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  1. Institutionalists ECON 205W Summer 2006 Prof. Cunningham

  2. What is Institutionalism? • Institution: an organized pattern of group behavior; well-established and accepted as a basic part of the culture. • Also referred to as Evolutionary Economics. • Seeks to: • Understand society’s normative priorities, and the direct implementation of the collective values of a particular culture. • Describe the organization and control of the economic system and its historical evolution.

  3. What is Institutionalism? (2) • Methodology • Concepts and Agenda • Themes • Conclusions • Lasting Contributions • Focus on social institutions in mainstreams economics • Policy implications • Vocabulary of discussion • Association for Evolutionary Economics, Journal of Economic Issues • Keynesian, Post Keynesian and other groups have taken over much of Institutionalism’s ground

  4. Thorstein Veblen (1857-1929) • Background • “Probably the most significant, original, and profound social theorist in American history.” • Multidisciplinary • Human behavior is based on discernible patterns called “instincts.” • Thought human history is the evolution of social institutions. • Growth and development are the cumulative result of a process of habituation. • It is culture and social institutions that differentiate humans from other animals.

  5. Veblen (2) • Traits or instincts that arise underly all of human behavior and are inter-related in a fundamental way. • They form a fundamental antagonistic dichotomy in nearly all societies. • Two clusters of traits in perpetual conflict: • Cluster I: Related to Workmanship • Cluster II: Related to Exploitation (Predatory Instinct) • The conflict between these two and the social institutions created to deal with this conflict, was the central point of Veblen’s social theory.

  6. Veblen (3) • Critique of Neoclassical Economics. • Simple product of Benthamite Utilitarianism • Attacked consumer sovereignty,saying society might be better off if gov’t directed production. • Neoclassical economics is static. • Simplistic view of human nature and social institutions • Equates hedonism with human nature • Offers his own perspective on the purposes of neoclassical theory.

  7. Veblen (4) • Insists that production is always social and cultural • Production requires human beings to share knowledge and skills • Categorizing inputs and land, labor, and capital is peculiar to capitalism. • The categories of wages, rents, and interest are flawed and problematic. • Neoclassical theory is designed to obscure the fundamental antagonism between capitalists and workers.

  8. Veblen (5) • Rejects (private) property rights. • Production is inherently social. • Private property originated in brute coercive force and is perpetuated by force and by institutional and ideological legitimization. • Capitalism leads to the subjugation of women.

  9. Veblen (6) • Basic Conflicts • Business vs. Industry • Salesmanship vs. Workmanship • Exploitation vs. Workmanship • Ideals of workmanship vs. the leisure class • Workmanship is an instinct. People have a proclivity for achievement, not effort. • Concerns of the managerial class, the pursuit of profit.

  10. Veblen (7) • Government • Ultimate power is in the hands of owners of capital because they control the government. • Did not deny the democratic nature of U.S. government. • Social Mores • Cultural and social domination of the leisure class

  11. Veblen (8) • Theory of the Leisure Class. • Most is devoted to a detailed description of how the leisure class displays its predatory prowess. • “Conspicuous consumption” • “Veblen good” • “Conspicuous use of leisure” • The wealthy maintain their position by predation or parasitism. • Power is everything.

  12. Wesley Claire Mitchell (1874-1948) • Veblen’s most brilliant student. Summa cum laude, Chicago, 1899. • Empirical bent. Studied business cycles. • Business cycles are a product of a monetary economy • Widely diffused through the economy • Related to profit projections • Not external, but endogenous and inherent. • Founded NBER in 1920 and ran it for 25 years.

  13. Mitchell (2) • Social planning is appropriate, but raises two difficulties: • Agreeing on what it is we want to accomplish • Interdependence of social processes. • Piecemeal planning is problematic. • Need comprehensive plans, considering direct and indirect effects of social actions. • Social planning is inevitable.

  14. John Kenneth Galbraith (1908-2006) • Canadian born. • Advisor to U.S. government, held high positions. • Board of editors of Fortune. • Ambassador to India in Kennedy administration. • Professor of economics at Harvard. • Author of numerous popular books.

  15. Galbraith (2) • Critic of the neoclassical “conventional wisdom.” • Does not fault originators of the theory, but rather those who follow it blindly. • The theory probably persists because it is easy to understand, has clear structure, can be taught, and can be expanded. It is difficult to attack. • Helped introduce Keynesian economics to the U.S.

  16. Galbraith (3) • Dependence Effect • As society becomes increasingly affluent, …wants come to depend on output. • Theory of imperfect competition? • Innovation driven by firms, not by consumer sovereignty. Consumer choice does not drive the economy. • Underallocation of goods to the public sector, which he calls “social imbalance.” (Not enough social goods to support the private goods.)

  17. Galbraith (4) • Theory of the firm • Neoclassical theory is only true for small, competitive, owner-managed firms that follow market trends—the market sector. • The planning sector—2000 or so largest firms wherein ownership and control are divorced—have different motives. • Protective purpose—survival (profit) • Requires direct or indirect price fixing. Oligopolists price low to expand market share, not high as neoclassicals argue. • Affirmative purpose—growth. • Large firms grow as a technological imperative, the result of economies of scale, R&D, etc.

  18. Galbraith (5) • Favors government policies • Argues that economic forces do not work out for the best except for the powerful. • Public policy has been unable to bridle the growth of large business. • Believes in price and wage controls, control of executive salaries, redistribution. • Wants a planning agency to join with corporations and unions to plan economic activity. Very socialist.