The Evolution of Behavioural Institutional Complexity

This essay considers how behavioural economics and institutional economics have coevolved in their development, with understanding their links central to understanding how evolutionary processes within economies dynamically develop. Key to this is that a most important function of economic institutions is to aid humans in overcoming the limits imposed by their bounded rationality. To do this, we shall consider the ideas of the respective founders of institutional economics and behavioural economics, Thorstein Veblen and Herbert Simon, both of whom will also be shown to have complex evolutionary views of how the economy operates. Veblen’s work was earlier (1898, 1899); however, he prefigured Simon’s work in many ways, with Simon tying the concept of behavioural economics, a term he coined, with that of bounded rationality, a term he also coined (1947, 1955, 1957).