New institutional economics in the context of Neoliberalism in international relations

In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any other external authority. Proponents of the free market as a normative ideal contrast it with a regulated market, in which a government intervenes in supply and demand by means of various methods such as taxes or regulations. In an idealized free market economy, prices for goods and services are set solely by the bids and offers of the participants.

Scholars contrast the concept of a free market with the concept of a coordinated market in fields of study such as political economy, new institutional economics, economic sociology, and political science. All of these fields emphasize the importance in currently existing market systems of rule-making institutions external to the simple forces of supply and demand which create space for those forces to operate to control productive output and distribution. Although free markets are commonly associated with capitalism in contemporary usage and popular culture, free markets have also been components in some forms of market socialism.

Douglass Cecil North (November 5, 1920 – November 23, 2015) was an American economist known for his work in economic history. Along with Robert Fogel, he received the Nobel Memorial Prize in Economic Sciences in 1993. In the words of the Nobel Committee, North and Fogel "renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change."

North was an influential figure in New Institutional Economics, which emphasizes the impact of institutions on economic behaviors and outcomes. North argued, "Institutions provide the incentive structure of an economy; as that structure evolves, it shapes the direction of economic change towards growth, stagnation, or decline." Rational and wealth-maximizing individuals lack complete information and have difficulties monitoring and enforcing agreements. Institutions can provide information and reduce transaction costs, thus encouraging economic activity.

Liberal institutionalism (or institutional liberalism or neoliberalism) is a theory of international relations that holds that international cooperation between states is feasible and sustainable, and that such cooperation can reduce conflict and competition. Neoliberalism is a revised version of liberalism. Alongside neorealism, liberal institutionalism is one of the two most influential contemporary approaches to international relations.

In contrast to neorealist scholarship (which is skeptical of prospects for sustainable cooperation), liberal institutionalism argues that cooperation is feasible and sustainable. Liberal institutionalists highlight the role of international institutions and regimes in facilitating cooperation between states. Robert Keohane's 1984 book After Hegemony used insights from the new institutional economics to argue that the international system could remain stable in the absence of a hegemon, thus rebutting hegemonic stability theory.