The Influence of Institutionalists on the New Deal and Why the Mainstream Literature of the History of Economic Thought Ignores This Period in History

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THE INFLUENCE OF INSTITUTIONALISTS ON THE NEW DEAL AND WHY THE MAINSTREAM LITERATURE OF THE HISTORY OF ECONOMIC THOUGHT IGNORES THIS PERIOD IN HISTORY

Lin Zhang and Yingli Xu

Lin Zhang, School of Economics of Yunnan University, P. R. China. Email: [email protected] Yingli Xu, School of Economics of Yunnan University, P. R. China. Email: [email protected]

Abstract: This article holds that institutional economics constituted the economic foundation for Roosevelt’s New Deal. Institutional economics created the ideal environment for the implementation of the state intervention measures of the New Deal though the “institutionalist movement” of 1920s. The notions of planning of Wesley C. Mitchell, John M. Clark, and Walton Hamilton, the most influential institutionalists then, were embodied in a good many measures of the New Deal. Many institutionalists participated in the making and the implementation of New Deal policies. The ideas of planning held by Rexford G. Tugwell and Mordecai Ezekiel were directly adopted in the New Deal measures, proving that the New Deal measures came from institutional economics. Adopting the SSK approach, this article believes that the literature of orthodox economics ignores this period of history on purpose, since it is part of the social construction process for orthodox economics to ignore this period of history.

Key words: the New Deal; Institutionalism; SSK

Research on the economic theoretical foundation of Roosevelt’s New Deal mostly comes from historical rather than economic literature. And research of historical literature on the economic theoretical foundation of the New Deal mainly revolves around the influence of Keynesianism on the New Deal and barely mentions that Institutionalism had great influence on the New Deal. This article aims to formulate

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where and how institutionalists greatly influenced Roosevelt’s New Deal and point out that from the economic perspective, the New Deal resulted from the radical atmosphere in the circle of economics in the United States created by the “institutionalist movement” which took place in the first 20 years of the twentieth century. In addition, certain approaches from Sociology of Scientific Knowledge (SSK) will be tentatively adopted to explore the reasons why mainstream literature of the history of economic thought ignores the fact that institutionalists had significant influence on the New Deal.

The Economic Atmosphere of the New Deal: the Institutionalist Movement

The implementation of the state intervention measures of the New Deal was closely connected with the long-established ideological atmosphere which supports governmental intervention in the economy. The establishment of this atmosphere is attributed to the Progressive Movement of the early twentieth century as well as reflections and criticism on the part of academic circles and social classes on laissez-faire at the end of the nineteenth century. The end of the Progressive Movement did not bring an end to movements which it advocated against monopoly, inequality, and laissez-faire. Institutionalists, for example, are still continuing with these efforts in the circle of economics. Academically opposing the laissez-faire of orthodox economics and strongly advocating state intervention in policy making, institutionalists became the leading power of the economic circle in the period from the entire 1920s to early 1930s, exerting great influence on the policies of the states and the federal government of the United States. This event is known as the “institutionalist movement” in the history of economic thought. The academic foundations of the institutionalist movement came from Thorstein Veblen, “H.C. Adams, Richard T. Ely, C. H. Cooley, John Dewey, and from the natural science emphasis on measurement and empirical observation that was commonly seen as the defining characteristic of a true science” (Rutherford 2000: 293). After Veblen established the economic analytical tradition of institutionalism, it attracted many followers in the United States, among whom the outstanding representatives formed the nucleus of the institutionalist movement. The leaders of the movement included Walton H. Hamilton, John M. Clark, Wisely Mitchell, and John R. Commons, another founder of institutionalism. Hamilton coined the term “institutional economics”; Clark’s research centered on the legal issues in the economic system; Mitchell was well-known for his institutional approach to explaining the problem of the business cycle as well as for a series of statistical works, and he was also the founder of the famous NBER (National Bureau of Economic Research). Commons was one of the founders of institutionalism, and

