Commons and Keynes: Their Assault on Laissez Faire
Atkinson, Glen, Oleson, Theodore, Jr., Journal of Economic Issues
In his remarks upon receiving the Veblen-Commons Award from the Association for Evolutionary Economics, Wallace Peterson said that "Keynes and institutionalism are the two major intertwined threads in my work as an economist" [Peterson 1992, 337]. A few years later, on the occasion of receiving his Veblen-Commons Award, Hyman Minsky quoted from a letter that John Maynard Keynes wrote to John R. Commons in 1927 in which he said "there seems to me to be no other economist with whose general way of thinking I feel myself in such general accord" [Minsky 1996, 357]. Similarly, Robert Skidelsky, in a recent biography of Keynes, describes Commons as "an important, if unacknowledged influence on Keynes" [Skidelsky 1995, 229]. These remarks encouraged us to explore the reasons for the sympathy Keynes and institutionalists have expressed for each other's work. We examined the similarities and differences between Keynes and Commons to find what insights they might have for current institutional investigations.
Both Keynes and Commons dissented from orthodox economic theory and methods, but neither sought an alternative to capitalism. Instead, each was interested in developing institutions necessary to save capitalism, given the developments in the economy in the early decades of the twentieth century. Their dissents and positive contributions shared two interrelated elements that we will document in this paper. First, they shared a skeptical attitude toward deterministic models based on pure reason or even on objective statements of mathematical probability. Second, they each were determined to incorporate money and other pecuniary institutions into the body of economic theory. We will set the stage for discussing these concepts, uncertainty and pecuniary institutions, with a brief section on the intellectual environment of the times and the personalities of these two men.
The Men and Their Times
Peter Bernstein recently suggested that "the revolutionary idea that defines the boundary between modern times and the past is the mastery of risk" [Bernstein 1996, 1]. The mastery of risk is the basis of "the notion that the future is more than a whim of the gods and that men and women are not passive before nature. Until human beings discovered a way across that boundary, the future was a mirror of the past or the murky domain of oracles and soothsayers who held a monopoly over knowledge of anticipated events" [Bernstein 1996, 1]. The way across this boundary was the development of the mathematics of probability. Probability analysis allowed prediction of the future and the risk or likelihood of alternatives. By the first decade of the twentieth century, probability scholars believed that risk was mastered or at least estimated.
At the same time, the English neoclassical school of economics completed its deductive model of self-interested individuals making choices. These choices inevitably lead the system back to the best of all possible equilibrium positions with output and employment always moving toward their maximum through the operation of flexible prices. Probability analysis completes this analytical system by depicting the movements between equilibria when risk affects choice. Rather than a single outcome, there is a range of possible outcomes that can be evaluated using probability and expected values.
As Bernstein tells the story, World War I shattered the optimism behind these models of human behavior [Bernstein 1996, 215-216]. How could rational people in the most civilized societies engage in such barbaric behavior for such ambiguous objectives? This loss of innocence shifted research from risk to uncertainty and the limits of rational models. Both Keynes and Commons came to the study of uncertainty and the need to stabilize the economy during this period. While they came from extremely different social and academic settings, they arrived at substantially similar conclusions.
John Maynard Keynes was born into an affluent family and educated at the best schools. …