BEYOND DISSENT STUDIES IN INSTITUTIONAL ECONOMICS

GARDINER C. MEANS INSTITUTIONALIST AND POST KEYNESIAN Warren] Samuels and Steven C. Medema

THE HETERODOX ECONOMICS OF GARDINER C. MEANS A COLLECTION Frederic S. Lee and Warren] Samuels, editors

UNDERGROUND ECONOMICS A DECADE OF INSTITUTIONALIST DISSENT William M. Dugger

THE STRATIF1ED STATE RADICAL INSTITUTIONALIST THEORIES OF PARTICIPATION AND DUALITY William M. Dugger and William T. Waller, Jr., editars

A VEBLEN TREASURY FROM LEISURE CLASS TO WAR, PRICE, AND CAPITALISM Rick Tilman, editar

ACTIVIST UNIONISM THE INSTITUTIONAL ECONOMICS OF SOLOMON BARKIN Donald R. Stabile

BEYOND DISSENT ESSAYS IN INSTITUTIONAL ECONOMICS Philip A. Klein BEYOND DISSENT

Essays in Institutional Economics

PHILIP A. KLEIN First published 1994 by M.E. Sharpe

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Library of Congress Cataloging-in-PubHcation Data

Klein, Philip A. Beyond dissent: essays in institutional economics by Philip A. Klein p. cm.-(Studies in institutional economics). Includes bibliographical references and index ISBN l-56324-321-0.-ISBN 1-56324-322-9 (pbk.) I. Institutional economics. I. Title. II. Series. HB99.5.K58 1993 33O-dc20 93-30938 CIP

ISBN 13: 9781563243226 (Pbk) ISBN 13: 9781563243219 (hbk) For Peggy and Grace Steve and Barbara and to the Memory of Hank Jameson This page intentionally left blank Contents

Foreword by Marc R. Tool ix Preface xv

PART I. INSTITUTIONALISM-A BASIC PERSPECTIVE

Dissent from Orthodox Theory 1. Economics: Allocation or Valuation? 3 2. American Institutionalism: Premature Death, Permanent Resurrection 26 3. Of Paradigms and Politics 48

Mainstream Microeconomics 4. Demand Theory and the Economist's Propensity to Assume 54

Mainstream Macroeconomics 5. Reinventing the Square Wheel: A Behavioral Assessment of Inflation 81 6. Institutionalism and the New Classical Economics 105

Positioning Institutional Economics 7. Institutionalism as a School---A Reconsideration 115

PART II. INSTITUTIONALISM AND CONCENTRATED POWER

8. Confronting Power in Economics: A Pragmatic Evaluation 125 9. Power and Economic Performance: The Institutionalist View 147

PART III. THE ROLE OF THE PUBLIC SECTOR

10. Institutionalist Reflections on the Role of the Public Sector 181 11. Reagan's Economic Policies: An Institutionalist Assessment 202

vii viii CONTENTS

PART N. APPLIED INSTITUTIONAL ECONOMICS

12. Economic Activity and the Public Sector: Is Small Beautiful? 215 13. An Institutionalist View of Development Economics 224 14. The Neglected Institutionalism of Wesley Clair Mitchell: The Theoretical Basis for Business Cycle Indicators 244 15. What's Natural about Unemployment? 273

PART V. INSTITUTIONALISM AND THE OBLIGATIONS OF THE ECONOMIST

16. Institutionalism Confronts the 1990s 283 17. Economic Policy and the Obligations of the Economist 290 18. Why Be an Economist? 298

Index 313 About the Author 327 Foreword

Professor Philip A. Klein's Beyond Dissent: Essays in Institutional Economics ap• pears at a propitious and instructive time. Given the turmoil of structural transforma• tion of much of Eastern Europe, the search for economic community in Western Europe, and the depressed and backward state of the American economy, it now seems obvious that we are in a historically significant watershed period. Major convulsive changes in political economies have occurred and more are already perceived as probable. Yet the query of which direction is forward? remains. What theories will inform the post-Socialist societies? What theories will guide the further integration of European welfare states? What theories will instruct the United States in the search for prudent and progressive structural changes to enhance productive efficiency and equity? Klein's theoretical contributions direct us to positive answers. In these troubled years, nearly all major political economies, driven by the com• pelling urgencies of extending and improving the provisioning process and by the clamor for increasing democratic accountability, are forced to reexamine fundamen• tal tenets of what the character and functioning of the political economy will be. The old ism recipes are now everywhere understood to be irrelevant except perhaps for the entry of a few messianic orthodox price theorists as counsels in Eastern Europe. "Marxism is dead; long live Friedmanism?" It will not serve! The convulsive changes must be given more reasoned direction. Relevant and credible theory must be used to inform policy-making and to guide conduct. The scope and character of the productive sectors must be restructured. Distributive mechanisms must be over• hauled in pursuit of adequacy and equity. New conceptions of feasible and account• able functions in the public sector are required. The scope, goals, and responsibilities of the private sector must be freshly appraised. Institutional transformation is and must be of high priority on the policy agenda. Yet there is no handbook, no bible, no timeless recipe to which to tum. This volume does not presume to provide one. But it is possible, as Professor Klein here demonstrates, to write reasonably and relevantly to a number of these concerns. Heterodox institutionalist scholars, including especially the author of this volume, think and write as theoretical

ix x FOREWORD

realists, pragmatists, and policy-oriented inquirers. What is provided here is a cogent, constructive presentation of a body of theory, with policy implications, that will steer inquiry and effort into timely and constructive channels. As an American institution• alist, Klein joins with other heterodox post- Keynesians, European evolutionary theo• rists, and Scandinavian "negotiated economy" theorists, among others, in the search for applicable theory and policy to cope with contemporary realities. The papers in this collection, written over the last two decades, show Klein to be a major contribu• tor to, and clarifier of, the theoretical tenets of institutional economics. This volume provides relevant counsel of an exploratory, not a dogmatic, kind. It offers a problem• solving analysis, not ism-imaging apologia for existing control centers, intellectual or political. This collection provides an uncommonly provocative and relevant delin• eation of major constructs of the institutionalist perspective and a surgically precise and devastating critique of elements of the dominant mainstream neoclassical tradi• tion. The latter is incidental to the former. Some eighteen essays are arranged and grouped under five major heads: Institutionalism-A Basic Perspective; Institutionalism and Concentrated Power; The Role of the Public Sector; Applied Institutional Economics; and Institutionalism and the Obligation of the Economist. The first section, constituting perhaps half the volume, sets the context for subse• quent discussion. Klein here presents both major theoretical tenets of institutionalism and a running critique of comparable orthodox precepts. In the former, he canvasses the literature and seeks consensus views that reflect both the substance and evolu• tionary development of the institutionalist mode of inquiry. Among the tenets he develops as central to the institutionalist position are the following: its methodology is processual; its causal inquiry is exploratory; the economy is culturally embedded; social value is a constituent element of inquiry; the economy is a system of power; the quest is for progress, not simply growth; market outcomes are judged against norms of the economy, not the reverse. He demonstrates that institutional economics is not merely or mainly dissent from neoclassicism, but has a robust, evolving, and comprehensive stature with paradigm standing in its own right. Klein does not dismiss the orthodox tradition with a flippant quip or a cavalier condemnation. He ably confronts neoclassicists at length in their own theoretical backyard, challenging their claims to cogency, rigor, relevance, and substance. Thus, contestable market theorists, public choice theorists, Chicago school mar• ket devotees, and Robbins-influenced positivists, among others, are each grasped by the intellectual lapels and faced directly with questions and counter argu• ments. Contestable markets theory turns out to be apologetics for existing power systems; public choice theory mistakenly redefines the public sector with archaic microtheory assumptions and values; the market devotees speak of an imagined world to be mimicked, not an actual market exchange arena; the normative-positive dichotomy has long since become passe in both philosophy and economics-social value theory inescapably permeates any serious inquiry in political economy, as Klein makes clear. In this extensive dialogue, Klein, for example, explores the FOREWORD xi reshaping of demand theory where the assumption of "given tastes" is abandoned. He examines the cogency of the "new classical," rational expectations position as it relates to theories of inflation and finds little of merit or insight. The analytic comparisons are cogent and compelling. But the contribution of this book does not reside mainly with the critiques of neoclassical orthodoxy, striking, original, and devastating though they may be. It resides rather in his impressive positive contributions to institutionalist theory and policy-making. It is of course very helpful to realize the limitations and irrelevancies of orthodoxy. But of greater significance is the fashioning of fresh, pertinent, and productive ways of thinking about the provisioning process at large. Two papers in the second section are illustrative of this fresh approach to economic analysis. In these, Klein directly confronts the presence and use of power in the economic process. Power is sought; power is held; power is exer• cised. For Klein, economic power is not a peripheral issue or concern; it is, and since Veblen has always been, a central inquiry focus of institutional economics. Any political economy is a system of power. From Veblen's analysis of the vested interests, to the most recent institutionalist inquiries into corporate hege• mony (Dugger) and comprehensive private sector planning (Munkirs), institu• tionalists have analyzed and assessed the locus and use of economic power to determine and shape the performance of provisioning institutions. Klein contrib• utes importantly to this tradition in defining power as the "disproportionate control over the economic decision-making process," in exploring how the allo• cation of resources generally is affected by concentrated power, and in explain• ing how the exercise of power reveals value commitments which themselves must be critically examined. The mainstream deference to status quo reinforce• ment of acquired property and attained position is itself a value position, a normative posture. To demonstrate these and related theoretical distinctions, Klein provides a detailed tabular comparison of conceptual positions on a wide range of topics from the perspectives, respectively, of institutionalists, neoclassicists, and politi• cal scientists. The first and third are found to have great commonality; both perspectives are addressed in part to power. Klein explains that mainstream economists avoid any serious analysis of the possession and use of economic power. Where treated at all it is a matter of unfortunate monopolistic aberrations; inquiry becomes an exercise in pathology. The free market model is a zero• power ideal; discretion is widely disbursed; individuals and firms are price tak• ers. Klein's canvas of industrial organization theories, public choice theories, and radical economics theories shows that these formulations yield few significant insights on the role of power in the economic process. Institutionalists have more fully developed analyses of the discretionary roles that direct the economy. The third section is addressed to the role of the public sector. Klein's contri• butions here are pivotal when we realize that neoclassicists have no theory of governmental "intervention" or participation in the economy. (This is one re- xii FOREWORD

