policymakers demonstrate

Economic Approaches to Energy, Environment and Sustainability 277
7.2.3 Institutional, Evolutionary, and Behavioural Economics
These three schools of economics are included here because each is relevant
to ongoing efforts to understand how humans interact with the natural environment
through the economy, and how these interactions change over time. Each
also challenges the core tenets of neoclassical economics, including assumptions
of rational, welfare-maximizing behaviour by all economic agents (individuals
and firms) according to exogenous preferences, the absence of chronic
information problems, complexity and limits to cognitive capacity, and a theoretical
focus on movements towards or attained equilibrium states of rest
(Hodgson, 1988, p. xviii).
Institutional economics emphasizes the importance of institutions to economic
action. Hodgson described economic institutions as ‘complexes of
habits, roles and conventional behaviour’ (Hodgson, 1988, p. 140), whilst John
Commons, another early father of institutional economics, conceived of them
as ‘embodying collective action’ (Rutherford, 1983, p. 722), and ‘including
the state, political parties, courts, unions, firms, churches, and the like ...[with
their] rules, regulations, customs, common practices and laws that regulate the
actions of individuals and concerns’ (Rutherford, 1983, p. 723). Many institutional
economists have paid little attention to the natural environment, and even
(Hodgson, 1988, Figure 1.2, p. 16) considers it outside ‘the projected domain
of institutional economic theory’, although many have applied this school of
thought to resources and the environment (a recent example of which is Bromley,
2014). Although the terms ‘institutional’ and ‘evolutionary’ economics are
often used interchangeably, the more ecologically aware version of the latter
conceives development as a co-evolutionary process between five dimensions
of economic and ecological systems: values, knowledge, organization, technology,
and the environment (Norgaard, 2010). Furthermore, many evolutionary
economists have focused in particular on the important role of technical change
and innovation in markets and in broader long-run changes in economies (e.g.,
Freeman (1992)).
Behavioural economics focuses on the behaviour of individuals, rather than
the nature of the institutions that influence or constrain them. An extensive
behavioural economics literature concludes that human behaviour is highly
complex, and exhibits characteristics of both homo economicus and homo
reciprocans, espoused by environmental/resource and ecological economics,
respectively (Gsottbauer and van den Bergh, 2011). Glasser (2002) explores
a number of moral considerations and other factors that can result in actual
human behaviour departing from the narrow self-interested and static assumptions
of much neoclassical consumer theory. Moreover, people have often been
observed to seek equitable outcomes where self-interest would produce higher
rewards (Fehr and Schmidt, 1999). While this evidence runs counter to the