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despite the differences in theory between him and Veblen, he was consistent with Veblen in his emphasis on institutionalist analysis and hope to change the existing economic order through institutional adjustment. Commons contributed greatly in particular to legislation on labor and social security in the institutionalist movement. Under the influence of these leaders, three centers of the institutionalist movement sprang up: the first center was Amherst College, which later transferred with Hamilton to Robert Brookings Graduate School of Economics and Government. Its members included Isador Lubin, Willard Atkins, Morris Copeland, Carter Goodrich, and Stacy May. The second center was at the University of Wisconsin with Commons as the leader, and other members including E. E. Witte, Harold Groves and so on. The third as well as the biggest center was University of Columbia, where there gathered institutionalists such as Mitchell, Clark, and Rexford Tugwell. NBER being the platform, Mitchell was able to assemble a large number of institutionalists including Simon Kuznets, A. F. Burns, Adolph Berle, Gardener Means, F. C. Mills, James Bonbright, and Leo Wolman to carry out research on the business cycle as well as statistical work on national income. Besides economists, the University of Columbia also assembled social scientists who had the same belief as institutionalists, such as historian Charles Beard, philosopher John Dewey, and sociologist William Ogburn. Many people in this group later directly participated in the making and implementation of the New Deal measures.1 Advocates of institutionalism devoted their efforts to solving a good many existing problems of their society, believing that traditional economics was not able to provide a satisfactory solution to the existent problems of economic order. The theme of their research centered on the analysis of the existing business institutions or pecuniary institutions put forward by Veblen. Mitchell’s Business Cycles (1913), Business Cycles: The Problem and its Setting (1927), Clark’s Overhead Costs (1923), Social Control of Business (1926), Hamilton and May’s The Control of Wages (1923), and Hamilton and Wright’s The Case of Bituminous Coal were answers to this question. Institutionalists of this period emphasized the scientific features of economics, demanding that economics be measured, observed and empirically tested. This demand reflected their disappointment with laissez-faire economics. “As economics is taken by the institutionalists to be a functional science, they believe that economists should devote their efforts to the translation of economic theory into some form of action which would enable us to get at the sources of our widespread economic difficulties” (Gruchy 1939: 122). This belief and the emphasis on empirical work closely connected institutionalists with the government. As early as the beginning of the twentieth century, institutionalists’ proposals for social reform influenced the policies of the US government. For instance, Commons almost led the reform on public utilities regulation and labor legislation. Commons

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drafted the Civil Service Law of the State of Wisconsin together with his students in 1905, and the Wisconsin Public Utility Law in 1907. In 1911, Commons established the Wisconsin Industrial Commission (WIC). Composed of experts and representatives of the conflicting interest groups in labor issues, the commission carried out investigations on labor conflicts and put forward solutions. Commons called this kind of commission “a fourth branch of government” (Commons 1996: 251), and regarded it as the best choice to solve labor problems and avoid labor-capital conflicts. Ever since then, the establishment of commissions has become the major way to solve conflicts on industrial regulation and labor-capital disputes. In the period between World War I and post-war reconstruction, institutionalists participated widely in government statistics, policy making and administration by submitting research reports, assuming the office of advisors at government departments, and directly serving in government departments. They had huge influence on the US government in price control, industrial regulations, public infrastructure, unemployment insurance, labor subsidies and social security. For instance, during World War I, Mitchell was in charge of the War Industries Board (WIB) and led the research on wartime price control. Hamilton was the economic expert of the War Labor Policies Board. As to the influence of institutionalists in this period, that of the research on the business cycle by the group led by Mitchell was the most important. The publication of Mitchell’s masterpiece Business Cycles in 1913 did not get much response, since Americans back then believed that the business cycle and the cyclical unemployment were no more than the normal “seasonal changes” of economic activities. It was after the 1920–21 depression that Mitchell’s work began to attract great attention. In 1921, at a hearing held by the Education and Labor Committee of the Congress, Mitchell expressed support for large scale public projects and services of economic forecast by the government and proposed the voluntary unemployment insurance plan as the measure to maintain purchasing power during the depression. The biggest contribution of the institutional movement was the fact that it fostered the awareness of intervention and control. In an economic environment where monopoly had replaced free competition as the typical feature of the economy, and which was characterized by the increasingly widening gap between rich and poor, the continuing increase in the extent of economic fluctuations, and the increasing frequency in labor-capital disputes, control of the economy by the government became a necessary choice. Not only did institutionalists clearly illustrate the necessity of government control in theory, they also widely participated in governmental activities. Further more, a great number of scholars from the similar disciplines of law, ethics, psychology, and sociology endorsed the belief of institutionalists from different perspectives. The academic idea diffused to different levels of society through the scholars themselves and the media, which created an ideal

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environment of consensus. Of course there were also opponents. However, as far as the circle of economics was concerned, even orthodox economists of this period no longer stuck to the belief in complete laissez-faire. Their criticism of institutionalists was targeted on their ideas, rather than their policy suggestions (Dorfman 1959). This kind of consensus environment and the cooperative relationship with the government laid a firm foundation for institutionalists to widely participate in the making and implementation of the New Deal policies.