spect in which Keynesian theory departed dramatically from neoclassical theory of the day.) The neoclassical ideological insistence that government "participation" must be "interference" or "intrusion" and disruptive of the private economy's quest for market efficiency, discloses the barrenness and irrel• evance of orthodoxy in the arena of political economy. For Klein, the dilemma is inherent in the distinction between macro- and microeconomics. Since Keynes, the public sector's macromanagement responsi• bility has been largely, if grudgingly, acknowledged. Assuring aggregate de• mand, so long as it does not significantly threaten private sector centers of power, can be defended. In the microeconomic realm, however, such interven• tion (except for defense) grossly violates the market allocation ideal. The com• petitive model is the "benchmark," says Klein, against which one is supposed to judge allocative efficiency in the real world. It is the normative use of the competitive model. Government is presumed to have no goal beyond the creation of an even playing field on which the market game is to be played. Klein vigorously rejects this torturously reasoned position. Institutionalists, he insists, are not for or against intervention per se. At issue is the character, extent, and purpose of intervention; it is proffered to advance what or whose purposes? They acknowledge that the public sector does shape emergent values of the community. That sector, in Klein's view, has two general functions: one is to monitor and appraise allocative results flowing from private markets; a second is to create resources for allocation and to undertake and direct some part of that allocation. Jointly the implementation of these two functions defines what Klein calls the "collective ought." Contrary to orthodoxy, the sum of individual wants does not constitute the "collective ought." To argue such is to indulge the fallacy of composition, as most readers will recall. The "collective ought" is reflected for Klein in "how well ... the economy reflects the values of its participants-all its participants and all the relevant values-in its operation at any given time." But Klein is not ethically relative about these "values of participants." The "value floor," undergirding the "collective ought," is the life process itself. The public sector's role is corrupted by clogged or distorted information channels, concentrations of economic power, and large inequalities of income and wealth. It is the responsibility, then, of the public sector, continu• ously to facilitate and support the quest for efficiency, equity, freedom, security, and compassion. The public sector's role is more than that of an umpire; "it is part manager, part coach, and a sometime player." In the fourth section, Klein makes cogent application of his institutional the• ory in four major areas of substance and concern: the appropriate size and responsibilities of the public sector; the determination and management of eco• nomic development, especially in third world economies; the cyclical instability of market economies, with a special eye on the contributions of Wesley Clair Mitchell; and analysis of the origins and significance of unemployment. In an assessment of the Reagan revolution, Klein argues that smaller govern- FOREWORD xiii ment is not necessarily beautiful when it involves a reduction of regulatory responsibilities, deficit mismanagement, increased tolerance of environmental hazards, and insensitivity to basic welfare needs, and the like. The growth of technology changes the nature of problems; governments must be responsible, and responsive. With regard to theories of economic development, Klein persuasively argues that, although generally unacknowledged, the institutionalist approach in fact dominates that inquiry field. What is shown is that it is precisely the "givens"• structure, wants, technology-of orthodoxy that development economists have had to abandon in identifying the determinants of growth and progress. In partic• ular Klein joins other institutionalists in the insistence that the savings theory of capital formation simply cannot be sustained. In addressing cyclical instability of market economies, Klein draws on his own extensive analytical and consultative work in the field. One of his concerns is to demonstrate that Mitchell is properly characterized as an institutionalist, charges of Mitchell's eclecticism notwithstanding. More important, perhaps, is Klein's development of the institutional theoretical underpinnings for the more technical formulation and tracking of business cycle indicators. His exposition here is an analytical tour de force. Finally, in this section Klein applies his analytical skills to the erosion of the orthodox claims concerning a "natural rate of unemployment." Whatever is "natural" is therewith deemed nondiscretionary and therefore nonproblematic. Klein demonstrates that the traditional analysis is incomplete and flawed. The conventional insistence that our short-term choice is only between unacceptable inflation rates and unacceptable unemployment rates is mistaken. The great "trade-off' is miscast. The volume concludes with three essays in which Klein holds a conceptual mirror up to the economics profession and asks directly and repeatedly, What is the purposiveness of economic inquiry? Should the discipline, in its mainstream quest for mathematical rigor and deductive inference, be bled dry of its compas• sionate concern for the well-being of ordinary citizens? He insists that enhancing the provisioning process, and thus the life process, is the raison d'etre of eco• nomic inquiry. Klein, reflecting a profound sense of concern for those who fare less well in any economy, defines the role of the economist as a scholar who is obligated to develop relevant theory and directive policy applications that do make a difference in how the allocation of resources is accomplished, and on whose behalf and at whose expense. The institutionalist approach is driven by this purposive concern to assist the community in its realization of its' 'collective ought." The quest is for understanding of causal phenomena generating eco• nomic problems of instability, maldistribution, environmental deterioration, stag• nant development, unemployment, perpetual poverty, and the like. If the economics discipline fails in this responsibility, some other discipline fulfilling that function must replace it. Problems will continue. Communities will continue xiv FOREWORD to need assistance in understanding their problematic circumstances. The inquiry role of institutionalists in general, and Professor Klein in particular, is therewith identified. Klein's professional career and his scholarly contributions, as reflected in this volume, exhibit well his scholarly passion to assist economies to generate effi• ciency and equity in their provisioning processes. The dialogue with orthodoxy encompassed in these essays serves as an insightful example of how to set deliberative inquiry in motion and to sustain it for theory-clarifying and policy• drafting purposes. The dialogue must continue, of course. I strongly commend this volume to the reader as a major analytical resource that will help make that continuing dialogue productive. -Marc R. Tool Preface

As the reader will discover, the essays in this book were written over more than twenty years. I have, in fact, been thinking about the matters discussed here ever since I was first exposed to the institutionalist perspective in Clarence Ayres's classroom at the University of Texas in the mid-1940s. I have never seen any reason to alter my original view that this perspective is a very fruitful one from which to confront the challenges posed by today's economy. I believe that there is a very real disjunction in modem economics. For many academic economists the challenge appears to be to develop a discipline that is rigorous, highly quantitative, capable of simulation and manipulation with modem computers, logical, as abstract as is necessary to make its interrelation• ships reducible to a set of equations, and satisfying as an intellectual exercise. I have no objection to any of these provided they are compatible with a discipline focusing on the real world problems which increasingly all recognized modem economies face. The problem, of course, is that the old charge of rigor without relevance has only increased its claim to truth in the past forty or fifty years. Most academic economists today like it that way. They operate within a very complete, comfortable, supportive system: journals have mushroomed to publish their studies; graduate programs, in both their basic theory and increasingly the applied fields as well, are built around the most recent findings of the Young Turks (now often aging) who have led the way back-beginning perhaps in the 1950s-from the wilderness some still call "reality" into which John Maynard Keynes led the discipline in the 1930s. Graduate courses are taught by the newest assistant professors, who teach what they have just learned, thus perpetuating the notion that the most significant perspectives and insights in economic analysis are almost invariably only or chiefly those made in the last few years; courses in both economic thought and methodology are passe except for the thinking and methodology of the various branches of "New Orthodoxy" (which is surprisingly like pre-Keynesian orthodoxy). Research funds are increasingly channeled toward research devoted to accounting for "stylized facts" rather than "realfacts."

