Institutional Economics and the Theory Of Value: Essays in Honor Of M. Tool

Edited by Charles M.A. Clark (Kluwer Academic Publishers, Boston,1995)
Review published in Prometheus, Vol 14, No 2, December 1996, p 291-293.

Keywords: History of Ideas, Methodology & Philosophy;

According to the Palgrave Dictionary of Economics institutional economics has been the principle school of heterodox economic thought, apart from Marxism. Some of its practitioners are extremely well known – Thorstein Veblen, Wesley Mitchell, Gunnar Myrdal, J.K. Galbraith, and Ken Boulding (perhaps Joseph Schumpter) – but it is rare for the school to impinge on the central economics paradigm of neo-classical economics. The two seem like distant cousins, who are still not talking after a feud over the family inheritance.

Robert Heilbroner in his The Worldly Philosophers nicely captures the difference when writing of Thorstein Veblen, perhaps the founder of institutional economics, that “his inquiry began not with the economic play, but with the player; not with the plot, but with the whole system and customs and mores which resulted in a particular kind of play called `the business system’.” (6ed, p.221) Of course neo-classical economics has a player of sorts, although rational economic man is a severely limited notion in comparison to the complexity and subtlety of Veblen’s individual. Similarly the institutions described in orthodox theory are much flimsier, transparent arrangements than they are in Veblen and institutional economics. Institutionalists eschew physics as the appropriate model for economic science, and look towards biology – or even anthropology. Inevitably they look at different issues: power – the organization and control of the economic system – comes to the forefront.

Like all successful paradigms, albeit in this case not the dominant one, institutional economics has a history of development, internal disagreement, and its own major thinkers. Marc Tool was one such person, and this book is a festschrift of 15 essays by 17 authors. Tool is certainly a worthy candidate for such a venture. Born in 1921, his career was troubled by the McCarthyism of the early 1950s, which he faced and survived to become a respected academic, the first president of the Association for Institutionalist Thought (AFIT), and a long term editor of the Journal of Economic Issues, the premier forum for institutionalists economists. His doctoral thesis, eventually published as The Discretionary Economy: A Normative Theory of Political Economy, was at the forefront of the revival of institutionalist – or, as he called it, “neo-institutionalist” – economics in the 1960s.

Whether this festschrift does him justice is another matter. The essays are loosely centred around the institutionalist account of value theory, but this reader found them difficult to follow, perhaps because I come from a neo-classical perspective (although a sceptical one). Many of the contributors do not attempt to engage with that perspective. None of the modern greats – say Kenneth Arrow or Gerard Debreu – are mentioned, and it is unclear whether value theory is addressing the same issues in the two paradigms. For the neoclassical economist, value theory is about the determination of the price of commodities transacted in the market. Nominally this is a positive theory about what the world “is”, although a normative account about “ought” sneaks in, especially that a competitive market clearing gives “just” prices. Institutionalist value theory starts off with the view it is about a normative theory, but it is unclear whether they disagree with, say, the Marshallian or Walrasian accounts of the positive determination of prices. It is clear that institutionalists consider the real determinant of resource allocation is not the market – as it is in neo-classical economics – but the structure of society, especially organizational and institutional power. Somebody like Joan Robinson, from the Marshallian tradition, would have agreed with the sentiments in the previous sentence.

I fear that by now I will have lost many of the readers in the arcane mysteries of the history of economic thought. But they will be even more lost in the essays in the book – with one exception. Fortunately for readers of this journal, the exception is an essay on telecommunications by Harry Trebing whose notable career includes having been chief of the Economic Studies Division of the US Federal Communications Commission. (That an institutionalist has risen to this rank reminds us that they may be a small part of the totality of the US economics profession, but they need not be marginal.)

