Institutionalism is the view that "humans and their institutions display goal-seeking behavior," and that the environment both affects and is affected by this goal-seeking (John T. Harvey, "Institutions and the Economic Welfare of Black Americans in the 1980s," Journal of Economic Issues, #25, March, 1991, pp. 115-35). Basically, the idea is that social and political institutions have a major impact on the individual's life, and that these institutions are not separate entities, but instead have significant interplay. The major kinds of institutions in this context are: housing, education, financial services, the labor market, government policy and health care.
Some examples of the relationships between these institutions follow. Poor housing, which not infrequently results from housing discrimination, leads to poor education (because bad schools tend to be found in bad neighborhoods), as well as unequal access to financial services (because lenders screen applicants by street address, among other things), and the inability to find a job that offers any real promise (because most promising businesses tend to locate away from poor neighborhoods). Similarly, poor education is a screening device for both lenders and employers, and thus furthers unequal access to financial services and gainful employment. Unequal access to financial services furthers housing segregation, because the poor cannot afford to move out of poor neighborhoods without access to credit, which has become a prerequisite to home ownership. Inability to find meaningful employment also serves to further housing segregation, as well as reducing access to loans. The lower-middle class and lower class have been demonstrated to have inadequate access to health care. But, poor health affects performance in both school and the workplace, which hurts chances for a good education or advancement in employment, which further removes the individual from access to adequate health care.
These are but a small number of all of the possible relationships between the six institutions mentioned, and not only are there other likely relationships, but quite probably other institutions that participate as well. Even so, it is already clear that the self-perpetuating nature of these relationships result in a distinctly American Nightmare for those that are unfortunate enough to become entangled in them. The Institutionalists have a slightly different view of the economic world, in that they view these institutions as bodies in themselves, which exert influence and power in economic activities that directly affect individuals.
This view allows us to see some of the reasons that Marx was wrong about Capitalism, and possibly some of the reason that people don't revolt nearly as predictably as Marx thought. Capitalism has its entrenched institutions, its sub-economies. These sub-economies exert influences on individuals and are therefore the direct participants in the economy at large. But these institutions are created by men and do not have a naturally determined form or purpose. It should be quite obvious whose hands are the most involved in the shaping of these institutions and whose purposes they serve. Particularly in America, in our representative democracy, where so much power is entrusted to an elected and easily persuaded few. So, when someone is frustrated with their situation, it is not surprising that they become frustrated with the direct cause of their woe, the institution, instead of focusing on the indirect and root cause, the makers and beneficiaries of the institution. Marx's Proletariat have no Bourgeois against whom to revolt. There is no fat king taking a tax on corn and sugar to send to the guillotine. The landed wealthy now sit comfortably behind the walls of "democratic" institutional bureaucracy and tradition.
Later sections will describe this theory and its underlying logic and assumptions in more detail.