Institutions and Economic Theory: The Contribution of the New Institutional Economics.

• Author: Hogdson, Geoffrey M.

By Eirik G. Furubotn and Rudolf Richter

Ann Arbor: University of Michigan Press, 1997. Pp. xv, 542. $65.00 cloth.

Written by two leading authors in the area, this major work explores at length the "new institutional economics." Research in this area has become prominent in the social sciences in the 1980s and 1990s. Addressed largely to academic economists and advanced students, the book covers transaction-cost economics, property-rights analysis, and the theory of contracts. The "new institutional" approach embraced here centers on the key concept of transaction costs. By use of this idea, an attempt is made to explain the nature and role of the organizations and institutions of economic life. The approach is much in the tradition of the work of Nobel Laureate Ronald Coase and his well-known and prolific follower Oliver Williamson.

The book is organized into ten substantial chapters. After an introduction, the work moves on to a second chapter on the pivotal concept of transaction costs. Two chapters on property rights follow, then chapters on contract theory, markets, firms, and the state. A final chapter usefully considers possible future developments of the new institutional paradigm.

The exposition is generally clear and helpful, and the volume is an excellent introduction to the literature of the new institutional economics. Each chapter ends with useful recommendations for further reading. As a comprehensive introduction to a particular type of institutional approach, the book cannot be easily faulted.

Another welcome feature of the book is its occasional consideration of the earlier work on economic institutions by the German historical school of economics, which was prominent from the 1830s to the 1930s. Although Furubotn and Richter seem to endorse the old and mistaken prejudice that members of the German historical school were "hostile to abstract theoretical work" (p. 2), the occasional citation of their ideas--including those of Gustav Schmoller, Werner Sombart, and Max Weber--is testimony to their enduring relevance. By contrast, however, Furubotn and Richter pay much less attention to the American "old" institutional school of Thorstein Veblen, John Commons, and Wesley Mitchell, which was dominant in U.S. universities in the first third of the twentieth century. In addition, the authors do not spend much time considering modern alternative explanations of institutional phenomena, outside the transaction-cost paradigm.

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