The Influence of Institutionalists on the New Deal

The influence of institutionalists on the New Deal is embodied in two levels: first, the influence of their ideas, particularly that of their concept of planning; second, the influence of individual institutionalists in real work.

The institutionalists’ concept of planning The economic planning of the institutionalists who influenced the New Deal was by nature conservative rather than radical.2 They did not intend to overthrow the institutional foundations of the existing economic society, but just wished to fix the capitalist economic system with the purpose of eliminating conflicts in economic interest as much as possible, assuring economic security, and enabling every member of society to benefit from the result of technological progress. Mitchell, Clark, and Tugwell believed that the success of the national economic planning necessarily lay in its combination with the existing economic order. In their opinion, the essence of economic planning was the raising of living standards, which included two aspects: first, the assurance of the maximum effect of the existing productive capacity, and second, the gradual expansion of productive capacity. In order to achieve this goal, control of the economic process was needed (Gruchy 1939). It was also the idea of the New Deal to improve the level of economic welfare, alleviate and eliminate social contradictions through government control of the economic process without changing the existing institutional foundations. Mitchell and Clark’s notions of planning could well reflect the combination of institutional theories with policy suggestions. They respectively built their own notions of planning on the theoretical analysis of the business cycle and overhead costs. In his “The Social Sciences and National Planning” (1935), Mitchell generalized his ideas of planning (see also Hill 1957). In his view, the automatic regulatory functions of the economic system were defective, which made it impossible for the business cycle to be successfully ironed out. The fundamental cause for economic predicaments such as depression and unemployment lay in the “cultural lag” phenomenon by which the progress of social economic organizations could not synchronize with the development of productive technology. In other

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words, the development of industrial technology had already changed the production system and the economic system, for example, monopoly enterprises had become the dominant power of the economy, but the response of the society to this change still lagged far behind. Therefore, planning on the national level would be necessary to eliminate the lag. Mitchell suggested that detailed planning schemes be made through research by the National Planning Committee which served as a consulting department (Mitchell 1935). Clark’s idea of economic planning was embodied in his 1926 book, Social Control of Business. His idea of planning derived directly from his early analysis on the problem of overhead costs (Clark 1923). The production enterprises were burdened with a large amount of unused capital or productive capacity, and this type of unused capacity is heavy social costs, reflecting enormous inefficiency on the social level, which took the form of a large amount of unused productive capacity on the one hand, and low living standards on the other. Despite the enterprise’s planning measures to regulate the productive capacity and output level, the individual planning was confined to the enterprise and not capable of eliminating the idling of productive capacity of the entire society. Therefore, the goal of national planning would be targeted at regulating the productive capacity of the society. The planning scheme designed by Clark included four levels. The first level aimed at competitive industries, such as agriculture, wholesaling and retailing, and small scale manufacturing. He suggested that national planning be carried out in the form of trade association in these industries and believed that it was needless to carry out government control on price and production, since unused productive capacity could be eliminated just by limiting their expenses on capital goods. The second level aimed at imperfect competition industries. The government would place control on the price and production policies of these industries, and the controlled production could be exempt from the antitrust laws. The governmental control was based on the detailed investigation of the efficiency of operation of these industries. The third level aimed at public utilities, and the fourth level aimed at direct governmental production. Governmental control at these two levels was stricter. The planning department was a central planning board “with functions of investigation, suggestion, and correlation rather than with administrative duties and authority” (Clark 1932: 248). In order to avoid the possibility of centralization in the planning process, the central planning board could only put forward suggestions via Congress for legislation, which would implement the planning and policies.

The influence of individual institutionalists on the New Deal The direct influence of the conception of planning held by institutionalists at large on the New Deal was achieved by the individual institutionalists participating in the policy making and implementation of the New Deal. Table 1 gives an incomplete list of the institutionalists who played a role in the government during the New Deal.

