Economy as Instituted Process: Change, Transformation, and Progress
Adams, John, Journal of Economic Issues
In this year of 1994, we celebrate the fiftieth anniversary of the Publication of two oracular cornerstones of our common intellectual lineage: Karl Polanyi's The Great Transformation  and Clarence Ayres's The Theory of Economic Progress , both of which appeared in 1944.(1) In this extraordinary, double-demicentennial anniversary year, it gives me special pride to stand here and address you in our grand shared tradition, as a comrade from the ranks of the second postwar generation of institutional and evolutionary economists.(2) The influence of Polanyi's insights remains formidable: reciprocity, redistribution, the household, and the market as alternative modes of exchange;(3) the embeddedness of the economy in society; the fictitious commodities: land, labor, and money; the myth of the anti-liberal conspiracy; and the double movement that ensues from societies' strivings to protect human livelihoods and habitats against the consequences of an untrammelled, self-regulating market system. Likewise with Ayres. One cannot look at history, or at the predicaments of modem economies, without observing in everyday life the constant interplay of progressive technology and ideas with the restraints of past-binding customs, ceremonies, and beliefs. Nor can one fail to see at play the process of experimental validation of working rules in the world's political and legal arenas.(4)
My ambition today is not to riffle through the dog-eared pages of our sacred texts, intoning our accustomed chants.(3) Quite to the contrary-I leave the priestly role to others. Strong currents are flowing in our favor, and we are at a propitious juncture for institutional and evolutionary economists-an opportunity to work toward the reconstruction and widening of economics as the profession moves toward the twenty-first century. Concretely, I intend to argue that process is a concept that has the potential to resolve at least some of the divergences between methodological individualism-embodied in the rational economic agent presupposition -and institutionalism. I will first discuss some of those differences, with an accent on the rationality premise. Then, after clarifying what I mean by process, I will apply that construct in an exploration of the institutional basis for international exchange. Last, I will examine the meanings of transformation and progress by briefly appraising some features of recent economic and demographic trends in the Third World.
The words in my title have been chosen with solicitude. Institutional economics is evolutionary economics because it is concerned with economic and social change. As Polanyi's title avers, since roughly 1800, the world's peoples have been passing through an all-encompassing and unparalleled systemic transformation. This transformation has been driven by individual and collective actors involved in clashing political and intellectual movements of sweeping importance. In slightly different language: the great transformation is holistic, and it involves the remaking of self and society-the conjunction of person and institution. As Ayres most discerningly reminded us, this process is not without meaning because through instrumental valuing it yields grudging progress-the amelioration of the human condition; hence, the denotiveness of change, transformation, progress.
Individualism, Holism, and Change
The great divide in economic science is between proponents of methodological individualism and advocates of holistic institutionalism. In the first, or orthodox group, the selfish, rational, fully informed, and maximizing individual is taken as the starting point for analysis. In the second, or heterodox group, the preference is to begin inquiry by considering the matrix of culture and the institutional structures that provide a context for personal behavior. The challenge for the orthodox practitioners is to generate collective action and patterns of integrated economic, political, and social conduct from the bare bones of self-interest. The task of the institutionalist is to inject sufficient motivation, choice, and freedom to activate life in a reified and apparently rigid institutional pattern. This methodological bifurcation is not exclusive to economics, but is discoverable in anthropology, sociology, political science, and history. In the case of anthropology, formalists imported from economics the notion of the maximizing individual, contradistinguishing themselves from the substantivists.(6) role of leadership in the political system has been juxtaposed to that of party or class. In Third World studies, the moral economy thesis of James Scott was countered by proponents of the rational-peasant school.(7)
The simplest world of individual choice begins with established and unchanging tastes and preferences. Through the mechanism of market pricing, these imprint themselves on the structure of production in a manner that optimizes the productive efficiency of a set of given resources that are combined according to a fixed technology. If tastes are totally predetermined-which can be regarded as saying that culture is constant-and if technology is unchanging, the outcome is foregone: the economic system will reach a general equilibrium from which it can only be moved by some form of exogenous shock. Joseph Schumpeter opened his study of entrepreneurship, The Theory of Economic Development [19341, by fabricating such a representative model of competitive capitalism. He then shattered this artificial plaything by saying, "Development in our sense is a distinct phenomenon, entirely foreign to what may be observed in the circular flow or in the tendency toward equilibrium" [p. 64].(8) Schumpeter remains highly influential because of his insistence that the essence of capitalism is change in its fundamental technologies and business organizations. The mixture of orthodoxy and heterodoxy in his work, and its acknowledged respectability, allow many economists interested in advances in methods of production, the nature of business leadership, and relations between firms and governments to rally to his flag as a way of characterizing and legitimizing their work."(9) One could equally as well denominate such work as Veblenian, but that would not carry equivalent cachet.(10)
