History of Economic Doctrines

Lecture 24

 

German Historicism

Rejected utility theory

Favored Protectionist policies [Friedrich List was nine years old when Alexander Hamilton died.]

Made mercantilists mistakes about wealth of nations, etc

 

American Institutionalism

 

In many ways, American institutionalism was a school of economic thought that developed as a reaction against the behavior of such ‘successful’ people as JP Morgan, John Rockefeller and the Astor and Vanderbilt families.  It was also a revolt against neoclassical theory and hyper-rational decision making.  The most notable of the traditional American Institutional economists were Thorstein Veblen, John Rogers Commons, and John Kenneth Galbraith.  The institutions in ‘institutionalism’ refer to technical and ceremonial institutions.

 

Maybe much of economic activity is based, not in self-interested optimization per marginalism, but is instead based in culture and institutions?

 

Institutionalist rejected the idea of hyper-rational decision making by ordinary people (i.e., lightning-quick calculations and taking derivatives in one’s head so as to maximize profit).  Institutionalists also objected that orthodox economics ignored interdependence on other people in society. (Neoclassical economics views environment [e.g., culture, institutions, social norms and mores] as not affecting the motives and decisionmaking characteristics of people.)

 

Aside: Public Choice analysis may be a somewhat right wing modern version of American institutionalism? … Effect of government on the search of self-interest

 

Thorstein Veblen (1857-1929)

 

Veblen was a first generation Norwegian-American who was born on his parents’ farm in Wisconsin, just before the Civil War.  He was a child prodigy who read book after book while his siblings did the chores.  Veblen’s parents recognized his intellect and sent him to Carleton College, where he wrote on such topics as “A Plea for Cannibalism” and “An Apology for a Toper.”  Veblen bounced around academia, never studying or teaching in the same place for long.  His lectures were a mix of ramble and mumble, deserved his bizarre reputation.  All students, regardless of attendance or performance, received “C” grades, however, when one student protested that anything below an “A” would ruin his eligibility for a Rhodes Scholarship, Veblen gave him one without much fuss.  Veblen had shorts teaching stints at many universities, however, they were marred by bitter fights with many of his colleagues and sordid affairs with their spouses.  He died broke at 72, filling a slot as a visiting assistant professor at the University of Missouri. 

 

  1. Veblen’s views of human nature and economic behavior in many ways echo Darwinian evolutionary thought
  2. Veblen developed an evolutionary economics based on human adaptations to ever-changing institutions, and categorized institutions as either technological or ceremonial
  3. Veblen viewed show-offs who flaunt the extravagance of their spending patterns as practicing behavior he called ‘conspicuous consumption’
  4. Veblen was most vehement with objections to the use of marginal utility theory
  5. Anthropological and sociological theories underpinned many of the views of Veblen
  6. Veblen was most adamant in condemning the notion that utilitarian calculation is the foundation for human behavior.  He viewed people as creatively curious, creatures of propensities and habits
  7. Veblen believed that property acquisition is a significant activity in the quest for social esteem.  He also believed that businessmen are ‘parasites’ who acquire unjust shares of the income produced by ‘engineers’
  8. In his book, The Theory of the Business Enterprise, Veblen categorized the working class as comprising of engineers and business people (parasites)

 

John Rogers Commons (1862-1945)

 

John Rogers Commons was an American Institutionalist who championed social and economic reform through regulation.  Much of the New Deal legislation of the 1930’s, including public utility regulation, collective bargaining and labor dispute mediation, was built from the regulatory framework pioneered by Commons.

Commons’ agenda of reforms for American labor markets included laws mandating workers compensation, job safety, unemployment compensation and the permissibility of collective bargaining.

 

Clarence Ayres

 

Ayres was the American Institutionalist who focused on and furthered Veblen’s views on technology.

 

Wesley Clair Mitchell

 

Mitchell was the institutionalist who established the National Bureau of Economic Research to provide economics with a sounder statistical foundation.  He analyzed business cycles exhaustively using then-modern statistical techniques.

 

ASIDE:       Principal-Agent Problem

 

In The Modern Corporation and Private Property (1932), Adolph Berle and Gardiner Means documented the dominant position of the large corporation in the modern economy, the growing dispersion of ownership of common stock, and the separation of ownership from control.  The growing dispersion of ownership of common stock and the separation of ownership from control brought light to a particular sort of moral hazard dilemma called the principal-agent problem.