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Table 1 Some of the Institutionalists Who Participated in the New Deal

Institutionalists Place in the government during the New Deal and influence

Rexford Tugwell One of the three important members of the “Brains Trust” at the beginning of the New Deal (the other two were also from the University of Columbia: assistant Secretary of State Raymond Moley, and Adolph Berle), and the institutionalist with the biggest direct influence on Roosevelt and the New Deal. Mordecai Ezekiel Economic expert for the Agricultural Department, member of the Industrial Department of the National Recovery Administration after 1933, and the major drafter of the Agricultural Adjustment Act of 1933. Adolph Berle One of the three important members of the “Brains Trust” at the beginning of the New Deal, advisor to the President since the presidential campaign of Roosevelt, drafted many key acts in the New Deal. Eveline Burns Consultant of the Committee on Economic Security. In 1936 she was hired by Walton Hamilton, then Director of Research for the Social Security Board, to teach those who would be administering the social security program. Carter Goodrich Consultant for the Resettlement Administration and the Social Security Board. Leo Wolman Chairman of the Labor Advisory Board of the National Recovery Administration. James Bonbright Member of Roosevelt’s council. Morris Copeland The executive secretary of the Central Statistical Board between 1933 and 1938. Willard Thorp Director of the Bureau of Foreign and Domestic Commerce in 1933, and later member of the Industrial Committee of the National Resources Committee. Louis Reed Member of the Social Security Committee, and later served at the Public Health Service. Winfield Riefler Economic advisor of the Executive Council of the New Deal, and chairman of the Central Statistical Board. Isador Lubin Designated as the Commissioner of Labor Statistics in 1933, member of the Central Statistical Board, and member of the Industrial Committee of the National Resources Committee (special advisor to Roosevelt during World War II). Others Oscar Kiessling (chief economist of the Mineral Statistics Division, Bureau of Mines), Henry Chalmers (chief of the Division of Tariffs, Department of Commerce), Leon Truesdell (chief of the Population Division, Bureau of the Census), Woodlief Thomas (Research and Statistics Division of the Federal Reserve Board), Norman Myers (Department of Interior, Petroleum Division), William Young (Department of Agriculture), Dexter Keezzer (member of the Consumers’ Advisory Board of the National Recovery Administration).

Sources: Burns (1956), Dorfman (1959), Rutherford (2001, 2002, 2003a).

Of course, during the New Deal, a great number of economists participated in governmental work, including orthodox economists. In order to prove the significant influence of institutionalists on the New Deal, it is necessary to discover the role of institutionalists in the core decision-making level. Tugwell, Ezekiel, and Berle were the major economists around President Roosevelt at the beginning of the New Deal. Through their thoughts, it is not difficult to see that the institutionalist claims were highly consistent with the ideas and policies of the New Deal. Take Tugwell and Ezekiel for instance.

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Tugwell (1933, 1935) believed that the behavior of industrial sections, particularly that of large industries, should take major responsibility for the economic depression. When the economic system was unable to control the use of capital and the price of goods, even though the society had made great progress in technology, the benefit of technological progress belonged to corporations in the form of huge profits instead of increased real purchasing power of the consumers by lowering the price of goods. The corporations freely used the huge profits in plants extension, which resulted in the surplus of productive capacity, a form of huge social waste. The result of allocation of capital by private enterprise was the technological unemployment in economic prosperity; while in depression, due to market shrinkage, the policy of private enterprises to maintain price by reducing production resulted in cyclical unemployment. The power of private enterprises to allocate capital and control price had not only brought disasters to industry, but also to agriculture. The market of agricultural products would necessarily shrink under the circumstance of maintaining the price of industrial products by reducing the production. In depression, the structure of agricultural economy was rendered chaotic due to the sharp decrease in the purchasing power of consumers. Therefore, the root of depression was the production and price policies of private enterprises. To change the situation, the government must play an active and direct role in capital allocation and price making of the enterprises, not by nationalization, but by building a partnership with the enterprise through planning, in which the government would hold a higher place than private enterprises. According to Tugwell’s planning scheme, every industry would have an industrial association made up of representatives from each enterprise. The industrial association would form its own planning committee to design the planning devices. Representa- tives from each industrial association and representatives from the government and the republic would form a central planning organization called the United States Industrial Integration Board to coordinate planning in terms of production and price for each industry. The making and implementation of the planning would be the responsibility of each industry. The essence of the planning was that each industry would decide the price of its products, so that the price would drop to a level where it would be impossible for the enterprises to accumulate the residual profits. To realize this scheme, it would be necessary to establish the Industrial Reserve Fund, which would be funded by the 3 percent excise tax levied on industrial products. The Industrial Integration Board would divide the fund into three parts: one for rewarding the industries for carrying out the plan, one for helping the enterprises pay the dividends, and one for the payment of unemployment insurance. Under the circumstance when the enterprises were unable to carry out the plan, Tugwell suggested a tax upon undistributed corporate profits for the distribution of their residual profits. Through planning, the power of private enterprises to allocate

