“Over time, some institutions survive and others do not, while new ones are created. Institutional Darwinism suggests that only the fittest institutions survive.”

– Jaya Sil, Organizing Ideas

I have further ideas following the short introduction to New Institutional Economics in the last post. The marketplace is supposed to be a place where valued products survive and sub par products fail. Adding to this, some say that good institutions are supposed survive and bad ones fail. I find this “meta” Darwinian view about institutions in the marketplace essentially invalid. Or at the very least unsophisticated.

Bad institutions are harder to change out than bad products. The rules of capitalism are firmly established, so a lot must be done to supplant its various institutions.

But this is exactly Jaya Sil’s point. It is the New Institutional point: that Institutional Darwinism is just more residual from neo-classical thinking. According to the neo-classical analysis if an institution is clearly not the fittest, it would not survive the challenge from another institution poised to take it over. But why is that not true? Jaya Sil lists the 5 reasons given by the New Institutional paradigm.

1) the costs are too high to switch.

2) there is uncertainty over who gains from the switch.

3) there is lack of credibility regarding whether compensation for losses by redistributions from gainers to losers will occur.

4) there is a coordination failure.

5) there is a high sunk cost to the institutional switch.

But we should identify another one, because all five of these reasons so far assume that costs in some form or another are the only stumbling block to changing up the institutions, and therefore that analysis is still naive when it comes to Darwinian thinking. I would suggest

6) regulatory capture; if the failing institution is holding its power through governmental mandate, especially when the regulating institution itself has been “captured” by lobbyists for the institutions in question.