There are many elements in the dispute between the individualists and the institutionalists over the first principles of social science. Philip Mirowski [1988, esp. chaps. 1-31 has effectively traced the antecedents of modern market analysis to nineteenth-century energetics.(11) Geoff Hodgson 11993, chaps. 2-41 has pointed out that by the 1920s and 1930s orthodox economics had consciously withdrawn itself from developments in evolutionary biology. This detachment from biological analogies was associated with a loss of interest in process and evolution. The adherence to physics was accompanied by a growing reliance on individual atomism, in the quest for a fundamental social particle from which larger constructions such as demand, supply, and market equilibrium could be fashioned. Rather than adopt the cultural person, economists moved towards the fully informed maximizing individual endowed with unchanging tastes and attributes. The rational actor became society's fundamental atomic unit out of which more complex compounds had to be assembled. A number of philosophers, economists, and other social scientists have critiqued this reductionist concept, but like a target in a fairground shooting gallery, it is no sooner shot down than it bounces up with renewed life.(12)
Let me shift from the abstract to the concrete and consider the attempt to apply the rationality postulate in the context of agricultural development in peasant societies, where I am on familiar terrain. Development economics distinguished itself after World War II by its concern with the problem of launching economic growth and the attention most of its partisans gave to special conditions in the emerging nations of the world. It was in many ways institutional. At the level of villages and farms, there was the need to energize the agricultural sector in order to raise output. Initially, the preferred line of attack on rural stagnation was organizational: to push land reforms and concurrently to implement a broadly geared package encompassing community development, local democracy, education, and social programs-India being the archetypical illustration. Then, in 1964, Theodore W. Schultz published an uncomplicated but highly influential book, Transforming Traditional Agriculture . He asserted that peasants were poor but efficient in using the resources at hand. An increase in productivity could therefore come only from adopting new technologies and absorbing more inputs. Favorable prices would induce farmers to plant more, to innovate, and to purchase more fertilizers and other commercial inputs in the marketplace.
In Schultz's view, peasants were rational in several ways: in their traditional agricultural practices, they applied resources efficiently; they would respond to profits; they would select the most desirable technology for their scale of operation; and they would respond to supply prices and input prices as maximizers. Schultz's influence among agricultural economists and on policy was profound. The simultaneous creation of high-yielding strains of wheat and rice set the stage for the Green Revolution based on price incentives, expanded credit, hybrid seeds, and a faith that peasants were uniformly rational and consistent in their behavior throughout the world. There was no need to consider local conditions and cultural differences or to engage in broad-gauged institutional reform.
Following Schultz's receipt of the Nobel Prize-and with characteristically good timing, I suggested that it would be better to say that peasants were "demirational" [Adams 1982, 663-672]. This single term sought to capture what critics of the rationality premise propose when they talk about conditional, functional, bounded, or instrumental rationality. The narrowness of the conventional concept of rationality denies that context, knowledge, local customs, or a lack of information have effects on choice and behavior. Schultz ignored considerable evidence from supply-responsiveness studies done by economists and from village surveys carried out by anthropologists that farmers deviate widely in their responses to putative opportunities. One researcher attempting to validate Schultz's thesis in Thailand concluded that "differences in personality are also quite important' [Moerman 1968, 147!. As many have noted, peasants facing the same price display enormous variety in their reactions-the strong rationality precept cannot account for diversity. Culture and circumstances do matter. 13 As Walter C. Neale and I wrote in a recent reappraisal of Indian village studies in light of current developments in the new institutional economics, Iikewise, individualistic reductionism of the type found in highly rationalistic microeconomic investigations pays too little attention to the heterogeneity of cultural preconditions, the institutional context for personal acts, prior knowledge, and states of mind.(14)
The prior discussion of the rationality construct demonstrates that there is a loss of realism and a diminution of capacity for valid policy assessment when holding to the extreme position of atomistic individualism. Whether examining Indian peasants or Silicon Valley entrepreneurs, it is necessary to put behavior in a cultural context in order to gauge how people will respond to incentives and opportunities and to anticipate who will succeed and who will fail. When tastes and technologies are fixed, it is immensely difficult to introduce persistent change or even to get economic growth in an idealized economy. Not only all evolutionary economists, but most conventional economists, would agree. What is rarely appreciated among institutionalists is that the same stasis or rigidity arises when institutions are excessively reified and become fully directive of individual actions. On a strict interpretation, the Indian caste system allots lifetime and hereditary occupations to families. Yet, observers have frequently pointed out the many exceptions to the complex rules of caste. Many people farm who do not belong to farmer castes. Some rahmins are poor and ill-thought of in their communities. A Marxist might say that the multinational corporations inevitably dictate to a local comprador class how to manage a developing country's government in their mutual interest.
