The new institutional economics and agricultural organization

The institutional economics if John Commons (1934) contained two related objectives. The first was to explain the evolution of economics. The second was to analyze the effects of institutions on resource allocation and the distribution of income. The method of explaining the evolution of institutions was historical. In explaining resource allocation, Commons used institutional considerations such as interest groups and bargaining power largely as an alternative to neoclassical economics. Common’s brand of institutional economics has been practically extinct in the evolution of economic methodology. The reason for this is that historical explanations tend to be arbitrary and fail to identify alternative causes of change. At the time, “institutional” explanations of economic events and patterns tend to be ad hoc and irrefutable A body of literature has now been developed from somewhat diverse sources, however, which may provide a new paradigm for achieving Common’s objectives. Without claim to originality, we call this paradigm the new institutional economics. In explaining the existence and evolution of institutions, the new institutional economics uses conventional economic tools such as benefits, costs, and equilibrium. In explaining resource allocation and income distribution, the new approach uses institutions in conjunction with rather than as an alternative to neoclassical theory. One of the primary concerns of the new institutional economics is explaining nonmarket resource allocation. This is an especially important area of research for helping to describe the organization of agriculture in developing countries. Since the cost of market operation is characterized by economies of scale, markets for agricultural products in isolated regions of developing countries are often poorly developed or nonexistent. Factors of production are often contracted for by nonmarket devices. Similarly, agricultural products are typically disposed of (e.g., for and by an individual household). It is therefore important for understanding the prospects and potential for agricultural development to improve both our empirical and theoretical knowledge of these institutional arrangements. The purpose of the present paper is to provide a methodology for investigating institutional arrangements in agriculture and to illustrate the methodology by explaining selected patterns in agricultural contracts. The paper is organized as follows. In section I, we review the literature which makes up the new institutional economics. By integrating and extending the literature, a new method for explaining the organization of production emerges. This methodology is developed and described in section II. In section III, certain stylized facts about agricultural organization are presented, developed and explained using the principles discussed in section II.