xv xvi PREFACE

The result of all this is that the profession that Ayres and his contemporaries found less than satisfactory has, from their institutionalist perspective, become even less congenial. This is anomalous, because as Marc Tool has suggested in his gra• cious foreword, the necessity of incorporating much of what institutionalists have been saying into our efforts to meet current economic challenges is every day more obvious. In my own career I have combined writing about institutional economics with work in business cycles. While my colleagues no doubt regard them as completely separate, I find them highly compatible. Wesley Clair Mitchell was both a founding father of American institutionalism and a leading expert in measuring and forecasting business cycles. (I may be the only economist in the United States who tries to wear both of Mitchell's hats!) As such that part of my work which mainstream economists feel comfortable with has always seemed to me to exemplify how an institutionalist approach can enrich work in any field in economics. Moreover, my work in business cycles has certainly been quantitative. The approach I have taken over the years in many joint projects with my colleague, Geoffrey H. Moore, has not been econo• metric, but econometrics is compatible with what we have done. Our various studies of business cycle indicators have, along with much other work on indica• tors, led to their inclusion in many econometric models. I regard myself as a typical institutionalist, and as such I would assert that institutionalists cannot legitimately be charged with methodological narrowness or exclusivity. We use a number of approaches in our work and appreciate many more. Whether mainstream economists can say the same about their attitude toward institutionalism is moot. I argue that the enormous challenges economists face in the current world, the appalling failures economies are exhibiting, con• tinue to suggest that no economist has a right to claim to have found the method• ological single best approach. The essays in this collection try in various ways to show the flexibility of institutionalism, and to indicate that its emphasis on relating economic activity to the culture in which it occurs is essential to leading to better economic policies. It is not easy to be optimistic about the years ahead. The problems economies face are huge, and the question whether economists are developing better tools with which to tackle them is at best painfully open. Nonetheless, it is my hope that these essays will illustrate that institutionalism in the last twenty years has made some progress in defining our problems, in refashioning our discipline so as to cope with them more realistically, and in clarifying and keeping current the approach to which Ayres and his generation first exposed me. If the most recent developments in economics have, as suggested earlier, moved mainstream economics farther away from the institutionalist perspective, there is reason to hope that methodological approaches in social science are themselves cyclical. Having explored, more or less fully, the potential for developing convoluted abstract models, it may well be that pressure to tackle real-world problems will PREFACE xvii build, echoing a return to the perspective of the Keynesian revolution of the 1930s. There is clearly pressure building both to achieve greater productivity and growth, and to attain stability in market economies, but to have the fruits of this progress distributed by principles societally deemed more equitable. I have incurred many obligations in the course of writing these essays. My debt to Ayres is obvious. Without his influence I probably would not have gone into economics at all. I am, of course, greatly in Marc Tool's debt for writing a foreword which, among other things, obviates the necessity for me to summarize what I have tried to do here. Far more, he has been my friend and supportive colleague. Without his encouragement and sometimes insistence as editor of the Journal of Economic Issues many of the essays in this book simply would not have been written. Similarly I wish to thank Marc's predecessor as editor, War• ren Samuels, who was the first editor with whom I worked and who has always been helpful and encouraging. I also am obligated to all the economists in the Association for Evolutionary Economics with whom I have worked over the years and with whom I have had both annual conversations at our meetings and active correspondence. Without that network it would be difficult to sustain the will to persevere. Edythe S. Miller deserves being singled out for special thanks for her many years of wise counsel. I also thank Paul Dale Bush. Monroe Newman and the late Will Mason are my two Penn State friends and colleagues who read many words of mine and always offered valuable advice. Increasingly in recent years, I have benefited greatly from the resurgence of interest in institu• tionalism in both Eastern and Western Europe, and I acknowledge my gratitude for the encouragement I have gotten from these new colleagues. Among these Owen Nankivell deserves special mention for many hours of valuable discussion. Finally, I thank Dick Bartel at M. E. Sharpe for his help and cooperation. Hetero• dox economists owe an enormous debt to M. E. Sharpe for the willingness of this publisher to give a voice that can be heard to their work. Lastly, I thank my family, who has always thought that the opportunity cost of these essays was too high, but has tolerated my contrary view with grace and humor. -Philip A. Klein University Park, Pennsylvania September 16, 1993 This page intentionally left blank Part I Institutionalism-A Basic Perspective This page intentionally left blank Dissent from Orthodox Theory

1 Economics: Allocation or Valuation?

Whether or not it continues to be a science ofprice, economics must be a science ofvalue. -Clarence E. Ayres Theory ofEconomic Progress

Among the social sciences, economics long has suffered from a superiority com• plex. The economist's view of his field has been of a discipline that was rigorous and precise, with an advanced and pragmatic methodology leading to a highly developed theoretical structure. All this left far behind the imprecise and murky theoretical strivings of political scientists, sociologists, anthropologists, and historians. The promised land which economic analysis made possible was known as equilibrium. I What sociologist or political scientist or anthropologist could offer any piece of analytical apparatus which for sheer beauty, precision, and logic could equal it? True, psychologists kept insisting that the behavioral assumptions of conventional economic theory-maximizing behavior, hedonism, rationality-all the characteristics of "Economic Man" which economics always has relied on for convenience, were fatally oversimplified. But economists mostly have ig• nored the complaints of psychologists (who after all had problems of their own). Moreover, the psychologists were only too willing to follow the economist down the quantitative primrose path. Both disciplines once worried about their ancient roots in philosophy and could never quite rid themselves of the nagging suspi• cion that questions of subjective valuation could not be eliminated entirely so as

Reprinted by permission of the publisher from Journal ofEconomic Issues, vol. 8, no. 4 (December), pp. 785--811. Copyright 1974 by Journal ofEconomic Issues. Authoriza• tion #: 557696. The author wishes to thank Lord Robbins for a very helpful and thought-provoking reading of this article.

3 4 BEYOND DISSENT

to render each a 100 percent pure science. Both embraced mathematics as the true methodological messiah come at last.2 Together economists and psycholo• gists measured all visibly quantifiable variables, developed models for all prob• lems, and achieved intellectual orgasm through the contemplation of the possibilities of the electronic computer. By enshrining quantification, they be• lieved they had set a standard of scientific excellence sufficiently ahead of their laggardly sister social sciences to enable them to continue virtually indefinitely to play the role of superego to the lowly id of sociology or history. Without in any way demeaning the very real accomplishments of quantitative procedures in advancing knowledge in critical areas, I should like to suggest that at least in the case of economics, schizophrenia always has been latent in the discipline and has been kept that way only by sweeping under the rug important problems which increasingly have crept out to disturb the neat world of econo• mist and econometrician alike. We can cope with any number of variables in ever more elaborate models, but we cannot cope with underlying questions of direction and meaning, of goals and objectives for the system. The excessive preoccupation with tools with which to cope with problems at best comprising a small corner of economics, and the obsessive need to believe these tools coped with the heart of economics, long has characterized the discipline. Facing up to this obsession involves the fundamental question of whether economics is a science of allocation or a science of valuation. For most of its existence econom• ics has managed to equate the two, and there is a long and bloody literary road devoted to establishing that economics as a "science of price" thereby was cop• ing with all the value problems with which it need legitimately concern itself.

