Abstract
Hayek belongs to a long tradition of social scientists who saw themselves as contributing to the “invisible hand theorizing” of Adam Smith. In this, he was influenced by other Austrian economists, particularly Carl Menger and Ludwig von Mises. Menger was the first economist to develop an evolutionary theory of institutional formation, which he used to make sense of the emergence of money. Mises extended Menger’s argument on money and elaborated the methodological foundations of the study of institutions. In turn, Hayek himself influenced the development of a new, genuine institutional economics during the emergence of the law and economics approach pioneered by Aaron Director, Ronald Coase, and Bruno Leoni in the second half of the twentieth century.
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Notes
- 1.
The Great Enrichment refers here to increase in income per capita by a factor of 40 to 100 that began first in northwestern Europe around 1800. See McCloskey’s The Bourgeois Virtues (2006), Bourgeois Dignity (2010), and Bourgeois Equality (2016).
- 2.
See Francis Bator (1957, 31), where he states that the theorems of welfare economics are “antiseptically independent of institutional context.” Furthermore, he argues that the optimality conditions are “technocratic” and that the theorist seeks to avoid any “institutional overtones,” Bator is in the intellectual line of economic thinking that developed from Lange -Lerner , to Samuelson-Bergson, and eventually to Arrow-Hahn -Debreu. The flip side to this evolution was the rebirth of classical political economy and the rise of neoclassical institutionalism between 1950 and 2000 that we are highlighting.
- 3.
Barry Weingast (2016) recently identified what he dubbed the “neoclassical fallacy.” First, the standard economists treats the institutional framework as given and fixed for analysis, and thus eventually forgets the central role in the analysis and assessment of alternative economic systems that institutions must play. Second, upon realizing this intellectual error, the standard economist will acknowledge the importance of institutions, but remain silent on the analysis of the working mechanisms of those institutions for their maintenance, stability, and/or fragility. In our narrative, exposing and correcting the “neoclassical fallacy” is one way to think about the Austrian-inspired law and economics revolution in the second half of the twentieth century.
- 4.
On the reform mentality of the Old Institutionalist thinkers, see Thomas Leonard’s Illiberal Reformers (2016).
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Boettke, P.J. (2018). A Genuine Institutional Economics. In: F. A. Hayek. Great Thinkers in Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-41160-0_7
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