"Institutional determinism" results from imbuing culture, rules, customs, and laws with an excessive capacity to prefigure individual actions."' Atomistic individualism ultimately fails because it cannot account for institutions-and diversity and change. Institutional determinism flounders because it cannot account for individualistic actions-and diversity and change. In everyday observation, it is plain that families and persons display a wide range of behaviors although situated in the same institutional context. As previously explained, peasant farmers react differentially to price and profit incentives, even when they live in the same village. In the United States, 40,000 deaths in automobile accidents per year, and approximately half as many murders, suggest that many people out there are not following the rules too closely. To account for social deviation and diversity, and to explain social change, it is necessary to abandon extreme individualism and avoid institutional determinism. Change can only result from volitional individual deviations, which are uncorrected and unstifled by sanction or retribution, in an institutional setting that is somewhat permissive and open-ended.(16) Precisely defined, an institutional change is the minimum unit of social deviation from past practice.
Institutions: Structure and Incentive
Looking beyond the narrow confines of economics, and expanding the argument just made, it may be said that the cardinal task in the social sciences is to escape the limitations of individualistic reductionism on the one hand and institutional determinism on the other. As Margaret S. Archer insists, The problem of structure and agency has rightly come to be seen as the basic issue in modem social theory" [1989, ix].(17) Archer emphasizes the dualism between institutional structure and culture and believes that these two social realms are relatively autonomous. Individual action, or agency, operates in these two orbits, which within themselves are not fully coherent or stable; and, structure and culture are likewise not totally consistent or articulated. In other words, neither culture nor institutional structure is well integrated, and there is scope for the play of spontaneously acting individuals, families, and groups, and of ideas, authority, and power. This ramshackle quality of society creates ample scope for agents and collective interests to operate creatively to devise new modes of conduct, which may then become more widely practiced.
Let me keep matters as simple as possible by recentering attention on institutions and individualism, even if this slights a more comprehensive and explicit involvement of culture, power, repression, and forms of collective action. As a point of beginning, let me assert that institutions must be considered prior to individual conduct. This is a means of assembling the logic and does not deny that in everyday life society and personal behavior are simultaneous and codetermining. It is a fact, nonetheless, that institutions and the rules they provide have long-term continuities that extend before, during, and after any person's life span. For those seeking a precise parallel between biological and social evolution, the working rules of society or institutions themselves have been equated to human genes, individual creatures, or species. In The Selfish Gene , Richard awkins uses the neologism "meme" to define the basic unit of social replication, which serves as an idea-behavior cluster that persists in the cultural soup.(18) Santa Claus, Jingle Bells, and New Year's Eve, to extract illustrations from the recent holiday season, are cases in point.(19) There are difficulties in making a too facile translation of any theory of biological evolution to cultural evolution, and I am seeking only to establish that it is useful to start by considering the nature of institutions as a means of investigating individual action, and that humans enter into any social transaction bearing with them ideas, values, rules of thumb, urges, and misconceptions.(20)
Institutions have three aspects; or, we may ray that institutions and individual behavior are related in three ways.(21) It is most essential to recognize and utilize this insight because it helps make sense of what appear to be distinctive or competing views of institutions and, what is more important, facilitates the treatment of creative human agency. By all odds, the most pervasive canon is that institutions are structures, matrices of rules and procedures that give consistency and pattern to behavior. Society is then an amalgam of institution-churches, governments, families, banks, codes of law-and societies diverge in their characteristic institutions. Societies differ to the extent that their institutions differ. Repeated and shared patterns of behavior permit the observer to distill institutions from witnessing repeated events. Rules and values are learned from infancy on, and institutions are the templates that govern conduct. As previously remarked, this purely structural view runs the risk of making society appear too orderly and rigid and leaves little if any latitude for original personal actions.
A second institutional attribute is that of disincentive and incentive. Many writers, including Commons, have underscored the importance of social control. There are limits to how far internalized values, conscience, or superego can go in effectively suppressing actions that are socially disapproved. Societies must have methods for conserving their principles of operation, and these range from ridicule and ostracism to the application of brute force. Commons says that when the parties to a transaction contest whether its governing rules have been abided by, then a social representative will step in, a ". . . judge, priest, chieftain, pater-familias, arbitrator, foreman, superintendent, general manager, who would be able to decide and settle the dispute,...... [1959, 67]. Such decisions and reconciliations either reaffirm existing rules or permit some adjustments in established practices, which may then become guides to accepted deportment in the future.
