Dissent From Neoclassical Economics

1
Dissent From Neoclassical Economics

• Despite the influence of Marshall some economists
  rejected the neoclassical framework
• American Institutionalism
• Fabian Economists in the UK (associated with the
  Labour Party)

2
American Institutional Economics

• The term institutional economics introduced by
  Walton Hamilton in 1918
• Hamilton characterized neoclassical theories as
  sterile exercises in value theory
• Institutional Economics would
• Unify theory and application
• Be relevant for social control
• Focus on institutions as the changeable elements
  of economic life and as the agencies for control
• Be concerned with process
• Be based on modern psychology
• Be more properly scientific

3
Sources of Institutionalism

• This conception of an institutional economics
  came from several sources
• The work of Thorstein Veblen and Wesley Mitchell
• American progressivism and reformism
• A general concern in American social science to
  become more scientific through quantitative and
  fact based investigation

4
Thorstein Veblen

• Son of Norwegian immigrants to Minnesota
• Taught by J. B. Clark
• Much influenced by evolutionary ideas of Darwin,
  Spencer, and others
• Well versed in Marx and socialist thinking
• Difficult academic career at Chicago, Stanford,
  Missouri, and The New School
• Very ironic writing style

5
Veblens Critique of Neoclassical Economics

• Attack on the hedonistic psychology underlying
  neoclassical economicsreplace with a modern
  psychology based on concepts of instinct and
  habit
• Attack on the notion of economic laws as
  natural and giveneconomic arrangements are
  institutional
• Attack on the notion of normal equilibrium
  statesneed to look at cumulative institutional
  change
• Attack on neoclassical confusions between
  monetary values and real quantitiesie capital as
  and as machines

6
Veblens Critique of Consumption

• Theory of the Leisure Class 1899
• People are concerned with relative social
  standing
• Idea of conspicuous consumption to display wealth
  or conspicuous leisure
• Snob and bandwagon effects
• This use of consumption behavior to display
  social standing evolved from displays of warlike
  prowess in earlier times
• Waste of conspicuous consumption

7
Veblens Critique of the Institutions of Business

• Theory of Business Enterprise 1904
• Absentee Ownership 1923
• The institutional framework surrounding business
  activity had developed in the time of handicraft
• Since then large scale machine production had
  developed
• Since then methods of corporate finance had
  developed
• Distinction between business and industry
• Are the institutions of business suitable for the
  control of large scale industry?

8
Problems of Business Enterprise

• Gradual separation of financial control from
  technical expertise
• Large owners interested in financial gain that
  may not coincide with traditional notions of
  efficient production
• Insider dealing, manipulation of stock prices,
  takeovers and capitalization of goodwill
• Firms operated in ways that may damage the
  interests of holders of bonds, preferred stock,
  or smaller common stock holders

9
Problems of Business Enterprise

• Trusts, holding companies, interlocking
  directorates
• Business Cycles due to competitive recourse to
  loan credit (including stocks) which creates an
  eventual discrepancy between the firms
  capitalization and its true earning capacityand
  a liquidation occurs
• New technology lowering costs also tends to lower
  profits on older plants
• Ultimately an effective monopoly control of many
  major industries in order to maintain prices and
  profits

10
Problems of Business Enterprise

• Modern business also engages in competitive
  salesmanship and advertising
• Arms race type of competition that is wasteful
• Misinformation, misleading advertising,
  questionable sales tactics, etc
• Sate and governmental promotion of business
  interests
• Business principles applied to non-business
  institutions--universities

11
Veblen and the Engineers

• Veblens work is a root and branch attack on the
  idea that the individuals pursuit of private
  economic gain will lead to socially desirable
  results
• The invisible hand of Adam Smith may have applied
  to handicraft industry but not to conditions of
  corporate finance and large scale industry
• Suggested a Soviet with economic planning done
  by engineers (1921)

12
Veblen and Later Institutionalists

• Few other institutionalists were as radical as
  Veblen
• Institutionalism was critical of existing
  business institutions but became reformist
• Business regulation
• Advertising and product standards(consumer
  protection)
• Regulation of stock markets
• Unemployment relief, workmens compensation,
  social security
• Labour law

13
Wesley Mitchell

• Student of Veblens at Chicago
• Later at Berkeley and Columbia
• Combined Veblens concern with the adverse effect
  of business institutions with a quantitative
  approach
• Early work on the Money Economy project
• Psychology and economics (1910) and the Economics
  of the Household (1912)

14
Wesley Mitchell

• Came to focus on the problem of business cycles
• Business Cycles 1913
• Business cycles emerge at a particular point in
  the development of business or pecuniary
  institutions
• Importance of a developed banking and credit
  system and larger scale firms

15
Business Cycles

• Business cycles are due to complex interactions
  between
• Profit seeking activity of businesses
• The behavior of banks
• Leads and lags in the movement of prices and
  wages
• Close and detailed analysis of the course of a
  cyclean analytic description. Four phase cycle.
• Link between quantitative research and the
  institutional point of view

