Beyond Dissent: Essays in Institutional Economics

Essays in Institutional Economics

Philip A. Klein

• Publisher: Routledge
• Year: 2016
• Topic: Economics
• eBook ISBN:
  9781315484198
• Subtopic: Business General
• Index: Economics

This text provides an ethnography of a Chinese middle school based on fieldwork conducted in 1988 to 1989. It provides a way of looking at classroom and societal interactions in terms of the interplay among criticism, face and shame.

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Part I
Institutionalism—A Basic Perspective

Dissent from Orthodox Theory

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1
Economics: Allocation or Valuation?

Whether or not it continues to be a science of price, economics must be a science of value.

—Clarence E. Ayres
Theory of Economic Progress

Among the social sciences, economics long has suffered from a superiority complex. The economist’s view of his field has been of a discipline that was rigorous and precise, with an advanced and pragmatic methodology leading to a highly developed theoretical structure. All this left far behind the imprecise and murky theoretical strivings of political scientists, sociologists, anthropologists, and historians.

The promised land which economic analysis made possible was known as equilibrium.¹ What sociologist or political scientist or anthropologist could offer any piece of analytical apparatus which for sheer beauty, precision, and logic could equal it? True, psychologists kept insisting that the behavioral assumptions of conventional economic theory—maximizing behavior, hedonism, rationality—all the characteristics of “Economic Man” which economics always has relied on for convenience, were fatally oversimplified. But economists mostly have ignored the complaints of psychologists (who after all had problems of their own). Moreover, the psychologists were only too willing to follow the economist down the quantitative primrose path. Both disciplines once worried about their ancient roots in philosophy and could never quite rid themselves of the nagging suspicion that questions of subjective valuation could not be eliminated entirely so as to render each a 100 percent pure science. Both embraced mathematics as the true methodological messiah come at last.² Together economists and psychologists measured all visibly quantifiable variables, developed models for all problems, and achieved intellectual orgasm through the contemplation of the possibilities of the electronic computer. By enshrining quantification, they believed they had set a standard of scientific excellence sufficiently ahead of their laggardly sister social sciences to enable them to continue virtually indefinitely to play the role of superego to the lowly id of sociology or history.

Without in any way demeaning the very real accomplishments of quantitative procedures in advancing knowledge in critical areas, I should like to suggest that at least in the case of economics, schizophrenia always has been latent in the discipline and has been kept that way only by sweeping under the rug important problems which increasingly have crept out to disturb the neat world of economist and econometrician alike. We can cope with any number of variables in ever more elaborate models, but we cannot cope with underlying questions of direction and meaning, of goals and objectives for the system. The excessive preoccupation with tools with which to cope with problems at best comprising a small comer of economics, and the obsessive need to believe these tools coped with the heart of economics, long has characterized the discipline. Facing up to this obsession involves the fundamental question of whether economics is a science of allocation or a science of valuation. For most of its existence economics has managed to equate the two, and there is a long and bloody literary road devoted to establishing that economics as a “science of price” thereby was coping with all the value problems with which it need legitimately concern itself.

Economics as a Science of Allocation

The central core of economic theory—at least microeconomic theory—was spelled out by Adam Smith and elaborated upon by the well-known nineteenth-century mainstream economists. The culmination was its restatement by Alfred Marshall, who not insignificantly changed the name of the discipline from political economy to economics. The profound changes of the past eighty years have left remarkably untouched much of the field which Marshall defined as “a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.”³ Marshall added that economics “concerns itself chiefly with those motives which affect most powerfully and most steadily man’s conduct in the business part of his life.”⁴ The latter is a far narrower perspective and considerably closer to what in fact Marshall’s Principles dealt with. It was a critical reinforcement to the continued confusion between economics as allocation and economics as valuation.

