Conflict and Cooperation: Institutional and Behavioral Economics, by A. Allan Schmid. 2004. Malden, Mass.: Blackwell Publishing. ISBN 1405113561, $39.95.
Allan Schmid's book provides a readable introduction to institutional economics for those who have had little experience with an area of thought that traces its roots back to Thorstein Veblen and John Commons. At the same time, his book provides a number of insights for those who would like to explore more deeply the behavior of economic activities that are not restricted by the usual neoclassical assumptions.
Over the years, Professor Schmid has presented his situation-structure-performance (SSP) paradigm as an alternate way to look at economic action. He now expands his argument to create a theory of economic behavior. He argues that each situation has to be viewed through the lens of the structure that is in place in order to be able to predict the performance. Different structures will lead to different performances for similar situations. These structures are not natural; they are created by institutions. In the broad definition of the term, institutions are human relationships.
In the first part of the book, Schmid develops the key factors that make institutions so important. Unlike the static view of neoclassical economics where equilibrium is paramount, Schmid offers a view of a system in flux. The situation goes through the structure to affect performance. But the structure can feed back to the situation and change both, which will affect future performance. Likewise, performance can change the situation and the structure. Equilibrium is punctuated and rarely returns to the same point.
The behavior of individuals is an important factor in institutional theory. Individuals are restricted in the scope of their ability to understand the world. This bounded rationality means that perceptions are often more important than facts in making decisions. Likewise, individuals are backward looking. They project the future based on what has happened in the past. Habit is more important than rational analysis of all alternatives.
Behavior is important because individual persons are part of all institutions. The perceptions, beliefs, and habits of individuals will affect how the institution is structured. This, in turn, will affect how a situation is perceived and the performance that follows. Individuals can learn, and this provides feedback which can change the nature of the institution.