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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Institutions are the controlling force at the center of any economy. They organize and control all economic activity from markets to producers, consumers to governments, and more. Institutions determine how fundamental economic questions such as, what, how, and for whom, are answered. Thus, scientific analysis of economic activity requires a deep and systematic understanding of institutions.
This much-needed text provides students with a comprehensive introduction to the increasingly influential field of Institutional economics. Across its ten chapters, it unpacks the history, theory, applications, policies, and methods of Institutional economics, carefully blending theoretical, conceptual and empirical elements that together illuminate the complexity of the modern economy. Topics covered include production, consumption, class and distribution, development, value theory, and specific institutions including the corporation, property, labor, and government. Each chapter concludes with selected questions or issues posed as a basis for class discussion and further research.
Written in a lively and accessible style for students new to the topic, this book is set to become the go-to resource for classes on institutional economics across the world.
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Seitenzahl: 486
Veröffentlichungsjahr: 2025
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Table of Contents
Cover
Title Page
Copyright Page
Figures
Tables
Boxes
Preface
Acknowledgments
Abbreviations
1 Introducing Institutional Economics
Organization and Terms
Definition of Economics: Scope and Nature
What Is an Institution?
The Concept of Culture: Human Behavior
Evolutionary Analysis
The Veblenian Dichotomy
What Is Technology?
What Is Meant by Ceremony?
Principles of Institutional Adjustment
Enduring Tension
Institutionalist Critique of Mainstream Theory
Questions and Issues for Discussion
Notes
2 Economics in Historical Perspective
The Evolution of Mainstream Economics
Classical Economics
Division of Labor
Factors of Production
Competitive Markets
Savings and Capital
Classical Political Economy after Smith
Neo-Classical Economics
John Maynard Keynes and Keynesian Economics
The Development of Institutional Economics
Thorstein Veblen
Contributions: Veblenian Economics
Veblen Myths
John R. Commons
Wesley Clair Mitchell
Walton Hamilton
Depression and New Deal Economics
Post-War and Contemporary Institutional Economics
Questions and Issues for Discussion
Notes
3 Theoretical Foundations
The Concept of Culture
Evolution
The Veblenian Dichotomy
The Technological/Instrumental Aspect
The Ceremonial/Ideological Aspect
Patterns of Institutional Behavior
Principles of Institutional Adjustment
Institutional Adjustment in Practice
The Enduring Tension
Public/Private Conflict
Differential Power Groups
Class/Social Stratification
Questions and Issues for Discussion
Notes
4 The Evolution of Economic Society
Settled Life and the First Agricultural Revolution (10,000 BCE)
The Second Agricultural Revolution (700–1400 CE)
The Printing Press
The Scientific and Industrial Revolutions (1500–1900)
Third Agricultural Revolution and Industrial Society
Industrial Evolution in the United States, 1870–1940: The Machine Process
Electronic Machine Process: Contemporary Financialization
A Theory of History
Questions and Issues for Discussion
Notes
5 Human Behavior and Economic Analysis
Doing
Habit: Instinct–Impulse
Behavior Patterns
Knowing
Means–Ends Continuum
The Logic of Inquiry
Research Tools for Economic Inquiry
Valuing
Value Theory
Institutional Value Theory
Values: The Unity of Value
Freedom
Democracy
Security
Abundance
Equality
Excellence
Time: Speed
Value Change
Patterns of Behavior: Interest and Commitment Profiles
Individual Wreckage
Militant Patterns
Most People
Analysis and Institutional Adjustment
Questions and Issues for Discussion
Notes
6 Production Theory and Resources
Theory of Production
Resources: Whence They Come
Work: Human Effort – Skills
Tools and Technology: Capital Accumulation
Capital: Money or Tools
Production versus Output
Costs: Social/Private, Instrumental/Ceremonial
The Organization and Institutions of Production: The Going Concern
Industrial Organization and Structure
The Dual Economy: Center and Periphery, Planning and Market
Private-Sector Central Planning
The Triadic Economy
Path Dependence, Evolution, QWERTY, and Mudholes
Questions and Issues for Discussion
Notes
7 Consumption Theory and Patterns
General Theory of Consumption
Types of Goods and Attributes
Price and Value
Class and Consumption
Individual-Level Consumption and Psychological Theory
Aggregate Consumption Theory
Habit and Mind Control: Advertising and Persuasion
Questions and Issues for Discussion
Notes
8 Class Theory, Income, and Wealth Distribution
Class Theory
Institutional Class Theory
The Institution of the Leisure Class
The Skills Matrix: Working-Class Differentiation
Gender and Race
Distribution Theory
Institutional Distribution Theory
Distribution of Income: Ceremonial and Instrumental
Empirical Analysis of Income and Wealth Distribution
Mobility, Income, and Social Change
Questions and Issues for Discussion
Notes
9 Economic Development and Progress
Background: Alternative Approaches
Institutional Theory
Development: Progress versus Growth
Development Theory: The Principles of Adjustment and Progress
Values, Planning, and Goals
Planning
Goals
The Institutional Approach in Practice: Cases
Global Development: Environment, Resources, and Climate
National Development: Colombia
Local Cases: Kansas City Neighborhood; United Kingdom Self-Healing Cities
Questions and Issues for Discussion
Notes
10 Institutions in Action
Government
Legal Foundations: Law and Property
Government and the Social Control of the Enduring Tension
Control of Social Costs
Work and Labor
Wages
Wages and the Economic Arts
Job Guarantee as Institutional Adjustment
The Modern Corporation
Ownership and Control
Corporate Power
Money: Old and New
Financial Institutions: Banking, the Central Bank – Instability
Modern Money and Government Finance
Social Security and Insecurity
Selected Social Security Systems
Social Security Solvency
Questions and Issues for Discussion
Notes
Conclusion
Change, Conflict, and Cultural Borders
What Is Next?
