Models of Capitalism in the European Union

Post-crisis Perspectives

Beáta Farkas

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9781137600578
• Topic: Politica e relazioni internazionali
• Subtopic: Commercio e tariffe

This book uses comparative economic analysis to provide a common conceptual framework for all current European Union member states. Based on empirical investigation, the author identifies the Nordic, North-western, Mediterranean, and Central and Eastern models of capitalism on the threshold of the 2008 global financial and economic crisis. The chapters also examine the resulting institutional responses to the crisis and the methods of crisis management adopted by each member state. The analysis reveals that the crisis has not triggered radical institutional change but, instead, highlighted deep institutional differences not between the old and new member states, but between the Nordic, North-western, Mediterranean, and Central and Eastern European countries. These institutional differences are so significant that they require the rethinking of European integration theory.
Models of Capitalism in the European Union serves as a useful handbook for academics, advanced students, policy-makers and advisors who are interested in European economic issues.

Part I
Institutional Analysis in Economics

© The Author(s) 2016

Beáta FarkasModels of Capitalism in the European Union10.1057/978-1-137-60057-8_1

Begin Abstract

1. Institutions in the Economic Thought

Beáta Farkas¹

(1)

Finance and International Economic Relat, University of Szeged, Szeged, Hungary

End Abstract

1.1 Historical Precursors

The thought that “institutions matter” is currently widely accepted in mainstream economics. However, a range of various ideas and approaches existed until this thought gained recognition. In order to understand the current situation, a brief historical overview is needed. Among the classical economists, Adam Smith was receptive to the historical approach, which inherently involved describing the changing institutional system. Analysing the operation mechanism of the market was only an instrument for Adam Smith to create a normative argument—based on the efficiency of the market—for a given institutional system. Screpanti and Zamagni (2005) reference the interpretation of James Buchanan, Gordon Tullock, and Friedrich von Hayek and go as far as to claim that Smith dealt with the comparison of various institutional structures. David Ricardo vigorously moved towards an abstract, deductive model, which was void of almost any historical or institutional content. John Stuart Mill, belonging to the classical school of economics, and Alfred Marshall, who gave a summary of the neoclassical trend, both returned to the methodology of Smith and combined deductive reasoning with historical description (Landreth and Colander 2002). However, Marshall’s approach concerning the institutions did not become generally accepted in neoclassical economics, but rather the thought—which had already been present in the works of the “founding fathers” (William Stanley Jevons, Carl Menger, ¹ and Léon Walras)—that economics studies the universally applicable laws concerning the allocation of scarce resources among alternative uses. It is well known that this brief definition of the subject of economics was polished to perfection by Lionel Robbins in his book titled An Essay on the Nature and Significance of Economic Science in 1932. ² In this system of thought, the aim and motivation of human action are exogenous features built on the a priori axiom of rational thinking and profit maximisation. The legal and institutional environment in which decisions are made is also considered exogenous. For Marshall, it was important that his theory provide answers to the questions of economic reality that are relevant in economic policy. The impact of his approach has faded in this respect, however. In neoclassical orthodox economics, Walras’ legacy—which was preoccupied with the internal logic of the equilibrium models—proved to be more powerful. Positivism, the main philosophical, epistemological theory of the era, also fostered the view that theory enjoys certain autonomy as opposed to reality. Pursuant to this approach, the validity of the assumptions of a model is less important than the model’s ability to forecast. This view did not leave much room to take institutions into account (Henley and Tsakalotos 1993).

Neoclassical economics gained ground in Britain and France, but not in Germany, and it was met with resistance in the USA. Schools both in Germany and the USA placed importance on the study of institutions.

In Germany, even the classical Anglo-Saxon political economy failed to win acceptance. The main characters of the old German historical school (Wilhelm Roscher, Bruno Hildebrand, and Karl Knies), which existed in the less developed, fundamentally agrarian German economy, refused that an economic theory that was valid for the industrialising British economy would be equally valid independent of time and space. According to them, economics, as a social science, must be historically well-founded. It was exactly for this reason that they rejected the attempt of the classical school, especially Ricardo and his followers, to adapt the methodology of physics. The second generation of the German historical school, with its outstanding leader, Gustav von Schmoller, also denied that economics possessed universal laws that would be independent of all historical, social, or institutional contexts. Thus, it is not surprising that the models of Menger, Jevons, and Walras built on marginal analysis and abstract deduction could not take effect in the 1870s (Landreth and Colander 2002; Spiegel 2004).

The German historical school did not develop an alternative economic theory with long-lasting effects; nevertheless, it had a direct influence on American economic thought. At the turn of the nineteenth century, it was not unusual for American students to go to Germany to obtain doctorate degree in economics; thus, several American university professors had gathered experience in Germany. This effect was added to other influences and effects within the USA; consequently, the old institutional school was born. There are essential differences between the views of Thorstein Veblen, Wesley Clair Mitchell, and John Rogers Commons—just to mention the three most frequently featured authors in the history of economic thought—but they share some common ideas, which have relevance to my study. Pragmatism—more precisely, the views of John Dewey—exercised profound influence on American social science and on the institutionalists. This philosophical tradition rejected natural law, the existence of universal social laws and the abstract, deductive argument in social sciences. Instead, it turned towards experience and evolutionary change. In addition to Darwin’s evolution theory, the profound, dynamic economic growth and structural changes that were so characteristic of the USA at the end of the nineteenth century made scholars open to these views.

