Marshall and the Quest for a New Paradigm

Abstract

It is not easy to identify the essential differences between Neo-Classical and neoinstitutional economics. It has been stressed that the unboundedly rational actor is central to Neo-Classical theory, and that the satisficing behavior of agents who face positive information cost is characteristic of neoinstitutional economics. Bounded rationality and positive information cost seem to belong to each other and to constitute the main theme of neoinstitutional economics. On the other hand, it is said that in Neo-Classical theory institutions do not matter, information cost is zero and economic agents are gifted with perfect rationality. However, the difference between Neo-Classical and neoinstitutional economics is more complicated. Unboundedly rational behavior is also postulated in neoinstitutional theories for agents who must cope with information problems. In his survey, Economic Behaviour and Institutions, Eggertsson discerns new institutional and neoinstitutional economics (Eggertsson, 1990, 8–9). New institutional economics postulates unboundedly rational actors, whereas neoinstitutional economics assumes bounded rationality. In this respect, Williamson may be perceived as a neoinstitutional theorist. According to Williamson, bounded rationality is the cognitive assumption of transaction cost economics, whereas (Neo-Classical) orthodoxy invokes stronger rationality assumptions (often hyperrationality) (Williamson, 1996, 6). On the other hand, law and economics theorist Posner is a representative of new institutional economics, which simultaneously assumes full rationality and positive information cost.