INSTITUTIONALISM

Unit 7

The objectives are:

1. Institutionalism a part of Heterodox
development in economics;
2. The German historical school- the
precursor of institutionalism;
3.Caracteristics of institutionalism
economic thought;
4. Evolution of American
institutionalism-Thorstein Veblen;
5. Sociological France school-Francois
Perroux

Heterodox Economics
Heterodox economics is an umbrella term used to cover
various approaches, schools, or traditions.
do not propose that capitalism (i.e. the free market
system) is an ultimately perfect system of organizing
society;
unlike neoclassical economists they criticize the
shortcomings of the market system to various degrees;
call for government intervention to overcome these
shortcomings;
emphasize political, social, cultural, historical, structural
and institutional factors that interplay with economic
factors.

Heterodox Theories of
Development

Structuralism
Institutionalism
Neo-Marxian Underconsumptionist School
Neo-Marxian Dependency School
Classical Marxian School

Heterodox Theories of
Development

Heterodox developmentalist theories do not believe:

that relatively minor changes in economic conditions would be
sufficient to create the big-push or the take-off into sustained
growth;
that economic development is a linear, universal process;
that capitalism (market economy) is the ultimate goal.
Heterodox theories of development propose the following:
the process of development has geographically and historically unique
features varying from one place to another;
caution the possibility of adverse path dependence;
emphasize the unequal relations of power between South and North
and Capital and Labor;
underline the importance of socioeconomic and political structures
and institutions in the development process.

 The most famous is the heterodox doctrine of North

American institutionalisms. German School is

considered a precursor of Institutionalism.
Heterodox is a partial reaction of the intellectuals and
the small bourgeoisie to classical and neoclassical
ideas with apologetics made by classics to the free
competitors
and
differentiation
of
wealth,
entrepreneurs and private property. Supports the
market economy, the heterodox emphasize a number
of gaps and limitations of it and try to use the state to
settle it.

Institutionalism
Institutionalism, is the social sciences, an approach that emphasizes
the role of institutions.
The study of institutions has a long pedigree. It draws insights from
previous work in a wide array of disciplines, including:
economics, political science, sociology, anthropology, and psychology.
The reappearance of interest in institutions in the early of 1980s
followed a familiar pattern: it was a reaction to dominant strands of
thought that neglected institutions, historical context, and process in
favor of general theorizing. Accordingly, institutionalism is frequently
characterized by the attention it gives to history.

The institutions, the motive power of

socio-economic development
What are institutions? So far there is no
universally accepted notion. However, most
experts argue that economic institutions are
some stable phenomenon, which impose to
humanity such a mandatory behavior, establish
some order in their activity. Form for society the
kind of playing rules, institutions may be formal
or official and., informal or unofficial by the
state

What are the key

institutions?

The state, the church, monopolies, family, trade

unions, political parties, traditions, habits,
legislation, etc., which mean some phenomenon,
stable, according to followers of institutionalism
doctrine, which have a decisive influence to the
economic life. It represents, according to these
doctrine theorists, the motive power of society
development, also determines the directions and
nature of progress.

Justification of institutionalism
Interference in the economy were the first critics
of monopolies. Starting from the thesis that the era of
free competition had past, institutionalism assert that the
doctrine of economic liberalism, with its non
interventionist ideas that fit that era, no longer
corresponds to the new realities. Thus, long before
Keynes, in the nineteenth century institutionalisms
demanded a massive state interference in the economy.
The state should intervene in economic life to liquidate
the anarchy of production, to fight robbery, incomes
from speculation, but also to limit the domination of
society by a group of monopolies.

2. The German Historical School

The historical school held that history was the
key source of knowledge about human actions and
economic matters, since economics was culturespecific, and hence not generalizable over space and
time. The school rejected the universal validity of
economic theorems. They saw economics as resulting
from careful empirical and historical analysis instead of
from logic and mathematics. The school also
preferred reality, historical, political, and social, as well
as economic, to mathematical modeling.

The historical school can be divided into two tendencies:

the Older, led by Wilhelm Roscher, Karl Knies, and Bruno Hildebrand;
the Younger, led by Gustav von Schmoller, and also including Etienne
Laspeyres, Karl Bcher, Adolph Wagner, Georg Friedrich Knapp and to
some extent Lujo Brentano; Predecessors included Friedrich List.

