Understanding the evolutionary process and the function of institutions in determining economic behaviour is the subject of institutional economics. Institutional economics stresses a more comprehensive examination of institutions and views the market as a result of the complex interactions among them. For example, individuals, companies, social customs and states.
The new institutional economics from the later 20th century is an important variant which incorporates the later development of neoclassical economics into the study.
Institutionalism is another name for institutional economics. It was an economics school that thrived in the United States during the 1920s and 1930s. It sees economic institution evaluation as part of a larger cultural development process.
Although institutionalism never became a major school of economic thinking, its influence has remained, notably in the study of economic problems from a social and cultural perspective. This board technique is excellent for studying the problem of developing nations, where social institution modernization may be a prerequisite for industrial success.
Since the publication of John R. Commons’ The Legal Foundation of Capitalism in 1924, law and economics have been a key focus for them. Then onwards the function of the law (a formal institution) in economic progress has been the subject of intense discussion.
The optimum organisational structure, according to the Transaction Costs Theory (Williamson 1979, 1986), is one that achieves economic efficiency by lowering the cost of exchange.
According to the notion, each sort of transaction has a coordination cost associated with observing, regulating, and managing transactions. T.S is defined by Williamson as a firm’s running economic system.
The three broad categories in which transaction cost can be divided into are:
- Search & information cost
- Bargaining & decision cost
- Policing & enforcement cost
For example, a purchaser of a used car was faced with various transaction costs.
The cost of looking for an automobile and analyzing its condition is known as the search and information cost
The expense of negotiating a price with a car seller is known as the bargaining and decision cost.
Ensuring that the vendor delivers the car in the condition that was promised is the cost of policing and enforcement.