




































Ecology, Economy and Society–the INSEE Journal 1 (1): 5–9, April 2018 

 
COMMENTARY 
 

Institutional Economics—The Economics of 
Ecological Economics! 
 

Arild Vatn   
 
On its homepage, The International Society for Ecological Economics 
states that ‗ecological economics exists because a hundred years of disci-
plinary specialization in scientific inquiry has left us unable to understand or 
to manage the interactions between the human and environmental compo-
nents of our world.‘ Understanding and managing these interactions well 
depend not only on a sincere focus on the interactions, as important is how 
we understand the dynamics of the economic, social, and environmental 
subsystems of our world. We know that the whole is more than the sum of 
its parts, but it is important also that the way we understand the parts 
captures the specificities of each subsystem. Therefore, ecological econ-
omics should not be ‗agnostic‘ about what kind of economic theory forms 
its basis. Many ecological economists adhere to the neoclassical brand of 
economics—at least if we look at papers presented in our journal (Ecological 
Economics) and at conferences hosted by the society (The International 
Society for Ecological Economics). But I think, given its focus, neoclassical 
economics is not suitable as a basis for ecological economics. While I 
observe several alternatives that may offer progress, I will in this short 
paper show what institutional economics, as an alternative, can offer 
ecological economics. 

Ecological economics has a normative basis, in the sense that it looks for 
ways to move the world onto a sustainable development path. Humans live 
in a biophysical environment, characterized by interdependencies, limits, 
and thresholds, and so we need an economic theory that is well suited to 

                                                        
 Faculty of Landscape and Society, Department of International Environment and 
Development Studies, Norwegian University of Life Sciences, Universitetstunet 1, 1432 Ås, 
Norway, arild.vatn@nmbu.no 

Copyright © Vatn 2018. Released under Creative Commons Attribution-NonCommercial 
4.0 International licence (CC BY-NC 4.0) by the author. 

Published by Indian Society for Ecological Economics (INSEE), c/o Institute of Economic 
Growth, University Enclave, North Campus, Delhi 110007. 

ISSN: 2581-6152 (print); 2581-6101 (web). 

DOI: https://doi.org/10.37773/ees.v1i1.4 

https://doi.org/10.37773/ees.v1i1.4


Ecology, Economy and Society–the INSEE Journal [6] 

study human action in such a context and describes well the complexities of 
human motivation. In these regards, neoclassical economics fails for several 
reasons. Here, I emphasize three. 

First, it builds its analyses on ‗solved political problems‘ (Lerner 1972)—for 
example, given distribution of (property) rights—while sustainability issues 
are typically unresolved political problems, as new limits and thresholds are 
continuously approached. 

Second, it holds that human action is based on the pursuit of maximizing 
individual utility, a perspective that is both empirically flawed and unable to 
handle interdependencies well. I note that there are developments within 
the branch of behavioural economics that offer progress regarding the 
understanding of human action, while a methodological individualist ontol-
ogy is maintained. 

This leads to the third point: The individual is seen as autonomous, which 
implies that social processes have no influence on what the individual 
prefers. In short, it offers a very limited basis for studying collective action.  

Institutional economics can largely be divided into two main schools—
‗new‘ and ‗classic‘. New institutional economists deviate from neoclassical 
economics mainly by including information and transaction costs (Coase 
1960, 1984; Eggertsson 1990; North 1990, 2005; Williamson 1985, 2000). 
This challenges the assumption that human action is based on the pursuit of 
maximizing individual utility. Williamson (1985) therefore distances himself 
by accepting bounded rationality and emphasizing opportunism. The ‗old 
North‘ takes a similar position (North 2005), while he continues to 
emphasize that individuals are autonomous. 

Classical institutional economics has its origin in the works of authors like 
Veblen (1898, 1919) and Commons (1931, 1934). Its revival in the 1980s—
for example, in the work of Hodgson (1988) and Bromley (1989)—was at 
least in part a reaction to the development of new institutional economics. 
Classical institutional economics emphasizes the role of culture and social 
processes and sees humans as socially constructed, and in this way it goes 
beyond new institutional economics. This implies that our perceptions, 
values, and preferences depend on which societies and cultures we belong 
to. Here, institutions—understood as conventions, norms, and formal 
rules—play a crucial role (Scott 2014; Vatn 2005): they protect the values a 
society prioritizes and outline appropriate actions. Through changing 
institutions, we can facilitate not only new constraints for the ‗egocentric 
individual‘, but also create new meaning for ourselves and support various 
forms of collective and responsible actions. 



[7] Arild Vatn 

Classical institutional economics emphasizes that people are interdepend-
ent, as they act within common environments. Traditionally, its proponents 
have focused mainly on cultural and political interdependencies. Intro-
ducing classical institutional economics to ecological economics implies 
expanding its focus to include also physical interdependence, which implies 
that there will be both conflict and the need for coordination. Classical 
institutional economics emphasizes that the role of institutions is to define 
whose interests should be protected and how easy or demanding it will be 
to coordinate actions that are interdependent. 