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capital would be checked, which in Tugwell’s view would cut off the source of economic chaos. Tugwell believed that the above-mentioned measures would enable the central planning organization to construct a national economic plan covering consumption patterns, production quotas, price, and capital allocation. However, he did not elaborate on the prospect of this plan since the pragmatism widely held by institutionalists made him propose that trial-and-error method be adopted in carrying out the plan to seek the best means for balancing production and consumption so as to ensure the legal benefits of all the parties involved in the planning program. In 1939, Mordecai Ezekiel systematically summed up his concept of planning and policy claims which had long been put in practice (Ezekiel 1939; Ezekiel and Rowe 1939). Like Mitchell, Clark, and Tugwell, Ezekiel held that the major cause for the extreme cyclical fluctuations of the economy lay in the instability of the equipment investment, which he called the instability of the capital goods industry. “It is in large part this large and increasing importance of the capital goods industries in our economy, and the exceptional instability that these industries show, that has produced such extreme fluctuations in business activity during the past 20 years” (Ezekiel and Rowe 1939: 94). The capital goods industry expanded blindly during prosperity, which led to the huge surplus productive capability in depression. The predicament of this particular industry then diffused to other industries, and the entire industry faced worse depression. It was necessary to make a long term budget plan for the investment of capital goods industry in order to solve this problem. Ezekiel’s Industrial Expansion Program demanded that an Industrial Authority composed of managers, labor workers, consumers and government representatives be established in every key industry to be responsible for planning the yearly output. Different industries would inspect and coordinate outputs between each other to ensure a balanced industrial expansion. The Industrial Expansion Administration, the central planning organization, would be in charge of the management of the industrial expansion plan by confirming the yearly output for each industry. The government would purchase the unsold stock of the enterprise during the implementation of the plan. This was obviously the ever-normal granary measure of the 1938 Farm Bill. To implement the plan, legislation was needed to make sure that the enterprises stick to the planned output. Ezekiel’s suggestion was the industrial processing tax. This tax controlled output on the one hand, and provided funds for the government to purchase the surplus products on the other. To prevent the stagnation of the entire economic system, Ezekiel’s plan would allow enterprises with the highest efficiency to expand the output and in the mean time allow the entrance of new enterprises. The enterprises would be motivated by expanding the output quota for highly efficient enterprises. Some 2 to 5 per cent of the yearly output of each enterprise would be

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put aside for these highly efficient enterprises while the quota for enterprises with low efficiency would be reduced in the next year. Ezekiel’s plan would not include all the industries, but only those large-scale industries in the areas where competition had lost much of its regulatory force, such as industries of iron and steel, cement, automobiles, farm machinery, copper and aluminum. He believed this would avoid the mistake of the National Recovery Administration, which included too many economic departments in the planning framework to have sufficient administrative power for its implementation. Further more, he believed that his plan would ensure the increase in production, employment, and salary without raising the general price level. In addition, Ezekiel stressed that the plan must not be carried out precipitately. The industrial department of the National Recovery Administration must carefully research the production patterns of the key industries beforehand and estimate the possible supply and demand of all key industrial goods. Comparing the notions of planning of the institutionalists in the core decision- making level of the New Deal, particularly their policy claims and detailed planning schemes, with the New Deal measures, it is not difficult to see that no matter whether in terms of agricultural adjustment or efforts in industrial revival, the institutionalist claims could be seen as the ideological foundations of reforms in these areas. As for the area of finance, which is not covered in this article, although leading institutionalists did not directly participate in this area; their ideas were still in accordance with the policy objectives and a good number of measures in the area. In areas of public projects and social relief, the ideas of Commons and Clark were directly embodied, and many codes on social security in the state of Wisconsin were directly from Commons and his students.

