9.1 Institutional Analysis

An economics that treats institutions as primary is necessary to understand the economic behavior of group-dependent individuals–that is, people making decisions within the context of their families, communities, industries, and other forms of organization, formal and informal.  It is these social contexts and organizations to which heterodox economists are referring when they use the term institutions.  A broad definition of the term might be stated as follows:

Institutions are collectively shared habits of thought–of knowing, doing, and valuing–that control, expand, and liberate individual action.

As Aristotle recognized some 24 centuries ago, these institutions exist prior to the individuals born into them.  They are the rules we learn that tell us what to do and what not to do.  But as constricting as that may sound, institutions also constitute a powerful tool for the human race: they allow individuals to forego solving problems that others have already solved (so that we don’t have to ‘reinvent the wheel’, as it were); and they create reasonable expectations of others’ behavior, allowing us to act collectively.  Take, for instance, the simple collectively shared habit of thought concerning which side of the road to drive on.  Knowing ahead of time which side we’re to drive on saves us from the dangerous requirement of learning through trial and error.  Likewise, this simple institution doesn’t just restrict our decisions; it also produces expectations of what others will be doing, allowing us to travel more safely than we could without those expectations.  In this manner, our actions are expanded beyond what they could otherwise be–we would, in fact, be more limited without this institution.

Of course, individuals are not–and could not be–made to conform precisely to the institutions into which they are born–society is not a rigid mold into which each person is poured at birth.  We are ‘prime movers’ capable of making our own decisions and, to some extent, of changing the institutions of our society.  But, it is the collective power that institutions give human communities as a whole which ultimately liberates us, that allows us to shape our own destinies and to participate in the collective shaping of our community’s destiny as well.

Finally, as habits, institutions clearly must stay the same over some period of time.  Yet, the technologies, laws, culture, and so on–that is, the institutions–of any given society evolve over time, too.  This occurs through the accidental and intentional adaptation of how we think–our ‘habits of thought’–to an ever-changing world around us.  But, this creates an inherent tension within the concept of institutions: as the essential means by which humans collectively survive, institutions must constantly evolve to meet the proliferating exigencies we face; yet, as habits, they must have a resilience to change, a constancy, to be of any use at all.  Recognizing this tension offers an important insight into the essential nature of present institutions: our collectively shared habits of thought are always a combination of useful ways of solving problems and the useless remnants of old ways of thinking.

With the basic tools and insights of institutional analysis in hand, we turn now to analyzing consumption in modern society.  As you’ll see, the decisions we make when it comes to what we consume and why we make those decisions can look very different once we take this fundamentally distinct perspective as our starting point.  Our understanding of how we act as consumers depends on our understanding of who we are as a species.


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Principles of Microeconomics: Scarcity and Social Provisioning Copyright © 2016 by Erik Dean, Justin Elardo, Mitch Green, Benjamin Wilson, Sebastian Berger is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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