Given the above, I comment briefly on the following four aspects of class-
ical institutional economics as applied to ecological economics (see also 
Vatn 2015): 

1) The role of property rights. These rights specify who gets access to 
which resources and, so, define whose interests are protected. There-
fore, property rights are key institutional structures in a society defining 
whose interests get protection through specifying who gets access to 
which resources. 

This is a political question and raises several issues regarding the normative 
basis of a society, for example, its understanding of justice and treatment of 
cost-shifting behaviour (Kapp 1971; Martinez-Alier 2002). Moreover, as 
property rights ensure access to resources over time, they are key to sust-
ainable development. Equally important is the way interactions between 
resource-holders and -users are institutionalized—for example, as trade, 
command, or cooperation. Rights to resources and interaction rules (like 
trade, command and cooperation) form resource regimes. Classical 
institutional economics emphasizes how such regimes influence distribution 
as well as shape human action by influencing the costs of interaction (trans-
action costs), people‘s perceptions, and motivation structures. 

2) The role of transaction costs. Costs of interaction (transaction costs) 
depend on the kind of institutional structures established. Environ-
mental degradation is the result of myriads of independent actions made 
by individuals, households and firms. To establish sustainability 
demands institutions that facilitate coordination, that makes coordi-
nation affordable and meaningful for people when acting. The kind of 
resource regimes established influences these costs heavily. 

3) The effects on perceptions. Classical institutional economics also 
emphasizes that how and what we perceive, depends on how and what 
we have learned to ‗see‘; how we have been trained to interpret infor-
mation determines how we perceive a problem and even what we 



Ecology, Economy and Society–the INSEE Journal [8] 

perceive as a problem. Including this aspect is crucial for a theory that 
aims at supporting sustainable development. 

4) The effect on motivation. Last, but not least, classical institutional 
economics understands rationality and motivation as plural concepts. It 
is based on the observation that humans are able to act in ways that are 
socially responsible—that are ‗better for the group‘ or for others—and 
not only in ways that are purely self-regarding. Institutions are important 
in that they can make clear when social rationality, as opposed to 
individual rationality, is expected, and thus may support different types 
of rationality. This is a crucial insight, and it offers the hope that a 
sustainable future is possible. Whereas neoclassical economics demands 
a physical world without serious limits—that is, it emphasizes self-
interest and economic expansion—classical institutional economics 
acknowledges that there are limits and is based on the perspective that 
we through institutional change can facilitate the level of cooperation 
necessary to abide by such limits. 

While insights regarding the relationship between institutions and human 
motivation offer hope that sustainability is possible, much work is needed 
to develop the institutions that could foster such a development. We have 
certain insights regarding the management of local ‗commons‘ (for example, 
Ostrom (1990, 2005). However, when it comes to how we should organize 
production and trade more generally, we are only scratching the surface 
regarding what sustainability demands as well as what ‗works in practice‘. I 
hold that (classical) institutional economics offers a good basis for that 
endeavour; and my plea to ecological economists is that we should work 
much more seriously on these fundamental issues of economic 
organization. 
 
REFERENCES 
 
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Public Policy. Oxford: Basil Blackwell. 

Coase, R. H. 1960. ―The Problem of Social Cost.‖ Journal of Law & Economics 3: 1–
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Coase, R.H. 1984. ―The New Institutional Economics.‖ Journal of Theoretical and 
Institutional Economics, 140 (1): 229–231.  

Commons, J.R. 1931. ―Institutional Economics.‖ American Economic Review, 21: 648–
657.  

Commons, J.R. [1934] 1990. Institutional Economics. Its place in Political Economics. New 
Brunswick, Transaction Publishers. 

https://doi.org/10.1086/466560


[9] Arild Vatn 

Eggertsson, T. 1990. Economic Behaviour and Institutions. Cambridge: Cambridge 
University Press. https://doi.org/10.1017/CBO9780511609404 

Hodgson, G. M. 1988. Economics and Institutions A Manifesto for a Modern Institutional 
Economics. Cambridge Polity Press. https://doi.org/10.9783/9781512816952 

Kapp, K. W. 1971. The Social Costs of Private Enterprise. New York: Schoken Books. 

Lerner, A. 1972. ―The Economics and Politics of Consumer Sovereignty.‖ American 
Economic Review 62 (2): 258–66. 

Martinez-Alier, J. 2002. The Environmentalism of the Poor. Cheltenham: Edward Elgar. 
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North, D. C. 1990. Institutions, Institutional Change and Economic Performance. 
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North, D. C. 2005. Understanding the Process of Economic Change. Princeton, NJ: 
Princeton University Press. https://doi.org/10.1515/9781400829484. 

Ostrom, E. 1990. Governing the Commons: The Evolution for Collective Action. 
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Ostrom, E. 2005. Understanding Institutional Diversity. Princeton, NJ: Princeton 
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Scott, W. R. 2014. Institutions and Organizations: Ideas, Interests and Identities. 4th ed. 
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