Institutional
economics is a policy-oriented social science that
seeks resolution of economic-political problems at
government levels that impair the efficiency and
equity of the economic
system and the fair
distribution of the resultant income and wealth.
Institutional economists generally
question the presumption of neoclassical orthodox
economics that participants in the economy acting
separately and competitively to maximize their own
individual self interests in unregulated free
markets necessarily result in the best possible
common good. Among the aims of institutionalists
are the development of effective normative policy
analyses upon which goal-oriented government
economic policy is derived and problem-solving
programs are formulated and implemented to achieve
policy aims.
While much intellectual roots
in American thought had been sourced from European
thinkers, institutional economics in the United
States had been developed by American economists
in the US historical and political context. Two
major figure in US institutional economics are
Thorstein B. Veblen (1856-1929) and John Rogers
Commons (1862-1945).
The contribution
of Thorstein Veblen A popular and witty
critic of capitalism, as shown by his classic,
The Theory of the Leisure Class (1899), a
critique of modern consumerism, Veblen integrated
a Darwinian evolutionary perspective with his new
institutionalist approach to socio-economic
analysis. Veblen put forth a basic distinction
between the productiveness of "industry" run by
skilled engineers, which manufactures real goods
of utility, and the parasitism of "business",
which exists only to make profits for a leisure
class which engages in "conspicuous consumption".
The only economic contribution by the
leisure class is "economic waste", activities that
contribute negatively to productivity. By
implication, Veblen saw the US economy as being
made inefficient and corrupt by men of "business"
who deviously put themselves in an indispensable
position in society. Veblen believed that
technological advances were the driving force
behind cultural change, but such changes without
guidance are not necessarily connected with social
progress.
In The Theory of Business
Enterprise (1904), published during the height
of the anti-trust era in the US, Veblen employed
his evolutionary analysis to explain the cause and
consequence of small production enterprises
created by engineers being swallowed up by
business firms to provide lucrative profit
opportunities for business managers and passive
shareholders, in a conflict between productive
engineers and manipulative businessmen.
In
combination with the tendencies described earlier
in The Theory of the Leisure Class, Veblen
saw this conflict as resulting in waste and
financial "predation" that served only to enhance
the social status of a leisure class which
benefited from immoral predatory claims to goods
and services provided by hard-working engineers.
Unlike Marx, Veblen professed little
confidence in the ability of workers to manage
society and government. His writings influenced
the intellectual milieu of the Progressive Era, a
three-decade-long period of reformist social
activism beginning in the 1890s and lasting until
the 1920s.
In The Engineers and the
Price System (1921), Veblen envisioned that
capitalism would be overthrown by engineers, not
by workers as Marx predicted. Veblen believed that
technological developments would eventually lead
toward a socialistic organization of the economy
in a "technocracy" movement.
In contrast
to the claim of neo-classical economics on
individual self-interest as the motivating energy
in the market economy, Veblen saw economic
behavior as socially determined and saw economic
organization as a process of ongoing institutional
evolution. Veblen rejected economic theories based
on inner-directed individual action as
"unscientific" in that they fail to grasp the
effects of social and cultural change on economic
changes.
The contribution of John R
Commons John Rogers Commons (1862 - 1945)
at the University of Wisconsin-Madison developed
an analysis of collective action by the state and
associated institutions, which he saw as essential
to understanding economics. His notion of
transaction as being shaped not only by
contracting parties performing what they promised,
but also by the expected counter-actions by actual
and potential competitors, given the effective
enforcement power of the legal system. It is one
of the most important contributions to the
development of institutional economics.
This institutional theory was closely
related to Commons' remarkable successes in data
collection from fact-finding in the field and in
drafting legislation on a wide range of social
issues for the state of Wisconsin. Commons drafted
legislation establishing Wisconsin's workers'
compensation program, the first of its kind in the
United States.
Ironically, Wisconsin
lawmakers voted on March 10, 2011, to strip nearly
all collective bargaining rights from the state's
public workers in one of the strongest blows to
the power of unions in years. The measure set off
weeks of protests at the state capitol and sparked
a walkout by senate Democrats. It passed the state
assembly a day after the state senate used a
legislative maneuver to pass the bill without the
14 Democratic senators who had fled the state in
an effort to block it.
The Wisconsin
assembly passed 53-42 the explosive proposal by
Republican Governor Scott Walker. The state's
senate had approved the bill the night before,
after using a procedural move to bypass its AWOL
(absent without leave) Democrat members.
The vote brought a swift end to a standoff
over union rights that had rocked Wisconsin and
the nation. Tens of thousands of protesters had
converged on the state's capitol for weeks of
demonstrations. The implementation of Walker's
proposal will be a key victory for Republicans who
have targeted unions amid efforts to slash
government spending.
Governor Walker
signed the highly contested bill the very next
day, March 11, taking collective bargaining rights
away from most of the state's public employees.
This anti-labor trend is expected to spread to
other states
In 1934, Commons published
Institutional Economics , which laid out
his view that institutions were made up of
collective actions that, along with conflict of
interests, defined the economy. In Commons' view,
institutional economics added collective control
of individual transactions to then prevalent
economic theories. Many of his books are still
widely read today: The Distribution of
Wealth, New York, Augustus M Kelley, 1893;
Industrial Goodwill, New York, McGraw Hill,
1919; Institutional Economics.,New York,
Macmillan, 1934; Labor and Administration,
New York, Macmillan, 1913; and Legal
Foundations of Capitalism, New York,
Macmillan, 1924.
Alas, Commons was unable
to rise above the racial bias of his time. His
book Races and Immigrants in America (New
York, Macmillan, 1907) reflected the then
mainstream racial prejudice in US society.
The contribution of Henry D Macleod
Commons considered the Scottish economist
Henry Dunning Macleod to be the "originator" of
institutional economics. Macleod's principal
contribution to the study of economics consists of
his path-setting work on the theory of credit,
leading to a theory of money starting from a
theory of credit instead of the usual reverse
linkage.
In The Theory of Credit,
Macleod writes: "Money and Credit are essentially
of the same nature: Money being only the highest
and most general form of Credit." Macleod's Credit
Theory of Money influenced modern Chartalism as a
descriptive economic theory that outlines the
consequences of using government-issued tokens as
the unit of money. The name derives from the Latin
charta, in the sense of a token or ticket.
(On the issue of money as credit, see my series:
Liberating
Sovereign Credit for Domestic Development.
Schumpeter on Macleod In his
magnum opus, History of Economic Analysis,
Joseph Schumpeter wrote: "The English leaders from
Thornton to Mill did explore the credit structure,
and in doing so, made discoveries that constitute
their chief contributions to monetary analysis,
but could not be adequately stated in terms of the
monetary theory of credit. But they failed to go
through with the theoretical implications of these
discoveries, that is, to build up a systematic
credit theory of money..."
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
