In conventional economic theory the state and subsidiary institutions are viewed as instruments that largely evolve in conformity with the efficiency needs of the market economy in response to the level and changes in prices and incomes, tastes, endowments, and technology. Institutional change is thereby endogenized and does not have an independent impact on economic change. Therefore, the conventional wisdom pays little heed to institutional change or institutional details, because of the implicit assumption that institutions adapt to the efficiency needs of the economy, where this adaptation process goes largely unexplained. In the alternative theory presented here, extending and revising the conventional wisdom, institutional change plays a fundamental role in determining the content and direction of economic change. Institutional change is only partially endogenized and rational decision makers can construct sustainable institutions which need not be efficient. Efficiency, inclusive of optimal or frontier-based technological change, can be achieved only on very specific circumstances. The latter requires a more comprehensive understanding of the role which private property rights, human rights, political power, bargaining power, and preference formation, and preferences play in determining the content and direction of institutional change. This complex dialectical relationship relates to what Allan Schmid (2004) refers to as the Value Circularity Problem. The perspective articulated in the alternative theory fits nicely into the world view of institutional economics articulated by Schmid (2004, 2007) wherein it is important build upon the contemporary economic wisdoms, amending extant theory when necessary, to better explain socioeconomic reality so as to better inform institutional choice and the socio-economic consequences of institutional choice and change.
|Title of host publication||Alternative Institutional Structures|
|Subtitle of host publication||Evolution and Impact|
|Publisher||Routledge Taylor & Francis Group|
|Number of pages||30|
|ISBN (Print)||020389443X, 9780203894439|
|Publication status||Published - 15 Jun 2008|
Altman, M. (2008). Toward a theory of induced institutional change: Power, labor markets, and institutional change. In Alternative Institutional Structures: Evolution and Impact (pp. 300-329). Routledge Taylor & Francis Group. https://doi.org/10.4324/9780203894439