The methodology that is used by institutionalist (also known as evolutionary economics) has been called "pattern modeling (concatenated) because it seeks to explain events or actions by identifying their place in a pattern of relationships that is said to characterize the economic system as a whole." This methodology is different from neoclassical methodology in that the latter is a predictive (hierarchical) methodology.
Institutional economists explain human behavior by placing it in its historical and institutional context. They emphasize how important it is to pay attention to the detailed structure of firms and industries. The Nineteenth century German Historical School was the predecessor to institutional economics. Though this methodology is used by institutionalist's such as Veblen and Myrdal, this cannot be said for institutional economists such as Galbraith and Commons. However, institutional economists are united on their stand regarding "concepts of equilibrium, rational behavior, instantaneous adjustments, and perfect knowledge", which they view as totally unrealistic. "They all favor the idea of group behavior under the influence of custom and habit, preferring to view the economic system more as a biological organism than a machine."
Institutional analysis does not serve a predictive function, but is rather intended to better understand the pattern of capitalistic American culture. According to William Dugger, institutional economics can be best understood as a set of pattern models composed of institutions as the building blocks with behaviorism as the psychological foundation. Neoclassical economics, according to Dugger, can best be understood as a set of predictive models where individual consumers and firms are the building blocks and the psychological foundation being methodological individualism.
Veblen's, "The limitations of marginal utility" is , in my opinion, the best article to read if one desires a better understanding of the underpinnings of institutional economics. In this article, Veblen states the following:
" To any modern scientist interested in economic phenomena, the chain of cause and effect in which any given phase of human culture is involved, as well as the cumulative changes wrought in the fabric of human conduct itself by the habitual activity of mankind, are matters of more engrossing and more abiding interest than the method of inference by which an individual is presumed invariably to balance pleasure and pain under given conditions that are presumed to be normal and invariable. The former are questions of the life-history of the race or the community, questions of cultural growth and of the fortunes of generations; while the latter is a question of individual casuistry in the face of a given situation that may arise in the course of this cultural growth. The former bear on the continuity and mutations of that scheme of conduct whereby mankind deals with its material means of life; the latter, if it is conceived in hedonistic terms, concerns a disconnected episode in the sensuous experience of an individual member of such a community."
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