 

 

John Kenneth Galbraith (1908-2006)

 

Galbraith, who was Canadian-born and Berkeley-trainedwas considered by many to be the ‘Last American Institutionalist.”  Although he outside the mainstream, he was still elected as the President of the American Economic Association in 1972 and was one of the better known economists in post-WWII America.  John Kenneth Galbraith worked in many various capacities, including as an editor of Fortune magazine, a brief tour at Princeton and an extended tour at Harvard, director of U.S. Strategic Bombing Survey, as well as advisor and speechwriter for John Fitzgerald Kennedy, Eugene McCarthy and George McGovern.  At 6’9”, Galbraith was also the world’s tallest prominent economist.

 

  1. Galbraith focused on the crucial role of advertising in creating and manipulating demand for consumer goods.
  2. Believed that giant corporations manipulate markets and sometimes dominate government policies
  3. Also believed that wasteful private consumption comes at the expense of social and public goods
  4. The key point in Galbraith’s book, The Affluent Society, is that advertising artificially and undesirably inflates consumer demand
  5. Galbraith proposed ‘countervailing power’ as a remedy for abuses of power in his book, American Capitalism
  6. In his work, The Great Crash, Galbraith theorized that regulation and deregulation are a cyclical phenomena.  Prosperity is accompanied by deregulation and increases in corporate fraud, while economic downturns lead to the exposure of corporate improprieties, resulting in new regulation, which is then moderated during the next prosperous period, and so on.  Galbraith labeled corporate fraud as the bezzle.
  7. Galbraith was highly critical of the economic power of big business and was an advocate of a ‘new socialism’ through government supervision, despite the immense prosperity of the past six decades

 

 

Thorstein Veblen: Father of Institutionalism

 

BIO:

Education: B.A from Carleton College (1880) and Ph.D. in philosophy from Yale (1884). Ph.D. in Economics at Yale in 1884

Personal Facts:

            -A first generation Norwegian-American from Wisconsin.

            -He had bad hygiene and looked somewhat simian [apelike].

            -He taught at numerous universities, including University of Chicago, UC-Berkeley, and finally University of Missouri.

            -He opposed grade-grubbing and competition (especially honor societies)

            -He was a ladies man, which cost him several jobs.

Thorstein always remained Asst. Professor (was never promoted) and supposedly gave every student a C, independent of academic performance. However, the story goes that Veblen gave one A to a student who begged for the grade so that he might be eligible for a Rhodes scholarship (all he did was ask!).

-Alleged inventor of the automatic dishwasher [he dropped his dishes in a rain barrel and the sprayed them with a garden hose].

 

Philosophy and Ideas:

He looked at issues like a cultural anthropologist, had an outsider view.

Saw progress from science and technology

Income distribution, puncturing icons, going after symbolism

 

Defined instincts of humans

-Parenthood, workmanship and idle curiosity-produce high quality efficient products.

-Called Industrial Employments

-Acquisitive Instinct-behavior that benefits oneself

 

“The Place of Science in Modern Civilization”

 

Assaulted the basic assumptions of neoclassical theory

-Opposed the idea of Invisible Hand (assumed long-run)

-Challenged fixed prices, resources, tastes, technology are constant

*Velban wanted to study these factors that were held constant

-Disagreed with the idea that self-interested individuals will promote what is best

for society.

*Believe that peoples who are in their own self-interest only benefit themselves.

-Rejected that people produce for the good of society:

1. Believed that profit hurts general interest of society

2. Increase profits, by decreasing output and increasing prices (monopoly)

3. He questioned the benefit of Advertising

-Rejected perfectly competitive markets

-Wanted more inductive research

-Wanted more Empirical Work

 

Contributions

-Challenged that markets are perfectly competitive

-Use of factual material to test hypothesis

-Link economics with other social sciences

-Ease and reasons for people to be unethical in the economy, how one person’s  self interest can harm society.

 

Major Publications:

I.          The Theory of the Leisure Class (1899):

-Looked at consumption/ consumption patterns

-Came up with conspicuous consumption

            *Like diamond rings

* Fur clothing, it is not necessary for survival but rather is used as a means of showing that one is on top of the social pecking order.

-Conspicuous Consumption: Individuals do not consume goods to satisfy basic needs; but rather they consume goods to signal their position in the social hierarchy, sets up pecking order.

