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Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behavior. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the other. Its name and core elements trace back to a 1919 American Economic Review article by Walton H. Hamilton.Institutional economics emphasizes a broader study of institutions and views markets as a result of the complex interaction of these various institutions (e.g. individuals, firms, states, social norms). The earlier tradition continues today as a leading heterodox approach to economics.
"Traditional" institutionalism rejects the reduction of institutions to simply tastes, technology, and nature (see naturalistic fallacy). [ who? ] disagree with Marx's definition of capitalism, instead seeing defining features such as markets, money and the private ownership of production as indeed evolving over time, but as a result of the purposive actions of individuals.Tastes, along with expectations of the future, habits, and motivations, not only determine the nature of institutions but are limited and shaped by them. If people live and work in institutions on a regular basis, it shapes their world views. Fundamentally, this traditional institutionalism (and its modern counterpart institutionalist political economy) emphasizes the legal foundations of an economy (see John R. Commons) and the evolutionary, habituated, and volitional processes by which institutions are erected and then changed (see John Dewey, Thorstein Veblen, and Daniel Bromley.) Institutional economics focuses on learning, bounded rationality, and evolution (rather than assuming stable preferences, rationality and equilibrium). It was a central part of American economics in the first part of the 20th century, including such famous but diverse economists as Thorstein Veblen, Wesley Mitchell, and John R. Commons. Some institutionalists see Karl Marx as belonging to the institutionalist tradition, because he described capitalism as a historically-bounded social system; other institutionalist economists
A significant variant is the new institutional economics from the later 20th century, which integrates later developments of neoclassical economics into the analysis. Law and economics has been a major theme since the publication of the Legal Foundations of Capitalism by John R. Commons in 1924. Since then, there has been heated debate on the role of law (a formal institution) on economic growth.Behavioral economics is another hallmark of institutional economics based on what is known about psychology and cognitive science, rather than simple assumptions of economic behavior.
Some of the authors associated with this school include Robert H. Frank, Warren Samuels, Marc Tool, Geoffrey Hodgson, Daniel Bromley, Jonathan Nitzan, Shimshon Bichler, Elinor Ostrom, Anne Mayhew, John Kenneth Galbraith and Gunnar Myrdal, but even the sociologist C. Wright Mills was highly influenced by the institutionalist approach in his major studies.
Thorstein Veblen (1857–1929) wrote his first and most influential book while he was at the University of Chicago, on The Theory of the Leisure Class (1899).In it he analyzed the motivation in capitalism for people to conspicuously consume their riches as a way of demonstrating success. Conspicuous leisure was another focus of Veblen's critique. The concept of conspicuous consumption was in direct contradiction to the neoclassical view that capitalism was efficient.
In The Theory of Business Enterprise (1904) Veblen distinguished the motivations of industrial production for people to use things from business motivations that used, or misused, industrial infrastructure for profit, arguing that the former is often hindered because businesses pursue the latter. Output and technological advance are restricted by business practices and the creation of monopolies. Businesses protect their existing capital investments and employ excessive credit, leading to depressions and increasing military expenditure and war through business control of political power. These two books, focusing on criticism first of consumerism, and second of profiteering, did not advocate change.
Through the 1920s and after the Wall Street Crash of 1929 Thorstein Veblen's warnings of the tendency for wasteful consumption and the necessity of creating sound financial institutions seemed to ring true.
Thorstein Veblen wrote in 1898 an article entitled "Why is Economics Not an Evolutionary Science"and he became the precursor of current evolutionary economics.
John R. Commons (1862–1945) also came from mid-Western America. Underlying his ideas, consolidated in Institutional Economics (1934) was the concept that the economy is a web of relationships between people with diverging interests. There are monopolies, large corporations, labour disputes and fluctuating business cycles. They do however have an interest in resolving these disputes.
Commons thought that government should be the mediator between the conflicting groups. Commons himself devoted much of his time to advisory and mediation work on government boards and industrial commissions.
Wesley Clair Mitchell (1874–1948) was an American economist known for his empirical work on business cycles and for guiding the National Bureau of Economic Research in its first decades. Mitchell's teachers included economists Thorstein Veblen and J. L. Laughlin and philosopher John Dewey.
