After Neo-Liberalism: Towards an Institutionalism Paradigm

Margaret Thatcher’s infamous statement that “there is no such thing as society” pointedly expressed the neoliberal belief in individual responsibility and a lean state. Even today, the ‘household budget’ rhetoric which deliberately conflates the nature of public and personal finances, remains deeply anchored in our political discourse. As Michael Jacobs elaborated at the Berlin Summit, these narratives were successful by their supposedly scientific justification through economic theory. In his paper “After Neoliberalism: Economic Theory and Policy in the Polycrisis“, he proposes ‘ontological institutionism’ as a new theoretical framework for economic thinking.

A core tenet of neoclassical theory, ‘ontological individualism’ defines economic behaviour as driven by autonomous, self-interested individuals. According to Jacobs, this assumption contributed to economists’ over-reliance on market-based solutions since the 1970s/80s. In his view, adhering to this foundational framework of thinking has rendered economists incapable of addressing severe macroeconomic problems, from the global financial crash and the ensuing wave of austerity, to rising inequality, inflation and climate breakdown.

He argued in favour of ‘ontological institutionism’ as a new theoretical foundation for economic thinking. This approach views institutions rather than individuals as the cornerstone of economic decisions. Individuals, households and firms are seen as not fully sovereign or autonomous entities. Rather, their preferences and economic decisions are taken to be largely influenced by institutional structures and rules. While markets can play an important role in efficiently allocating resources, they should not be considered the prime institutional arrangement. Different kinds of institutions should be considered for different spheres of life. ‘Ontological institutionism’ understands economic policy as a process of institutional design. It aims at making the inherent ethical values underpinning policy objectives more transparent and moving away from the perception of economics as an exact science.

Jacobs underlined that this approach does not contain a value judgment regarding the choice of institution. For instance, in a society that prioritizes individual liberty, economists might use ‘institutionism’ as a theoretical framework to advocate for relying to a large extent on market-oriented institutions.

“Where the neoliberal approach, resting on its neoclassical foundations, asks: how can we make this market work better—or if we haven’t got a market, how can we create one?—the institutionist approach asks: are these the right institutions for the outcomes we are seeking? Could we reform the institutional arrangements, or create new institutions, which would be more likely—because of the values and motivations they embody—to achieve our policy objectives?”  (Jacobs, 2024)

In his comments, Peter Bofinger challenged the proposition that mainstream economics was experiencing fundamental challenges in the past decades and that a new theoretical foundation or meta-theory was needed. While he acknowledged that policy errors were made in recent years, such as with overly harsh austerity in Europe or by failing to adequately respond to climate change globally, in his view, economic policy has mostly been successful in dealing with the global crises after the financial meltdown in 2008. Bofinger also pointed out that many aspects of the institutionist approach laid out by Michael Jacobs could be found in the existing economic literature, for instance in the works of Musgrave and Schumpeter. While Musgrave is known to have been critical of strict methodological individualism, the zeitgeist of the second half of the last century meant that he did not articulate a coherent vision of how institutions influence economic behaviour. This ultimately illustrates that the prevailing economic paradigm and its theoretical basis is always shaped by the dominant understanding of the social contexts of the respective time.