An institutional setting contains positive incentives for proper conduct as well as negative sanctions. Religious beliefs offer profound rewards for adherence to paths of behavior that are deemed moral and right. Such tenets may override much individual pain and deprivation by offering the hope of heavenly bliss, as in Christianity or Islam, or by promising rebirth into a higher social caste as in Hinduism. Being knighted for service to the crown was an important prize in European feudalism. A teacher commending Sally for a beautifully drawn picture reinforces artistic endeavor. In history, negative and positive incentives have worked much more to preserve existing practices than to recognize and encourage change. Consequently, the rate of social change in much of history has been slow. Ayres's condemnation of tne capacity of past-binding ceremonialism to restrain the forward movement of science, technology, and general enlightenment is apposite.(22)
It was Schumpetet's greatest intuition that the balance of social punition and social approbation for acts that bring new technologies into play shifted strongly in favor of positive reward in the early stages of capitalism. Profits and social esteem flowed to entrepreneurs who injected new technologies into the economy.(23) It is not possible to comprehend the origins of capitalism or to understand the wellsprings of economic growth and development in the modem world without looking at the incentives for technological change, the acquisition of human capital, and the efficacious management of resources.24 To avoid any impression that this conviction amounts to a rationale for allowing feral financiers and rabid capitalists primacy in determining the fate of economies, it must be strongly attested that such incentives operate equally, albeit in different form, in the public, private, and non-profit sectors. There must be incentives and consequences for charity just as there are for plunder and profit.
I have now created a social structure that is defined by its institutions and added the notion that the behaviors that take place in that structure yield positive or negative valences for individual and collective actors. Let us now drop some squirming and conniving persons into this charged field and see what happens. There is going to be a lot of activity. People have to feed themselves, they have to procreate, they have to defend their persons and property, they have to determine how to handle their collective resources, they need to select some leaders (or the leaders need to select some followers), and they need to think about the human condition and then cheer each other up through religions, support groups, or professional associations (such as AFEE). Briefly stated, they must attend to their hierarchy of Maslovian needs [Maslow 1954; Gordon and Adams 1989). If they do wrong, they will be punished-sometimes; if they do good deeds, they will be rewarded, for the most part. If we put the magnifying glass only on economic activities, then we see our beings engaged in producing the things they need, consuming some within the household, and exchanging some things with other beings. They are engaging in economy as process-as an ordered sequence of events and transactions.(25)
To one of his most sagacious contributions, Polanyi affixed the label The Economy as Instituted Process" . Economic activities are shaped and coordinated by institutionalized rules. You prepare oatmeal by boiling salted water, adding oats for a specified period of time, and then letting them sit for a moment. Putting sugar, butter, and some milk into the cooked and settled oatmeal and eating the mixture with a spoon completes the process. In order to do these things, you must have obtained heat, a pot, salt, water, oats, sugar, butter, milk, a bowl, and a spoon. Multifarious exchange relations have been coordinated and timed in such fashion as to have all these items at hand on a Saturday morning. The preparer must have knowledge of the technology involved, either learned from watching a previous preparer or read from a cookbook or the back of the oatmeal box. All economic tasks are reducible to such elements of process, sequence, and technique, with time being a critical element.(26) Polanyi pointed out that the exchange relations involved in the economy-as-process imply the movement of goods-a locational dimension-and changes in ownership-an appropriational dimension. To summarize: "Goods and services get made, moved through the social framework, and consumed according to progressions that are built into the operations of institutions by use of calendars, clocks, phases of the moon, angles of the sun and stars, and other technologies of chronicity" [Adams 1993,258].
Intersocial Trade as Process
The founders of institutionalism did not display much interest in international trade and payments. Most modern institutionalists favor freer trade for the same reasons orthodox economists do: specialization leads to greater output, which constitutes the gains of trade; and, the cosmopolitanism implicit in more liberal movements of goods, people, and ideas has appeal.(27) Institutionalists are more inclined to worry about the failure of the international market mechanism to convey benefits to poor nations, about the need to regulate multinational corporations, and about restraints on access to what are today called intellectual property rights. There is concern, too, about insuring that workers displaced from import-competing industries be given satisfactory retraining and helped in finding new jobs. Some would be sympathetic to the idea of having an industrial and trade policy embedded in a national economic plan.(28)
By thinking about trade as an instituted economic process, it is possible to develop an institutional theory of the external sector. This lays the foundation for an explanation of movements of goods, services, monies, and technologies between societies that is distinctly more comprehensive than the comparative-cost model. Let us begin by recognizing that such movements-call them trade for short-must occur in an institutionalized milieu. In the conventional model, the mode of exchange is the market, and it is understood that all parties share a common language of commerce, agree to certain principles of property and contract, and have recourse to adjudication in cases of default. In history, the market method is only one of a number of exchange types, so it is necessary to take these into account. In addition, the comparative-cost theory assumes away the issue of exchange and amounts only to a theory of the location of production.