Clarence Ayres (1891–1972) was the principal thinker of what some have called the Texas school of institutional economics. Ayres developed on the ideas of Thorstein Veblen with a dichotomy of "technology" and "institutions" to separate the inventive from the inherited aspects of economic structures. He claimed that technology was always one step ahead of the socio-cultural institutions.
It can be argued that Ayres was not an "institutionalist" in any normal sense of the term, since he identified institutions with sentiments and superstition and in consequence institutions only played a kind of residual role in this theory of development which core center was that of technology. Ayres was under strong influence of Hegel and institutions for Ayres had the same function as "Schein" (with the connotation of deception, and illusion) for Hegel. A more appropriate name for Ayres' position would be that of a "techno-behaviorist" rather than an institutionalist.
Adolf A. Berle (1895–1971) was one of the first authors to combine legal and economic analysis, and his work stands as a founding pillar of thought in modern corporate governance. Like Keynes, Berle was at the Paris Peace Conference, 1919, but subsequently resigned from his diplomatic job dissatisfied with the Versailles Treaty terms. In his book with Gardiner C. Means, The Modern Corporation and Private Property (1932), he detailed the evolution in the contemporary economy of big business, and argued that those who controlled big firms should be better held to account.
Directors of companies are held to account to the shareholders of companies, or not, by the rules found in company law statutes. This might include rights to elect and fire the management, require for regular general meetings, accounting standards, and so on. In 1930s America, the typical company laws (e.g. in Delaware) did not clearly mandate such rights. Berle argued that the unaccountable directors of companies were therefore apt to funnel the fruits of enterprise profits into their own pockets, as well as manage in their own interests. The ability to do this was supported by the fact that the majority of shareholders in big public companies were single individuals, with scant means of communication, in short, divided and conquered.
Berle served in President Franklin Delano Roosevelt's administration through the depression, and was a key member of the so-called "Brain trust" developing many of the New Deal policies. In 1967, Berle and Means issued a revised edition of their work, in which the preface added a new dimension. It was not only the separation of controllers of companies from the owners as shareholders at stake. They posed the question of what the corporate structure was really meant to achieve.
“Stockholders toil not, neither do they spin, to earn [dividends and share price increases]. They are beneficiaries by position only. Justification for their inheritance... can be founded only upon social grounds... that justification turns on the distribution as well as the existence of wealth. Its force exists only in direct ratio to the number of individuals who hold such wealth. Justification for the stockholder's existence thus depends on increasing distribution within the American population. Ideally the stockholder's position will be impregnable only when every American family has its fragment of that position and of the wealth by which the opportunity to develop individuality becomes fully actualized.”
John Kenneth Galbraith (1908–2006) worked in the New Deal administration of Franklin Delano Roosevelt. Although he wrote later, and was more developed than the earlier institutional economists, Galbraith was critical of orthodox economics throughout the late twentieth century. In The Affluent Society (1958), Galbraith argues voters reaching a certain material wealth begin to vote against the common good. He uses the term "conventional wisdom" to refer to the orthodox ideas that underpin the resulting conservative consensus.
In an age of big business, it is unrealistic to think only of markets of the classical kind. Big businesses set their own terms in the marketplace, and use their combined resources for advertising programmes to support demand for their own products. As a result, individual preferences actually reflect the preferences of entrenched corporations, a "dependence effect", and the economy as a whole is geared to irrational goals.
In The New Industrial State Galbraith argues that economic decisions are planned by a private bureaucracy, a technostructure of experts who manipulate marketing and public relations channels. This hierarchy is self-serving, profits are no longer the prime motivator, and even managers are not in control. Because they are the new planners, corporations detest risk, requiring steady economic and stable markets. They recruit governments to serve their interests with fiscal and monetary policy.
While the goals of an affluent society and complicit government serve the irrational technostructure, public space is simultaneously impoverished. Galbraith paints the picture of stepping from penthouse villas on to unpaved streets, from landscaped gardens to unkempt public parks. In Economics and the Public Purpose (1973) Galbraith advocates a "new socialism" (social democracy) as the solution, with nationalization of military production and public services such as health care, plus disciplined salary and price controls to reduce inequality and hamper inflation.