Why Does the Mainstream Literature of the History of Economic Thought Ignore This Period in History: an Analysis from the SSK Perspective

The institutionalists undoubtedly influenced the New Deal by creating an atmosphere of national intervention in the economy through the institutionalist movement, explicit articulation of the notions of planning in academic terms, and direct participation in the decision making and implementation process of the New Deal. The problem is, none of the literature of orthodox economics (including the literature of the history of economic thought) which ever mentions this period of history has ever clarified the influence of institutionalism on the New Deal. Instead, the literature only provides a brief description of some of the participants in the New Deal. Here, “institutionalism” has disappeared in the history of economic thought.

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Why does the literature of orthodox economics ignore this period of history? We tentatively borrow some SSK approaches, particularly the Actor-Net Analysis (ANA) adopted by the Social Constructionism branch to seek the answer. SSK originated from traditional scientific sociology. It advances further than scientific sociology by not only questioning the universal adaptability of the form of science, but also believing that the content of science is constructed by the society, being the result of social process. Ever since its rise in the 1970s, SSK has undergone fast development and produced two schools: Strong Program and Social Constructionism. The approach I adopt here is the Actor-Net Analysis advocated by Bruno Latour, one of the representatives of Social Constructionism (Latour 1987; Latour and Woolgar 1979). The “disappearance” of both the influence of institutionalism on the New Deal and institutionalism itself as a school in the history of economic thought is caused by two reasons: on the one hand, institutionalism has not built a strong “net” to confront orthodox economics; on the other, the strong “net” of orthodox economics has not only powered orthodox economics itself, but also given a heavy blow to its rival, institutionalism. In Latour’s view, all the facts, people, money, methodological principles, theories, mechanisms, practices and organizations that are connected with one scientific theory or theoretical system are all material and non-material actors in the social construction of science. All of these actors form a net, which supports and recognizes every element of it. The bigger this net, or the stronger its power to combine the new elements with the net, the bigger the possibility that this science succeeds. The stronger the power of a net to absorb, even to the extent of absorbing elements from the competing net into its own, the better maintenance this net and its beliefs will get, and as a result, it will be more likely to beat its rivals and become the dominant knowledge (Latour 1987). The first 30 years of the twentieth century (particularly the 1920s) saw the Age of Pluralism of American economic circles. Orthodox economics such as classical economics, Marginalism and the rising neoclassical paradigm were full of supporters, and econometrics, which would strengthen the neoclassical paradigm, was on the rise; on the other hand, heterodox economics represented by institutionalism, or the economics of the United States on its own, were extremely active. In this age of pluralism, both the orthodox and heterodox regimes were building their own “nets.” On the institutionalist side, its “actors” included important figures in the economic circle such as Mitchell, Commons, and Clark, the “institutionalist movement” itself where institutionalists put their ideas to practice, famous organizations like NBER, and the huge funds they received from the Rockefeller Foundation and Carnegie Foundation (Rutherford 2003c). On these aspects it can be said that the actors of institutionalism had superior capability of action to orthodox economics. For institutionalism, however, its inattention to constructing a theoretical system constituted

