Institutional economics

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Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour. 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. [1] [2] 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. [3]

Sociocultural evolution, sociocultural evolutionism or cultural evolution are theories of cultural and social evolution that describe how cultures and societies change over time. Whereas sociocultural development traces processes that tend to increase the complexity of a society or culture, sociocultural evolution also considers process that can lead to decreases in complexity (degeneration) or that can produce variation or proliferation without any seemingly significant changes in complexity (cladogenesis). Sociocultural evolution is "the process by which structural reorganization is affected through time, eventually producing a form or structure which is qualitatively different from the ancestral form".

An economy is an area of the production, distribution and trade, as well as consumption of goods and services by different agents. Understood in its broadest sense, 'The economy is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the production, use, and management of resources'. Economic agents can be individuals, businesses, organizations, or governments. Economic transactions occur when two groups or parties agree to the value or price of the transacted good or service, commonly expressed in a certain currency. However, monetary transactions only account for a small part of the economic domain. Economic activity is spurred by production which uses natural resources, labor and capital. It has changed over time due to technology, innovation such as, that which produces intellectual property and changes in industrial relations. A given economy is the result of a set of processes that involves its culture, values, education, technological evolution, history, social organization, political structure and legal systems, as well as its geography, natural resource endowment, and ecology, as main factors. These factors give context, content, and set the conditions and parameters in which an economy functions. In other words, the economic domain is a social domain of human practices and transactions. It does not stand alone.

Human behavior is the response of individuals or groups of humans to internal and external stimuli. It refers to the array of every physical action and observable emotion associated with individuals, as well as the human race. While specific traits of one's personality and temperament may be more consistent, other behaviors will change as one moves from birth through adulthood. In addition to being dictated by age and genetics, behavior, driven in part by thoughts and feelings, is an insight into individual psyche, revealing among other things attitudes and values. Social behavior, a subset of human behavior, study the considerable influence of social interaction and culture. Additional influences include ethics, social environment, authority, persuasion and coercion.

Contents

"Traditional" institutionalism rejects the reduction of institutions to simply tastes, technology, and nature (see naturalistic fallacy). [4] 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. [5] Some institutionalists see Karl Marx as belonging to the institutionalist tradition, because he described capitalism as a historically-bounded social system; other institutionalist economists[ 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.

Technology making, modification, usage, and knowledge of tools, machines, techniques, crafts, systems, and methods of organization

Technology is the sum of techniques, skills, methods, and processes used in the production of goods or services or in the accomplishment of objectives, such as scientific investigation. Technology can be the knowledge of techniques, processes, and the like, or it can be embedded in machines to allow for operation without detailed knowledge of their workings. Systems applying technology by taking an input, changing it according to the system's use, and then producing an outcome are referred to as technology systems or technological systems.

In philosophical ethics, the term naturalistic fallacy was introduced by British philosopher G. E. Moore in his 1903 book Principia Ethica. Moore argues it would be fallacious to explain that which is good reductively, in terms of natural properties such as pleasant or desirable.

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.

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. [6] 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.

New institutional economics (NIE) is an economic perspective that attempts to extend economics by focusing on the social and legal norms and rules that underlie economic activity and with analysis beyond earlier institutional economics and neoclassical economics. It can be seen as a broadening step to include aspects excluded in neoclassical economics. It rediscovers aspects of classical political economy.

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.

Law and economics or economic analysis of law is the application of economic theory to the analysis of law that began mostly with scholars from the Chicago school of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated.

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.

Robert H. Frank economist

Robert Harris Frank is the Henrietta Johnson Louis Professor of Management and a Professor of Economics at the Samuel Curtis Johnson Graduate School of Management at Cornell University. He contributes to the "Economic View" column, which appears every fifth Sunday in The New York Times. Frank's 2011 book is on wealth inequality in the United States.

Warren Joseph Samuels was an American economist and historian of economic thought. He received a BBA from University of Miami, Miami, FL and obtained his Ph.D. from University of Wisconsin–Madison. After holding academic posts in the University of Missouri, Georgia State University, Atlanta, and University of Miami, he was appointed Professor of Economics in Michigan State University in 1968, where he stayed until his retirement in 1998.

Geoffrey Hodgson British economist

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.

Thorstein Veblen

Thorstein Veblen came from a Norwegian immigrant family in rural Mid-western America. Veblen3a.jpg
Thorstein Veblen came from a Norwegian immigrant family in rural Mid-western America.

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). [7] 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.

University of Chicago Private research university in Chicago, Illinois, United States

The University of Chicago is a private research university in Chicago, Illinois. Founded in 1890, the school is located on a 217-acre campus in Chicago's Hyde Park neighborhood, near Lake Michigan. The University of Chicago holds top-ten positions in various national and international rankings.

<i>The Theory of the Leisure Class</i> book by Thorstein Veblen

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 the social institutions of the feudal period that have continued to the modern era.

Conspicuous consumption Concept in sociology and economy

Conspicuous consumption is the spending of money on and the acquiring of luxury goods and services to publicly display economic power—of the income or of the accumulated wealth of the buyer. To the conspicuous consumer, such a public display of discretionary economic power is a means of either attaining or maintaining a given social status.

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.

