economic essays with some blanks quastions ( REVIEW _ MIDTERM)

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Institutional Economic Theory

Economics 451

University of Missouri-Kansas City

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Historical Background Principal Contributors

Veblen --------Commons-----------Mitchell

• Veblen – 1.Theory—2. Critique of standard, classical and Marxian.

Brief Biography Carlton College Johns Hopkins Yale Home – 7 years Cornell Univ. Chicago Stanford Univ Missouri New School Eight Major Books Many Journal Articles Several Popular Magazine Articles Veblen Myths

Major Contributions Criticisms of Classical Theory

pre-Darwinian Taxonomy pre- conceptions of human nature - natural order Analytical Elements

Evolution of Institutions -- Prevalent habits of thought Theory of Behavior -- Habit and Instinct Class Theory -- Leisure Class Theory of Consumption Theory of Production

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Schematic of Veblen – Dewey Theoretical Heritage

Veblen

Mitchell

Kusnets – NBER

Major Theoretical Developments

Ayres

Pecuniary Employments/Industrial Employments And all the rest of the distinctions he made Evolutionary approach to theory and method Class analysis

Dewey

Seek for security, Ceremonial arts, sacrifice, ceremonial rite, magical cult, sacrifice of contrite heart (more pleasing than oxen or bull) Industrial arts, turn powers of nature to account, make

friend instead of enemy. Instrumental theory of value

Veblenian Dichotomy, Combined: Veblen’s Distinctions With Dewey’s value theory

Business cycles, Quantitative Data, GNP

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Wesley C. Mitchell

built on Veblen’s theory to create empirical foundation for economics, especially business cycles, theory of money Business Cycles – Data, Quantification, NBER,

Biography on Mitchell •  Born Rushville Illinois 1874 •  Decatur Ill High school •  University of Chicago 1892 – entered in first class of U of C •  Veblen introduced him to economics •  Dewey – taught him Philosophy •  Dissertation – role of money -- greenbacks •  Continued statistics experiments Institute of U of C 1900-1901 •  Univ of California 1903 -- head of department •  Columbia University 1913 there for next 33 years •  Kusnets, National Income and Product accounts

Types of writing Statistical Series – business cycles National income accounts – Kuznets

Aspects of human nature -- institutional factors mass behavior Quantitative statistical approach to human behavior

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John R. Commons

Brief Biography -- Myself •  Indiana – discharged for ineffectiveness and dishonesty •  Syracuse – discharged due to views on business and religion.

Suggested baseball on Sunday so working people could have a form of recreation on only day off

•  University of Wisconsin– rest of career Definition of Institution -- collective action in control and liberation of

individual action

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Schematic of Commons Contributions

Reasonable value Going Concern Transactions

Transactions Bargaining Managerial Rationing

Unemployment Insurance Social Security Public Utility Regulation

Policy & Social Experiments Labor History and Policy

John R. Commons

Theoretical

Several Policy programs in Wisconsin- Later applied at national level

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Outline of the Elements of Institutional Economic Theory

Method Human Behavior Culture Veblenian Dichotomy Theory of Class Theory of Consumption Theory of Production Theory of Distribution Theory of Value Theory of Progress

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Elements of Theory

q Culture q Evolution of institutions q Consumption theory

•  Class Analysis – Leisure class – •  pecuniary emulation •  canons of taste •  conspicuous consumption •  conspicuous waste

Ø  dress v clothing

q Production theory •  Resources •  industrial arts – tools – machine process – combination – cumulative

causation •  Business – purchase and sale – profit max – money as the key variable •  Nature of capital

q Value Theory q  Theory of Progress

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Method- How do we know?

Climate of Opinion Frame of Reference Time- Historical Period Prevailing Beliefs, Institutions, Methods of Inquiry

• These are ways of thinking about economic activity –frames of reference, -- paradigms?   • Change is perhaps the most important fact of life and in economic activity   • To see differences in framework and perspective look at pre- Copernican, Pre-Newtonian, Newtonian, pre-Darwinian, Darwin -   • General Outline of Philosophy, 13th – 18th centuries – Table 1

Table 1

General Outline of the Western Philosophy of Knowledge and Social Theory in the 13th and 18th Centuries

Philosophy of Knowledge ____________________________________________________________________________