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its Achilles’ heel. The institutionalists all focused their attention on solving social problems, so that the bulky system of Veblen was not clearly explained and abstracted; the bulky and obscure system of Commons was only a guide of action for himself; Mitchell absorbed himself in research on the business cycle, but with emphasis on the statistical description and prediction of the cycle, not the theory; although Clark was a pioneer in the research of overhead cost and the multiplier principle, his breakthrough in the details of the theories was not powerful enough to sustain the entire edifice of institutionalism. Other outstanding institutionalists like Hamilton also only left behind ideas for later generations to explore. Thus, the “net” of institutionalism lacked a core to attract more elements. Moreover, many academic allies of institutionalism began to either shift their attention or gradually decline, so some of the original actors left the “net.” Institutionalism did not try to expand its influence to Europe, the then academic center of economics, and in the late 1930s began to decline. It can be said that the “disappearance” of institutionalism was to some extent due to its own disorientation. However, a faithful historical record cannot ignore the role of a school because of its decline. The decline of institutionalism itself is not the main reason why its influence on the New Deal is ignored. Orthodox economics was also building its own net. Except John B. Clark, outstanding orthodox economists such as Irving Fisher, Frank Taussig, Jacob Viner and Frank Knight had far less influence than the leading institutionalistsback then. They could not equal institutionalists in terms of action capability in practice, organization and money, either. However, orthodox economics grasped the core of the net—theory construction—and dressed its net up in a beautiful coat. From then on, facing the fact that the competitive economy was increasingly being replaced by a corporation-dominated economy, orthodox economics began to develop theories of monopoly competition or imperfect competition within its own theoretical system. When the mature theories of monopoly competition or imperfect competition were put forward in the 1930s, orthodox economics achieved development. In the meantime, innovations in analytical tools (e.g. indifference curve) provided a guarantee for consolidating the fruit of the Marginal Revolution. Facing an economic system of imbalanced free market, the Keynesian Revolution also carried out significant revisions within the realm of orthodox economic theories. Thus, the core of the orthodox economic net was constantly strengthened. On the other hand, orthodox economics constantly absorbed new elements as well as elements from the institutionalist regime into its own net, such as the multiplier principle derived by Clark from Mitchell’s analysis on the business cycle, which later became one of the sources for Samuelson’s analysis on this problem (Fiorito 2006). Furthermore, political unrest in 1930s Europe forced a good number of

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economists to move to the United States, who as a result strengthened the net of orthodox economics. The theoretical work and the arrival of strong aid made the net of institutionalism begin to break up, but the direct cause for the defeat of institutionalism in the net competition was the effort by the orthodox economics net in weaving its beautiful coat—the Formalist Revolution. Strictly speaking, the Formalist Revolution in economics did not take place until after the 1950s (Blaug 2003), but the revolution was in gestation when econometrics, which was strongly advocated by the Cowles Commission, had its debut on the stage of the history of economics. The emergence of econometrics changed the fact that institutionalism had been the only kind of economics which could be measured and subject to empirical test. Moreover, sustained by its powerful theoretical foundation, orthodox economics started to look down upon the measurements and tests of institutionalists. For example, Tjalling C. Koopmans once bluntly pointed out that the statistical work of Mitchell was completely “measurement without theory” (Koopmans 1947). With the increasing strength of the net of orthodox economics, began its effort in defeating its rival, institutionalism. Like Koopmans, the orthodox “show[s] the inadequacy of the black boxes of its rival in order to undermine the whole network of allies assembled by that rival” (Yonay 1998: 115). While undermining the network of institutionalism, neoclassical economists “construct the history of the field in such a way as to make their contributions look like natural developments from the past. … interpret past work according to the story they tell, in such a way as to justify their own work”; “…triumphant paradigms always revise the history of their fields” (Yonay 1998: 163, 49). Therefore, economists with orthodox economic training have no access to, and will not pay attention to, institutionalism. Institutionalism has been abandoned by orthodox economics as a “non-scientific” system, and its history will not appear in the literature of orthodox economics. This is because recognition of institutionalism, and even interest on the part of researchers to explore the influence and contributions of institutionalism, would mean self-destruction of the network of orthodox economics. What we want to emphasize here is that, from the SSK perspective, no matter whether it is network construction or the bout of rivals, under most circumstances, neither is done on purpose. A science can develop and expand its network by building an alliance of interests. Or, in other words, people of the same interests assemble naturally without authorization from anybody. The point is, this assembly will develop the same interest among its members with the construction of the net, and the members will benefit from the net only by staying in the net. The institutionalists’ disorientation was due to their negligence in theoretical work, which led to their disappearance. Not many people have tried to find them after their “disappearance,” and with the passing of time they will naturally be

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forgotten. Since orthodox economics ignores the influence of institutionalism on the New Deal, historians, whose research attention is not on the history of economics, naturally will not notice which economic school the people who once influenced the New Deal belonged to.