Questions and Issues for Discussion
Index
End User License Agreement
List of Tables
Chapter 1
Table 1.1 Comparison of Institutional and Mainstream economics, selected topics
Chapter 3
Table 3.1 Examples of Veblenian economic distinctions
Chapter 4
Table 4.1 Production of selected agricultural products in the United States, 1840–6...
Table 4.2 The evolution of industrial society
Chapter 6
Table 6.1 Forces of production: Institutional and Mainstream
Table 6.2 Denison’s analysis of the residual, in percentages, 1962
Chapter 8
Table 8.1 Dominant Western institutions and classes, thirteenth through twenty-first centu...
Table 8.2 The Skills Matrix
Chapter 9
Table 9.1 Income and wealth distribution, by percentage of population, selected countries,...
Chapter 10
Table 10.1 Selected pro-competition and regulatory laws, United States
Table 10.2 Top ten most profitable companies worldwide, 2023
List of Illustrations
Chapter 3
Figure 3.1 The Veblenian dichotomy
Chapter 4
Figure 4.1 Examples illustrating the evolution of cutting tools
Figure 4.2 Illustration of McCormick reaper
Chapter 5
Figure 5.1 Diagram of pragmatic inquiry method
Figure 5.2 Model of instrumental/pragmatic doing, knowing, and valuing
Figure 5.3 Model of ceremonial doing, knowing, and valuing
Figure 5.4 Schematic of two-way stretch in the value structure
Chapter 6
Figure 6.1 Zimmermann’s model of functional resource theory
Figure 6.2 Characteristics of labor, skills, and the division of labor
Figure 6.3 The Skills Matrix
Figure 6.4 Illustration of the Skills Matrix
Figure 6.5 The going concern model
Figure 6.6 The going concern model – extended
Figure 6.7 Going concern model – extended: real- and financial-sector firms
Figure 6.8 Dual market production economy
Figure 6.9 Example of indirect board of directors interconnection
Chapter 8
Figure 8.1 Dichotomized class and status distinctions
Figure 8.2 Female labor income share, in percent, selected countries, 1991 and 2019
Figure 8.3 Median value of net worth, by race, United States households, 2021
Figure 8.4 CEO-to-worker compensation ratio, 350 largest publicly traded companies, United ...
Figure 8.5 Earnings for selected occupations, male and female, United States, 2022
Figure 8.6 Income Gini coefficients, selected countries, 2020
Figure 8.7 National pre-tax income distribution, by percentage, selected countries, 2021
Figure 8.8 Distribution of wealth, by percentage, selected countries, 2021
Figure 8.9 United States distribution of income, by quintile, selected years, 1970–2...
Figure 8.10 Wealth distribution in the United States, by percentage, 2023
Chapter 9
Figure 9.1 Percentage income, top 1 percent of population, selected countries, 1950–...
Chapter 10
Figure 10.1 Cumulative total immigrants, selected countries, 2024
Figure 10.2 Cumulative immigrants as percentage of total population, selected countries, 202...
Guide
Cover
Table of Contents
Begin Reading
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Institutional Economics
Theory & Practice
James I. Sturgeon
polity
Copyright Page
Copyright © James I. Sturgeon 2025
The right of James I. Sturgeon to be identified as Author of this Work has been asserted in accordance with the UK Copyright, Designs and Patents Act 1988.
First published in 2025 by Polity Press
Polity Press
65 Bridge Street
Cambridge CB2 1UR, UK
Polity Press
111 River Street
Hoboken, NJ 07030, USA
All rights reserved. Except for the quotation of short passages for the purpose of criticism and review, no part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of the publisher.
ISBN-13: 978-1-5095-5669-4
ISBN-13: 978-1-5095-5670-0 (pb)
A catalogue record for this book is available from the British Library.
Library of Congress Control Number: 2024945653
by Fakenham Prepress Solutions, Fakenham, Norfolk NR21 8NL
The publisher has used its best endeavors to ensure that the URLs for external websites referred to in this book are correct and active at the time of going to press. However, the publisher has no responsibility for the websites and can make no guarantee that a site will remain live or that the content is or will remain appropriate.
Every effort has been made to trace all copyright holders, but if any have been overlooked the publisher will be pleased to include any necessary credits in any subsequent reprint or edition.
For further information on Polity, visit our website: politybooks.com
Figures
3.1 The Veblenian dichotomy
4.1 Examples illustrating the evolution of cutting tools
4.2 Illustration of McCormick reaper
5.1 Diagram of pragmatic inquiry method
5.2 Model of instrumental/pragmatic doing, knowing, and valuing
5.3 Model of ceremonial doing, knowing, and valuing
5.4 Schematic of two-way stretch in the value structure
6.1 Zimmermann’s model of functional resource theory
6.2 Characteristics of labor, skills, and the division of labor
6.3 The Skills Matrix
6.4 Illustration of the Skills Matrix
6.5 The going concern model
6.6 The going concern model – extended
6.7 Going concern model – extended: real- and financial-sector firms
6.8 Dual market production economy
6.9 Example of indirect board of directors interconnection
8.1 Dichotomized class and status distinctions
8.2 Female labor income share, 1991 and 2019
8.3 Median value of net worth, by race, 2021
8.4 CEO-to-worker compensation ratio, 1980–2021
8.5 Earnings for selected occupations, 2022
8.6 Income Gini coefficients, 2020
8.7 National pre-tax income distribution, 2021
8.8 Distribution of wealth, 2021
8.9United States distribution of income, 1970–2022
8.10 Wealth distribution in the United States, 2023
9.1 Percentage income, top 1 percent of population, 1950–2022
10.1 Cumulative total immigrants, selected countries, 2024
10.2 Cumulative immigrants as percentage of total population, 2024
Tables
1.1 Comparison of Institutional and Mainstream economics
3.1 Examples of Veblenian economic distinctions
4.1 Production of selected agricultural products in the United States, 1840–60
4.2 The evolution of industrial society
6.1 Forces of production: Institutional and Mainstream
6.2 Denison’s analysis of the residual, 1962
8.1 Dominant Western institutions and classes, thirteenth through twenty-first centuries
8.2 The Skills Matrix
9.1 Income and wealth distribution, selected countries, 2021
10.1 Selected pro-competition and regulatory laws, United States
10.2 Top ten most profitable companies worldwide, 2023
Boxes
4.1Time magazine, August 5, 1929
4.2 The Enron episode, 2001
5.1 Veblenian instincts
7.1 Summary of consumption variables
9.1 Ivanhoe socio-economic characteristics
9.2 Ivanhoe development goals and strategies
Preface
Institutional economics is a scientific approach to understanding real-world economies. It began in the United States over a century ago and has witnessed increased interest and development in the past few decades. There is a large and growing literature in the field. This volume provides a guide for students of economics and the social sciences. While designed for undergraduates, it may prove useful to graduate students who have not previously studied Institutional economics. Others interested in an alternative approach to economic analysis may find this work of interest. The approach in this text is to provide a theoretical structure, along with selected examples and cases, which instructors and students can utilize to bring in the larger and more detailed ways that Institutional economics can aid in understanding economic activities and economies. The text includes coverage of history, theory, policy, and methods useful at multiple levels of economic education. The book covers specific theoretical elements of Institutional economics and integrates them into areas of economics such as production, consumption, and distribution. It includes theoretical and application tools suitable to delve into the complexity of the modern economy. These tools are extended to examine value theory, economic development, socio-economic stratification, and specific institutions such as the modern corporation, property, and government. Additional online resources to accompany the book can be found on the companion website: www.institutionalthought.org/ietp/resources.
