1 Institutionalists ECON 205W Summer 2006 Prof. Cunningham

2 What is Institutionalism? Institution: an organized pattern of group behavior; well-established and accepted as a basic part of the culture. Also referred to as Evolutionary Economics. Seeks to: Understand society’s normative priorities, and the direct implementation of the collective values of a particular culture. Describe the organization and control of the economic system and its historical evolution.

3 What is Institutionalism? (2) Methodology Concepts and Agenda Themes Conclusions Lasting Contributions Focus on social institutions in mainstreams economics Policy implications Vocabulary of discussion Association for Evolutionary Economics, Journal of Economic Issues Keynesian, Post Keynesian and other groups have taken over much of Institutionalism’s ground

4 Thorstein Veblen ( ) Background “Probably the most significant, original, and profound social theorist in American history.” Multidisciplinary Human behavior is based on discernible patterns called “instincts.” Thought human history is the evolution of social institutions. Growth and development are the cumulative result of a process of habituation. It is culture and social institutions that differentiate humans from other animals.

5 Veblen (2) Traits or instincts that arise underly all of human behavior and are inter-related in a fundamental way. They form a fundamental antagonistic dichotomy in nearly all societies. Two clusters of traits in perpetual conflict: Cluster I: Related to Workmanship Cluster II: Related to Exploitation (Predatory Instinct) The conflict between these two and the social institutions created to deal with this conflict, was the central point of Veblen’s social theory.

6 Veblen (3) Critique of Neoclassical Economics. Simple product of Benthamite Utilitarianism Attacked consumer sovereignty,saying society might be better off if gov’t directed production. Neoclassical economics is static. Simplistic view of human nature and social institutions Equates hedonism with human nature Offers his own perspective on the purposes of neoclassical theory.

7 Veblen (4) Insists that production is always social and cultural Production requires human beings to share knowledge and skills Categorizing inputs and land, labor, and capital is peculiar to capitalism. The categories of wages, rents, and interest are flawed and problematic. Neoclassical theory is designed to obscure the fundamental antagonism between capitalists and workers.

8 Veblen (5) Rejects (private) property rights. Production is inherently social. Private property originated in brute coercive force and is perpetuated by force and by institutional and ideological legitimization. Capitalism leads to the subjugation of women.

9 Veblen (6) Basic Conflicts Business vs. Industry Salesmanship vs. Workmanship Exploitation vs. Workmanship Ideals of workmanship vs. the leisure class Workmanship is an instinct. People have a proclivity for achievement, not effort. Concerns of the managerial class, the pursuit of profit.

10 Veblen (7) Government Ultimate power is in the hands of owners of capital because they control the government. Did not deny the democratic nature of U.S. government. Social Mores Cultural and social domination of the leisure class

11 Veblen (8) Theory of the Leisure Class. Most is devoted to a detailed description of how the leisure class displays its predatory prowess. “Conspicuous consumption” “Veblen good” “Conspicuous use of leisure” The wealthy maintain their position by predation or parasitism. Power is everything.

12 Wesley Claire Mitchell ( ) Veblen’s most brilliant student. Summa cum laude, Chicago, Empirical bent. Studied business cycles. Business cycles are a product of a monetary economy Widely diffused through the economy Related to profit projections Not external, but endogenous and inherent. Founded NBER in 1920 and ran it for 25 years.

13 Mitchell (2) Social planning is appropriate, but raises two difficulties: Agreeing on what it is we want to accomplish Interdependence of social processes. Piecemeal planning is problematic. Need comprehensive plans, considering direct and indirect effects of social actions. Social planning is inevitable.

14 John Kenneth Galbraith ( ) Canadian born. Advisor to U.S. government, held high positions. Board of editors of Fortune. Ambassador to India in Kennedy administration. Professor of economics at Harvard. Author of numerous popular books.

15 Galbraith (2) Critic of the neoclassical “conventional wisdom.” Does not fault originators of the theory, but rather those who follow it blindly. The theory probably persists because it is easy to understand, has clear structure, can be taught, and can be expanded. It is difficult to attack. Helped introduce Keynesian economics to the U.S.

16 Galbraith (3) Dependence Effect As society becomes increasingly affluent, …wants come to depend on output. Theory of imperfect competition? Innovation driven by firms, not by consumer sovereignty. Consumer choice does not drive the economy. Underallocation of goods to the public sector, which he calls “social imbalance.” (Not enough social goods to support the private goods.)

17 Galbraith (4) Theory of the firm Neoclassical theory is only true for small, competitive, owner-managed firms that follow market trends—the market sector. The planning sector—2000 or so largest firms wherein ownership and control are divorced—have different motives. Protective purpose—survival (profit) Requires direct or indirect price fixing. Oligopolists price low to expand market share, not high as neoclassicals argue. Affirmative purpose—growth. Large firms grow as a technological imperative, the result of economies of scale, R&D, etc.

18 Galbraith (5) Favors government policies Argues that economic forces do not work out for the best except for the powerful. Public policy has been unable to bridle the growth of large business. Believes in price and wage controls, control of executive salaries, redistribution. Wants a planning agency to join with corporations and unions to plan economic activity. Very socialist.