Century Dominant Prevailing Dominant method of Inquiry Beliefs Institution

____________________________________________________________________________

13th innate thought God, sin Religious Doctrine logic-Aristotelian Salvation/Heaven (Christian Story)

18th rational proof nature, reason "scientific spirit" Newtonian era experimentalism natural law, natural rights

20-21th Experimentalism Nation, God, Me "Pragmatic" view

Darwin

____________________________________________________________________________ Social Theory

Century Dominant Prevailing Dominant

method of Inquiry Beliefs Institution ____________________________________________________________________________

13th-18th innate thought/logic theocracy Church

Aristotelian divine right of kings Monarchy

18th rational proof democracy Parliament

religious freedom divine right of capital Business Church

20-21th empirical data divine right of capital Business

Scientific method democracy Parliament Cultural analysis education School

__________________________________________________________________________________________

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Points of view - static, taxonomic - dynamic, evolutionary paradigms, theories, frame of reference Standard Approach

Main Theoretical – Market Analysis with Supply & Demand Institutional Approach

Main theoretical focus- Veblenian Dichotomy Method – Methodology

Standard Approach Logical Positivism Individualism

Institutional Approach Pragmatism Evolution Culture

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Knowledge Foundational Approach

Building Blocks Continuous and unidirectional Science as SCIENCE

Pragmatic/Institutional Approach Peircian Cable Cumulative but not unidirectional Evolutionary Process of Inquiry

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Inquiry Behaving - emerge out of problematic situation

Valuation What is a situation? What is knowledge – terminus of inquiry

•  How do we acquire it? •  How many teeth in the mouth of a horse? •  Clarence Darrow story. •  Knowledge and Action-- inseparable •  Nature of Theory and practice – properly done also inseparable

• Evolutionary Process

• Darwin -- Importance of ocean islands is that it reduces confusion of task to simpler proposition – assumed marooned-

•  consider this in relation to the analysis of the island civilizations examined by Diamond • evidence of past connection with nearest continent

• Finches on the Galapagos – had great variety of beaks – nowhere but on the islands – must have evolved there.

• The Grand synthesis •  Evolution by natural selection •  Genetics

Knowing–Doing–Valuing –>Behavior

From Veblen - Why is Economics Not an Evolutionary Science The reason for the Austrian failure seems to lie in a faulty conception of human nature, -- faulty for the present purpose, however adequate it may be for any other. In all the received formulations of economic theory, whether at the hands of English economists or those of the Continent, the human material with which the inquiry is concerned is conceived in hedonistic terms; that is to say, in terms of a passive and substantially inert and immutably given human nature. The psychological and anthropological preconceptions of the economists have been those which were accepted by the psychological and social sciences some generations ago. The hedonistic conception of man is that of a lightning calculator of pleasures and pains who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact. He has neither antecedent nor consequent. He is an isolated definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another. Self-imposed in elemental space, he spins symmetrically about his own spiritual axis until the parallelogram of forces bears down upon him, whereupon he follows the line of the resultant. When the force of the impact is spent, he comes to rest, a self-contained globule of desire as before.

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The activity is itself the substantial fact of the process, and the desires under whose guidance the action takes place are circumstances of temperament which determine the specific direction in which the activity will unfold itself in the given case. These circumstances of temperament are ultimate and definitive for the individual who acts under them, so far as regards his attitude as agent in the particular action in which he is engaged. But, in the view of the science, they are elements of the existing frame of mind of the agent, and are the outcome of his antecedents and his life up to the point at which he stands. They are the products of his hereditary traits and his past experience, cumulatively wrought out under a given body of traditions conventionalities, and material circumstances; and they afford the point of departure for the next step in the process.

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The economic life history of the individual is a cumulative process of adaptation of means to ends that cumulatively change as the process goes on, both the agent and his environment being at any point the outcome of the last process. His methods of life today are enforced upon him by his habits of life carried over from yesterday and by the circumstances left as the mechanical residue of the life of yesterday.

But what does all this signify? If we are getting restless under the taxonomy of a monocotyledonous wage doctrine and a cryptogamic theory of interest, with involute, loculicidal, tomentous and moniliform variants, what is the cytoplasm, centrosome, or karyokinetic process to which we may turn, and in which we may find surcease from the metaphysics of normality and controlling principles? What are we going to do about it? The question is rather, What are we doing about it? There is the economic life process still in great measure awaiting theoretical formulation. The active material in which the economic process goes on is the human material of the industrial community. For the purpose of economic science the process of cumulative change that is to be accounted for is the sequence of change in the methods of doing things, -- the methods of dealing with the material means of life.

