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Institutional Economic Theory

Economics 451

University of Missouri-Kansas City

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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

•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

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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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Elements of Theory

Culture

Evolution of institutions

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

dress v clothing

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

Value Theory

Theory of Progress 

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

•Veblen – Theory—Critique of standard, classical and Marxian.•Commons – applied and policy•Mitchell – built on Veblen’s theory to create empirical foundation for economics, especially business cycles, theory of money 

Veblen Brief Biography

Criticisms of Classical Theory pre-Darwinian Taxonomy pre- conceptions of human nature - natural order

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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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Mitchell -- 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 Chicago• Veblen introduced him to economics• Dewey – taught him Philosophy• Dissertation – role of money -- greenbacks• Continued statistics experiments Institute of U of Chicago 1900-1901• Univ of California 1903 -- head of dept• Columbia University 1913 there for next 33 years• Kusnets, National Income and Product accounts

Types of writingStatistical Series – business cyclesNational income accounts – Kuznets

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

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Schematic of Commons Contributions and Heritage

Commons

Theoretical

Labor Policy

social experiments

Reasonable value

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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

Natural Law -- problems – monopoly – what to do about – public utility

 

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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 on Instincts

Veblen -- The Instinct of Workmanship

Not Tropismatic

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Functional Workmanship Ownership irrationalProgressive Parental Bent Predation Past -bindingInstrumental Idle Curiosity Vested Interest

CeremonialTechnological

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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 and language 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

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