Economics as a Science of Allocation

The central core of economic theory~t least microeconomic theory-was spelled out by Adam Smith and elaborated upon by the well-known nineteenth• century mainstream economists. The culmination was its restatement by Alfred Marshall, who not insignificantly changed the name of the discipline from politi• cal economy to economics. The profound changes of the past eighty years have left remarkably untouched much of the field which Marshall defined as "a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing."3 Marshall added that economics "concerns itself chiefly with those motives which affect most powerfully and most steadily man's conduct in the business part of his life.'>4 The latter is a far narrower perspective and considerably closer to what in fact Marshall's Princi• ples dealt with. It was a critical reinforcement to the continued confusion be• tween economics as allocation and economics as valuation. Marshall's emphasis on materialism subsequently was questioned, for exam• ple, by Lionel Robbins, who wondered how a science concerned exclusively INSTITUTIONALISM-A BASIC PERSPECTIVE 5

with the material could determine the wage rates for opera stars or orchestra conductors whose productivity is not quite so easily viewed as the more con• cretely material output of ditchdiggers, carpenters, and others among the myriad toilers in the economic vineyards. Robbins concluded that Marshall's material• ism was a "pseudo-materialism"s and that what was really at the heart of eco• nomics was not materialism but allocation. Robbins then defined the field in the way which is customarily utilized to this day: "Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."6 Such a formulation extricated economists from the mate• rialism quagmire; by adding to this the deceptively simple assumption that the allocation process as carried out through the use of prices in the market disposed of all the ends and scarce means that the proper study of economics need em• brace, economists thought they were home free. 7 The pricing process was as• sumed to be the vehicle by which the economic system expressed all the allocating priorities of concern to the economist. Thus price became, if it had not always been, the only measure of value with which economics had to concern itself. Robbins himself reached this conclusion unequivocably by saying that the significance of economic science lay in the fact that "when we are faced with a choice between ultimates, it enables us to choose with a full awareness of the implications of what we are choosing." But he was very careful to add that "it is incapable of deciding between the desirability of different ends. It is fundamen• tally distinct from Ethics."s But even if the distinction between economics and ethics were accepted, the discipline must provide (if it is to permit us to choose with the "full awareness of the implications of our choice") mechanisms by which such "full awareness" choice can be made. The market alone cannot fill that bill in a modem industrial economy. Allocation and valuation are indeed different, and a discipline concerned only with the former can never permit "fully aware" choices to be made. Those who view economics as a science of allocation customarily have ar• gued that all participants in the economic process get their "values" from wher• ever they get them, that in fact societal values are of no concern to the economist. Thus all the economist need do is pontificate: "If an individual chooses to allocate his income in Direction A he must forgo Direction B." "To achieve certain objectives, here is the most efficient way for society to achieve them, and here is what must be forgone in the process." Consequently, genera• tions of economics students were taught that economics is not concerned with questions of "ought" but only with questions of "is." Economics as a science was not normative but positive.9 Thus economics was viewed as the administrator of social options, in charge of calculating costs and predicting results, but without any normative participation in the process. The economist qua economist occu• pied a role in which normative judgments definitionally had no place. Only the economist qua citizen was permitted to be filled with the minimal requisite 6 BEYOND DISSENT

quantities of passion, prejudice, and "subjective valuation" that reside in the breast of other mere mortals. This view of economics had some convenient side effects. For one, it enabled economic theory to blind itself to the implicit subjective valuations (previously alluded to) of what it did in the guise of pursuit of the scientific method, rigor, and precision. It therefore enabled economics to emulate the physical sciences and thus led to the coronation of equilibrium as normatively "good" in econom• ics because in physics, from whence it came, it was "natural." If Keynes's notion of underemployment equilibrium represented a severe jolt to this notion, in mi• croeconomics it survived because equilibrium prices led to market clearing, which was definitionally good. Finally, equilibrium could be viewed as an end in itself because the continued assumption that Adam Smith's Invisible Hand (de• veloped for atomistic competition) could be appropriately if only approximately attached to emergent prices in actual markets rationalized away any lurking doubts about how economics disposed of the value problem. Individual selfish• ness was transmogrified into a process optimizing social welfare, and emergent prices did indeed express the values of society in the only way that need concern the economist.

Economics as a Science of Valuation

The simple world of the classical economist, familiar to all economists, was orderly and attractive, but unrelated to much of the economic reality even of its own time. The history of economics has shown a remarkable tendency to cling to that world, however, and to make emendations only when pushed by a variety of inexorable forces. Even in its own time, classical price theory developed with the Industrial Revolution in England, and so Smith projected his Invisible Hand on a world replete with, among other things, subhuman factory conditions, child labor, widespread poverty, great inequality in the distribution of both wealth and income, vast slums and urban ghettos, and a rigid and uncompromising class system which severely restricted labor mobility and economic opportunity. In short, it was a world with a whole host of problems with which society still copes and from all of which Smith's economics was structured to dissociate itself. It is interesting to note that this view of economics, based on emulating the physical sciences, has in our own day seen the physical sciences come to ques• tion the rigid distinction between the normative and the positive. The dynamism oftechnology was such that by the 1940s the physicists had begun to realize that merely suggesting what constitutes the most efficient way to destroy the world as we know it might not thoroughly discharge the ultimate responsibility of the physicist qua physicist. 10 So much for the model economics chose to emulate. To the extent that economics subsequently faced up to its value problem (as opposed to its allocation problem) at all, it did so through the introduction of the INSTITUTIONALISM-A BASIC PERSPECTIVE 7

familiar notion of the Pareto optimum, which fit extremely well the notion of the Invisible Hand. Pareto optimality (however stated) never has been more than a very carefully hedged statement: With given tastes, technology, and resources, no reallocation of resources could better satisfy any member of the community without someone else being less well satisfied. Such a view, even leaving aside the old controversies about measuring satisfaction, nonetheless fits well into the conventional perspective because it does not ask how the distribution of satisfactions came to be what it is, what the rules of the game are in which satisfaction-seeking is played, and so forth. As was the case with the Invisible Hand, the Pareto optimum was an attempt to define the value problem in economics in sufficiently narrow terms to make it coterminous with resource allocation in the market via prices. To the extent that conventional theory altered its focus to cope with imperfect as opposed to pure competition, the following conclusions seem germane to our central concern with how economics copes with its value problem. Institutional• ism in the past attacked the use of "competition" in conventional theory, but failed to note that whatever equilibrium might mean in competitive markets, it means something different in imperfect markets. Institutionalists were thus vul• nerable to the charge of beating an ill if not dead horse. However, the charge that conventional economics continues to overemphasize the competitive model be• cause it is elegant, precise, and deterministic while imperfect models have none of these characteristics is probably a fair one. Economists cling to the competi• tive model, partly at least as a child to a security blanket, and rationalize its continued emphasis in academic curricula by a variety of means. These contain enough truth to avoid broadside attacks on the theory as irrelevant, but enough error to prevent economists from easily addressing the modem world in a realis• tic, direct, and straightforward fashion. II Economists always have been remarkably unconcerned about the allocational implication of how they spend their time and energy in price theory. Here, put in language the economist is uniquely qualified to understand, the institutionalist may have had a point: Price theory devotes a disproportionate amount of the economist's resources to competitive theory and too little to theories more gener• ally applicable in the real world. To many economists no doubt price theory has the appeal of chess, and (importantly) it does permit the mechanics of the price system to be detailed. But even in the sector of the economy in which market prices still operate it leaves many questions untouched. Despite the failure of men like Clarence Ayres to recognize the development of noncompetitive mod• els, the institutionalists still had a point in criticizing price theory. But this was in any case not the main import of what they were arguing.

The Frontiers of Economics: Valuation in the Market

If, as I believe, economics is and always has been primarily a science of valua• tion rather than merely allocation, it follows that price is not the only relevant 8 BEYOND DISSENT

measure of value, even in the areas where the price system still serves as the sole or primary allocative mechanism. There are many questions to which conven• tional economics should address itself in the areas where prices in fact do the allocating, but which many economists still prefer to ignore. For example, it is by now fairly clear that assuming that consumer wants are "given" assumes away many critical problems bearing on "the meaning of the price system." The normative implications of emergent prices in a system in which large corporate businesses produce whatever they choose to produce and then persuade consum• ers (through advertising, appeals to snobbery or class, or whatever) that this is also what they want are most assuredly not what they would be in a system in which prices reflected the efforts of business firms to adapt to the "sovereign" wishes of consumers. This would, of course, be true no matter where consumer wants came from provided only that they were not created by profit-seeking business firms themselves. This charge always has been leveled at price theory by institutionalists, beginning with Thorstein Veblen and including today J. K. Galbraith. He refers to demand manipulation as ''the revised sequence" and comments: "The revised sequence sends to the museum of irrelevant ideas the notion of an equilibrium in consumer outlays which reflect the maximum of consumer satisfaction."12 It may be that Galbraith has exaggerated the degree of demand manipUlation, as some have charged, but it is unlikely that any would argue that consumers and business firms interact on terms approaching parity. The attention given to Ralph Nader in recent years is due to the fact that consumerism is still so new and immature in our economy. Its rise is recognition that manipulation of consumers by firms unmatched by organized and informed consumer manipUlation of firms seriously alters the normative implications of emergent prices. Only in econom• ics as allocation can one argue that "the worth or value of a thing is determined simply by what a person is willing to pay for it."13 There is no need here to linger over this point except to note that what lies "beyond demand," to use John Gambs's phrase, is an integral part of economics as valuation and always has been. A second inadequacy of the economist's analysis of how markets operate is closely related to the first and involves again the tremendous concentration of power in the modem business corporation. Economics as allocation has not been unduly concerned with economic power per se, but only with how "market imperfections affected the allocation of resources." Economics as valuation can make no such convenient division. There is by now a vast literature dealing with the rise of the modem corporation, its basis in great wealth, its raison d'etre in its unique ability to exploit the fruits of ongoing technological development, and the concentration of power (economic but also political and social) to which these factors led. Certainly relatively little attention has been paid by mainstream economists to the impact of concentrated power on the meaning of the price system in operation. Adolph Berle and Gardiner Means warned in the 1930s of INSTITUTIONALISM-A BASIC PERSPECTIVE 9

