Hodgson on the Essence of Old Institutional Economics

Geoffrey M. Hodgson is a heterodox economist in the tradition of the Old American Institutionalism of Thorstein Veblen and the later Keynesian John Kenneth Galbraith (As an aside, Hodgson also co-founded the fascinating The Other Canon website with Erik Reinert.)

There is of course a subtle blending of some Old American Institutionalists with Post Keynesian economics; indeed, the great economist John Kenneth Galbraith could really be understood as both a Post Keynesian and Institutionalist.

Hodgson (2000) describes the essence of Old Institutionalist Economics, which is of great interest.

One must carefully distinguish the New Institutionalist economics (say, of Ronald Coase and Douglass North) from the Old American Institutionalist tradition, because the New Institutionalism is really just a variant of modern neoclassical theory.

The German Historical School had some influence on early American Institutionalists such as Richard Ely and Edwin Seligman who both studied in Germany in the 1870s and 1880s (see Chang 2002: 129; Hodgson 2001), and Old Institutionalism had a major role in the landscape of academic economics in the United States from the late 19th century down to the 1940s (Hodgson 2000: 317).

It is important to note that Old Institutionalism itself developed over time, and amongst the many Institutionalist economists there have been historically different policy and political viewpoints, ranging from conservative, centrist, liberal and even socialist (Hodgson 2000: 320). Some older Institutionalists such as Commons, Mitchell, J. M. Clark, Paul Douglas, and Arthur F. Burns even saw their discipline as being compatible with, or complementary to, neoclassical theory (Hodgson 2000: 325).

Nevertheless, Old American Institutionalism came to distinguish itself from neoclassical economics.

Hodgson sets out some fundamental ideas of Old Institutionalist Economics as follows:

(1) Economics must draw on other disciplines such as psychology, history, sociology and anthropology to study both human behaviour and social structures (such as institutions) relevant in economic life;

(2) Institutions must be seen as key elements in any economy, and the economist must analyse institutions;

(3) Any economy is a evolving system that is open ended, with very complex relations between its elements such as human beings, social life, culture, technology, resources, and politics.

(4) The neoclassical idea of basing economics on the individual utility-maximising agent is mistaken. Individuals and their action can be shaped by social and cultural factors and institutions. “Downward causation” from the social world and institutions can significantly alter and shape human behaviour. (Hodgson 2000: 318).

Hodgson rightly sees point (4) above as what distinguishes Old Institutionalism from mainstream, neoclassical economics.

Hodgson makes an interesting and insightful observation about neoclassical economics:

“It really concedes too much to neoclassical theory to suggest that it has an adequate theoretical foundation upon which to build any pro- (or anti-) market policy. Neoclassical theory is essentially neither pro-market nor anti-market, because it has no adequate theory of markets at all. Instead of associating it with markets, it would be more accurate to say that neoclassical theory was blind to real markets, and consequently to their virtues or vices.” (Hodgson 2000: 321).

So what we need is not bad theory about markets, but a proper, empirically-grounded and true theory of real world markets.

For that, study of social life and institutions is paramount. Although obviously human beings are agents of economic life, there is a two-way process involved: the dependence of institutions on individuals, but also the institutional moulding of individuals (Hodgson 2000: 326). That is to say, there is a need for understanding “both upward and downward causation” in an economy (Hodgson 2000: 327).

As an example, individual consumers are said to be the ultimate driver of capitalism, and the individual’s tastes and preferences are the ultimate driving force of production; “Consumer sovereignty” is the idea usually invoked to describe this idea.

But modern businesses and corporations can actively shape consumer tastes and preferences by means of multi-billion dollar programs of advertising, salesmanship and subtle manipulations of personal opinions and desires (Hodgson 2000: 325, citing the work of John Kenneth Galbraith). So much of modern advertising is based not only on deceptive advertising, but also on outright fraud. How does this affect production and efficiency when people are manipulated into buying things that do not actually do what they are supposed to do?

To sum up, Hodgson sees the essence of Old Institutionalism as the idea that “the individual is socially and institutionally constituted” and downwards causation is important in economic life (Hodgson 2000: 327).

Finally, you might ask: who were, and are, the economists working in the tradition of Old Institutionalism?

I provide a list of them below:

OLD AMERICAN INSTITUTIONALIST SCHOOL

Early American Institutionalists and Associates
Francis A. Walker and the American Apologists
Simon Nelson Patten 1852–1922
Henry Carter Adams, 1851–1921
Richard T. Ely 1854–1943
Edwin R.A. Seligman 1861–1939
William Trufant Foster 1879–1950
Waddill Catchings 1879–1969
Adolf A. Berle

Old Institutionalists
Thorstein Veblen 1857–1929
John R. Commons 1862–1945
John Maurice Clark 1884–1963
Clarence E. Ayres 1890–1972
Gardiner C. Means 1896–1988
Arthur R. Burns 1895–1981
Allan Gruchy
Allyn A. Young 1876–1929

Business Cycle Institutionalists
Wesley Clair Mitchell 1874–1948
Leonard P. Ayres 1891–1972
Arthur F. Burns
Frederick C. Mills
Solomon Fabricant
Simon Kuznets

Modern Institutionalists
Robert Heilbroner
John Kenneth Galbraith
Malcolm B. Rutherford
Robert Frank
John Adams
Warren J. Samuels
Mark R. Tool
Rick Tilman
Geoffrey Hodgson
Anne Mayhew

Links
Geoffrey Hodgson’s website.

The Other Canon.

BIBLIOGRAPHY
Chang, Ha-Joon. 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective. Anthem Press, London.

Hodgson, Geoffrey M. 2000. “What Is the Essence of Institutional Economics?,” Journal of Economic Issues 34.2: 317–329.

Hodgson, Geoffrey M. 2001. How Economics Forgot History: The Problem of Historical Specificity in Social Science. Routledge, London and New York.