History of economic thought
Presentation 10
Petr Wawrosz
Old Institutional Economics
(OIE)
Basic characteristics
• School of economic thought developed especially in
the USA cca 1889 – 1945
• Regards institutions as the key elements of economics,
their study is a major task for economists
• Treats the economy as open envolving system, situated
in nature, affected by technological change and
embedden in broad set of political, cultural social and
power relationships
• Treats individuals not as fixed (utility maximisers) but
shaped by their cultural and institutional situations.
Institutions
• Not very clear definition.
• Walter Hamilton (1919):
- adopts a broad definition of an institution, encompassing organizations
as well as other social structures.
- Hamilton associates an institution with ‘away of thought or action of
some prevalence and permanence’.
- institutions ‘impose form upon the activities of human beings’. He refers
to institutions imposing ‘sanctions’ and ‘penalties’ and refers to ‘standards
of conformity from which an individual may depart only at his peril’.
- institutions often depend on, and interact with, one another.
- not all institutions are the result of conscious design. He is fully aware
that many institutions are ‘never created by design or cut to a blue print’.
• John Commons (1931): institution as collective action in control, liberation
and expansion of individual action. Collective action ranges all the way
from unorganized custom to the many organized going concerns, such as
the family, the corporation, the trade association, the trade union, the
reserve system, the state. The principle common to all of them is greater
or less control, liberation and expansion of individual action by collective
action.
Thorstein Veblen (1857 – 1929)
• Is considered as the „father of institutional economics“. His idea
influenced many scholars who forms old institutional economics.
• A critic of the then economic theory.
- it was based on an unrealistic view of man, which in turn led to
misleading conclusion about the nature of economy as whole. The
then theory saw man as a rational and calculating agent, solely
concerned with a narrow conception of self-interest.
- Veblen: human behavior is determined in large extent by instincts
and habits.
- Instincts and habits are formed by the social interaction between
individuals and by the material basis of society, which is determined
by the state of technology.
- Continuous change.
Theory of Leisured Class (1899)
• Individual behavior is motivated mainly by the desire
for social recognition and prestige.
• Recognition may be also gained by adopting a
prestigious pattern of consumption.
• Conspicuous consumption: consumption of luxuries.
-the more expensive a commodity is, the higher
demand, demand can an increasing function of price,
- markets are not able to allocate resources in efficient
manner: conspicuous consumption leads to waste.
The Theory of Business Enterprise
• Veblen is deeply skeptical about modern business
leadership.
• The people who really understand the nature of
production are the engineers and the production
workers. The power is passed to shareholders
and financial specialists who lost touch with
basic production activities. „Absentee owners“.
• Shareholders try to limit competition in order to
achieve higher profit.
• Principal-agent problem.
Basic facts
• Institutional economics focuses on understanding the
role of the evolutionary process and the role of
institutions in shaping economic behavior. Its original
focus lay in Thorstein Veblen's instinct-oriented
dichotomy between technology on the one side and
the "ceremonial" sphere of society on the other. Its
name and core elements trace back to a 1919
American Economic Review article by Walton H.
Hamilton.[
• Institutional economics emphasizes a broader study of
institutions and views markets as a result of the
complex interaction of these various institutions (e.g.
individuals, firms, states, social norms).
John Commons (1869 – 1945)
• Commons is best known for developing an analysis of
collective action by the state and other institutions, which
he saw as essential to understanding economics.
• Commons believed that carefully crafted legislation could
create social change; this view led him to be known as a
socialist radical and instrumentalist.
• His institutional theory was closely related to his
remarkable successes in fact-finding and drafting legislation
on a wide range of social issues for the state of Wisconsin.
He drafted legislation establishing Wisconsin's worker's
compensation program, the first of its kind in the United
States.
• His students, Edwin Witte and Arthur Altmeyer, went on to
create the Social Security program in the 1930s.
Wesley Mitchell (1874 – 1948)
• Business Cycle (1913) .
• This book offers an analytic description of the complicated
processes by which seasons of business prosperity, crisis,
depression, and revival come about in the modern world.
The materials used consist chiefly of market reports and
statistics concerning the business cycles which have run
their course since 1890 in the United States, England,
Germany and France.
• Mitchell stated an endogenous theory, based on the
internal dynamics of capitalism. Whereas neoclassical
theories are deduced from unproven psychological axioms,
he builds his theory from inductive generalities gained from
empirical research.
Clarence Edwin Ayres (1891 – 1972)
• Publications: „The Nature of the Relationship
Between Ethics and Economics“: first attempt to
establish a philosophical base for institutionalism.
• Ayres strove to identify universal moral values
derived from a "technological continuum,"
defined as "the sum of human skills and tools."
His system denounced mere statistical analyses,
savings accumulation, and full employment as
moral measures and recommended that
governmental policy rather focus on "full
production" or technological advance.