the implications of separating ownership and control. 14 R. A. Brady some years later warned of the implications of concentrated corporate power to the fabric of the sociopolitical as well as the economic system15 in a view anticipating Dwight Eisenhower's celebrated warning of the dangers to democracy inherent in the military-industrial complex. Despite the effort to develop models of imperfect competition, economics as allocation has never escaped from the dilemma posed by the dynamism of technology which simultaneously destroyed the world of Smithian competition, with its convenient assumptions of the Invisible Hand, and enormously increased the efficiency and productivity (but also the dangers to "sovereignty") of the system in fact operating. This call to incorporate the realities of corporate economic power into con• ventional economics thus has a very old if relatively futile history. It may even be a cliche to mention, but like many cliches it represents an obvious necessity since it is still unrealized in economic theory. It is currently being urged most conspicuously by Galbraith. 16 Thus, if institutionalists erred in failing to recog• nize the impact of imperfect competition theory on the normative implications of "equilibrium," this error was small in the face of the problem they did perceive in the operation of prices to allocate resources in the market. The realities of concentrated power, the implications of an allocative mechanism based on "one dollar, one vote" operating amidst tremendous inequality in the distribution of both wealth and income, the degree to which concentration exercised a pervasive influence on both the flow of information and the "wants" assumed to be given-all these and related aspects of the economy were not so much unknown to economists as simply ignored definitionally by the profession in considering economic theory. The result was that even in its terra cognita, the domain of allocation in markets via prices, economists could not really deal with the value problem effectively. But the greatest inadequacies resulted from concentrating the attention of the economists unduly in this corner of their field, thereby ignoring the full implications of economics as valuation.

Institutional Economics and the Valuation Process

The meaning of the price system is only part of the strategy of economic prog• ress, and it is the latter that lies at the heart of economics as valuation. It was this view, of course, that gave institutionalism its characteristic flavor, and Ayres in particular tried to pull the separate threads together to make a complete statement of economics as a science of valuation directed at developing a strategy of progress. From Veblen came his great sensitivity to the impact of institutional forces (economic and noneconomic) in shaping the development of priorities and the resultant futility of presuming wants to be given when in fact they are shaped by the economy. From the disputes in the physical sciences came his conviction that the Newtonian emphasis on equilibrium was far less significant for econom• ics than was the Darwinian emphasis on conflict, process, and change. From 10 BEYOND DlSSENT

John Dewey came the instrumental theory of value, which succeeded in produc• ing a dynamic from which the valuation process in economics could be analyzed. What Ayres saw better than anyone else, in my judgment, was that instead of concentrating on how resources are allocated in markets via prices, economists should subsume that problem in the larger and more compelling problem, namely: How does the economy shape as well as channel human choice, both during a given period and through time? What mechanisms does it provide both for the development and for the expression of values? When Kenneth Arrow considered welfare economics, he still viewed the economy as a transmission mechanism for expressing "values" exogenously determined-hence his title Social Choice and Individual Values. But a more meaningful title might well have been Individual Choice and Social Values. It is the latter which "the econ• omy" represents. And I dare say that the fallacy of composition scarcely could be of greater critical importance than in the placid assumption of economists that the economy is an adequate and effective mechanism for summing individual values into social values. There is clearly a complex interaction between individ• ual and social values, but the way in which the economy directs this interrela• tionship is far from clear, let alone necessarily satisfactory. (And "satisfactory" here may be interpreted only as certainty that the system accomplishes what each of its participants would prefer it to accomplish if they were "suitably" aggre• gated.) The major critical frontier in economics, therefore, cannot be restricted even to market valuation; it lies in a far broader perspective.

The Frontiers of Political Economy: Individual Choice and Valuation in Society

Perhaps even Ayres took too narrow a view, in the sense that the ultimate concern of economics is not merely the meaning of the price system, but the meaning of the entire allocation pattern which emerges. 17 Increasingly it seems clear that economics as valuation cannot avoid concern with nonprice phenom• ena. The evidence is piling up on all sides that the old view of economics (as primarily concerned with how the market allocates resources via price under rigidly given assumptions) increasingly is being pushed aside by the necessity for facing many critical valuation problems. This necessity has, however, only exaggerated the schizophrenia in econom• ics. It is suddenly very fashionable in economics courses to include mention of urban blight, air and water pollution, conservation, the energy crisis, the popula• tion explosion, racial and sexual discrimination, and even "the quality of life." Our elementary texts exhibit the result brilliantly. They add chapters on these topics as each is pressed upon the professional consciousness in too forceful a manner to continue to be ignored, but these concerns are almost invariably grafted on at the end, in about chapter 37. The central chapters on the operation INSTITUTIONALISM-A BASIC PERSPECTIVE 11

of the market are untouched, and the inadequacy of the theoretical framework in the field for coping with the valuation problems is glossed over. Price theory, particularly competitive theory, is our rosary. Critical areas of economic valua• tion are each given a chapter. That is our confession. The religion is intact. 18 Thus Gunnar Myrdal recently suggested: "Modem establishment economists have retained the welfare theory from the earliest neoclassical authors, but have done their best to conceal and forget its foundation upon a particular and now obsolete moral philosophy."19 No better corroboration can be found for the thrust of the argument being advanced than to consider the history of the agricultural sector during the past several decades. Such perusal shows that price is by no means the same thing as value. It should suggest that welfare economics-even of the conventional type---cannot neatly separate allocative from distributive welfare problems, al• though it customarily tries to do so. It should support the notion that economics as valuation cannot easily isolate utility-based welfare economics, which is con• ventionally viewed as more manageable, from ethically based welfare econom• ics, considered too ambiguous to be capable of economic analysis, but clearly involved in fact in determining resource allocation and distribution in this sector. It underscores the bases of essential allocative mechanisms in both the decision unit of one dollar-

stricted sense involving the allocation of resources by prices with all the determi• nants of value given. The whole of the public sector, to which attention is shortly directed, is a monument to the limitations of Pareto optimality. Critical resource allocation decisions need to be-and in fact are-made constantly that cannot revolve easily about a market-price-measurable calculus. Pareto's maxim that the improvement in any member of the community improves social welfare ifno one in consequence "feels himself worse off" is already inadequate if one must consider (as in all taxation questions, for example) the decrease in welfare of those whose taxes are increased and the increased welfare of those on whom the resultant revenues are spent. Political economy as valuation then is ultimately as closely related to political science as economics always has been to psychology. Total allocation is made by both dollar votes and man votes. 20 To the conventional concern with how to measure the choices of individuals must be added the problem of how individu• als influence each others' choices.21 Even more crucial is the question of how individual and societal choices are interrelated. We lack a coherent developed theory here for static analysis, let alone for a dynamic theory capable of coping with the notion of economic progress. These problems can best be approached in turn.

