By: Eng. Ahmed Sobhi Al-Laham
Institutional Economics refers to the economy governed by institutions, defined as: socially imposed constraints that shape the structure of social, economic, and political relations and interactions. These include informal rules governing society (customs, traditions, and codes of conduct) and inherent formal rules (constitutions, laws, property rights, and regulatory rules). They can be referred to as the "rules of the game" within a society.
In Neoclassical Economics, we study the utility-maximizing and profit-maximizing behavior of individuals and firms without institutional constraints in the aforementioned idiomatic sense. In that model, property rights are protected, contracts are fully enforced without obstacles, and transaction costs for completing economic projects are assumed to be zero. However, in Institutional Economics, the subject is entirely different; the specific institutional structure of any society must be studied and understood before attempting to apply economic practices that were successful in another society.
An example of this is the failure of the privatization process in Russia after the collapse of the Soviet Union between 1992 and 1994, despite its success in other European countries. This failure was due to the lack of consideration for Russian institutional conditions: (absence of appropriate legal institutions, weakness of political institutions, and incompatibility of social institutions with the transformation process). This led to disastrous results, such as the acquisition of assets by former ruling elites and the formation of powerful monopolies instead of a competitive market.
This is what must be noted when applying successful economic management practices from a small country with specific demographic, social, and geographical characteristics and transferring them literally to a large country with complex institutions and intertwined constraints and governing rules. In such cases, long-standing established laws may clash with new, conflicting immediate decisions, potentially leading to catastrophic counterproductive results.
Perhaps the most fundamental point in Institutional Economics is that institutions generally form as organic, internal elements naturally generated from within the society itself, rather than being imported from the outside. Therefore, a deep study of institutions in any society is essential, as is monitoring the extent to which any proposed decision or law aligns or conflicts with the existing institutional social fabric.
Among the most important reasons for market failure caused by institutions are: (market immaturity or incompleteness, non-competitive and restricted markets monopolized by a specific group, imbalance in supply and demand for public goods, harmful externalities, lack of information or its inadequacy, inconsistency, or lack of transparency, lack of full clarity regarding property rights and their weak protection, slow adaptation to variables, and macroeconomic instability).
Consequently, Institutional Economics provides an indispensable analytical magnifying glass for understanding the diversity in economic performance among nations and societies. It warns against the risks of a literal application of economic models without understanding the vital institutional context of each society.
Damascus, February 06, 2026 Eng. Ahmed Sobhi Al-Laham Chairman of the Board Al-Yousr for Urban Development
