Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economicbehavior. 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]
"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.
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.
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?"[8] 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.
Ayres was heavily influenced by the philosophy of John Dewey. Dewey and Ayres both utilized the instrumental theory of value to analyze problems and propose solutions. According to this theory, something has value if it enhances or furthers the life process of mankind. Therefore, this should become the criterion to be utilized in determining the future courses of action.
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.”[9]
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.
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.
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.[15]
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.[15]
According to Thaler and Sunstein,[16] a person is not generally best described as an Econ, a person with mainly self-interest in mind, but rather as a Human. Institutional economics, consistent with Thaler and Sunstein, sees humans as social and part of a community, which has been extracted from neoclassical economics.[17] The Metaeconomics Frame and Dual Interest Theory argues that it is essential to integrate institutional and neoclassical economics.[18][19][20]
↑ 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.
↑ D.R. Scott, "Veblen not an Institutional Economist." The American Economic Review. Vol. 23. No.2. June 1933. pp. 274–77.
↑ 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, https://ssrn.com/abstract=2290481
↑ 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.)
↑ M. Klaes (2008). "transaction costs, history of," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
↑ • 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. 595–613Archived 2011-05-11 at the Wayback Machine .
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.
↑ Thaler., R.H.; Sunstein, C.R. (2008). Nudge: Improving Decisions About Health, Wealth, and Happiness. New Haven, MA: Yale University Press.
↑ Marglin, Stephen A. (2008). The Dismal Science: How Thinking Like an Economist Undermines Community. Cambridge, MA: Harvard University Press.
↑ Lynne, G.D. (2006). "Toward a Dual Motive Metaeconomic Theory". Journal of Socio-Economics. 35 (4): 634–651. doi:10.1016/j.socec.2005.12.019.
↑ Lynne, G.D. (2006). Altman, Morris (ed.). On the Economics of Subselves: Toward a Metaeconomics, Chp 6 Handbook of Contemporary Behavioral Economics. New York: M.E. Sharpe. pp.99–122.
↑ Lynne, G.D.; Czap, N.V.; Czap, H.V.; Burbach, M.E. (2016). "Theoretical Foundation for Empathy Conservation: Toward Avoiding the Tragedy of the Common". Review of Behavioral Economics. 3 (3–4): 245–279. doi:10.1561/105.00000052.
Related Research Articles
Neoclassical economics is an approach to economics in which the production, consumption, and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good or service is determined through a hypothetical maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production. This approach has often been justified by appealing to rational choice theory.
Thorstein Bunde Veblen was an American economist and sociologist who, during his lifetime, emerged as a well-known critic of capitalism.
Evolutionary economics is a school of economic thought that is inspired by evolutionary biology. Although not defined by a strict set of principles and uniting various approaches, it treats economic development as a process rather than an equilibrium and emphasizes change, innovation, complex interdependencies, self-evolving systems, and limited rationality as the drivers of economic evolution. The support for the evolutionary approach to economics in recent decades seems to have initially emerged as a criticism of the mainstream neoclassical economics, but by the beginning of the 21st century it had become part of the economic mainstream itself.
The Theory of the Leisure Class: An Economic Study of Institutions (1899), by Thorstein Veblen, is a treatise of economics and sociology, and a critique of conspicuous consumption as a function of social class and of consumerism, which are social activities derived from the social stratification of people and the division of labor; the social institutions of the feudal period that have continued to the modern era.
Neo institutionalism is an approach to the study of institutions that focuses on the constraining and enabling effects of formal and informal rules on the behavior of individuals and groups. New institutionalism traditionally encompasses three major strands: sociological institutionalism, rational choice institutionalism, and historical institutionalism. New institutionalism originated in work by sociologist John Meyer published in 1977.
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 broad, relative term referring to schools of economic thought which are not commonly perceived as belonging to mainstream economics. There is no absolute definition of what constitutes heterodox economic thought, as it is defined in constrast to the most prominent, influential or popular schools of thought in a given time and place.
Geoffrey Martin Hodgson is Emeritus Professor in Management at the London campus of Loughborough University, and also the editor-in-chief of the Journal of Institutional Economics.
Historical institutionalism (HI) is a new institutionalist social science approach that emphasizes how timing, sequences and path dependence affect institutions, and shape social, political, economic behavior and change. Unlike functionalist theories and some rational choice approaches, historical institutionalism tends to emphasize that many outcomes are possible, small events and flukes can have large consequences, actions are hard to reverse once they take place, and that outcomes may be inefficient. A critical juncture may set in motion events that are hard to reverse, because of issues related to path dependency. Historical institutionalists tend to focus on history to understand why specific events happen.
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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.
The history of economic thought is the study of the philosophies of the different thinkers and theories in the subjects that later became political economy and economics, from the ancient world to the present day.
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.
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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.
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