Marshall’s emphasis on materialism subsequently was questioned, for example, by Lionel Robbins, who wondered how a science concerned exclusively with the material could determine the wage rates for opera stars or orchestra conductors whose productivity is not quite so easily viewed as the more concretely material output of ditchdiggers, carpenters, and others among the myriad toilers in the economic vineyards. Robbins concluded that Marshall’s materialism was a “pseudo-materialism”⁵ and that what was really at the heart of economics was not materialism but allocation. Robbins then defined the field in the way which is customarily utilized to this day: “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”⁶ Such a formulation extricated economists from the materialism quagmire; by adding to this the deceptively simple assumption that the allocation process as carried out through the use of prices in the market disposed of all the ends and scarce means that the proper study of economics need embrace, economists thought they were home free.⁷ The pricing process was assumed to be the vehicle by which the economic system expressed all the allocating priorities of concern to the economist. Thus price became, if it had not always been, the only measure of value with which economics had to concern itself.

Robbins himself reached this conclusion unequivocably by saying that the significance of economic science lay in the fact that “when we are faced with a choice between ultimates, it enables us to choose with a full awareness of the implications of what we are choosing.” But he was very careful to add that “it is incapable of deciding between the desirability of different ends. It is fundamentally distinct from Ethics.”⁸ But even if the distinction between economics and ethics were accepted, the discipline must provide (if it is to permit us to choose with the “full awareness of the implications of our choice”) mechanisms by which such “full awareness” choice can be made. The market alone cannot fill that bill in a modem industrial economy. Allocation and valuation are indeed different, and a discipline concerned only with the former can never permit “fully aware” choices to be made.

Those who view economics as a science of allocation customarily have argued that all participants in the economic process get their “values” from wherever they get them, that in fact societal values are of no concern to the economist. Thus all the economist need do is pontificate: “If an individual chooses to allocate his income in Direction A he must forgo Direction B.” “To achieve certain objectives, here is the most efficient way for society to achieve them, and here is what must be forgone in the process.” Consequently, generations of economics students were taught that economics is not concerned with questions of “ought” but only with questions of “is.” Economics as a science was not normative but positive.⁹ Thus economics was viewed as the administrator of social options, in charge of calculating costs and predicting results, but without any normative participation in the process. The economist qua economist occupied a role in which normative judgments definitionally had no place. Only the economist qua citizen was permitted to be filled with the minimal requisite quantities of passion, prejudice, and “subjective valuation” that reside in the breast of other mere mortals.

This view of economics had some convenient side effects. For one, it enabled economic theory to blind itself to the implicit subjective valuations (previously alluded to) of what it did in the guise of pursuit of the scientific method, rigor, and precision. It therefore enabled economics to emulate the physical sciences and thus led to the coronation of equilibrium as normatively “good” in economics because in physics, from whence it came, it was “natural.” If Keynes’s notion of underemployment equilibrium represented a severe jolt to this notion, in microeconomics it survived because equilibrium prices led to market clearing, which was definitionally good. Finally, equilibrium could be viewed as an end in itself because the continued assumption that Adam Smith’s Invisible Hand (developed for atomistic competition) could be appropriately if only approximately attached to emergent prices in actual markets rationalized away any lurking doubts about how economics disposed of the value problem. Individual selfishness was transmogrified into a process optimizing social welfare, and emergent prices did indeed express the values of society in the only way that need concern the economist.

Economics as a Science of Valuation

The simple world of the classical economist, familiar to all economists, was orderly and attractive, but unrelated to much of the economic reality even of its own time. The history of economics has shown a remarkable tendency to cling to that world, however, and to make emendations only when pushed by a variety of inexorable forces. Even in its own time, classical price theory developed with the Industrial Revolution in England, and so Smith projected his Invisible Hand on a world replete with, among other things, subhuman factory conditions, child labor, widespread poverty, great inequality in the distribution of both wealth and income, vast slums and urban ghettos, and a rigid and unc...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Foreword
• Preface
• Part I. Institutionalism—a Basic Perspective
• Part II. Institutionalism and Concentrated Power
• Part III. The Role of the Public Sector
• Part IV. Applied Institutional Economics
• Part V. Institutionalism and the Obligations of the Economist
• Index
• About the Author