As a background to his essay entitled “Market Failure and Regulatory Reform: Energy and Telecommunication Networks as a Case Study”, (p.221-240) it should be noted that, since Veblen himself, institutionalists have had a deep interest and distinctive view of technological change and its role in economic development. As Heilbroner says “Veblen did put his finger on a central process that loomed larger than any other in his time and that had been strangely overlooked in all the investigations of contemporary economists. That process was the emergence of technology and science as the leading forces of historic change in the twentieth century.” (p.246: original’s italics) It is a little uncertain whether Heilbroner intends to imply this is still true, but in my view technology remains largely a mechanist force in neoclassical economics, whereas it is a vital one in institutionalist economics (and befitting an evolutionary science “vital” is used here in its biological meaning). It seems likely that in a static competitive market neo-classical and institutional economics give largely similar accounts of events, except they may focus on different issues. However for a market under acute technological innovation, the accounts are likely to be different. Thus Trebling’s essay is a test as to whether institutional economics provides a genuinely useful perspective to the neoclassical account.

The essay opens arguing that “much of the intellectual support for the deregulation movement [in network industries] has come from neoclassical economists who believe that utilities industries are inherently competitive and cases of market failure are either isolated phenomena or incidental spillover effects associated with an otherwise smoothly functioning system of markets.” (p.221-222). Instead he argues the networks are infrastructure in which there has been a failure of pervasive competition to emerge. There are five significant effects: the persistence of high levels of concentration; the persistence of continuously high levels of profitability; the persistence of price discrimination, cross subsidization and risk/cost sharing; the emergence of substantial market power exercised by monopsonistic buyers; and the merging pattern of pricing for core/basic service sales on the one hand, and large industrial sales on the other. The essay argues that as a result there is a potential impairment of the network as an integrated fully functioning entity.

Few of these notions will be unfamiliar to those who study the telecommunications industry, although the identification of the parallels with electricity and gas reticulation is a valuable one. Where then is the particular institutionalist insight?

Trebling goes on to argue for what Marc Tool called “progressive regulation” but which might also be called government regulation and planning. (“Progressive” means here “advancing social conditions”, rather than “increasing scope”.) He argues for five tasks: the determination of the proper size and scope of the network relative to the market to be covered; greater surveillance of network accessibility and adequacy of service; regulatory oversight of modernization and maintenance of the network; examination of the distributional consequences of regulatory intervention and imperfect markets; and developing adequate guidelines for constraining various forms of exploitative pricing.

This is a far cry from “light handed” (or as it is sometimes called by its critics “light fingered”) regulation, popular today. However it does not seem to me to be entirely outside standard neoclassical economics, unless one takes the extremist Chicago School version with its tight prior policy conclusions of minimal government intervention as being the centre of the paradigm. One gets the impression that there is a much greater overlap between institutional economics and the neoclassical paradigm than either side admits. It may be because of the dominance of economic rationalism in the US that institutionalism has been a sort of bunker to which dissenters retreat, rather than being on another planet altogether. Economics is a very broad church. Perhaps the Chicago Cowboys are in the right hand pews up the front, the institutionalists down the back on the left. Because until recently Australasian economics has not been so hostage economic rationalism, institutional economics has not been so explicitly differentiated here, and its insights have been more readily incorporated into economic analysis and policy.

But the bunker mentality is there in the US, and in these essays. Some contributors uncritically repeat a comment Marc Tool made in his 1981 presidential address to AFIT that “[t]he economists’ abiding commitment to develop and apply theory which is relevant, directly or indirectly, to the great issues and problems of the day, is the driving economists out of orthodoxy to positions similar to or comparable with positions institutional economists have been evolving over this century.” (p.1). I wish the first sentiment were true. In that it is not, we may have an explanation why the Tool’s prediction seems weak a decade and a half after it was made. Perhaps institutionalist economists should turn to explaining why many economists do not seem to have a commitment to investigate the great issues of the day. Marc Tool’s contribution to economics deserves constructive engagement, rather than the repetitive mantra on the one side, or the ignoring of him by the other.