Taxonomy the science of classification, esp. in relation to principles or laws Monocotyledon ‑ a plant that produces seed with only one cotyledon and by endogenous growth cotyledon ‑ the primary leaf of the embryo of plants loculicidal ‑ dissect longitudinally so as to bisect each loculus loculus ‑ a receptacle, coffin, recess in an ancient tomb or catacomb. involute ‑ curled inwardly, spirally, like a sea shell evolute ‑ uncurled, unfolding Cryptogamic ‑ an old division of plants comprising those with out true flowers or seeds, as ferns, mosses, thallophytes tomentous covered with densely matted hair moniliform ‑ jointed at regular intervals so as to resemble a string of beads ‑‑ like some insects cytoplasm ‑ the living substance or protoplasm of a cell, exclusive of the nucleus. centrosome ‑ minute protoplasmic body regarded as the active center of cell division karyokinetic ‑ the series of active changes that take place when the nucleus of a living cell is in the process of division, combining, resulting in motion

Teleology – primacy of – working toward an end.

Types of Teleological “Systems” a. Telenomic Processes - Development (individual development – ontogeny --life cycle). Guided by a program existence of some end point which is foreseen in regulating development. If breed like specie, get like offspring.     b. Telematic Processes -- Especially related to physical objects – a definite end is reached as a result of physical laws. But no goal seeking is involved. A river is inexorably flowing toward a river and to a sea.     c. Adapted Systems -- adaptive & evolutionary – not end-directed, e.g., Heart, kidneys -- evolved -- A major achievement of Darwin is to have shown that these evolved by natural selection     d. Cosmic teleology -- all things are guided toward a specific end—no, or almost no, scientist accepts this view

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Behavior – Human Nature

Standard Approach Rational Maximizer

Institutional Approach Control of Perception

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Behavior Theory – The nature of Human Nature A valid way of thinking about economics derives from a valid conception of human nature. What constitutes a valid conception of human nature? Rationality – irrationality – what constitutes these Economic Man and the Standard Perspective Human Nature – what everybody thinks

• human nature is such that . . . . . • It is only human nature to . . . . . • You can’t change human nature . . . .

The traditional view – assumptions about human behavior • hedonism • lack of evolution • rationality – in the form of economic man – calculator of pleasure and pain • determined or shaped by motives – profit motive

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• The contemporary-- traditional view

Human nature, at bottom, is based on self-interest and greed. Richard Posner has stated the position in its most stark form. Suppose we were to give humans an acid bath. What would be left? Greed and self-interest is Posner’s reply. What can we make of this •  one reaction may be to dismiss it as simplistic nonsense not deserving of attention • Another possibility is understand that significant numbers of people, including many social scientists (economists especially) agree with Posner, so a more complete response is called for.

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Veblen’s synthesis

•  Evolution by natural selection

•  Concept of Culture – anthropology

Veblen’s point of view – cumulative causation – instincts –

habits

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Where to start – no genuine inquiry can proceed, tabula rosa, without some antecedent presumption and facts.

Control theory – A use later on in consumption theory

Veblen on Instincts

Veblen -- The Instinct of Workmanship

Not Tropismatic

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Functional Workmanship Ownership irrational Progressive Parental Bent Predation Past -binding Instrumental Idle Curiosity Vested Interest Ceremonial Technological

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Institutional View – assumptions about human nature/behavior

• humans have a natural (biological) existence

• nature of the species

• genetic structure etc – relationship of head and hands

• human reproduction is bi-sexual – requiring two genders

• human infants require physiological care for an extended period in the early stages of life (unlike fish for example and many other species)

• human children, without the production of which there would be no more humans, usually are nurtured within a group of other humans (family, tribe, community etc.) for an extended period , often several years.

Assertion – hypothesis – proposition -- Most people adopt the cultural habits and behaviors of the group they associate with, especially early in life, e.g., most children adopt the religion, language, social customs, etc of their parents, family, community. Language contains cultural relationships – conceptualizations, -- cognitions If all behavior is traced to self-interest, by someone saying that all behavior is self-interest, i.e., I gave money to my mother because I felt guilty, therefore it was for my own self-interest, not hers, that the money exchanged, or other e.g., ad infinitium