Put in the language of the new institutional economics, in the conventional trade model transactions costs-including transportation charges-are zero.(29) Turning the matter on its head, if transactions costs were infinite, there would be no trade at all. Both assertions are unrealistic, and actual cases of trade will fall somewhere in between. This realization means that trade will be based on combined production costs and transactions costs. Trade will rise or fall depending upon what happens to their sum. A society's external economic connections must derive from its institutions, technology, and physical environment.(30) This vantage point properly makes the processes of exchange rather than production the central focus of the theory. Trade can only occur between peoples of two societies when there is some linking institutional arrangement that is compatible with the domestic practices and beliefs of each. If necessary, societies will impose restrictions on foreign agents, confining them to port cities, compelling them to obtain licenses, or limiting the goods they may convey. As in China during the Opium Wars, when trade arrangements cannot be worked out, powerful foreign intrusions may override domestic restraints. Polanyi identifies the port of trade as a common method of insulating societies from undesirable alien elements.(31)
Axiomatically, this line of thought leads to several propositions, which I will itemize and discuss as follows:
* The more similar are two societies' exchange institutions, the
more intensively they will trade together. Setting distance
aside, transactions costs are lower where agents share a
common language and rules of commerce. It is not by
chance that much long-distance trade has spawned pidgin
or trade languages or that maritime codes have either
arisen spontaneously or been imposed by imperial powers
in epochs of vigorous international exchange.
* The converse corollary is, the more divergent are two
societies' exchange systems, the more difficult it will be to arrange
trade transactions and the lower will be their volume.
When Western market-oriented traders encountered relatively
closed societies that had limited market orbits, it was
often difficult to work out suitable and mutually agreeable
terms of exchange. Prior to the collapse of the Soviet bloc, it
was hard for potential traders in the West and East to effect
trade, even when there were no political blockages.
* World trade expands most quickly when societies' exchange
systems are becoming more similar. In recent eras, 1870 to
1914 and 1950 to 1980 are periods when a convergence of
economies to common commercial and financial practices
accelerated the growth of trade. Spreading markets, the
gold and gold-exchange standards, and commitments to
open trade regimes were hallmarks of both epochs.
* To increase its involvement in intersocial transactions, a
society will have to align its exchange practices more closely
with those of the larger international community. Isolated,
hermit states can enter world commerce only reformulating
their idiosyncratic practices in concordance with universal
regulations. In the modern world, the collapse of the
Soviet bloc was mandated by the need to shift from a state-planned
to a market-oriented system. China's continuing reforms move the world's largest society ever further from its historic self-sufficiency - but reluctant).(32)
* Societies will follow their own methods of exchange where their power and influence enable them to do so. In history, from Greek or Roman times, through the age of mercantilism, dominated by Great Britain, up to the present age of American hegemonism, strong states have had the power to impose their languages, codes, and enforcement procedures on weaker peoples. Such influences include establishing property claims to land and resources; mobilizing labor through estate or corvee labor, or slavery; applying schemes of taxation; and establishing the acceptability of weights, measures, coinages, and units of account. It does not trivialize imperialism to say that one of its ubiquitous features is the imposition of such instrumentalities as a means of lowering transactions costs.
These principles are quite operational, meaning that they can be investigated and tested either by historical or statistical procedures. They have the virtue of defining a theory of intersocial transactions that incorporates the comparative advantage thesis as a special, limiting case where there are no frictions or costs to external economic relations. They stem from recognizing the vital pertinence of the proposition that all exchange occurs in sequenced processes that must be embedded in a set of legal and social relationships. I have applied them with some success to the case of the wheat trade of ancient Athens and believe that even in their preliminary and skeletal form, they can provide avenues for exciting research [Adams 1994b]. To return to the principal issue: an institutional analysis is not sufficient unless it incorporates individual agents who activate economic processes working in a multidimensional matrix of sanctions. Such processes involve sequences and timings, and any string of actions is irreversible. One implication of this vision is that the equilibrium concept is useless in social and economic theorizing.
Transformation and Progress
When change is widespread and institutions are going through rapid reconfiguration then we speak of transformation or revolution. Polanyi's Great Transformation masterfully delineates the institutional changes that fostered Europe's industrial revolution. The rise of new technologies, epitomized in the factory system of production, was accompanied by the attempt to create a self-regulating market system. At the end of the twentieth century, national and world politics are still overwhelmingly driven by the social forces unleashed in autochthonous reactions to that utopian experiment. Polanyi would be gratified by the Fifty Years Peace that has now extended from the end of World War II. He would equally welcome the dispersal of liberal democratic ideas and their adoption in most corners of the world. The demise of communistic authoritarian and fascist states is the most remarkable and encouraging event of our time. The grave risk is that still-fragile and emerging democracies, including those of the former Soviet bloc, will be unable to stabilize their control of newly unleashed, and formerly criminal, agents of the market, then relapse into unfree governance. Those who glibly counsel the most rapid and unrestrained conversion to product, factor, and financial markets would do well to imbibe Polanyi's lessons and water down their enthusiasm for the liberal panacea.