Acknowledgments
Human actions are socially organized and created. This book is no exception. It is impossible to account for all the people and experiences that have come to bear to create this work. I would be remiss to not mention Rodney Mitchell who mentored me as an undergraduate and was the first to encourage me to pursue the study of economics. John Hodges and Joe Brown, both students of Clarence Ayres, and my teachers at the University of Missouri–Kansas City, directed me to the University of Oklahoma to study with Nelson Peach and Jim Reece. John Munkirs and Ben Young, colleagues since our years at Kansas City and Oklahoma, have contributed to this work more than can be expressed. My thanks also go to James Peach for his many comments that helped shape this work, and his years of encouragement. Students at the University of Missouri–Kansas City, especially Tom Hale, Doug Bowles, Linwood Tauheed, Panayotis Giannakouros, Erik Dean, Zdravka Todorova, and others too numerous to name, will see their impact on this volume. My editors at Polity rendered valuable and timely service. Finally, my deepest appreciation goes to my family: sons Michael and Matthew, and especially my spouse, Maribeth, who has somehow managed to bear up splendidly through all the years of my academic pursuits, including work on this book.
Abbreviations
AI
artificial intelligence
ATT
American Telephone & Telegraph
BTU
British Thermal Unit
CEO
Chief Executive Officer
CNC
Computer Numerical Control
EM
electronic machines
FICA
Federal Insurance Contributions Act
GDP
Gross Domestic Product
GIS
Geographic Information Systems
HDI
United Nations Human Development Index
QED
quantum electrodynamics
SD
systems dynamics
SFM
Social Fabric Matrix
WHO
World Health Organization
1Introducing Institutional Economics
Institutional economics is a way of analyzing economic behavior based on the evolution of social practices and their relationship to making a living. Institutions are the controlling force at the center of the economy. They determine how fundamental economic questions – such as what, how, and for whom – are answered. Institutions organize and control economic activity including producers, consumers, markets, government, and more. Hence, scientific analysis of economic activity requires understanding institutions. The theory of institutional evolution forms the basis for scientific economics relevant to real economies. A main task is to understand how institutions have developed, and their consequences for the life process, including the health and well-being of individuals; and, through the understanding of these dynamics, to examine potential paths for future developments.
This book is an introduction to Institutional economics in the tradition of Thorstein Veblen, John Commons, Wesley Mitchell, and Walton Hamilton, sometimes referred to as Original Institutional economics. It offers a systematic introduction. Institutional economics includes two major parts: (1) an evolutionary theory and practice of economic analysis; and (2) a critical analysis of the Mainstream approach to economics. The purpose of this text is an explanation of the former. Attention to the latter occurs to point to contrasting approaches. Institutional economics is an alternative way of thinking about the economy and economic organization, rather than a modification or appendage to Mainstream economics. There are substantial misunderstandings, misperceptions, and errors regarding the content and importance of Institutional economics. Along the way some of these may be resolved.
Institutional economics is distinct from other theories in four ways. First, the cultural level of analysis forms the basis for theoretical development. The individual level is understood and analyzed as part of the cultural level. Second, an evolutionary method is used because economies evolve rather than move toward equilibrium. Third, economies are seen as embedded in and controlled by institutions, not by economic laws. In turn, institutions combine the interconnected forces of technology and ceremony which shape economic activity. Fourth, values and value judgments are legitimate subjects for scientific analysis. They are not mere opinions. They are not dualized with facts. There is a distinction between instrumental values, which are based on scientifically warranted cause and effect, and ceremonial values which are culture specific and based on spurious or imaginary cause and effect.
