of social sciences. Tjalling Koopmans (1947) dismissed Wesley Mitchell’s institutional work as nothing more than measures, and favoured the testing of theories. Milton Friedman’s (1953) plea for testing predictions and neglecting the empirical basis of assumptions also ended the marginalist controversy. The scientific aspirations of institutionalism were undermined, its authors forgotten and (inaccurately) written off as anti-theoretical and purely descriptive. Institutionalism survived at the margins of economics, with authors such as Clarence Ayres, John Kenneth Galbraith, Simon Kuznets and Gunnar Myrdal. However, the mainstream consensus was disrupted in the 1970s and new schools of thought, somehow related to institutionalist perspectives, emerged, such as radical economics, post-Keynesian economics, Austrian economics and social economics. This entry focuses on the schools labelled institutionalist after World War II; they are diverse and not always easily identifiable, but may be divided in two groups: new institutional economics and modern institutionalism.

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