The paper emphasises two flaws in mainstream economics: the failure to understand human behaviour and the belittling of transaction costs. By stressing the role of knowledge, institutions and path dependence, new institutional economics has provided a powerful answer to these shortcomings. Nevertheless, a number of questions remain open. In particular, path dependence is far from being a continuous process. Its dynamics and its irregularities are by and large unexplained. Hence, a strong need for a convincing evolutionary theory of environmental change. This paper does not deny the validity of the Darwinian view applied to the theory of the firm and of competition in a free-market economy. It is however maintained that the natural-selection process that characterises the Darwinian approach is ill suited to describe economic evolutionary processes. It is shown that a combination of functional analysis and natural selection may indeed be a better solution, for it solves some of the puzzles raised by the public choice school without violating the fundamental tenets of the neo-institutional approach. Still, although this combined view may well explain why the institutional features are retained by the system, it does not clarify why they are introduced in the first place. A third possibility is thus put forward in the second part of the paper, where a new evolutionary theory is suggested. Within this framework, agents are assumed to behave according to their preferences within the existing rules of the game. At the same time, new ideas and sometimes new ideologies may influence their behavioural patterns. The combination between needs and ideologies generates environmental change, especially if so-called "ideological entrepreneurs" are able to transform latent and shared beliefs into an institutional project and enforce it.
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Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number
26-2002.
Length: 31 pages Date of creation: May 2002 Date of revision: Handle: RePEc:icr:wpicer:26-2002
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