Organization and Terms
This chapter outlines the rationale and logic of the subsequent chapters. It also briefly introduces the tools and concepts explained in following chapters. Chapter 2 is a brief history of economic thought, tracing the evolution of Mainstream economic thought and situating Institutional economics in the field. Chapter 3 covers the principal theoretical elements of Institutional economics. Two important concepts – culture and evolutionary theory – and three theoretical tools – the Veblenian Dichotomy, the Principles of Institutional Adjustment, and the Enduring Tension – are introduced. Each is briefly explained below and in later chapters is applied to specific activities. With these in place, the simple elegance of the theory at the core of Institutional economics provides a story sorting out the complexity of economic activity and bringing it into clearer focus. Drawing on the concepts and tools in chapter 3, chapter 4 examines the evolutionary history of economic society. This leads to analysis of central economic activities in subsequent chapters. Chapter 5 combines doing, knowing, and valuing to present a unified approach to method and behavior. The elements of human behavior, habit and instinct, are discussed in the context of cognitive control theory. A model of the evolutionary, pragmatic method, and research tools illustrates how doing, knowing, and valuing are connected. A discussion of valuing covers the distinction between instrumental and ceremonial valuation and their application to economic valuation and completes the chapter. Chapter 6 is devoted to the theory of production, resources, and the organization of production. Chapter 7 lays out the theory of consumption and the forces and patterns affecting the demand for goods and services. Chapter 8 deals with class and distribution, while chapter 9 brings together threads from the previous chapters to analyze economic development. Chapter 10 examines the dynamics of specific institutions – government, the modern corporation, labor, money and its controlling organizations, and social security – as they have evolved and impacted economic life. The Conclusion is future looking. It outlines areas for potential new work and economic problems to be addressed. Not all issues and concepts are included in each chapter. At the end of each chapter, selected questions or issues are posed as a basis for discussion in extension of the material in the chapter. Users are invited to delve into areas to which their interests are drawn.
For the purpose of clarity in the remainder of the book, when referring to Institutional economics or Mainstream economics, the names will have an initial capital. Mainstream economics, as referred to here, includes Classical, Neo-classical, and Marginalism. In the literature, these go by various names such as “standard,” “conventional,” “received,” and so on. Mainstream economics refers to those approaches in which the market, scarce resources, equilibrium, supply and demand determined by price, and price as a measure of value are the central focus. It does not include Marxian economics, the economics of Keynes, or Post-Keynesian economics. Institutional economics includes Original Institutional economics and extensions and modifications introduced by Neo-Institutionalists, but not by New Institutionalists.1
Definition of Economics: Scope and Nature
A significant difference between Institutional economics and other approaches lies in definition. Definition sets the tone and scope of a subject matter. It frames the questions and issues to be raised. The Institutionalist definition is: economics is the study of the ways humans make a living.2 Making a living takes place in the institutions embedded in society. The Mainstream view is that economics is the study of the allocation of scarce resources among alternative uses. The framework is supply and demand determined by price in the context of market equilibrium. This means the focus is on production using scarce resources, and consumption as the end of economic activity. The scarce productive factors – land, labor, capital, and entrepreneurship – produce combinations of goods that satisfy some wants and not others. To be sure, the supply, demand, and distribution of goods and services lie at the heart of economic activity. This provisioning includes production, distribution, and consumption to meet human needs and wants. On this point there is little dispute. Yet the main concern is the forces that affect the supply and demand involved in provisioning. These forces go well beyond price and market allocation.
Simply stated, an economy is an instituted process involving economic and noneconomic activities. Government, religion, class, and social values are important.3 The study of the economy starts with the evolutionary behavioral patterns of institutions. These patterns are expressed in the interaction of technology and ceremony and how they jointly affect and determine the material well-being of all. These are the principal forces for the study of production, consumption, distribution, class, value theory, and economic development. Supply, demand, and prices are determined by these forces. The Mainstream definition does not include the institutions and social conventions in which economies are embedded and thus leaves out important forces and factors that affect making a living.
The Institutionalist definition of economics means more questions and issues may be raised. When a specific economic activity is under consideration, the examination occurs in the context of human behavior. Political, environmental, legal, and other activities are not necessarily separated from economic ones. Economic activity is not entirely distinct from social and political activity. This does not mean that all areas of knowledge must be brought to bear on each question or issue. It does mean that other areas are not automatically excluded because they lie outside of the scope of “economic” inquiry. The reason is straightforward: human activity occurs as a whole.
A criticism of Institutional economics is that it is too materialist. As the saying goes, “Man does not live by bread alone.” This is true for the simple reason that bread does not occur alone. Bread, like all other “materials” of life, occurs as part of a social process – an increasingly complex social process, and thus an increasingly complex provisioning process. Life is about more than bread, but without it there is no life. The production, distribution, and consumption of bread are up to those with the expertise, judgment, and power to conduct the life-provisioning processes. Economics as a social science is responsible for helping to understand these processes, explain their organization, and how they change and adjust. The general force that controls this is institutions.
What Is an Institution?
There are alternative definitions of this concept. Unfortunately, there is no single definition used in Institutional economics. Fortunately, the various definitions have commonalities. In this text, an institution is defined as correlated patterns of human behavior comprised of technological and ceremonial aspects, terms defined below. Thorstein Veblen’s definition of an institution was “a widely prevalent habit of thought.” John Commons’ definition was “collective action in control, liberation, and expansion of individual action.” These are reconcilable. Habits of thought control and expand individual action, and a widely prevalent habit shapes collective action. J. Fagg Foster’s definition was “an institution is a correlated pattern of behavior.” Correlated patterns of behavior can be seen as “prevalent habits” since habit is a force controlling behavior. Another definition is that institutions are the rules that constrain human actions. This definition may also be seen as compatible with the others. Rules can be thought of as having both a ceremonial and a technological basis. On the technological side, rules are the logic or laws of tool use. This logic enforces the rules. Tools, no matter how simple or complex, operate effectively only within the bounds of their logic. A nail cannot be driven with a saw. A music score has specific rules affecting time and notes. From the ceremonial aspect, humans create and impose controls and constraints. Some laws are formal, but also ceremonial – the voting franchise, for example. Others, such as taboos, customs, norms, or traditions, are informal. Both are socially sanctioned and enforced. This behavior involves both socially proscribed and prescribed rules required for group association and rules derived from myth, superstition, and invidious comparison. These definitions all require collective action because patterns of behavior only involve groups and only groups formulate rules that constrain others.