The historical school largely controlled appointments to chairs of

economics in German universities, as many of the advisors of Friedrich
Althoff, head of the university department in the Prussian Ministry of
Education 1882-1907, had studied under members of the school.
Moreover, Prussia was the intellectual powerhouse of Germany, so
dominated academia, not only in central Europe, but also in the United
States until about 1900, because the American economics profession was
led by holders of German PhDs. The historical school was involved in
the Methodenstreit("strife over method") with the Austrian school, whose
orientation was more theoretical and aprioristic.

Institutions for this school of thought are the formal or

informal routines, norms and conventions embedded in the
organizational structure of a national political system
Different forms of the school:
Calculative: explain individual behavior as shaped by the
capacity of institutions to provide certainty, in that they providing
information about others actions and how others will react to own
actions, thus making the strategic pursuit of interests (as defined
outside the institutional system) easier.
Cultural mode: see individuals as satisfices of goals, whose
actions are affected by the worldviews (moral and cognitive
templates) provided by established routines and norms embedded in
organizations.

two approaches of historical institutionalism:

1.Emphasize the importance of power and unequal power relations
uncover second and third faces of power, emphasize how institutions
distribute power unevenly. States and organizations are not neutral:
given particular groups better access to decision-making than others.
2. Emphasize the variability of policies and decisions across systems
by underlining the contextual nature of path dependence based on
history of policymaking, particular structure of institutions. Thus also
emphasize that what is produced by institutions is often unintended
and inefficient rather than intended and functionally fitting (as
opposed to structural-functionalism, which emphasizes the broad
similarities among systems due to the universal requirements of such
systems and the bounding effects of rationally performing a set of
universal functions).

Key concepts of
historical
provide an environment for individuals, who
institutionalism
benefit by following certain patterns of

behaviour;
disproportionately distribute power across social
groups;
are central in determining historical
development;
are never a single factor.

Characteristics of Institutional economic

thought
Institutional economics focuses on learning, bounded
rationality, and evolution (rather than assume stable preferences,
rationality and equilibrium). It was a central part of American
economics in the first part of the 20th century, including such
famous but diverse economists as Thorstein Veblen, Wesley
Mitchell, and John R. Commons. Some institutionalists see Karl
Marx as belonging to the institutionalist tradition, because he
described capitalism as a historically-bounded social system;
other institutionalist economists disagree with Marx's definition
of capitalism, instead seeing defining features such as markets,
money and the private ownership of production as indeed
evolving over time, but as a result of the purposive actions of
individuals.

 "Traditional" institutionalism rejects the reduction of

institutions to simply tastes, technology, and nature .
Tastes, along with expectations of the future, habits,
and motivations, not only determine the nature of
institutions but are limited and shaped by them. If
people live and work in institutions on a regular
basis, it shapes their world-views.

The primacy of social life

Institutionalisms' promote the idea of social

priority over economy. J. Commons even say
that economics is one of the part of sociology. As
a result, they replaced the concept of "homo
economicus" with "sociological man" and thus
that the activity economic agencies must be
studied closely related to the environment in
which they activate. Economic development
should not be seen as an end in itself but a means
of solving social problems.

Thorstein Bunde
Veblen (18571929)

Was an American economist and

sociologist. He was famous as a witty critic
of capitalism. Thorstein Veblen applied the
pragmatist principles and the ontology of
social darwinism to economics. Veblen is
famous for the idea of "conspicuous
consumption." Conspicuous consumption,
along with "conspicuous leisure," is
performed to demonstrate wealth or mark
social status. Veblen explains the concept in
his best-known book, The Theory of the
Leisure Class(1899). Within the history of
economic thought, Veblen is considered the
leader of the institutional economics
movement. Veblen's distinction between
"institutions" and "technology" is still
called
the Veblenian
dichotomy by
contemporary economists.

As a leading intellectual of the Progressive Era, Veblen

attacked production for profit. His emphasis on conspicuous
consumption greatly influenced the socialist thinkers and
engineers who sought a non-Marxist critique of capitalism.
Thorstein Veblen laid the foundation for the perspective
of institutional economics with his criticism of traditional
static economic theory. As much as Veblen was an economist,
he was also a sociologist who rejected his contemporaries who
looked at the economy as an autonomous, stable, and static
entity. Veblen disagreed with his peers, as he strongly believed
that the economy was significantly embedded in social
institutions.

