This book is a product of my long-standing interest in questions relating to institutions and their relation in economic life. Initially, this interest took me to the study of the American institutionalist tradition (now often called the "old" institutional economics, or OIE) and to a series of articles on Veblen, Mitchell, Commons and Ayres (Rutherford 1980, 1981, 1983, 1984, 1987), a line of work I have continued to pursue (1990a, 1990c, 1992a, 1992b). These pieces are written from the point of view of a sympathetic critic.

Contemporary institutional theorizing in the field of organizations dates back thirty-odd years. This particularly describes what are called new or neo-institutionalisms. These terms evoke contrasts with earlier theories of the embeddedness of organizations in social and cultural contexts, now retrospectively called the ‘old institutionalism’ (Hirsch & Lounsbury, 1997; Stinchcombe, 1997). They went through a period of inattention, so that when institutional thinking came back in force after the 1960s, it seemed quite new.
Institutional theories, as they emerged in the 1970s, received much attention in the field, along with other lines of thought emphasizing the dependence of modern organizations on their environments. Perhaps surprisingly, they continue to receive attention, and seem to retain substantial measures of vigor.

Some institutionalist lines of thought, arising particularly in economics and political science, retain very strong notions of society as made up of bounded, purposive, sovereign, and rational actors. In economics, these might be individuals or organizations, operating in market-like environments. In political science, they might be sovereign national-states operating in an almost anarchic environment. Institutionalism, in such schemes, involves the idea that some fundamental institutional principle must be in place before systems of such actors can effectively operate. The classic core principle required in economic versions is property rights (North & Thomas, 1973). In international relations theory it is the principle of nation-state sovereignty (Krasner, 1999).

An explanation of the "institutional approach" to economic theory is a plea for a particular kind of theory. It is possible to come upon the same object from different angles; but more often those who take different routes chance upon different things. The "institutional approach" doubtless has some importance because it is a happy way to acceptable truth, but its significance lies in its being the only way to the right sort of theory. An appeal for "institutional economics" implies no attack upon the truth or value of other bodies of economic thought, but it is a denial of the claims of other systems of thought to be "economic theory." This, however, is no pointless struggle in method to be carried on by breaking syllogisms over concepts and by engaging in polemics over niceties in statement. On the contrary, it involves the very nature of the problems which the theorist should set himself; its real issue is over what economic theory is all about.

The importance to economics of the study of institutions is no longer a controversial proposition, thanks in part to the scholarly literature generated by the new institutional economics movement. Institutions are more than organizations – property is an institution, but not an organization – but organizations are an important form of institution and will be the focus of my paper, as it is, to a considerable extent, of the new institutional economics.

The new institutionalism in organization theory and sociology comprises a rejection of rational-actor models, and interest in institutions as independent variables, a turn toward cognitive and cultural explanations, and an interest in properties of supra-individual units of analysis that cannot be reduced to aggregations or direct consequences of individual’s attributes or motives.

This book provides a detailed picture of the institutionalist movement in American economics concentrating on the period between the two World Wars. The discussion brings a new emphasis on the leading role of Walton Hamilton in the formation of Institutional economics, on the special importance of the ideals of “science” and “social control” embodied within the movement, on the large and close network of individuals involved, on the educational programs and research organizations created by institutionalists, and on the significant place of the movement within the mainstream of interwar American economics.

Renewed attention to institutions in political science over the past ten to fifteen years is a trend that has been widely recognized, discussed, and debated. This effort to emphasize the theoretical importance of institutions, succinctly expressed by slogans such as ‘bringing the state back in’ and ‘structuring politics’ typically is associated with a school that has come to be known as new institutionalism. New institutionalists have made the case for giving institutions analytical primacy, but substantial disagreements remain over how institutional analysis should be carried out.

Institutional theory presents a paradox. Institutional analysis is as old as Emile Durkheim's exhortation to study 'social facts as things', yet sufficiently novel to be preceded by new in much of the contemporary literature.

[Neoinstitutional Economics...] theory has made an indispensable contribution in recent times to advances of understanding in this area. But it seems to me that in the economics of institutions theory is now outstripping empirical research to an excessive extent. No doubt the same could be said of other fields in economics, but there is a particular point about this one. Theoretical modelling may or may not be more difficult in this field than in others, but empirical work is confronted by a special difficulty. Because economic institutions are complex, they do not lend themselves easily to quantitative measurement. Even in the respects in which they do, the data very often are not routinely collected by national statistical offices. As a result, the statistical approach which has become the bread and butter of applied economics is not straightforwardly applicable. Examples of it do exist, the literature on the economics of slavery being perhaps the most fully developed - not surprisingly because slavery is an institution that is sharply defined. But to a large extent the empirical literature has consisted of case-studies which are interesting but not necessarily representative, together with a certain amount on legal court cases, which are almost certainly not representative. Is this the best we can do? There is a challenge here on the empirical side to economists to see what is the best way forward.

The difficulty in defining a field for the so-called institutional economics is the uncertainty of meaning of an institution. Sometimes an institution seems to mean a framework of laws or natural rights within which individuals act like inmates. Sometimes it seems to mean the behavior of the inmates themselves. Sometimes anything additional to or critical of the classical or hedonic economics is deemed to be institutional. Sometimes anything that is "economic behavior" is institutional. Sometimes anything that is "dynamic" instead of "static," or a "process" instead of commodities, or activity instead of feelings, or mass action instead of individual action, or management instead of equilibrium, or control instead of laissez faire, seems to be institutional economics.

Contemporary theories of politics tend to portray politics as a reflection of society, political phenomena as the aggregate consequences of individual behavior, action as the result of choices based on calculated self-interest, history as efficient in reaching unique and appropriate outcomes, and decision making and the allocation of resources as the central foci of political life. Some recent theoretical thought in political science, however, blends elements of these theoretical styles into an older concern with institutions. This new institutionalism emphasizes the relative autonomy of political institutions, possibilities for inefficiency in history, and the importance of symbolic action to an understanding of politics. Such ideas have a reasonable empirical basis, but they are not characterized by powerful theoretical forms. Some directions for theoretical research may, however, be identified in institutionalist conceptions of political order.

Contemporary theories of politics tend to portray politics as a reflection of society, political phenomena as the aggregate consequences of individual behavior, action as the result of choices based on calculated self-interest, history as efficient in reaching unique and appropriate outcomes, and decision making and the allocation of resources as the central foci of political life. Some recent theoretical thought in political science, however, blends elements of these theoretical styles into an older concern with institutions. This new institutionalism emphasizes the relative autonomy of political institutions, possibilities for inefficiency in history, and the importance of symbolic action to an understanding of politics. Such ideas have a reasonable empirical basis, but they are not characterized by powerful theoretical forms. Some directions for theoretical research may, however, be identified in institutionalist conceptions of political order.

But institutional economics is the field of the public interest in private ownership, which shows itself behavioristically in buying and selling, borrowing and lending, hiring and firing, leasing and renting. The private interests become the field of intangible yet quantitative and measurable rights, duties, liberties and exposures to the liberties of others. These are various aspects of rights of ownership. What we buy and sell is not material things and services but ownership of materials and services. The correlation of engineering economics, home economics, and institutional economics makes up the whole of the science of political economics.