The Concept of Culture: Human Behavior
Perhaps the most significant difference between Institutional and Mainstream economics is the former’s grounding in the cultural level of analysis rather than the individual level. A culture is a way of life. It is the temporal continuum of things and events. Specifically, culture consists of tools, customs, institutions, beliefs, rituals, games, works of art, language, and more. Culture is not an undifferentiated conglomeration. Anthropologists have identified specific aspects or sectors.4 Institutional economics draws on two of these aspects: the ideological and the technological aspects. The ideological aspect, which in Institutional theory is called the ceremonial/ideological aspect, includes totems, taboos, class and status stratification, and the myths and legends that explain and justify these. The technological aspect involves the cumulative and progressive use and invention of tools. This aspect allows one generation to begin where the preceding generation left off. These two culturally organized and interconnected aspects of human behavior are the central core for explaining human behavior. A more complete discussion is undertaken in chapter 5. For now, a few comments will suffice.
Theories of human nature usually split over whether people are creatures of instinct or of reason. Institutional economics relies on neither. The basic fact of social significance is that people do what they do because of habit. Habit does not mean blind repetition or conformity to the past. It is the influence of the past on the present and future. Habit and critical thought are not necessarily divorced, although, beginning in infancy, most people are educated to conform to the prevailing institutions and form habits compatible with this institutional environment. Humans begin life as infants, dependent on other people. In time, children adopt the customs, institutions, and tools that become habits. The Institutional theory of human behavior is lodged in the Darwinian concept of cumulative change. Thus, behavior involves a process of adjustment to problematic situations and cognitive perceptions of these situations.
Evolutionary Analysis
The evolutionary basis of economic activity is adapted from the work of Charles Darwin and other biological evolutionists. The Darwinian concept of cumulative change and adaptation is evolution by natural selection. This theory was combined with genetics in the first third of the twentieth century to form the synthesis which now prevails in the sciences. The difference between evolutionary change and other types, such as mechanical, lies in the factors that create and shape the change. Evolutionary economic change shares the same sources as biological evolution, but the ingredients are different. Biological evolution has three main sources: Inheritance, via DNA; Variation, via mutation and reproduction; and Adaptation, via interaction with other species and the environment. Economic evolution occurs via Inheritance of culture, Variation via invention, and Adaptation via institutional adjustment. In Institutional economics, the simultaneous evolution of technology and ceremony are the active forces of institutions. Their dynamic interaction creates situations requiring adaptation or adjustment. Adjustments are part of the patterns of social arrangements and derive from the transactional activities of individuals with others and their environments.
The Veblenian Dichotomy
This approach to the “nature and causes of the evolution of institutions” is through the lens of the Veblenian dichotomy. This analytical dichotomy has two dimensions, consisting of the integration of the generic ends of life and the means–ends continuum. It is the theoretical starting point for Institutional theory and is a theoretical tool used to analyze institutions. Institutions are dichotomized into two aspects of human behavior: the technological/instrumental and the ceremonial/ideological. Economic activity involves the simultaneous evolution of these two. Each is a way of doing, knowing, and valuing. Both branches of the dichotomy are aspects of human behavior. How these two interact and interrelate is the main determinant of economic activity. Both technological and ceremonial aspects carry analytical weight vis-à-vis the functioning of the economy. Economic activities take place in an interconnected pattern of institutions that have evolved through a process of cumulative causation. Thus, making a living is, at bottom, a function of how these two ways of doing, knowing, and valuing interact.
What Is Technology?
Technology is a learned aspect of human behavior occurring in patterns of tool use and creation. It is not an external force. It is not like a coat that can be taken off as may strike one’s fancy. It is part of the network of social and personal relationships and permeates these relationships. The concept is more broadly defined than in conventional usage. It ceases to be a concept of tangible material adaptations of science to industry and becomes behavioral, designed to capture the impact of the sum of the instrumental heritage. Technological behavior derives from warranted or experimental/scientific knowledge. This behavior is based on an instrumental logic or system derived from tools and tool-using (skills). The term captures the process from which the technological aspect derives its logic. The process and its accompanying logic condition the technological aspect so that the resulting behavior is in accordance with the continuum of experimentally selected means–ends and their attendant consequences for both ceremonial and technological adjustment.
What Is Meant by Ceremony?
Ceremonial/ideological behavior forms correlated patterns based upon, and deriving from, myth, legend, and tradition. It involves ceremonial/ideological knowledge and spawns a ceremonial logic or system. Ceremony includes ideologies and creeds that enforce and justify beliefs and actions. These behaviors are verified by the ceremonial seat of authority. Ceremony is socially validated and reinforced by a non-scientific validation process: spurious cause and effect. The ceremonial process involves inhibitions to change and promotes reenactments of the past. The character of these reenactments takes form from the validating myths and legends. For example, the myth of free enterprise forms the basis for the ceremonial validation of the institution of competition, which in turn is used as a basis for determining prices without consideration of power.
Principles of Institutional Adjustment
To understand economic change, and therefore changing institutions, a theory of how economies evolve is needed. Three principles of institutional adjustment form the basis for understanding this process. These principles indicate behavioral changes needed as institutions adjust to the forces impinging on them. Instrumental primacy5 is the principle that indicates that change is predicated on the actual ability to do something. It must precede any adjustment to an institution; it is primary. This involves technological progress – additions to the warranted stock of knowledge. Recognized interdependence specifies the pattern of interconnectedness and interdependency of the institutions/members affected by the change. Since the institutions of a society are interconnected, adjustments require understanding and recognition of these patterns. Minimal dislocation sets the limits, in terms of rate and degree, of any adjustment. Adjustments must be capable of integration into the remainder of the existing social fabric. This does not mean that adjustments are necessarily small, only that there is a limit based on the integration of associated institutions.
Enduring Tension
Tension and conflict have long been part of human association. This condition is called the enduring tension. It is a tension between private and public interest, between groups and classes with conflicting interests, between the welfare of individuals and social welfare. The basic proposition is that people live together neither in natural harmony nor in perpetual conflict. For example, in a monetary production system, individuals can do well if they have money, but may not contribute to the provisioning process. It may come to them because of social position, class, chicane, force, or fraud. For society, including the interdependent network of economic relations, the problem is different. Societies must be capable of provisioning the means of life or they collapse.
