A Manifesto for Institutional Economics
Fusfeld, Daniel R., Journal of Economic Issues
Remarks Upon Receiving the Veblen-Commons Award
My dictionary defines a manifesto as a public declaration of principles or intentions. This manifesto begins by briefly recalling the work of the leading institutional economists of the 1920s and 1930s, when institutional economics last reached its peak of influence. The principles developed by the Texas, Wisconsin, and Columbia institutionalists created the foundations on which an institutional economics of the future can be built. Two themes united these three centers of institutional thought: criticism of economic orthodoxy and support of government to achieve social goals.
We are in a new era today, in which both the institutional framework and economic orthodoxy have changed. We need to emphasize those same themes developed by the earlier institutional economists, in four ways.
1. Analysis of the changed institutional structure of contemporary capitalism.
2. Critical analysis of mainstream high theory in economics that accompanied the new economy.
3. Development of new instruments of public policy to meet the economic and social problems of this new era.
4. Development of an empirically based research method that challenges the metaphysics of mathematical models.
A Look at the Past
As institutional economics enters a new century, we might take a look back at its glory days of the 1920s and 1930s. There were three chief emphases, rooted in the seminal work of Thorstein Veblen and strongly influenced by American pragmatic philosophy. Clarence Edwin Ayres and the Texas school stressed the impact of technological change in transforming the institutional structure of the economy and the resistance of "vested interests" to the changing order. John Rogers Commons and the Wisconsin institutionalists emphasized the need to use government to meet the new social needs created by economic development and institutional change. Commons, for example, argued that the conflict between capital and labor could be channeled by collective bargaining into mutually satisfactory and socially acceptable conclusions instead of leading to continuous and wasteful conflict or to a Marxist revolutionary outcome. Meanwhile, Wesley Clair Mitchell and the Columbia school developed the concept of empirically based economic theory in which every step in the deductive logic required empirical verification. Mitchell's business cycle theory was bult in this way.
Criticism of mainstream economic orthodoxy bound these three groups together. The institutionalists rejected a theoretic economics that began with the simplistic behavioral assumption of individualistic acquisitiveness and led by deductive logic to universal truths. Indeed, the strong instituionalist critique forced mainstream orthodoxy to add empirical testing of theoretic propositions in an effort to apply universal truths to the real world.
Advocacy of government action at the national and state levels was a second common thread among institutional economists. New social needs created by institutional change and an increasingly complex economy required new forms of social action. In this sense, the work of institutional economists was part of a much larger social and political trend: the Progressive movement, labor organization, women's rights, and the New Deal of the 1930s. Institutionalists contributed to a variety of social innovations, including workers' compensation, unemployment insurance, Social Security, fair wages, healthy and safe working conditions, enforcement of the antitrust laws, collective bargaining, and efforts to stabilize employment and prices. We do not usually include writers like Ida Tarbell, William Foster and Waddill Catchings, or Henry Wallace as institutional economists, but they made important contributions to insitutionalist thinking and to the institutionalist program. Institutional economics was part of and contributed to a social and political movement directed toward providing a humanistic face to a largely free private enterprise economy. …