Institutional Economics

Extract from The Whimpering of the State. p.123-124.

Keynotes: History of Ideas, Methodology & Philosophy;

In 1931, at the age of 24 [Sutch] went to the Department of Economics at Columbia, at the time the most important in the United States, where it taught the dominant economic paradigm of the times ‘institutionalism’.(1) The neoclassical synthesis (often abbreviated to ‘neoclassical’) a combination of the macroeconomics that Keynes pioneered and the modern theory of markets (including a welfare economics which emphasises their beneficial outcomes), strongly laced with mathematical techniques only becomes important after the Second World War. Institutionalists trace their origin to Thorstein Veblin. Among the best-known are Gunnar Myrdal and John Kenneth Galbraith and Maurice Clarke, who lead inter-war Columbian economics.

Yuval Yonay summarises ‘the trademarks of institutionalism [are] empirical research, suspicion towards deductive theory, emphasis on the changing nature of economic institutions, habits, and norms, special attention to the divergence of market values (prices) from social values, and the belief in the reality of informed concerted action to improve human welfare.’(2) The (largely valid) implication of this definition is that the neoclassical economics which followed it is less empirical and more deductive. It tends to assume that institutions, habits and norms are irrelevant (but often the implicit assumption is the norms of an idealised white middle class US males). It thinks market prices normally match social prices, and while collective actions rarely improve human welfare, but individual ones usually do.

Readers may be a little dismayed to see such disagreement between the two economic paradigms, and may not even be reassured by Paul Samuelson, the key neoclassical innovator and doyen of MIT economics which replaced Columbia’s supremacy after the war, who said in 1999 ‘I do not come today to bury institutionalism nor to dispraise it. I believe it lives on as a lively element inside today’s mainstream economics, … American institutional economics [is] a force that will endure and flower in the next century to come.’(3) The eclectic economist has a toolkit, in which both institutionalist and neoclassical paradigms (and others) reside. Faced with a particular problem, the economist uses the tool (or tools) which best tackles the job.

American institutionalism was greatly influenced by nineteenth century German philosophy, as was Marxism. Both thought planning was an important part of economic policy, but for different reasons.

1. The next few paragraphs are informed by Y.Younay, The Struggle over the Soul of Economics: Institutionalist and Neoclassical Economics Between the Wars, Princeton.
2. Op. cit., p.52.
3. P.A. Samueslon, ‘The Golden Virtue of Eclecticism Economics’, The American Economist, Vol.44, No. 1 (Spring 2000), p.4.