Th e representatives of old institutional economics rejected the orthodox, neoclassical form of theory, and model construction, declaring its pro-gramme too formal, abstract, and limited in its scope. Th is rejection does not mean that they refused the necessity of the theory—of which they were often accused. Th e methodological debate has always been about the necessary level of abstraction needed in the analysis of a complex, variable system. Th e complexity of the history of institutions implies a less formalised, abstract approach that comes into confl ict with the expected severity of theory. Th e strictly formalised models lead to a sim-pler, idealised outcome, which may lack important elements of reality.
Neither new nor old institutional economics was able to fi nd a defi nite solution to this dilemma. Opinion is divided among new institutionalists in this respect: Coase, Williamson, and North do not apply formalisa-tion, the followers of the Austrian school’s traditions expressly refuse it, while those applying the game theory use it (Rutherford 1996 ).
A central and long-standing debate concerning the methodology of social sciences is the choice between a holistic approach and
method-ological individualism, which has been discussed extensively in old and new institutional economics.
According to the holistic approach, society is more than simply a sum of its parts, and social structures and institutions infl uence the behaviour of individuals, who are the functioning of society’s parts. If this train of thought is pursued further, all social phenomena and attitudes of indi-viduals may be derived entirely from or explained by social structures, institutions, or culture. Th e holistic approach is characteristic of old insti-tutionalists, but usually they do not reach that extreme, reductionist level at which the action of the individual is considered merely the product of the social and cultural environment. However, they emphasise the impact of the institutional environment, norms and customs on individual behaviour. Another problem, which is even more diffi cult to avoid—and comes up frequently in the works of several old institutionalist authors, such as Veblen, Ayres, and Galbraith—is that the formation of norms and institutions is explained in a functionalist manner; however, these works do not describe the mechanism that actually created these norms and institutions, that is, the individual aims and incentives that led to the formation and maintenance of norms and institutions. Th e functional-ist explanation usually postulates a purpose without a purposive actor (Rutherford 1996 ).
Th e starting point of methodological individualism is the notion that only individuals have aims and interests. Institutions, the social system, and its changes are the results of individuals’ actions. Th erefore, social structures and their changes can be traced back entirely to individuals’
actions, goals, and beliefs. Unilateral reasoning will not hold in this case, either. Critics are correct in saying that if they want to derive the for-mation of institutions and norms from individual decisions—as some new institutionalist authors who apply the game theory do—it cannot be avoided that at the beginning of the game, one should assume elemen-tary rules that would still require explanation, that is, we have to face the problem of “ regressus ad infi nitum ”. Th us, the reductionist solution cannot be accepted here, either (Hodgson 2007b ). However, the new institutionalists who deal with transaction costs, property rights, and the legal system often make the above mistake of functionalist argumenta-tion (Whitley 1999 ). Th e change began with North, who fi rst explained
the institutional changes in a functionalist manner in his economic his-tory, saying that these changes are shaped by the maximising behaviour of economic organisations. Th e controversies he found led him to introduce the term “path dependence”, that is, historically developed institutions restrain the possibilities of institutional change; furthermore, he says that ideology has its own motivating role (North 1990 , 2005 ).
Due to these evident diffi culties, those who currently deal with insti-tutional analysis, regardless of whether they are from the economic or the sociological side, avoid the extremes of the holistic approach and of methodological individualism. It may vary where emphasis is placed, but the starting position is the same: the individuals and the institutions mutually depend on each other and refl exively interlink. Th is thought has its forerunners in sociology and appears quite markedly in contempo-rary sociological institutionalism. Contempocontempo-rary game theory also shares the view that the rules and the players create a mutually interdependent context for each other. Th is approach is represented rather pronouncedly by Masahiko Aoki and Avner Greif, who argue that institutions are pro-duced and repropro-duced by the strategic behaviour of actors, even while actors are constrained. At the same time, institutions not only constrain actors in pursuing their material interests but also shape their cognitive capabilities and mind-set. Historical institutionalism, which has its roots in political science, also considers actors and institutions interdependent and co-generative (Hall and Taylor 1996 ; Jackson 2010 ). Representing old institutionalists, Hodgson draws attention to the “middle-way solu-tion” in his entry about methodological individualism (Hodgson et al.
1994b : 63–67).
Th e issues of rational choice and rule-following are closely related to the above-detailed problems. In neoclassical economics, method-ological individualism is interlinked with the assumption of rational, profi t- maximising decision-making, which was thought to be universally applicable (Coates 2005 ). Th is individualism was exposed to a crossfi re of attacks by old institutional economics, which holds the view that hab-its, norms, and institutions play an important role in directing human behaviour. Th is does not mean that rationality would be excluded from the interpretation of behaviour. It is not diffi cult to prove that maxi-mising rationality from case to case is not realised in human decisions.
Th erefore, the old institutionalists assume adaptive rationality, and cus-toms, social conventions, and norms gradually change according to the changing conditions and circumstances. Th e new institutional school is more divided in this respect. Some advocates of the agency theory and the game theory represent the traditional rational maximisation, which extends over each and every case. Others are of the opinion that follow-ing customs and norms can itself be a rational decision. Th is decision may be justifi ed by the costs of information and decision-making, cogni-tive and informational constrains, risks related to decision-making, and advantages derived from rule-following. Th e use of adaptive rationality is approved in this school for solving the problems of maximising ratio-nality. Herbert Simon’s theory of bounded rationality also had an eff ect on some of the authors (for example, on Williamson). Th e authors who use the evolutionary perspective (for example, Richard R. Nelson and Sidney G. Winter) expressly refuse the concept of maximising rationality (Nelson 1995 ; Rutherford 1996 ; Whitley 1999 ).
Schotter ( 1986 ) describes another type of intertwining between the game theory and evolutionary thought. According to Schotter, there are two trends in terms of the institutional conception within the new insti-tutional school. One of them regards the social and economic institutions as rules, which can be designed, restrain the behaviour of the individu-als and, thus, lead to a pre-determined equilibrium. Others—as well as Schotter—see the rules as unintended regularities of social behaviour emerging spontaneously in the course of repeated confrontation with the same types of social problems; in this process, Schotter assumes profi t- maximising actors. Table 1.1 gives an overview of the methodological dilemmas.
In the following, I will examine the principal theoretical questions in connection with the institutions that must be clarifi ed from the viewpoint of comparative institutional analysis. For instance, a key issue is the con-cept of “institution”, the institutional changes, and the complementarity of the institutions. In the diff erent views, the confl icting ideas of the old and the new schools appear, but I will place more emphasis on the trends within comparative institutional analysis. In institutional analysis, soci-ologists and political scientists also apply the term “new institutionalist”
to themselves, that is, to those who do not use the economics
perspec-tive when trying to fi nd an explanation for the mechanism and eff ects of institutions. Th ese scholars call themselves historical new institutionalists (avoiding the term, “new institutional economics”), and their view of institutions is closer to the old view.