Both the Classical economists and Marx were correct in finding a place for conflict in their analysis. Both, however, were incomplete. The Classical notion that conflict will usher in public good via a competitive market economy is a utopian fantasy. Marx’s postulate about the universality of conflict was based mostly upon a history of Western European society and a pre-evolutionary theory of human nature. It leads to the promises of the Enlightenment. In Institutional economics, the enduring tension is part of an ongoing process of human evolution. Humans confront a hazardous world. Part of inhabiting this world is the invention of the industrial and ceremonial arts, and the arts of associated living. These arts enable humans to live together with sufficient harmony or tolerance so that, while the tension endures, it is constrained. The social fabric is not torn asunder. The arts of associated living evolve and accumulate, but when they fail, for example during war or economic depression, the social fabric suffers dislocations and discontinuities.
Institutionalist Critique of Mainstream Theory
Albert Einstein commented that a theory should be as simple as possible – but not more so. The Mainstream approach is a simple story – too simple, and often incapable of explaining real-world economic activities. One aspect of Institutional economics is a critique of Mainstream economics. It is not a central concern in this book, but certain points merit consideration. First is its static, non-evolutionary framework. Economic forces are assumed to move toward equilibrium. They operate mechanically, which means the movements are constrained by a “fixed program” which fails to account for change. Think of an automobile engine. If it has fuel and spark, it repeats the same motions. Economies do not work that way. Rather, continuing the metaphor, the engine itself evolves as increased knowledge – about mechanics, fuels, roads, aerodynamics, and more – is discovered and invented. This takes place in institutions. Since Mainstream economics fails to account for institutions – they are taken as given – this represents a fundamental deficiency in understanding economic activity.
Mainstream economics has an outdated, nonscientific conception of human behavior. It operates from an individualistic theory of behavior failing to account for the fact that humans only exist in groups. The outdated theory carries over into the theory of production, consumption, and distribution. The economic man of Mainstream economics is conceived as a maximizer of pleasure (consumption) and minimizer of pain (production). However, the theory of consumption fails to account for the multiple and changing sources of utility. The theory of production is cast as involving individual agents of production. It fails to account for how knowledge and resources evolve and, beyond the exaggerated importance of markets, how production is organized. The story of Robinson Crusoe is a favorite parable of Mainstream theory. Crusoe’s economy depends on him saving berries so that he has time to fashion a net (accumulate capital) to catch more fish. The story does not explain how he knows which berries are edible or even what a net is or how to make one. Of course, he knows these things because he was raised in English culture before he landed on a deserted island, with a ship full of tools, and his slave Friday, who is also left out of the story. Finally, it does not have a theory of distribution beyond the flawed theory of marginal productivity. It does not account for the social determination of income and wealth. Nor does it account for class, race, and gender, or the sources of power due to these. Thus, at bottom, its noncultural, individualistic basis of analysis renders it an inadequate and unscientific approach, with an unnecessarily narrow scope for economic study.
Table 1.1 is a quick guide to some theoretical and policy differences between Institutional and Mainstream economics. These are addressed in more detail in the following chapters.
Table 1.1Comparison of Institutional and Mainstream economics, selected topics
Topic
Institutional economics
Mainstream economics
Nature and scope of economics
Based on the evolution of institutions
Based on ahistorical self-interested individual agents
Theory of resources
Function of human knowledge and nature
Scarce in nature
Theory of production
Technological and pecuniary forces
Factors motivated by monetary incentives
Theory of consumption
Interaction of instrumental and display utility
Rational, sovereign consumer maximizing satisfaction
Theory of distribution
Interplay of social forces
Marginal productivity
Theory of class
Class determined in prevailing institutional structure by wealth, status, and power
Classical economics – factors of productionMainstream – no class theory
Theory of money
State theory – creation of state – endogenous
Commodity-based theory – exogenous
Role of government
Active – appropriate to activity
Minimum – laissez-faire
Government finance
Tax to control aggregate forces. Federal government spending constrained by supply of real resources – not fiscally constrained. Tax to restrain undue influence
Tax–borrow–spend to maintain balanced budget and market equilibrium
Jobs
Government financed – locally administered job guarantee
Labor force determined by private market forces
Social security
Eliminate payroll tax – fund from general revenue. Recognize it is a production problem not a financial one
Privatize and allow capital markets to generate returns to individuals
Healthcare
Universal one-payer insurance system, funded on pay-as-you-go basis
Private insurance
Economic power
Regulate based on promoting used and useful plant and equipment
Market and anti-monopoly law will control
Economics is still in a period of turmoil, which is one reason there are differing views concerning economic activity. The diversity of views is not just a matter of difference of opinion. It is not necessarily due to feelings of loyalty or bias toward political dogma or party affiliation. These do exist, but the basic issues are larger than mere matters of opinion or political doctrine. How, when, or even if the intellectual turmoil in economics will be resolved is not known. Institutional economics may be able to answer some of the questions facing the economies of the world and, as such, to help in the resolution of the turmoil in economic thought. By way of summary, the following are the principal characteristics of Institutional economics: (1) economic behavior is embedded in the institutional environment, and economic behavior in turn affects this environment; (2) economic behavior and the institutional environment are interactive and co-evolve, requiring an evolutionary theory of analysis; (3) the evolution of economic institutions involves the interaction of technological and ceremonial/ideological forces, often in conflict; (4) economic activity usually involves conflict rather than harmony; (5) conflicting forces, values, and economic relationships call for social control; (6) analyzing economic behavior is interdisciplinary, calling on multiple social and behavioral sciences for knowledge; and (7) given the above characteristics, much of Mainstream economics is mistaken or irrelevant, based on false to fact assumptions, and lacking an evolutionary approach.
Questions and Issues for Discussion
What is the meaning of culture? What difference does it make to lodge economic analysis in culture rather than in the individual?
What is the difference between economic evolution and biological evolution? Discuss other theories of evolution – e.g. Lamarckian – and sources of evolution – natural versus artificial selection.