The institutionalists did not attempt to find an equilibrium deriving from a static comparison—as the neoclassical economists did—but rather wanted to explain the dependence of the economic setting and behaviour on other circumstances. In contrast with the German historical school, these scholars were not so much interested in the historical dimension of this dependence, but rather in the interaction of the economic setting and the wider social environment and institutional framework, that is, its social embeddedness. German institutionalists also dealt with the latter in a national framework, while American institutionalists concentrated on the local communities, which is only natural if we consider their historical backgrounds. Empirical data collection was deemed important by the Americans as well, but besides this, several representatives could not abandon the idea of theory building. Moreover, the lack of theory building caused them to criticise German historism (Djelic 2010; Spiegel 2004; Ekelund and Hébert 1997; Screpanti and Zamagni 2005). American institutionalists had considerable influence between the two World Wars, but Clarence Ayres—who was member of the next generation—declared in 1944 that neoclassicism gained complete victory over the institutionalist approach (Landreth and Colander 2002: 477). The above-referenced interpretations of economic thought univocally distinguish John Kenneth Galbraith and Gunnar Myrdal as scholars who dealt with institutional analysis after the Second World War (WWII), but this approach was entirely abandoned until the 1970s.

The above-referenced books on the history of economic thought regard the old and the new German historical schools as part of economic thinking and univocally speak about old or American institutional economics when the approach of Veblen and his followers is discussed; others mention the impact of other social sciences as well. However, when historical precursors are reviewed, it immediately stands out that the study of the institutional dimensions has always been interdisciplinary from the beginning. In compliance with this, the handbook of comparative institutional analysis, which was created as an interdisciplinary undertaking, explores German historism and old institutionalism as the joint legacy of economics and political science. Based on the arguments put forward, this thought is not without reason (Djelic 2010).

1.2 Institutions in Contemporary Economics

After WWII, economic thought was no longer interested in the study of institutions, and the Keynesian economic policy based on state intervention became dominant. It seems that short-term stimulation of demand and the acceptance that market failures are handled by the state could not shake the belief in the existence of a long-term neoclassical equilibrium. This thought is expressed rather well by the neoclassical synthesis beginning with John R. Hicks, the aim of which was to fit the Keynesian system of thought into the neoclassical theory. Thanks to Paul A. Samuelson, its formalised version found its way to education, thereby determining the way of thinking for generations (Beaud and Dostaler 1995).

In the decades after WWII, there were changes in the interrelations among the social sciences, which obviously affected institutional analyses as well. Until the 1960s, the various fields of social sciences—economics, political science, psychology, sociology, anthropology, and so on—shared experiences and learned from each other. Originating from the economics departments in the USA, several fields of social sciences began to pull away from each other. Economics became mathematised, and psychology became closer to biochemistry. Economic sociology practically disappeared in the 1950s and 1960s. In the post-war “Golden Age”, it may have seemed that the Keynesian welfare state would be able to solve the social problems of developed countries (Crouch 2005).

The explosion in oil prices in the 1970s and the subsequent economic crisis resulted in a structural rearrangement in scientific scrutiny as well. Those schools based on neoclassical thought, such as monetarism and the new classical macroeconomics, basically criticised the institutional system when finding fault with the Keynesian interventionist policy. The microeconomics-based demand-side policies called for substantial institutional changes, which carried the implicit acknowledgement that “institutions matter” (Amable 2003; Pedersen 2010).

Two paradigms developed parallel to each other. On the one hand, in political sciences, one paradigm was historical institutionalism, also known as comparative political economy, which dealt with expressly economic institutional issues. On the other hand, economists and economic historians began to use the denomination of new institutional economics, new political economy, which basically meant an analytical institutionalism. In the mid-1980s, economic sociology appeared again, and according to its representatives, it immediately had fruitful interaction with new institutional economics (Nee and Swedberg 2005).

Nevertheless, if we aim to place institutionalism in contemporary economics or in social sciences, we have a difficult task. It is only natural that there is no generally accepted classification of the contemporary trends in the history of economic thought because we do not have the temporal perspective that would be necessary for such a classification. The thought that attention must be devoted to institutions appeared in a series of contemporary approaches from the French school of “régulation” and from Marxists through Post-Keynesians to evolutionists (Hodgson 2007a). Therefore, it is hardly surprising that various groupings can be found in the literature or—at the other end of the spectrum—the books on economic thought often fail to address contemporary schools at all. Screpanti and Zamagni (2005) examine the contemporary trends in an even greater volume, compared to similar works, which provided an overview of economic theories, and they have collected a series of contemporary schools under the heading of institutional analysis. For instance, they include new political economy, the contractarian, the utilitarian and the evolutionary neo-institutionalism, the new “old” institutionalism, Hayek and the neo-Austrian schools. It can be seen from the above categorisation that the widespread rediscovery of institutions in economics makes the application of the institutional analysis as a group-generating, scientific-taxonomical category more or less meaningless.

We can therefore conclude—in agreement with Hodgson (2007b: 1)—that the discussion of the role of institutions in economics is commonplace today. ³ Paying attention to the institutional issues has become so general that it is no longer suitable as the basis of a scientific-taxonomic classification. It is worth making a distinction between the institutional analyses—which are also frequently performed by other social sciences (see Fig. 1.1)—and another, better defined field, institutional economics, which can easily fit into the family tree of economics as an individual approach (at the same time, naturally, it is an important area of institutional analysis, and the interdisciplinary methods are used in this as well). When we say that institutional economics is “better defined”, it is only relatively true because institutional economics is a highly complex scientific branch of economics, full of contradictory and overlapping tendencies.

Fig. 1.1

The relationship between economics and other social sciences (sociology and political science) in institutional analysis. Source: Author’s construction

1.3 The New “Old” Institutionalism and the New Institutionalism

If the authors of large, comprehensive books on the history of econ...