In 1960, I was told by my boatman that if I went overboard and bathed in the Ganges, off Varanasi, I would be bound to India for life. I suspected he was right then, or I would not have been there in the first place, wandering after college. Like most shamans, be was shrewd enough, if not actually divinely inspired, in seeing what the future would bring, based on what he saw in front of him. Peering through Polanyic and Ayresian lenses, I have had the good fortune to have watched intently, as a professional, three nations contest with the economic, political, and social currents of the modern world. India continues as the world's largest democracy, tacking through apparent crisis after apparent crisis, weathering most recently the rise of Hindu extremism and challenges from Sikhs and Muslims seeking greater autonomy or independence. Economic growth in the 1980s was exceptionally rapid, whether compared to the pace of earlier decades or to gains elsewhere in the world.(33) Pakistan has recently held a successful election and has had strong growth since independence, punctuated by only a few years of slowdown [Adams and Iqbal 1983; Adams 1985]. South Africa is just now emerging from the toils of white domination and has a reasonable chance of creating a pluralistic democracy and regaining economic momentum [Adams et al. 1977!. Each of these three little transformations appears on course toward democracy and prosperity.
Institutional economists have not effectively grappled with one processual component of modern developing societies, and they share this lacuna with orthodox economists. Rates of population growth are unsustainable in most of the Third World. India's 2.1 percent is exceeded by South Africa's 2.8 percent, which is surpassed by Pakistan's 3.1 percent. The forecasted steady-state populations for these three societies are, respectively, 1.9 billion, 103 million, and 600 million.(34) India's terminal population will be 10 times that at independence; South Africa's is slated to be 5 times what it was in 1970; Pakistan's capstone level would be 30 times that of 1950. These figures should be regarded as provisional ceilings at best, based on optimistic guesses about declines in fertility rates. In each of these cases, and globally, the gravest risk to world peace in the next 100 years will be the threat of growing conflict over water and living space, coupled with the task of assigning the costs of preserving the globe's biosphere. Population growth factors into labor-force expansion that is insupportable at rising wage levels earned in meaningful employment. Recent tensions in India and Pakistan among ethnic and regional groups foreshadow continuing strife, which will be increasingly difficult to manage.(35) I have no message beyond expressing this worry and voicing the hope that upcoming institutionalists viewing the global landscape will place much more emphasis in their labors on the process of population expansion.
The Future of Evolutionary Economics
Let me conclude by voicing optimism about the state of American institutionalism and its allied global heterodox movements. In the past decade, we have seen serious efforts by some of the best orthodox minds to break out of the fetters imposed by the limitations of individualistic reductionism. Whether one agrees fully or not with the neoinstitutional proponents of the orthodox world, there are manifold signs that the boundaries of convention are being pushed. There are debilitating limitations to the game theoretic method, and pressing fruitlessly against those walls will ultimately validate the need to abandon long-held methodological first principles and examine carefully the alternative of rejoining the social science mainstream, whereinto institutionalists long ago cast their lot. Douglass North's winning of the Nobel Prize in Economics is without doubt a craw-sticker for many real institutionalists, but a charitable and sanguine interpretation of this award is that it legitimizes a broader form of economics and sends a signal to young graduate students who are on the fence. We paleoinstitutionalists must seize every opportunity in the current climate for engaging in an intensive dialogue with all economists who are willing to talk across that fence, or even hurdle it.
In Anaheim last year, following a tradition that began four years earlier, I was going through the economic and social process of lavish dinner with my wife and two former Maryland students who were long-time tennis accomplices. We were talking about trends in the profession, and I was making the case that I have just exposited, with considerable force, toward dessert and well into the second bottle of wine. I expressed consternation that I had to write a presidential address and that I had been warned by my precursors that it was a daunting task overhung by the hazard of creative gridlock. One of the two has attained fame and fortune as an orthodox economist at a Big Ten university. He looked at me and said, "Haven't you just expressed the theme for your talk? You guys are winning." I was forced to agree with him.
We are winning.
We have won.