The Valuation Process and the Public Sector

From what has been said, it is clear that the meaning of the political economy as the instrument for valuation transcends the confines of economics as allocation. One clear proof is the size of the public sector in all advanced industrialized economies, even the most market-oriented-our own. (More than 20 percent of 1972 U.S. GNP originated in the public sector.22) Prices are utilized for the goods and services purchased in the public sector, but we do not permit the price system to do the allocation except in a trivial sense. Indeed, the public sector exists precisely because here we have chosen to express our values through resource allocation by fiat. The quintessential exam• ple always has been defense expenditures. Collective consumption of any kind reflects the value process as embedded in the political economy. Our system operates in such a manner that military expenditures far more readily can achieve a high priority justifying taxation for subsequent social expenditures without being termed inflationary or "fiscally irresponsible" than can social welfare ex• penditures (note the term). The latter run into far stiffer opposition. Elementary macroeconomic theory suggests that a dollar's worth of government expenditure might, as a first approximation, be viewed as being as inflationary as any other dollar's worth of government expenditure. The terminology employed is, there• fore, merely obscuring differences in what one defines as "necessary government expenditures." We conclude in effect that we "need" national security "regard• less of price"--a subjective value judgment. We opt for stricter controls and INSTITUTIONALISM-A BASIC PERSPECTIVE 13 limits on our definition of "need" in other directions, also a value judgment and one essentially nonprice determined. This can be illustrated by Charles Schultze's comment that the 1969 Department of Defense appropriation of some $78 billion involved only 50 different appropriations of which one (for procure• ment and research and development), amounting to $22 billion, was justified by a single-page appropriation. In contrast, the Health, Education, and Welfare budget ofa mere $14.5 billion (the non-trust fund part) was covered in approxi• mately 100 different appropriations. HEW's budget is one-fifth the defense bud• get, but requires twice the appropriations.23 The same value orientation can be substantiated by dozens of comparable illustrations. The point here is neither to criticize nor to approve any particular attitude toward the resource allocation involved. It is only to underscore that because it concerns resource allocation, it is indubitably economic in nature; it involves political economy as valuation, and we have virtually nothing to contribute to the analysis as political economists. Resource allocation is being carried out via de facto values, which both shape and are shaped by the economy and are no less integral because economics chooses to take them as given. A mixed economy is definitionally part market and part command, but most of the efforts made to bring the value problem into economics (except for the institutionalists) have centered on value as allocation in the market. This is true (as already noted) of Pareto optimal notions of wel• fare; and it is true of welfare economics in the Bergson-Arrow tradition.24 Arrow made this point absolutely unambiguous: "We will assume in the present study that individual values are taken as data and are not capable of being altered by the nature of the decision process itself. This is . . . the standard view in eco• nomic theory."25 In short, virtually all would agree that modern welfare economics has been deliberately restricted to the interesting but extremely limited problem of defin• ing and measuring social welfare only in cases for which individual values are given data and in which social welfare is restricted to the summation of these individual values. The "welfare" problem is confined to how to express and communicate individual values, how to sum them, and how to interpret the results. Whether individual values even so viewed can include collective con• sumption is not at all clear. The "social good" is surely deliberately eschewed. This brings us to the current concern with what is called cost-benefit analysis. On the face of it, it appears a potential step forward in coping with the value problem; perhaps it could be. But of crucial importance is the fact that cost-benefit analysis customarily is referred to as an application of welfare economics, and "social betterment" is viewed in terms of "a potential Pareto improvement." In short, social betterment cannot be separated from the summation and transmogrifica• tion of given individual values, which brings us back to the fallacy of composi• tion, already commented upon.26 E. J. Mishan has suggested that Pareto-improvement notions of welfare are not very adequate until the economist decides whether to ground his welfare 14 BEYOND DISSENT

economics in utility or ethics.27 This seems to obscure the issue somewhat, because one certainly could subsume utility under ethics, but what is needed is some more complete calculus than ''the market" for expressing the underlying value system in economic decisions. This is more than cost-benefit analysis has ever claimed for itself. Consideration of the public sector, therefore, suggests the magnitude of the problem. The public sector represents a sizable part of the total allocation of human and nonhuman resources in all market-oriented economies. We have noted that although the resources so allocated have prices attached to them, they are not fundamentally allocated by prices, but by fiat. The fiat comes from the political economy in the form of decisions to tax and to spend which are made by various officials selected in various ways (most through election, although by appointment in many critical areas, such as the Office of Management and Bud• get), and by consumers and producers organized into political units. What I am suggesting is that the manner and degree to which the economy develops, con• veys, reacts to, and acts on societal values is as crucial to understanding and evaluating the political economy as the psychological basis of demand theory is to considering the behavior of individual consumers. Whereas economics may worry at least on occasion about its psychological assumptions, in both demand theory and the theory of the firm (the units involved in conventional economic "value" theory), little concern is expressed for the assumptions or characteristics of the political system through which individual and societal values are intermin• gled in myriad complex but crucial ways. Here dollar votes often are weighted by power considerations and in any case must be combined with man votes to represent the total allocational machinery--4he political economy. Economics traditionally views "the market" as the only such individual-social conduit with which it need concern itself. But while it has concerned itself with its view of the individual, it has been relatively oblivious to the character of the other end of the conduit. Such analysis is a necessary prerequisite to a meaningful evaluation of the performance of the economy in coping with its value problem. This emphasis is what distinguishes the position taken here from that taken by radicals, liberals, or conservatives, all of whom ultimately would seem to advocate the substitution of their own values for those they perceive in the system. The radical dissent involves, it is true, much that customarily is considered out of the bailiwick of conventional economic theory (the total distribution of power, for example). To the extent that the argument here is that the political economist must focus on the total allocation system, on how the political economy both shapes and responds to emergent societal values if it is to comprehend the meaning of the economy, our view, like that of the radicals, is broader than that customarily taken. To the extent that the radical critique is based on their dislike of the results they per• ceive emerging from the system, judgments with which we may agree or dis• agree, the argument here is different from the radical dissent.28 INSTITUTJONALISM-A BASIC PERSPECTIVE 15

Liberals such as Galbraith, who is disturbed by "private affluence and public squalor," object to how the public sector is being used. But he, as are radicals and conservatives, ultimately is arguing that he likes his own values better than those he views as emerging from the political economy. His impact, too, depends ultimately on his persuasiveness. But for the science of political economy, adopt• ing the values of any participant is no substitute for developing techniques for ensuring that the economy moves in a way that is consistent with its own emerg• ing values, no matter how individual participants may view them. Such a theory of political economy as valuation would suggest, incidentally, appropriate tech• niques to all groups for influencing it in the marketplace of valuational ideas.29 The same judgment is essentially applicable to the conservative critique. Mil• ton Friedman, for example, no doubt would argue that his "positive economics" avoids subjective valuation. He has attempted, in effect, to elevate market alloca• tion per se to a value premise on grounds that the results are, in his view, most efficient, or if not efficient more reliable and ultimately more in accord with his notion of what the economy should be doing than any other allocative mecha• nism. His argument is that one should "trust the market" because, whatever its flaws, it performs better than nonmarket mechanisms. Friedman has commented, for example, that "the role of the market ... is that it permits unanimity without conformity; that it is a system of effectively proportional representation."3o The word effective glosses over most of the problems considered earlier (the actual sovereignty of the consumer, the impact of concentration on the use of power in market allocation, and so forth) as well as being fairly irrelevant to collective consumption. The market cannot possibly allocate defense, "proportionally" or otherwise. Friedman, therefore, does find a role for political allocation (man votes). But he suggests that "fundamental differences in basic values can seldom if ever be resolved at the ballot box."3l It seems inconsistent to place such faith in laissez-faire markets for economic allocation and so little in democratic pro• cesses for converting individual values into social policy. In the end, reliance on the market, even if more consistent than reliance on anyone individual, is no substitute for a theory of political economy as valua• tion. There still will be allocation for necessary collective consumption by politi• calor administrative fiat. Social Security may be "necessary" to Galbraith, but not to Friedman. National defense is "necessary" to them both (but how much and how to decide?). What shall be the criteria for determining "necessary"? The argument here is that these are crucial economic problems about which the economist remains mainly mute, that no single individual's values will suffice as acceptable criteria for these allocative decisions, and that the only solution is finally to face the total relevant value problem inherent in shaping and directing the destiny of the economy. It might be added that Ayres's distinction between institutional and techno• logical values was directed at just this point: that notions of welfare never can be appropriately resolved by the imposition of the "value system" of a single indi- 16 BEYOND DISSENT

vidual or group, nor (he argued) even of a given society. His failure was to suppose that emphasis on process, which eliminated the old problem of means and ends, could solve the value problem entirely. He argued that "the general welfare is not a condition; it is a process."32 While he certainly was correct that values in this sense change, he underrated the practical need to develop an analytical technique by which emergent values in the political economy could be discerned. An adequate theory would constitute a mechanism through which emergent values are recognized, transmitted, and reflected in the ongoing opera• tion of the economy. More important, economists then could judge both the accuracy and the sensitivity with which the political economy expressed society's emerging values and how closely it conformed to any other precon• ceived "standard." This is why the emphasis here has been on the need to develop a more complete theory of the political economy as valuation. The institutionalist emphasis on process was convenient in that one could assume that progressive development, as in technology, would constitute eco• nomic progress definitionally. It did not entirely serve to distinguish growth from progress, however, unless one assumes that in time society will make the "right" (that is, "technological") choices. (Ayres, of course, did indeed feel technologi• cal choices were eventually inevitable. By emphasizing the "continuum" he thought he had disposed of the value problem inherent in the notion of an end in itself ["ultimate values].33) If the unsatisfactory way in which political economy currently copes with the value problem is illustrated by what it can offer in evaluating the public sector, its inadequacies for viewing the political economy through time are exemplified by considering the notion of economic progress.