Veblen viewed the relationships between the economy and

social and cultural phenomena. Generally speaking, the study of
institutional economics viewed economic institutions as the broader
process of cultural development. While economic institutionalism
never transformed into a major school of economic thought, it
allowed economists to explore economic problems from a
perspective that incorporated social and cultural phenomena. It also
allowed economists to view the economy as an evolving entity of
bounded rationale.
The central problem for Veblen was the friction between
"business" and "industry". Veblen identified "business" as the
owners and leaders whose primary goal was the profits of their
companies but, in an effort to keep profits high, often made efforts to
limit production. By obstructing the operation of the industrial
system in that way, "business" negatively affected society as a whole
(through higher rates of unemployment, for example).

FRENCH SOCIOLOGICAL
SCHOOL
Developed during 1940s in France
Francois Perroux (Lconomie du XXme sicle,
1961)
John Marchal (La repartition du revenue
national franaise (with J. Lecaillon, 1959, 1967)
Andre Marchal (Systms et structures
conomiques, 1959)

Precursor of
Institutionalism

Jean Charles de Sismondi was a French

historian and political economist, who
is best known for his economic ideas.
He insisted on the fact that economic
science studied the means of increasing
wealth too much, and the use of wealth
for producing happiness, too little. For
the science of economics, his most
important contribution was probably his
discovery of economic cycles. In
refutation of other thinkers at the time,
Sismondi
challenged
the
idea
that economic equilibrium leading to
full employment would be immediately
and spontaneously achieved.

WORLD VIEW of Frenchs school

Holistic, organic, evolutionary;

Human beings are social by their nature;
Social, group and individual interests exist side by side;
Group interests and group behavior are important for
social and economic development.

VALUES
Non-materialistic;
Social-reformist .

GOALS
To explain on the basis of structural
approaches evolution of developed
capitalist economy;
To explain social and economic
behavior of groups on social and
economic structures;
To attain harmonious social and
economic development.

CENTRAL CONCEPTS
Economic systems
Economic regimes
Economic structures
Dominance
Poles of development
Harmonized economy
Indicative planning

Neoinstitutionalism. John Galbraith

 Although he had served as president of the American Economic

Association, Galbraith was considered an iconoclast by many

economists. This is because he rejected the technical analyses and
mathematical models of neoclassical economics as being divorced
from reality. Following Thorstein Veblen, he believed that economic
activity could not be distilled into inviolable laws, but rather was a
complex product of the cultural and political milieu in which it
occurs. In particular, he believed that important factors such
as advertising, the separation between corporate ownership and
management, oligopoly, and the influence of government and military
spending had been largely neglected by most economists because they
were not amenable to axiomatic descriptions. In this sense, he worked
as much in political economy as in classical economics.

Galbraith was a zealous opponent of those who advocated

laissez-faire approach as the cure for all social ills. He was an
important figure in twentieth century institutional economics,
providing perhaps the exemplar institutionalist perspective on
economic power. He believed that government should protect
citizens by actively intervening in economic affairs.
Galbraith's work included several best selling books throughout
the 1950s and 1960s. After his retirement, he remained in the
public awareness by continuing to write new books and revise his
old works. In addition to his books, he wrote hundreds of essays
and a number of novels. However, from the Nixon presidency
onwards, he was regarded as somewhat of an anachronism, as the
public discourse centered more and more around the pro-market,
small-government, anti-regulation, and low-tax orthodoxies
which came to prominence in the 1980s.

In American Capitalism: The Concept of Countervailing

Power, published in 1952, Galbraith outlined how the American
economy in the future would be managed by a triumvirate of big
business, big labor, and an activist government. Galbraith termed
the reaction of lobby groups and unions "countervailing power."
He contrasted this arrangement with the previous pre-depression
era where big business had a relatively free rein over the
economy.
In The New Industrial State (1967), Galbraith argued that very
few industries in the United States fit the model of perfect
competition. A third related work was Economics and the Public
Purpose (1973), in which he expanded on these themes by
discussing, among other issues, the subservient role of women in
the unrewarded management of ever-greater consumption, and
the role of technostructure in large firms in influencing
perceptions of sound economic policy aims.

CONCLUSIONS:
Institutionalists reoriented the economic

science to the direction of national

economy
study,
of
its specific
traditions, which has great significance
for
the
nation's
younger
and
economically less developed. They use a
new research method, replacing the
deductible method with
historical
comparison.