(1) I read Polanyi's great book in fall 1962 on the recommendation of Walter C. Neale. The Great Transformation instantly ordered my immature thoughts about society and economy and has given form and substance to how I have looked at the worlds of history and ideas ever since. At Texas, it was classes with Ayres and the conversational tradition more than The Theory of Economic Progress that conveyed his powerful thoughts about technological progress and instrumental valuation. I should add that I was most affected by Ayres's Toward a Reasonable Society, The Values of Industrial Civilization . It remains a strong antidote to today's moral drift and cynicism. (2.) My father-to-be and his uncle spent a night in a Fort Worth jail during the Texas Centennial of 1936 for overenjoyment, and as a child when I listened to the frequently told story I became impressed by the word "centennial" and its combinations. Later, during World War II, my father and several other Interstate Theatre managers were involved with protestors from the University of Texas, including Wendell Gordon, J. Fagg Foster, and Valdemar Carlson, who had driven up from Austin; he played a role in clearing them from the stage. (3.) The firm should be added to this list as a fifth mode in which transactions are taken outside the market. Conceptually, this brings Coasian reasoning into the Polanyic taxonomy [Adams 1992]. (4.) I center on Polanyi and Ayres in this talk because of their great influence on me, not to diminish the contributions of Commons, Veblen, Mitchell, or others, and because it is the fiftieth anniversary of their signature books, as I have noted. (5.) In my own work, I have mostly attempted to apply institutional theory to concrete problems and cases, or to develop and extend that theory. I have expressed the view on many occasions that too much effort is devoted by institutional economists to retrospection of their origins. Only a comparatively small percentage of the articles in the Journal of Economic Issues is devoted to presenting research findings about actual institutions and economic behavior. Too much weight is given to the orthodox critique that institutionalists "lack theory." There is plenty of theory. What is lacking is good application of that theory in order to explain how some bit of the economy works, in a manner that is interesting and meaningful, in the policy sense, to a wide audience. (6.) For an explication of the contretemps, see Mayhew . (7.) The chief reference is Scott . (8.) A propos of my title, I noticed when checking this quotation that the first sentence of Schumpeter's book says, "The social process is really one indivisible whole" [p. 3]. (9.) Unlike Veblen's, Schumpeter's theory of evolution was not drawn from biology. Hodgson comments on Schumpeter's "... rejection of any evolutionary analogue from biology" [p. 139). (10.) Hodgson [1993, 138] concludes "..." Veblen's use of evolutionary thinking from biology was much more extensive than that of Schumpeter. Veblen should thus be placed among the founding figures of modern evolutionary economics." (11.) Mirowski  writes, "... There was a readily identifiable discontinuity in economic thought in the 1870s and 1880s, which was the genesis of neoclassical theory; and both its timing and intellectual content can be explained by parallel developments in physics in the mid-nineteenth century" [p. 13]. (12.) One example is Heap . He distinguishes instrumental (orthodox) rationality from procedural and expressive rationalities. His primary indictment is the failure of instrumental rationality to cope with the informational and institutional features that decision makers face in everyday life. (13.) I returned to the debate in Adams [1986, 273-2821. A beginning point was the examination of the price-responsiveness probes done by many doctoral students in agricultural economics, including Schultz's own students. See Adams [1972, 1-20]. (14.) Adams and Neale [1993, 2]. The essay contains several sharp critiques of Douglass North's work on institutions and transactions costs. North was in the audience but, despite the weight of our arguments, was awarded and accepted the Nobel Prize in Economics a few weeks later. (15.) I am simplifying the problem into a dichotomy. One could identify another form of determinism: cultural determinism, since the cultural and institutional realms are frequently distinguished in the social sciences. Because the point I am making would be the same, I have elected not to complicate the argument. In addition, when most evolutionary economists use the term "institutional," they are including both culture and social relations in their depiction of society. "Systemic determinism" might be the most comprehensive term but would imply that the ordinary usage of "institutional" does not embrace culture. (16.) The institutionalist with by far the highest understanding of this point is John R. Commons. Every economist and social scientist should be compelled to read, if not memorize, chap. 4 (Transactions) of his Legal Foundations of Capitalism -insofar as a rule can dictate individual conduct! (17.) I cannot summarize Archer's full argument here and depart from her language, adhering in this paragraph to the language I am using in this talk. I think that I am faithful to her meanings. (18.) In Dawkins's theory, genes are the unit of replication in the biological sphere; human foresight and self-awareness may permit the race to overcome the blind selfishness of the gene and create a basis for altruism. He says, "We are built as gene machines and cultured as meme machines, but we have the power to turn against our creators. We, alone on earth, can rebel against the tyranny of selfish replicators" [p. 201]. (19.) Dawkins actually uses the tune "Auld Lang Syne" to illustrate the persistence of a meme, the point being in this case that the usually sung version contains a mutation. See p. 194 and the accompanying note. (20.) This truth (it is stronger than a viewpoint) means that game theoreticians face insuperable problems in trying to use their technique to recreate society from bilateral, face-to-face confrontations between "A:" and "B." (In the previously cited reference, Commons argues there are always at least five persons engaged in any transaction: A, B, C, D, and someone I like to call "J," who is the judge, policeman, village leader, or high priestess of decorum.) One must applaud the growing use of game theory in orthodox economics on the grounds that if enough practicians pound their heads on a prison wall long enough, it will fall down