With the new developments in the economic theory of organizations, information, property rights,and transaction costs, an attempt was made to integrate institutionalism into more recent developments in mainstream economics, under the title new institutional economics.
The vacillations of institutions are necessarily a result of the very incentives created by such institutions, and are thus endogenous. Emphatically, traditional institutionalism is in many ways a response to the current economic orthodoxy; its reintroduction in the form of institutionalist political economy is thus an explicit challenge to neoclassical economics, since it is based on the fundamental premise that neoclassicists oppose: that economics cannot be separated from the political and social system within which it is embedded.
The earlier approach was a central element in American economics in the interwar years after 1919, but was marginalized relative to mainstream economics in the postwar period with the ascendence of neoclassical and Keynesian approaches. It continued, however, as a leading heterodox approach in critiquing neoclassical economics and as an alternative research program in economics, most notably through the work of Ha-Joon Chang and Geoffrey Hodgson
The leading Swedish economist Lars Pålsson Syll is a believer in institutional economics.He is an outspoken opponent to all kinds of social constructivism and postmodern relativism.
Critics of institutionalism have maintained that the concept of "institution" is so central for all social science that it is senseless to use it as a buzzword for a particular theoretical school. And as a consequence the elusive meaning of the concept of "institution" has resulted in a bewildering and never-ending dispute about which scholars are "institutionalists" or not—and a similar confusion about what is supposed to be the core of the theory. In other words, institutional economics has become so popular because it means all things to all people, which in the end of the day is the meaning of nothing.
Indeed, it can be argued that the term "institutionalists" was misplaced from the very beginning, since Veblen, Hamilton and Ayres were preoccupied with the evolutionary (and "objectifying") forces of technology and institutions had a secondary place within their theories. Institutions were almost a kind of "anti-stuff"; their key concern was on technology and not on institutions. Rather than being "institutional," Veblen, Hamilton and Ayres’ position is anti-institutional.
As George Lakoff famously said, paraphrasing, "whoever frames the debate tends to win the debate." The Criticism is being framed by the mainstream, mainly Neoclassical Economics (and the Microeconomics Frame and Single Interest Theory), which facilitates relegating Institutional Economics framing to the periphery of economic thinking, if considered at all, and in some sense leading to a "win" by the mainstream. The point is, as Thaler and Sunsteinhave made clear, a person is not generally best described as an Econ, but rather as a Human. Discounting Institutional Economics is to see only the Econ (as is also done in some of the newer versions, the Neo-institutional Economics), a person with mainly if not only a self-interest in mind. Institutional Economics, in contrast, sees a Human... a person with perhaps a more primal drive to self-interest, but also quite capable of being social, and, being part of a Community of shared other (yet still internal to own-self)-interest. Institutional Economics is about that Community, which has been extracted from Neoclassical Economics (see Marglin ). It is about regulation and law, both growing out of the moral dimension of a Community. Institutional Economics is most fundamentally about the Moral Dimension of the Economy, the Moral Community as it were, which was also arguably the most primary concern of Adam Smith, in the Theory of Moral Sentiments, in that he wrote the Moral Sentiments book first, and labored on it until his passing. The "...Nature and the Causes of the Wealth of Nations book by Smith was about the Econ, and did not occupy much of his attention after the 1776 edition was published, only with minor edits over his lifetime. The Theory of Moral Sentiments was about the Moral Dimension, which Smith as Moral Philosopher made clear was essential to a viable, Good Capitalism, and, he labored on it until the end. Seeing the two books as a whole, we see that a Human has Dual Interests... a Self-interest and an Other (reflecting the right-thing-to-do, the moral dimension of a community of shared, also reflected in law)-interest... the latter a primary focus of Institutional Economics. In order to more accurately represent Adam Smith...both of his books... it is essential to see the need for both Institutional (and, some versions of Neoinstitutional) Economics and the more mainstream Neoclassical Economics. It is essential to work at integrating... rather than critically setting aside... the two frames and theories, as in Neoclassical&(Neo)Institutional-Economics. Such an integration is represented in the Metaeconomics Frame and Dual Interest Theory, which is an empirical economics drawing heavily on Behavioral Economics framing and testing.
Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory, a theory that has come under considerable question in recent years.
Thorstein Bunde Veblen was an American economist and sociologist, who during his lifetime emerged as a well-known critic of capitalism.
Evolutionary economics is part of mainstream economics as well as a heterodox school of economic thought that is inspired by evolutionary biology. Much like mainstream economics, it stresses complex interdependencies, competition, growth, structural change, and resource constraints but differs in the approaches which are used to analyze these phenomena.
The Theory of the Leisure Class: An Economic Study of Institutions (1899), by Thorstein Veblen, is a treatise on economics and a detailed, social critique of conspicuous consumption, as a function of social class and of consumerism, derived from the social stratification of people and the division of labour, which are social institutions of the feudal period that have continued to the modern era.
Wesley Clair Mitchell was an American economist known for his empirical work on business cycles and for guiding the National Bureau of Economic Research in its first decades.
Heterodox economics is a term that may be used in contrast with orthodox economics in schools of economic thought or methodologies, that may be beyond neoclassical economics. Heterodox economics is an umbrella term that can cover various schools of thought or theories. These include institutional, evolutionary, feminist, social, post-Keynesian, ecological, Georgist, Austrian, Marxian, socialist and anarchist economics, among others.
Geoffrey Martin Hodgson is a Professor in Management at the London campus of Loughborough University, and also the editor-in-chief of the Journal of Institutional Economics.
Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to heterodox economics, which encompasses various schools or approaches that are only accepted by a minority of economists.
Herbert Joseph Davenport was an American economist of the Austrian School, educator and author.
The history of economic thought deals with different thinkers and theories in the subject that became political economy and economics, from the ancient world to the present day in the 21st Century. This field encompasses many disparate schools of economic thought. Ancient Greek writers such as the philosopher Aristotle examined ideas about the art of wealth acquisition, and questioned whether property is best left in private or public hands. In the Middle Ages, scholasticists such as Thomas Aquinas argued that it was a moral obligation of businesses to sell goods at a just price.
The European Association for Evolutionary Political Economy (EAEPE) is a pluralist forum of social scientists that brings together institutional and evolutionary economists broadly defined. EAEPE members are scholars working on realistic approaches to economic theory and economic policy. With a membership of about 500, EAEPE is now the foremost European association for heterodox economists and the second-largest association for economists in Europe.
In the history of economic thought, a school of economic thought is a group of economic thinkers who share or shared a common perspective on the way economies work. While economists do not always fit into particular schools, particularly in modern times, classifying economists into schools of thought is common. Economic thought may be roughly divided into three phases: premodern, early modern and modern. Systematic economic theory has been developed mainly since the beginning of what is termed the modern era.
Institutionalist political economy, also known as institutional political economy or IPE, refers to a body of political economy, thought to stem from the works of institutionalists such as Thorstein Veblen, John Commons, Wesley Mitchell and John Dewey. It emphasizes the impact of historical and socio-political factors on the evolution of economic practices, often opposing more rational approaches. In the political sense, this implies the influences actors like the state have on socio-economic practices and the shaping of institutions via political decision-making.
Jonathan Nitzan is Professor of Political Economy at York University, Toronto, Canada.
The following outline is provided as an overview of and topical guide to economics:
Neo-classical economics has come under critique on the basis of its core ideologies, assumptions, and other matters.
Throughout modern history, a variety of perspectives on capitalism have evolved based on different schools of thought.
The Association for Evolutionary Economics (AFEE) is an international organization of economists working in the institutionalist and evolutionary traditions of Thorstein Veblen, John R. Commons and Wesley Mitchell. It is part of the Allied Social Sciences Association (ASSA), a group of approximately 55 organizations including the American Economics Association (AEA), that holds a three-day meeting each January.
Transaction Man: The Rise of the Deal and the Decline of the American Dream is a non-fiction book which chronicles the role of corporations in relation to the American economy and shifts in public policy by Nicholas Lemann, who is a veteran journalist and a The New Yorker staff writer.
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