Discuss theoretical approaches to Institutional economics other than those of Veblen and Commons – e.g. Gardiner Means or Kenneth Parsons.
Discuss the various definitions of institutions used by Institutionalists.
Notes
1
New Institutional economics has a touchstone with Original Institutional economics through the transactions analysis of John Commons. This approach has interesting and varied outcomes. The work of Douglas North became more like Original Institutional economics in later years. Elinor Ostrom’s works on the institutions necessary to sustain the commons has parallels as well. Much other New Institutional work bears only scant relationship to the Original. Only Ostrom’s work is included in this book.
2
Alfred Marshall defined economics as the study of man in the ordinary business of life. His definition is more inclusive than the Mainstream one, even though his work is one of its pillars.
3
See Karl Polanyi (1944),
The Great Transformation
, Farrar & Rinehart, p. 250.
4
For example, Leslie White ([1949] 2005),
The Science of Culture
, Percheron Press, divides the components of culture into four categories: ideological, sociological, attitudinal, and technological.
5
J. Fagg Foster, the first to articulate these principles, used the term “technological determinism.” Here it is named “instrumental primacy.” This term is more in line with terminology used to define the Veblenian dichotomy and, considering contemporary usage of “technological determinism,” is less likely to be misunderstood.
2Economics in Historical Perspective
Understanding economies is not simple. As the search for new economic knowledge has evolved, it is unsurprising that there are alternative approaches.1 The following sketch of economic thought has two objectives: to examine the evolution of Mainstream economic thought and to situate Institutional economics in the field. Thus, this brief tour is undertaken to illustrate the continuities, discontinuities, connections, and departures among the various approaches. This history of economic thought covering multiple schools over a 250-year period necessarily omits important concepts, theories, and thinkers. The purpose here is to point out and summarize the contributions of leading schools and thinkers. For Institutional economics, the purpose includes summarizing specific contributions of leading thinkers, approaching economic analysis on an evolutionary basis, and linking the focus of scientific economics to the evolution of institutions.
Institutional economics has both differences and commonalities with Classical and Keynesian economics but little in common with Neo-classical economics. One example of this, discussed below, is the overarching interest in political economy and policy found in Institutional, Classical, and Keynes’ economics, but lacking in Neo-classical. An underlying concept used to analyze the evolution of economic thought is “the enduring tension.” Recall from the previous chapter that this tension frames the distinction between social and individual welfare. The point at the tip of this spear is that conflicting interests and social tension, rather than a harmony of interests, form the general economic condition. This shows up in the history of economic thought and constitutes a thread running through this sketch. Related to the enduring tension is the theory of value, itself a source of conflict in the development of economic theory and a companion in tracing the history that follows below.
While tension and conflict are not always explicit in economic perspectives, they are present. Adam Smith framed this tension as private vice / public virtue and sought an alternative economic order to replace mercantilism. Thomas Malthus and David Ricardo followed suit but turned it to a prescription for economic stagnation and bare subsistence. Karl Marx saw the problem as an ongoing struggle between the haves and the have-nots – a class struggle leading inevitably to the promises of the Enlightenment. Keynes saw the problem as fallacies of composition that led to an internal breakdown of economic order: individual rationality leading to irrational group outcomes.
This tension is also prominent in Institutional economics. Thorstein Veblen framed conflict and tension within a series of distinctions between science and superstition, or specifically between industrial and pecuniary (monetary) habits. Clarence Ayres fashioned a dichotomy between technology and institutions, or instruments and ceremonies, and examined the tension between these two behavioral aspects. John Kenneth Galbraith used the concepts of countervailing power, dependence effect, and private/public interests to explain why both liberals and conservatives have problems explaining contemporary economies, the large corporation, and why public power – government – was needed to help close the gap between private power and public interest.
The Evolution of Mainstream Economics
Mainstream economics has sought to explain the economy through the lens of market price which is thought to establish a theory of value. Prices, the theory asserts, are determined by supply and demand in competitive markets. The story promises that if the economy behaves as theorized, the result will be the most efficient allocation of resources. It does not promise equity in the distribution of income or wealth. This tour begins with the Classical school. This school emerged as a counter to earlier doctrines such as the thirteenth-century Just Price doctrine of Thomas Aquinas and the mercantile system that dominated Western European countries, roughly between 1500 and 1800. According to Aquinas, a seller committed a mortal sin by charging a price above cost because this would raise their social status above its God-given level. Violation could lead to excommunication. Thus, one was not supposed to buy cheap and sell dear – the opposite of Adam Smith’s view. In the 500 years between Aquinas and Smith, the Just Price doctrine reached its zenith, declined, and was supplanted by mercantile doctrines.
Mercantilists’ ideas centered on how the nation state could increase its stock of gold. International trade organized to achieve an export surplus was one way. An export surplus allowed gold to flow into the treasury of a country selling more goods – exports – than it buys – imports. Since not all countries can simultaneously have a trade surplus, other means were required. One way was colonialism: a system in which the “mother country” imposed economic and political control on a colony or region. This meant, for example, the British imported inexpensive raw materials from the colonies and used them as inputs for more expensive manufactured goods. These manufactured goods were then sold to the colonies and to other nations. The difference between importing cheap raw materials and exporting higher-priced manufactured goods yielded a profit or export surplus. The organizational mechanisms operating the mercantile system were state-chartered monopolies, for both domestic and international trade.
