Institutional Economics

Perspectives and Methods in Pursuit of a Better World

Charles J. Whalen

• Publisher: Routledge
• Year: 2021
• Topic: Economics
• eBook ISBN:
  9781000463026
• Subtopic: Economic History
• Index: Economics

Institutional economics is a sociocultural discipline and policy science which draws on the idea that economies are best understood through an appreciation of history, real-world institutions, and socioeconomic interrelations. This book brings together leading institutionalists to examine the tradition's most essential perspectives and methods.

The contributors to the book draw on a broad range of institutional thought from the classic work of Thorstein Veblen, John R. Commons, and Karl Polanyi, to the newer viewpoints of post-Keynesian institutionalism, feminist institutionalism, and environmental institutionalism. Methods range from frameworks used to analyze public policy and institutional change, to modes of analysis including myth busting, historically grounded narratives, and computer-based simulations. Each chapter surveys the origins, development, key features, applications, and frontiers of a particular viewpoint, framework, or mode of analysis. Due consideration is given to both strengths and weaknesses; and woven into the chapters is attention to core institutionalist concepts, including technology, institutions, culture, and complexity.

The book provides economists with promising starting points for new research, students with contributions refreshingly in touch with the real world, and policymakers and social scientists with compelling reasons for engaging further with the institutionalist tradition.

Part I

Perspectives

1 Institutions, technology, and instrumental value

A reassessment of the Veblenian dichotomy

William T. Waller

DOI: 10.4324/9781003160434-1

Introduction

The distinction drawn between “institutions” and “technology,” inspired by the work of Thorstein B. Veblen, and the tradition constructed upon it by institutional economists, especially Clarence E. Ayres and his students, requires reassessment in light of the body of scholarly work addressing and employing it. This chapter provides such a reassessment, including a discussion of that distinction’s future in institutionalism.

The Ayresian interlude in institutional economics is winding down. Through his teaching and writing, Ayres had a dramatic impact on institutional economics after World War II. In The Theory of Economic Progress, his central thesis was that economic development is a function of the increased influence of improved technology, expanding the scope of technological (instrumental) behavior and overcoming the conservative resistance created by a ceremonial cultural legacy (the norms, myths, and legends of the past) that resists change, but also structures behavior. This thesis was quite controversial among Ayres’s contemporaries (Rutherford 2011, 335–338; Almeida and Goulart 2020). But it had a major influence on Ayres’s students (and their students). Many in the so-called Veblen–Ayres tradition viewed this construction—which they called the “Veblenian dichotomy” between technology and ceremonial behavior or institutions—as a methodological approach to analysis, an interpretation encouraged by Ayres (Ayres 1935, 36–37). This chapter will discuss that development.

Ayres’s attempt to address criticism that institutionalism was purely descriptive and non-theoretical seemed to take him back to Veblen (Rutherford 2011, 335). But the elements of Veblen’s theorizing incorporated by Ayres were extremely selective. Ayres rejected Veblen’s use of instinct psychology, upon which Veblen built his concept and theory of institutions. Ayres reconfigured the definition of “institutions” and then contrasted it with technology in ways that cannot be attributed to Veblen (Hodgson 2004, 202; and especially Ayres 1935, 33).

So what did Veblen contribute? Veblen often characterized behavior in terms of two categories. But the crux of the matter is, while Veblen frequently used dichotomous categorization schemes in his theorizing and analysis, this was an analytic rather than a methodological technique.¹ Veblen neither consistently avoided dualistic constructions (in the Cartesian sense) nor developed a consistent set of dichotomies that could be coherently mapped upon one another.

The chapter focuses on reassessing Ayres’s methodological turn. The reassessment will explore reservations that developed and were articulated about the provenance, internal consistency, and practical usefulness of that turn—and will explore the turn’s impact, both positive and negative, on the development of institutional analysis.

Ayres’s thesis (described above) was one of many theories about how Western economies developed; it also became an approach to economic analysis. The 1950s accelerated the exclusion of institutional economics from economics curricula and professional publications that began before World War II, leading to an increasing isolation of institutionalists. One response, especially by Ayresians, was the tendency to present their ideas as an oral tradition. To be sure, this characterization is an oversimplification, since many institutionalists continued to publish in journals and produce books; but with regard to many in the so-called Veblen–Ayres tradition, it is accurate enough. Ayres, his students—especially J. Fagg Foster and his students, particularly Marc R. Tool, Paul Dale Bush, and Louis Junker—and others used and constructed a historical narrative of the Veblenian dichotomy as a methodological approach.

The focus on this Veblen–Ayres approach to institutional analysis had numerous consequences that included creating community solidarity. But strangely, the Veblenian dichotomy, beyond its “methodological” elaboration, did not result in a great deal of application by its proponents—and had even less impact on institutionalism beyond this sub-community of institutionalists. In fact, it was largely ignored by institutionalists in the traditions of Walton Hamilton, John R. Commons, Wesley Clair Mitchell, Karl Polanyi, K. William Kapp, and Gunner Myrdal; by prominent post-WWII institutionalist labor economists; and, notably, by John Kenneth Galbraith. And yet, quality institutionalist research in those traditions continued.