Notes

1. Much of the literature of Malcolm Rutherford explores the institutionalist movement and its leaders, see Rutherford (1999, 2000, 2001, 2002, 2003a, 2003b, 2004, 2006). 2. There were more radical elements in the ideas of Veblen, the founder of institutionalism, than in those of his successors. The radical feature of institutionalism has been greatly reduced after the reconstruction by later institutionalists such as Mitchell and Commons.

References

Backhouse, Roger E. (2002 [2007]) The Penguin History of Economics. Haikou, China: Hainan Press (Chinese Edition). Blaug, Mark (2003) “The Formalist Revolution of the 1950s,” Journal of the History of Economic Thought 25, 2: 145–156. Burns, James M. (1956 [1987]) Franklin D. Roosevelt: Lion and Fox. Beijing: Commercial Press (Chinese Edition). Clark, John M. (1923) Studies in the Economics of Overhead Costs. Chicago: University of Chicago Press. —— (1926) Social Control of Business. Chicago: University of Chicago Press. —— (1932) “Long-Range Planning for the Regularization of Industry,” The New Republic, January 13, Part 2. Commons, John R. (1924) Legal Foundations of Capitalism. New York: Macmillan, reprinted by Transaction Publishers (New Brunswick, New Jersey), 1995. —— (1996) John R. Commons Selected Essays, edited by Malcolm Rutherford and Warren J. Samuels. London: Routledge. Dorfman, Joseph (1959) The Economic Mind in American Civilization (Vols. 4–5: 1918–1933). New York: The Viking Press. Ezekiel, Mordecai (1939) “The Economics of the National Resource Committee,” American Economic Review 29, 1 (March): 60–73. Ezekiel, Mordecai, and Guy Rowe (1939) Jobs For All through Industrial Expansion. New York: Knopf. Fiorito, Luca (2006) “An Institutionalist’s Journey into the Years of High Theory: John M. Clark on the Accelerator, the Multiplier, and their Interaction,” Working Paper, Palermo University. Gruchy, Allan G. (1939) “The Concept of National Planning in Institutional Economics,” Southern Economic Journal 6, 2 (October): 121–144. Hill, Forest G. (1957) “Wesley Mitchell’s Theory of Planning,” Political Science Quarterly 72, 1 (March): 100–118. Koopmans, Tjalling C. (1947) “Measurement without Theory,” Review of Economic Statistics 29, 3 (August): 161–172. Latour, Bruno (1987 [2005]) Science in Action: How to Follow Scientists and Engineers through Society. Beijing: Donfang Press (Chinese Edition). Latour, Bruno, and Steve Woolgar (1979 [2004]) Laboratory Life: The Social Construction of Scientific Facts. Beijing: Dongfang Press (Chinese Edition). Mitchell, Wesley C. (1935) “The Social Sciences and National Planning,” Science 18 (January): 55–62.

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Rutherford, Malcolm (1999) “Institutionalism as ‘Scientific’ Economics,” in Roger Backhouse and John Creedy, eds., From Classical Economics to the Theory of the Firm: Essays in Honour of D. P. O’Brien, pp. 223–243. Cheltenham: Edward Elgar. —— (2000) “Institutionalism Between the Wars,” Journal of Economic Issues 24, 2 (June): 291–303. —— (2001) “Institutional Economics at Columbia University,” Working Paper. —— (2002) “Morris A. Copeland: A Case Study in the History of Institutional Economics,” Journal of the History of Economic Thought 24, 3 (September): 261–290. —— (2003a) “On the Economic Frontier: Walton Hamilton, Institutional Economics and Education,” History of Political Economy 35, 4 (Winter): 612–653. —— (2003b) “Chicago Economics and Institutionalism,” Working Paper. —— (2003c) “‘Who’s Afraid of Arthur Burns?’ The NBER and the Foundations,” Working Paper. —— (2004) “Institutional Economics at Columbia University,” History of Political Economy 36, 1 (Spring): 31–78. —— (2006) “Wisconsin Institutionalism: John R. Commons and his Students,” Labor History 47, 2 (May): 161–188. Tugwell, Rexford G. (1933) The Industrial Discipline and the Governmental Arts. New York: Columbia University Press. —— (1935) The Battle for Democracy. New York: Columbia University Press. Yonay, Yuval P. (1998) The Struggle over the Soul of Economics: Institutionalist and Neoclassical Economists in America between the Wars. New Jersey: Princeton University Press.

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