16
Mitchell and the NBER

• Mitchell and others founded the NBER in 1920
• To provide resources for statistical and
  quantitative research
• To do scientific and unbiased analysis
• National income measures
• Business cycle research
• Dating of cycles
• Specific and reference cycles
• leading indicators
• To provide objective information to government,
  but not to give direct policy advice
• Measurement Without Theory debate--1947

17
J. M. Clark

• Son of J. B. Clark
• The accelerator mechanism, 1917
• A version of bounded rationality, 1918
• Overhead Costs 1923price discrimination, price
  inflexibility
• Social Control of Business 1923business affected
  by a public interest, monopoly regulation,
  consumer protection, problems of externalities,
  public goods etc.

18
J. M. Clark

• Work on business cycles and public works programs
  during the New Deal
• Concept of workable competition and of
  Competition as a Dynamic Process
• Critique of mathematical approaches and plea for
  communicability

19
J. R. Commons

• Career at the University of Wisconsin
• Studies of labour unions
• Pioneered public utility regulation, workmans
  compensation, and unemployment insurance in
  Wisconsin
• The Legal Foundations of Capitalism 1924, and
  Institutional Economics 1934
• Focus on law and economics

20
J. R. Commons

• Concept of a transaction as a transfer of rights
• Transactions take place within a context of
  rulescustom and law. Working Rules.
• Bargaining transactionstransfer of property
  rights between legal equals
• Managerial transactionscommand and obedience
• Rationing transactionscollective superiors

21
J. R. Commons

• Working Rules change over time affecting the
  distribution of benefits and burdens
• Conflict of interestdisputes settled by
  courtscommon law, or by legislatures
• Courts and reasonableness
• Legislatures and log rolling
• Problem of representation of interests.
  Proportional Representation Occupational
  Representation?

22
Institutionalism in the Interwar

• Became a significant movement in American
  Economics
• At Columbia, Wisconsin, Brookings Graduate School
• Heavily involved in the improvement of government
  statistics
• Much involved in the New Deal
• New Deal plannersTugwell, Ezekiel, and Means
• Commonss students and social security and labor
  legislation

23
Institutionalism in the Interwar

• Later New DealKeynesian macro economics and
  revival of anti-trust
• Some institutionalists shifted to Keynesian ideas
  but criticism of Keynesian economics as well.
• Keynesian economics, new developments in
  neoclassical microeconomics, in econometrics, and
  in methodology led to the decline of
  institutionalism

24
British Fabians and Socialists

• A movement also arose in the UK nor entirely
  dissimilar to American institutionalism
• Many were associated with the Labour Party,
  Fabian Society, and with policy reform
• Sidney and Beartice Webblabour movement,
  cooperatives
• G. B. Shaw, Graham Wallas, J. A. Hobson
• Concern with unemployment issues, unemployment
  insurance, income redistribution, nationalization
  of the coal industry, etc.

25
J. A. Hobson

• Hobson was well known on both sides of the
  Atlantic
• Wrote on
• Cycles and Unemployment
• Imperialism
• Welfare criteria
• Major books
• The Physiology of Industry 1889
• The Evolution of Modern Capitalism 1894
• Problems of the Unemployed 1896
• Imperialism 1902
• Work and Wealth 1914

26
Hobson on Cycles

• Rejected Says Law
• oversaving or underconsumption
• Inequality in the distribution of income leads to
  higher rates of saving and lower levels of
  consumption
• Savings are relatively insensitive to interest
  rates and tend to become investment
• In an upswing wages lag behind prices
  transferring income to profits
• This leads both to a constraint on the growth of
  consumption expenditure and to more investment
  which adds further to the volume of output

27
Hobson on Cycles

• Eventually profitable prices cannot be maintained
  and the economy will go into a recession
• Solution is in greater equality of
  incomesredistribution
• Hobsons views attacked by EdgeworthHobson lost
  his work as an extension lecturer in economics
• Later regarded by Keynes as a precursor of
  Keynesian economics

28
Concept of Surplus

• A feature of the work of many Fabians is their
  concept of Rent or Surplus
• Both land and capital can yield an unearned
  increment (Rent)
• This rent due to community efforts and should be
  returned to the community (Webb, Shaw)
• Nationalization of land and major industries
  (Webb, Hobson)
• For Hobson total product could be divided into
  what is required to maintain existing factors,
  what is required for growth, and a surplus
• Important to ensure that more goes to growth and
  less to surplus

29
Hobson on Welfare

• Influenced by Ruskin
• Thought that economics was too narrowly focused
  on monetary costs and benefits
• For policy purposes need to consider wider
  ethical purposes
• Human costs and benefits
• A standard of human well being in place of the
  monetary standard of wealth
• Social progress