The chapter also gives attention to the negative impacts of the Veblen–Ayres tradition. The focus on the Veblenian dichotomy resulted mainly in attention being directed to the elaboration of variations of Ayres’s theory of economic change. This actually distracted institutionalists from considering other ideas on the character of evolutionary change in social institutions. Paradoxically, Ayres’s approach inhibited careful consideration and scholarship on Veblen’s approach, which was actually based on the role of instincts in the creation of habits leading to the formation of institutions.

The chapter also covers other ground. It demonstrates that Ayres’s views challenged the very meaning of the term “institution.” It also shows that a focus on “instrumental valuation” as the only legitimate form of social valuation, and the later implication that its adoption was inevitable, was dismissive of even the possibility of multiple and alternative processes of social valuation. Finally, the chapter discusses what role, if any, the Veblenian dichotomy should play in the further development of institutional economics.

Veblen gets a pass

Veblen’s concept of institutions is the starting point for understanding the early formulations in which he contrasts institutions with technology. What will become clear is that scholarship since the mid-1980s shows Veblen’s role was one of inspiration for the creation of categories later employed in the development of what eventually came to be called the Veblenian dichotomy.

Institutions

Veblen offers various definitions of institutions. For example:

The institutions are, in substance, prevalent habits of thought with respect to particular relations and particular functions of the individual and of the community; and the scheme of life, which is made up of the aggregate of institutions in force at a given time or at a given point in the development of any society, may, on the psychological side, be broadly characterized as a prevalent spiritual attitude or a prevalent theory of life.

(Veblen [1899] 1934, 190)

In another article, Veblen articulates an often-used definition, which is controversial:

As a matter of course, men order their lives by these principles and, practically, entertain no question of their stability and finality. That is what is meant by calling them institutions; they are settled habits of thought common to the generality of men.

(Veblen [1909] 1919, 239)²

Elsewhere, he writes that institutions are “of the nature of a usage which has become axiomatic and indispensable by habituation and general acceptance” (Veblen [1923] 1964, 101).

Instances in which Veblen describes the evolution of institutions include the following:

The evolution of social structure has been a process of natural selection of institutions. The progress which has been and is being made in human institutions and in human character may be set down, broadly, to a natural selection of the fittest habits of thought and to a process of enforced adaptation of individuals to an environment which has progressively changed with the growth of the community and with the changing institutions under which men have lived.

(Veblen [1899] 1934, 188)³

Institutions must change with changing circumstances, since they are the nature of a habitual method of responding to the stimuli which these changing circumstances afford. The development of these institutions is the development of society.

(Veblen [1899] 1934, 190)

The institutions—that is to say the habits of thought—under guidance of which men live are in this way received from an earlier time; more or less remotely earlier, but in any event they have been elaborated in and received from the past. Institutions are products of the past process, are adapted to past circumstances, and are therefore never in full accord with the requirements of the present.

(Veblen [1899] 1934, 191)

Like all human culture this material civilization is a scheme of institutions—institutional fabric and institutional growth. But institutions are an outgrowth of habit. The growth of culture is a cumulative sequence of habituation, and the ways and means of it are the habitual response of human nature to the exigencies that vary incontinently, cumulatively, but with something of a consistent sequence in the cumulative variation that so go forward—incontinently, because each new move creates a new situation which induces a further new variation in the habitual manner of response; cumulatively, because each new situation is a variation of what has gone before it and embodies as causal factors all that has been effected by what went before; consistently, because the underlying traits of human nature (propensities, aptitudes, and what not) by force of which the response takes place, and on the ground of which the habituation takes effect, remain substantially unchanged.

(Veblen [1909] 1919, 241–242)

Institutions play an important theoretical role in Veblen’s evolutionary economics. The theoretical context for his use of the term (institutions) is as follows. For Veblen, instincts, triggered by environmental circumstances, motivate behavior for addressing problematic circumstances. Successful problem-solving leads to repeated triggering of the behavior when the same or similar circumstances arise activating the instinct again, eventually becoming habits of thought and action. These habitual behaviors are shared with other members of the social group by emulation, education, and diffusion, thus becoming community habits of thought, namely institutions in Veblen’s terminology (see Hodgson 2006, 6–8; Waller 1982; Waller 2016; and Waller 2017b).

Dichotomous categories

Returning to the dichotomy, Veblen certainly had a tendency to distinguish between everyday employments directed at social provisioning in contrast with processes of exploit (Veblen [1899] 1934, 8); pecuniary motivated behavior was contrasted with productive provisioning behavior, thereby highlighting wasteful behavior from behavior directed at provisioning (Veblen [1899] 1934, 208). And in The Theory of Business Enterprise, Veblen ([1904] 1932, 20 ff) famously distinguished between making money (business) and making serviceable goods (industry). However, the characterization of this as a methodology is a much later construction.

In defense of that later construction, Tool constructs an impressive list of such distinctions in Veblen’s work. The following are from Tool (2000, 70–71):

• Institutions of acquisition—institutions of production (Veblen [1899] 1934, 208);
• Pecuniary institutions—industrial institutions (Veblen [1899] 1934, 208); and
• Institutions serving invidious economic interests—institutions serving non-invidious economic interests (Veblen [1899] 193, 208).

Even more dis...

Table of contents

• Cover
• Endorsements
• Half-Title
• Title
• Copyright
• Dedication
• Contents
• List of illustrations
• List of contributors
• Introduction: The institutionalist tradition in economics
• PART I Perspectives
• PART II Methods
• Index