The Theory of Business Enterprise is an economics book by Thorstein Veblen published in 1904 that looks at the growing corporate domination of culture and the economy.

Consumerism social and economic order that encourages the purchase of goods and services in ever-greater amounts

Consumerism is a social and economic order that encourages the acquisition of goods and services in ever-increasing amounts. With the industrial revolution, but particularly in the 20th century, mass production led to overproduction—the supply of goods would grow beyond consumer demand, and so manufacturers turned to planned obsolescence and advertising to manipulate consumer spending. In 1899, a book on consumerism published by Thorstein Veblen, called The Theory of the Leisure Class, examined the widespread values and economic institutions emerging along with the widespread "leisure time" in the beginning of the 20th century. In it Veblen "views the activities and spending habits of this leisure class in terms of conspicuous and vicarious consumption and waste. Both are related to the display of status and not to functionality or usefulness."

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" [8] and he became the precursor of current evolutionary economics.

John R. Commons

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 Mitchell

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

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 Berle

Adolf Augustus Berle, Jr. Adolf Augustus Berle NYWTS.jpg
Adolf Augustus Berle, Jr.

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.” [9]

John Kenneth Galbraith

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. [10]

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. [11]

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.

New institutional economics

With the new developments in the economic theory of organizations, information, property rights, [12] and transaction costs, [13] an attempt was made to integrate institutionalism into more recent developments in mainstream economics, under the title new institutional economics. [14]

Institutionalist political economy

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.

Institutionalism today

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. [15] He is an outspoken opponent to all kinds of social constructivism and postmodern relativism. [16]

Criticism

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. [17]

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. [17]

Journals

See also

Notes

  1. Walton H. Hamilton (1919). "The Institutional Approach to Economic Theory," American Economic Review, 9(1), Supplement, pp. 309–18. Reprinted in R. Albelda, C. Gunn, and W. Waller (1987), Alternatives to Economic Orthodoxy: A Reader in Political Economy, pp. 204- 12.
  2. D.R. Scott, "Veblen not an Institutional Economist." The American Economic Review. Vol. 23. No.2. June 1933. pp. 274–77.
  3. Warren J. Samuels ([1987] 2008). "institutional economics," The New Palgrave: A Dictionary of Economics . Abstract.
  4. "AMERICAN INSTITUTIONAL SCHOOL". archive.org. 19 March 2009. Retrieved 1 April 2018.
  5. Malcolm,Dewey and Reese Rutherford (2008). "institutionalism, old," The New Palgrave Dictionary of Economics , 2nd Edition, v. 4, pp. 374–81. Abstract.
  6. Li, Rita Yi Man and Li, Yi Lut (2013) The relationship between law and economic growth: A paradox in China Cities, Asian Social Science, Vol. 9, No. 9, pp. 19–30, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2290481
  7. Heilbroner, Robert (2000) [1953]. The Worldly Philosophers (seventh ed.). London: Penguin Books. pp. 221, 228–33, 244. ISBN   978-0-140-29006-6.
  8. Veblen, Th. 1898 "Why is Economics Not an Evolutionary Science", The Quarterly Journal of Economics, 12.
  9. Berle (1967) p. xxiii
  10. Galbraith (1958) Chapter 2 (Although Galbraith claimed to coin the phrase 'conventional wisdom,' the phrase is used several times in a book by Thorstein Veblen that Galbraith might have read, The Instinct of Workmanship.)
  11. Galbraith (1958) Chapter 11
  12. Dean Lueck (2008). "property law, economics and," The New Palgrave Dictionary of Economics , 2nd Edition. Abstract.
  13. M. Klaes (2008). "transaction costs, history of," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  14. Ronald Coase (1998). "The New Institutional Economics," American Economic Review, 88(2), pp. 72–74.
       • _____ (1991). "The Institutional Structure of Production," Nobel Prize Lecture PDF, reprinted in 1992, American Economic Review, 82(4), pp. 713–19 .
      Douglass C. North (1995). "The New Institutional Economics and Third World Development," in The New Institutional Economics and Third World Development, J. Harriss, J. Hunter, and C. M. Lewis, ed., pp. 17–26.
      Elinor Ostrom (2005). "Doing Institutional Analysis: Digging Deeper than Markets and Hierarchies," Handbook of New Institutional Economics, C. Ménard and M. Shirley, eds. Handbook of New Institutional Economics, pp. 819 –48. Springer.
      Oliver E. Williamson (2000). "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, 38(3), pp. 595–613 Archived 2011-05-11 at the Wayback Machine .
  15. Gudeman, Stephen (2005). Peopled Economies: Conversations With Stephen Gudeman. Staffan Löfving. ISBN   91-974705-6-2.
  16. "LARS PÅLSSON SYLL". Arenagruppen. Archived from the original on 2013-05-27. Retrieved 2012-04-17.
  17. 1 2 David Hamilton, "Why is Institutional economics not institutional?" The American Journal of Economics and Sociology. Vol. 21. no. 3. July 1962. pp. 309–17.

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References

Polterovich, Victor. "institutional traps." Abstract.
Rutherford, Malcolm. "institutionalism, old." Abstract.
Samuels, Warren J. [1987]. "institutional economics." Abstract.