The Frontiers of Dynamic Valuation: Political Economy and the Meaning of Progress

We have proceeded by stages, and we come now to the last step. We have suggested that economics has concentrated its work in welfare theory on that which is measurable within the market through prices and with individual values assumed given. Consideration of the meaning of prices limited to that framework suggests that the institutionalist charge (but only this charge) that conventional equilibrium always meant competitive eqUilibrium can be partially rebutted. We also have argued that the economy as an overall allocative mechanism should be the proper focus of the economist and that to do so he must once more become a political economist and cope with the meaning of total allocation--that is, the problem of value. It is here that the question ofthe public sector is most instructive. If, finally, the element of time is added, as it must be if questions such as pollution, conservation, and development are considered, even a simple Pareto optimality would become quite complex. Should we try to "dynamize Pareto optimality" by saying that "a dynamic Pareto optimality implies that a change INSTITUTJONALISM-A BASIC PERSPECTIVE 17

which enhances the well-being of at least one member of the next generation without reducing the well-being of a single member of the present generation shall be defined as genuine economic progress"? If strategy X enhanced the well-being of the next generations as well as the present one, but at the expense of the n + 1 generation (the "limiting case" being the annihilation of the race in some future generation), what then? Intergenerational trade-offs are inherently complex even in the relatively simple Paretian world because tastes, technology, and resources at the very least must become dynamic givens.34 But just as Pareto optima cannot serve as adequate guides to the total value problem in political economy in a single period, they cannot serve as adequate guides to progress. It is important to note that the customary emphasis in eco• nomic dynamics is on growth rather than progress for precisely the same reasons that the traditional emphasis in statics is on allocation rather than valuation. Progress involves valuation through time, while growth involves simply increase in whatever it is the economy happens to be doing.35 Paul Samuelson, for exam• ple, in the ninth edition of his basic text tries finally to suggest that progress rather than growth is what concerns us, but his approach is to introduce a version of the Nordhaus-Tobin measure of economic welfare.36 Samuelson suggests that increases in "per capita net economic welfare" are at a slower rate than increases in per capita GNP. The Nordhaus-Tobin suggestion that growth brings "disamenities" which need consideration is constructive. Techniques for distinguishing growth from progress, let alone measuring it, have very far to go, however.37 In short, the strategy of economic progress clearly suggests the primacy of political economy as a science of valuation. The focus is on a global inventory of human and nonhuman resources over time, their relations to changing technol• ogy, and the processes by which human beings create political economies. The latter are thus mechanisms through which emergent goals are determined through the interaction of individual and societal valuation processes. By explic• itly comprehending the mechanisms in a theory of total allocation, the political economist thereby would enable the participants to direct all resources toward the goals which emerge and to evaluate them against any external criteria they individually might choose to employ. This emphasis on progress rather than growth currently is being debated both in developing economies, where institu• tionalists long have had an interest, and in the developed economies. Ayres was one of the first (and still one of the few) to concern himself with economic progress rather than economic growth.38 Technological progress has been such that we now can view the possibilities for the future with considerably greater awareness of the full implications of alternative strategies than was possi• ble even thirty years ago, when Ayres outlined his theory of economic prog• ress.39 Economists increasingly recognize the distinction between growth and progress. Political economy as dynamic valuation focuses on where economies are headed. It is allocational in the broad sense that it begins with some funda• mental notions: Accessible to human beings on the earth are a number of human 18 BEYOND DISSENT

and nonhuman inputs which an evolving technology converts into potential re• sources (in Zimmerman's sense); economies exist as channeling and condition• ing mechanisms to assist in both determining and transmitting individual and social, values as well as to provide techniques by which analysis can study the success or failure of economies in accomplishing what their participants expect of them. Political economy will develop criteria for making such judgments and at the same time will lay bare the techniques it develops for exposing the criteria so that advocates of diverse goals for economies (that is, with different views of what constitutes progress) will be better able to assess both the economy as the valuating mechanism it is and their own views for change.4o Implicit in this is ultimately a noneconomic value premise--that economic progress as dynamic valuation will emerge from within the system rather than be imposed from without by elitist or authoritarian agencies. Advocates of divergent strategies for progress will need to be able to dissect the existing strategy with reasonable accuracy so as to know whether their problem is to improve the way the existing economy reflects existing values or whether the problem is to change the values so as to produce a different path into the future.41 It should be noted that in advocating that political economy as dynamic valuation must confront the notion of progress in meaningful terms, we are not suggesting that there is no natural division of labor between economists and philosophers in approaching value. It seems consistent with the present position to argue that economists can continue to shunt off onto philosophers the more abstruse elements of the value controversy as it affects, for example, the debate over what constitutes the good life. If, however, we accept that resource allocation is the heart of economics, then economists need to confront all the value elements that bear directly on this central problem. So viewed, economics never has been ''mere alloca• tion," that is, concerned only with resource allocation via prices in markets.

Conclusions

It is perhaps possible to summarize the essential argument in a few propositions. (l) Economics always has recognized that its distinctive emphasis has been on the need to make choices in a world where the energy crisis is only the most recent reminder that affluence has yet to replace scarcity as a basic conditioner of human existence. (2) While economics, therefore, indubitably revolves about allocation, it is preeminently a science of valuation. To say this is to say something more spe• cific than the philosopher's more cosmic concern with the ultimate destiny of man, but less specific than, say, Lionel Robbins's definition of economics would imply. Economic theory, in which market imperfections are noted, but values are assumed given, even when termed only "benchmark theory," is inadequate the• ory to cope with the economic problem.42 (3) Ayres well may have erred in his view of the meaning of modern market equilibria, but he surely was supremely correct in arguing that the central con- INSTITUTIONALISM-A BASIC PERSPECTIVE 19

cern of economics is not how markets allocate resources, but rather how the total allocative thrust of the economy is perceived, determined, reviewed, transmitted, and altered over time. (4) Economics long has given in to the tendency, therefore, to convert what is essentially a complex value problem into a relatively simple and often mechanis• tic allocative problem because of the advantages of the latter in developing precise and rigorous models. But this effort has produced schizophrenia which has become ever more pronounced. The disproportionate attention given to theo• retical apparatus which concentrated on simplistic allocation while the economy itself wrestled with valuation increasingly is being recognized. Perusal of any basic text will underscore this discrepancy between the complexity of our appa• ratus to deal with "markets" and the paucity of our apparatus to deal with value (in static terms) or progress (in dynamic terms). (5) Only when economic theory concentrates on the meaning of the political economy--the problem of value-will we be able to assess the adequacy of our current allocation (outside as well as inside the market) to accomplish the evolv• ing ends which the participants in the economy currently set for it. Only then can we criticize either the actual functioning of the economy or the expectations of its participants in effective fashion. (6) If we accept consumer sovereignty as the important factor in economic allocation that classical and neoclassical economists assumed, the challenge is to turn their assumption into reality by developing a theory of political economy as valuation in terms of which the evolving total allocational thrust of society (its emerging values) can be expressed. In such terms economic performance can be judged by the only criteria that ultimately make sense: How effectively and accurately does the system reflect emergent choice?43 (7) The frontier of the political economy, therefore, is to be found in develop• ing criteria by which economies can be judged in terms of their ability success• fully to express the emergent values of society. In dynamic terms these criteria will provide an avenue for judging the economy through time as the embodiment of the evolving values of its participants, that is, economic progress. Only then can we comment meaningfully on whether the current structures in the economy constitute a road to serfdom, a road to utopia, or some halfway road, and whether, whatever the road may be, it is what (rightly or wrongly) its inhabitants choose.