and let in the daylight, revealing thousands of social scientists going about their chores. (21.) This threefold distinction is further explained in Adams . (22.) In recent books, Hodgson [1993, 270, n. 15] and Mirowski [1988, 129] critique Ayres's ceremonial-technological dichotomy for being imprecisely defined. I have always believed that the crucial issue is its lack of operationality or quantifiability. Ayres dubs ceremonialism and technology "forces" but never explains how their influence at a point in time might be measured and compared. Presumably, if ceremonial elements weakened, technological advance would speed up, but to what degree? No one has had much luck in measuring technological change, whether non-economist or economist-orthodox or heterodox-and I am aware of no attempt to quantify ceremonial resistance and calculate the relative balance. When applied in case studies by Ayresians, the results often have the air of arbitrary judgment. Nonetheless, Ayres's perspective is a powerful one, and part of the institutionalist agenda should be to determine how to apply the dichotomy in practice. (23.) The rewards to invention, as opposed to innovation, appear to have been more limited, for few inventors gained from their discoveries. It is not inconsistent to take the Veblen-Ayres view that invention is driven by an intrinsic human curiosity and willingness to tinker, along with the Schumpeterian conception of the process of innovation. In fact, Schumpeter himself takes invention as spontaneous. (24.) The notion of saving a social surplus in order to impel development is nothing but unclear thinking and a masque for the machinations of conservative businessmen and financiers intending to tilt the income distribution in their favor. I therefore do not list capital accumulation of this sort as responsive to constructive incentives of the type a society should put in place. See Adams [1991, 111-123; 1983, 485-4951. (25.) At this point in the discussion, one could add a section discussing the manner in which volitional personal actions can deflect and shape broad historical currents. Twisting a phrase of Commons, this would entail examining both collective action in control of individual action and individual action in control of collective action. An important component of the reasoning would be to depict the institutionalist view of the role of planning in liberal democracies. (26.) I do not have space to deal with the matter here, but time is crucial in understanding processual economic behavior. To be plain, I would stress that the various measures of time are cultural constructs, not intrinsic in nature. It is probably not accidental that ancient civilizations uniformly featured more-or-less sophisticated calendars, which guided the cropping cycles and the rhythmics of religious ceremony. Social complexity can only arise with higher levels of coordination, which in turn are predicated on the creation of concepts of time and its management. The rise of the modern market system, and the factory method of production, could not have occurred without there first being town clocks and then personal timepieces. It is the irreversibility of time inherent in processual analysis that affords contrast with conventional equilibrium analysis that is either achronic or permits events to reverse themselves, which amount to permitting time to run backwards, a physical impossibility. (27.) The only text written from an institutional point of view is Gordon . (28.) I discuss some of these subjects in Adams [1984, 275-294] (29.) I am comfortable using the term here because the costs of international transactions are readily ascertainable. They would include transport charges, insurance, port fees, currency conversion rates, and customs duties as out-of-pocket costs; in addition, they would be raised by the implicit costs of time and trouble where languages and business codes differ, when there is insecurity and risk, and in instances where the enforcement of agreements is problematic. In many cases, the concept is used arbitrarily and with no attempt at establishing measurability; also, what is not grasped by many who talk about transactions costs is the need to consider transactions benefits, which exist apart from the pure gains of exchange. In African markets or Asian bazaars, for example, much satisfaction is gained from protracted discussions about the price to be paid for tomatoes or brass trays. Transactions benefits are very important in settings where enjoyment is gained from multidimensional interactions in which one component eventually effectuates the movement of a good or service. As my mother-in-law's sweatshirt says, "Shop Till You Drop." (30.) The institutional theory of intersocial exchange is more adequately explicated in Adams [1987, 1839-1860]. (31.) The concept is most fully developed in Arnold . Large states and empires find it easier to go their own way than do small nations. The costs of isolation are less because large size means more and a greater variety of resources, a more extensive internal division of labor, and broader demand. The trade coefficient - the ratio of exports to gross domestic product - of a large nation is much lower than that of a small nation. It is important to recognize that the principle of institutional convergence does not imply that the system has to be market capitalism. Counterfactually, global exchange would have grown rapidly in a period when all nations adopted state socialism and regulated trade. (33.) Adams [1990, 77-100]. W. C. Neale and I are revising our book, India: The Search for Unity, Democracy, and Progress; the second edition was published in Princeton by D. Van Nostrand, 1976. (34.) Estimates for India and South Africa are from World Bank [1993, 288-289, table 26]. The estimate for Pakistan is my own. (35.) Adams [1994a]. This article argues that fertility limitation is a public choice issue in which those who do not practice birth control acquire free rider advantages over those who do. Also, see James and Roy [1992 238-258]. I examined the effects of population growth in colonial East Africa in Adams 11975, 852-865!.
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Publication information: Article title: Economy as Instituted Process: Change, Transformation, and Progress. Contributors: Adams, John - Author. Journal title: Journal of Economic Issues. Volume: 28. Issue: 2 Publication date: June 1994. Page number: 331+. © 1999 Association for Evolutionary Economics. COPYRIGHT 1994 Gale Group.
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