Institutional Economics and Neoclassicism in the Early Twentieth Century: The Role of Physics

At the beginning of the 20th century, neoclassical economics was driven by outdated physics. The Mirowski thesis has gained greater support as new work in the history of theory has been developed. Institutional economics was clearly independent of the neoclassical paradigm, and its own external stimuli came from both natural and social sciences. Veblen, Mitchell, and others developed a methodology that was clearly more empirical than neoclassical economics early in the 20th century. An attempt is made to create a new context for rereading early institutional theory. The Mirowski thesis is useful but limited for the purpose at hand, due to an incorrect interpretation of Veblen's methodology. However, saying that early institutionalists were astute enough to avoid following an outdated physics model is not enough. Mirowski's new history of economics successfully reconstructs neoclassical history but incorporates too little institutional development in the story.