 

Veblen good:

A Veblen good is viewed by its owners as a status symbol, and such a good is valued by an individual because its high price places it beyond the reasonable budgets of other individuals.

 

-The Poor’s goal is not to rid themselves of the leisure class; their goal is to emulate them.  People want to climb the social ladder and acquire these symbols of status.

 

positional good:

A positional good is a good that is more highly valued by its owner than the good would be valued were the individual isolated from the rest of society because the positional good serves as a signal of the owner’s class, status, or power. Rolls-Royces, tattoos, expensive jewelry or furs, massive boom-boxes, or black leather jackets festooned with hardware are often positional goods. See also bling.

 

 

II.        Theory of Business Enterprise:           

                  - He theorized that people who make money into 2 Groups:

                              1. Engineers (Blue Collar workers): These individuals create the inventions and goods that are later mass produced and sold. 

2. Business Men (parasites, also called the Ceremonial Class) These Individuals take those good created by the Engineers and make money off it for their own profit. He regarded the Ceremonial class as rip off artists. The Leisure Class was admired by all class of people because they made money with ease.

-Investment bankers facilitate roundabout production- Veblen disagrees

 

John Commons:

 

 (views similar to Fabian socialists in some ways)

 

Contributions:

            -Public Utilities: He was an advocate for public municipalities to undertake large projects for the public good such as highways, telephone polls, electricity, and sewage. He viewed these public utilities as a appropriately break even, or they might be permitted to generate funds for the municipalities. That extra profit would allow the municipalities to provide for schools, police, and other public benefits. He devised a rate structure that as an individual increased the amount of utilities they used the cheaper the extra units would become. 

 

            - Some areas where government needs to be involved according to Commons

      -Utilities

-Tend to gravitate towards Monopoly. Ex: AT & T

      - Took lessons from Dupuit

      - Price Discrimination

      - Price for the last unit > MC

      - Shouldn’t allow capitalists to own utility companies. Instead, these should be            owned by government or be “coops”

      - Government should regulate rate structures – and a lot of other industry.

      - His views were very similar to Fabian socialist in some ways.

 

 

Aside:

tournament theory:

Tournament theory is an explanation for tremendous disparities in incomes within a hierarchy. According to this theory, the huge compensation associated with being at or near the top of the hierarchy provides enormous incentives for subordinates to strive harder to be promoted so that they can capture these economic rents for themselves.

 

Clarence Ayers:

 

 

 

 

 

 

 

John Neville Keynes:

 

Bio:

            -Father of John Maynard Keynes

            -Neoclassical Economist a Contemporary of Marshall

 

Contributions:

      -Distinguished between normative and positive economics

-Normative: impossible to prove

-Positive: can be scientifically proven

      -Is there always a clear distinction between the two? No

-Ex: there is no possible way to scientifically prove “superiority” of Pareto efficiency—is it better to be efficient?

-Almost all issues are a mix of normative and positive

-E.g., The mere fact that we believe that knowledge is good shows that any inquiry has an element of normative.

Extra Info:

            John Neville Keynes wanted to make economics more scientific, therefore he advocated eliminating value judgments. This was the type of Neoclassical Economics, which Veblens was rebelling against. A major argument in economics is can economic analysis be performed accurately without the addition of value judgments.

 

 

Wesley Clair Mitchell:

 

Contributions:

            - Professor at Columbia, One of the first directors of the New School for Social Research.

            - Founded the National Bureau of Economic Research in 1920, in order to study    the the U.S. business cycle for which that organization

            - He almost single-handedly contrasted the way to analyze business cycles.           

            - His life-long interest in business cycles culminated in his authoritative opus with Arthur F. Burns, Measuring Business Cycles (1946).

 

John Kenneth Galbraith:

 

Bio:

            - world's tallest economist

           

 

Contributions:

Public Poverty & Private Opulence

- people don't take care of the public goods in society
Solution per Galbraith? Shift resources to public goods so that they are as nice as our homes

Induced Demand

- we consume stuff b/c they are status symbols

- we know things are status symbols b/c advertisements and society tells us so

- status competition results (similar to Veblen’s conspicuous consumption)

Embezzlement: The “bezzle”

- tremendous amounts of fraud are built into our system as the result of regulations

- Business Cycles

            -- deregulation during prosperity encourages fraud and abuse

            -- reregulation during down turns

 

 

These web pages are significantly edited and elaborated versions of student notes based on lectures by Ralph Byrns, 2002-2005.