Classical Economics
Classical economic theory emerged, in part, as a refutation of mercantilism. Adam Smith (1723–90), a Scottish philosopher, is considered the founder of economics. In his book An Inquiry into the Nature and Causes of the Wealth of Nations (1776), he sought to explain the causes of wealth. He also articulated serious objections to mercantile policies, especially monopoly rights granted by the state. His economics, or political economy as it was then called, was rooted in English liberalism and natural law philosophy. His conception of the economy was anchored in Newtonian concepts of the physical universe and change in that universe. Newton explained gravitation and planetary behavior as fixed natural laws determining movement within the physical universe. Smith applied these concepts to economics. Accordingly, man, the equivalent of a Newtonian planet, is compelled by self-interest, the equivalent of Newtonian gravity, to operate in certain predictable ways, to move in a certain orbit. Change occurs, but only according to fixed and unalterable laws – at least unalterable by humans. They were Natural laws. The universe is conceived as a fixed whole, and any movement obeys the natural laws, which are but a step removed from the Laws of God – the dominant view of the world in Newton’s time. This philosophy was part of Smith’s view of the forces affecting the economy. It is also how he explained that the conflicting interests of producing classes could be turned into a harmony of interests with market competition. For Smith, growth and wealth could be explained by the division of labor which leads to specialization and hence to increased output. This in turn leads to market exchange fulfilling man’s propensity to truck, barter, and exchange. As the title of his book implies, Smith focused on the growth of wealth and production, and its causes. His theory of production, followed by most Classicals, is built around four main concepts: (1) the division of labor; (2) individual factors of production; (3) competitive markets; and (4) a savings-based theory of capital.
Division of Labor
The division of labor, “the immediate cause of opulence,” leads to specialization and hence to increased output. Smith believed the division of labor was limited by the market. “As it is the power of exchanging that gives occasion to the division of labor, so the extent of this division must always be limited by the extent of that power or, in other words, by the market.”2 Thus, the division of labor and market competition are linked. The larger the market, the greater the division of labor, and therefore the solution to creating wealth lies in the market. Understanding market behavior unravels the secrets of exchange and hence prices. Thus, the division of labor was tied directly to competitive markets. The “free market” and laissez-faire were to establish a new relationship between government and business to replace the mercantile system. It was a system based on unrestricted competition allowing self-interest to be turned to social good. This would bring about a natural harmony of interest among the various economic actors. Left alone by government, the economy would automatically create a competitive environment in which equilibrium, efficiency, and harmony prevailed. The market should be organized to get the best result, to maximize the wealth of the nation. To do this, it was necessary to throw off the shackles of the mercantile system that controlled the economy.
Factors of Production
In Classical economics, “factors of production” theory is at the base of the division of labor and the creation of wealth. The factors – land, labor, and capital – are the necessary and sufficient inputs needed to produce goods and services. Land yields free gifts of nature but has a fixed supply. Labor supply varies but is eventually limited by the ability to produce food and fiber on a fixed land supply. Capital, in the form of plant and equipment, is born of past labor. The factors theory is also an income distribution formula. Land receives rent. Since land is fixed and population increasing, rents are driven up. Labor receives wages. The total amount of wages available to pay labor was limited by the “Wages Fund.” This fund, together with the rising population, drives wages to a subsistence level. Capital receives both interest and profit.3 Interest is paid as an incentive to save. Profit is paid for supervising the other factors and is a residual – the amount left over after rent, wages, and interest are paid.
Competitive Markets
Smith and most Classical economists believed in the concept of competition. Competition4 meant that a market was supplied by many small firms. Being small relative to the total market, they could not control supply and thus could not control price, or have market power, and thereby take unfair advantage of the public. This meant prices of goods were free to fluctuate. It also assumed that the means of communication were limited to such an extent that competitors could not know each other, and it would be impossible to get together to agree to control production and prices. It probably never occurred to Smith that a telephone, much less a worldwide internet, might be invented.
The laissez-faire philosophy is a complicated mixture of ideas of conflict and harmony. Smith tended to see conflict in individual terms. He had confidence that individuals were motivated by self-interest, but he relied upon competition, a particular form of conflict, to force producers to promote public welfare even in the face of their own self-interest. Smith did not favor business owners – rather, he believed market competition would control their self-interested impulses. Further, competition in a free market could reduce the stifling power of the royal government. This is also part of the freedom of investment argument. It is based on the idea that, even though producers seek their own self-interest, they are led by an Invisible Hand to create something which was never intended – namely, the public good. What makes things work out, what assures that the activities (free investment) of producers will lead to wealth, is God. The creator of the universe established a natural course of things. The benevolent creator takes care of all things spiritual and economic if collective action and government are kept out of the way.
Savings and Capital
Increased plant and equipment allow labor to produce wealth, but their acquisition is limited by the willingness to postpone consumption, to be parsimonious and save. Saving, postponing consumption, is necessary so that resources can be allocated to create more capital. In Mainstream economics, saving must precede capital accumulation. The basic idea is that if all income is consumed, there can be no increase in capital thus allowing increased production due to greater productivity. Smith and the Classical economists hailed saving and parsimony as the factors that were primarily responsible for the growth of industrial civilization. This issue was of such concern to early economists that it pushed consumption, the other component of income, to the side, with scant attention given it. To have increasing savings, an unequal distribution of income is not only justified but required and celebrated. The savings-centered theory of capital accumulation is one of the more enduring pillars of the Classical school.
Classical Political Economy after Smith
By the early nineteenth century, the general opinion was that production theory was complete, and attention turned to distribution theory. Two prominent political economists, Thomas Malthus and David Ricardo, wrestled with this issue. Malthus is best known for the population thesis. He believed that the pressure of population would make it impossible to produce enough food. Resource scarcity combined with population pressure resulted in a bare subsistence for the masses, a natural condition about which nothing could be done.
Ricardo was concerned with finding the market forces that would create a distribution of income bringing harmony, or at least equity, to the classes. He combined the “Iron Law of Wages,” the idea that wages are driven to a subsistence level, with the population theory of Malthus. The classes are attached to the factors of production – land, labor, and capital – and their incomes to these factors. Unlike Smith who was writing before the industrial revolution had had much effect, Ricardo and Malthus were writing as the spread of steam-powered machinery was significantly affecting the British economy. There is a sense that Classical economics emerged to address the conflicting interests of the old, landed aristocracy that dominated agriculture, and the rising industrialists or capitalists who were increasing manufacturing output. The income of the landed interests – rent – was under pressure from the increasing income share of capitalists – profit (and interest). This tension, or conflict, spurred debate among economists, especially Ricardo and Malthus.