Notes

l. That there were problems with the notion of eqUilibrium was not denied; they were simply ignored. For example: "Equilibrium economics describes a community with• out economic problems, because so far as it affects him, everybody knows how everyone else is going to behave." T. W. Hutchison, The Significance and Basic Postulates of Economic Theory (1938) (New York: Augustus M. Kelley, 1965), p. 164. 2. In this connection, it is instructive to consider the views of MaIthus, originally expressed in 1819: "It has been said, and perhaps with truth, that the conclusions of 20 BEYOND DISSENT

Political Economy partake more of the certainty of the stricter sciences than those of most of the other branches of human knowledge. . . . There are indeed in Political Economy great general principles ... [but] we shall be compelled to acknowledge that the science of Political Economy bears a nearer resemblance to the science of morals and politics than to that of mathematics." T. R. Malthus, Principles ofPolitical Economy (Tokyo: Interna• tional Economic Circle, 1936), p. 1. 3. Alfred Marshall, Principles ofEconomics, Sth ed. (New York: Macmillan, 1949), p. 1. 4. Ibid., p. 14. 5. Lionel Robbins, An Essay on the Nature and Significance of Economic Science (London: Macmillan, 1946), p. 43. 6. Ibid., p. 16. Robbins thus explicitly related "means and ends" in the way which Ayres, with his notion of the "means-ends continuum," was to reject. The point is dis• cussed below. 7. I do not suggest that Lord Robbins himself assumed that his definition so disposed of all means-ends problems, but only that this is what the profession customarily permit• ted his definition to lead them to. S. Ibid., p. 152. 9. This view found expression, for example, in most of the editions of Paul Samuelson's widely used text, but significantly has dropped out of the last few. 10. The peril implicit in this view was aptly summarized by Tom Lehrer in his song about the ethics of Werner von Braun: "Once the rockets are up who cares where they come down? 'That's not my department,' said Werner von Braun." Developing such awesome technology carried with it uncomfortable responsibilities that could not be con• signed to "society," and the physical sciences have been far less precise and certain, and far more factionally divided, ever since. 11. I myself some years ago argued strongly that institutionalism was failing to make much impact on the profession precisely because it attacked price theory as though no changes in the apparatus had occurred since Marshall. (Compare P. A. Klein, "A Critique of Contemporary Institutionalism," Quarterly Review ofEconomics and Business 1 ([May 1961].) While I have not changed my view of the validity of that charge, I have changed my view of its importance, as the text may indicate. 12. John Kenneth Galbraith, The New Industrial State (New York: New American Library, 1967), p. 223. 13. The words are those of E. J. Mishan in Cost-Benefit Analysis (London: Allen and Unwin, Ltd., 1971), p. 31, and represented his description of conventional "normative economics," not his concurrence with the definition. 14. Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (New York: Macmillan, 1932). 15. Robert A. Brady, Business as a System of Power (New York: Columbia Univer• sity Press, 1943). In connection with the failure of economics as allocation ever ade• quately to come to grips with the value implications of emergent prices in concentrated markets, we may quote Robert S. Lynde's introduction to Brady's book: "For the most part, contemporary social scientists still exhibit toward the changing business world the encouraging moral optimism of Alfred Marshall. Nor are we helped by the fact that the crucial science of economics derives its data within the assumptions and concepts of a system conceived not in terms of such things as 'power' but of blander processes such as the automatic balancing of the market" (p. xvi). The economists would not make so simple a statement, lest he be accused of being simpleminded, but the charge strikes one as not only apt in 1942, when it was written, but discouragingly apt as well in 1974. 16. In his presidential address to the American Economic Association in December 1972, titled, significantly, "Power and the Useful Economist," Galbraith reiterated the INSTITUTIONALISM-A BASIC PERSPECTIVE 21

theme once more that modem corporations have obtained control of half the economic output in the United States and in the process have acquired so vast a netwotk of control as to justifY calling the result a "power or planning system." American Economic Review 63, no. 1 (1973): 4. 17. In this connection Allan Gruchy characterized Ayers's view as follows: "He shifts the center of attention from the individual as a choosing person to the whole economy as an evolving process in which individuals as a collective unit or body seek to cope with the problem of using scarce resources to serve culturally determined wants or needs." Contempo• rary Economic Thought (New Yolk: Macmillan, 1972), p. 95. The argument of the text is that the relationship between individuals and society cannot adequately be characterized as a one-way street in either direction, but is rather one of constant interaction through time. 18. In this connection Ayres wrote: "The truth is, it is impossible for economics to disavow the ethical implications of value theory or to dispense with the terminology in which those implications are imbedded, since economics is, and always has been, con• cerned primarily with the meaning of the price pattern." The Theory of Economic Prog• ress (Chapel Hill: University of North Carolina Press, 1944), p. 82. If by the "price pattern" one means the total pattern of allocation in an economy, then Ayres's view is identical with the view taken in the text. 19. Gunnar Myrdal, Against the Wind: Critical Essays on Economics (London: Mac• millan Press, Ltd., 1974), p. vi. 20. T. W. Hutchison noted this many years ago. "The political side of politico• economic problems is represented sometimes as the 'weakness of the politician' in not putting through necessary but unpopular measures, or 'rigidities' or frictions. That is, the difficulties are not faced at all; it is implied simply that they ought not to be there." Significance and Basic Postulates, p. 165. We suggest only that the problem is not faced much more directly nearly forty years after Hutchison wrote because we still lack a coherent theory of political economy with which to view economics as valuation. 21. Game theory tends to be mechanistic rather than value oriented and to ignore the producer-consumer interactions alluded to earlier. 22. For a comparison of the role of the public sector in eleven matket-oriented economies during the 1960s, see P. A Klein, The Management ofMarket -Oriented Economies: A Compar• ative Perspective (Belmont, CA: Wadsworth Publishing Company, 1973), Table 8-2, p. 179. 23. Charles Schultze, The Politics and Economics of Public Spending (Washington, DC: Brookings Institution, 1968), p. 4. This value perspective continues critically to shape allocation through the public sector. Thus a Brookings Institution analysis of the fiscal 1974 budget proposals concluded that the administration's budget proposals, ''while leaving the structure offedera1 taxes and the current defense posture unchanged ... recommended a sweeping series of reductions in the domestic expenditures of the federal government, including elimination or sharp curtailment of many programs." Edward R. Freed, Alice M. Rivlin, Charles L. Schultze, and Nancy H. Teeters, Setting National Priorities: The 1974 Budget (Washington, DC: Brookings Institution, 1973), p. vii. This is not Friedman's "proportional representation" through the market (see text below), but economics as valuation masquerading as mere "fiscal orthodoxy." 24. Some years ago, Arrow suggested the difference between Abram Bergson's view and his own as follows: "But where Bergson seeks to locate social values in welfare judgments by individuals, I prefer to locate them in the actions taken by society through its rules for making social decisions." Social Choice and Individual Values, 2d ed. (New York: John Wiley and Sons, 1963), p. 106. Arrow appears, therefore, to come closer than Bergson to avoiding the possibility mentioned earlier that the Invisible Hand might be afflicted by the fallacy of composition. Arrow came close to recognizing that the real value problem in economics needs to be faced, but in the welfare economics he developed he generally appears to assume that the value 22 BEYOND DISSENT

problem somehow has been met and overcome (see text) and then concentrated on the mechanisms of its transmission through the economy under varying circumstances and assumptions. 25. Arrow, Social Choice, p. 7. Arrow goes on to note that this standard view has been attacked for its lack of realism by Veblen, Frank Knight, J. M. Clark, and others. 26. For a clear current statement of cost-benefit analysis and its view of social better• ment, see Mishan, Cost-Benefit Analysis, especially p. 8. That efforts of this sort to develop applied welfare economics take too restricted a view of the required scope of economics as valuation may be noted in the following typical comment (this time from input-output analysis in welfare terms): "The analysis in this book has been concerned only with the implications of specifying a national objective such as maximizing production or consumption. Before one may examine how such an objective may be reached, it is first necessary to describe the actual operation of the economy in terms of a set of lagged behavior functions in market prices." Burgess Cam• eron, Input-Output Analysis and Resource Allocation (Cambridge: University Press, 1968), pp. 94-95. Economics as valuation never can be encompassed simply by specify• ing a maximizing objective without some framework to suggest how specifying the char• acter of the maxima reflects the value system, and that will never emerge from concentration on market prices alone, even if presented as a set of the most elegant of lagged behavior functions. 27. Ibid., p. 311. 28. An interesting and illuminating exchange between a radical and a mainstream economist was that between John Gurley and Robert Solow in 1971. Gurley argued that the establishment paradigm emphasized data and technique and ignored such factors as power and conflict and thereby "a large part of reality." Solow's rebuttal suggested that "knowledge of technique and acquaintance with data" was precisely what distinguished econo• mists from others. See American Economic Review (May 1971): especially 54 and 65. 29. Ayres would no doubt suggest a technique be devised for testing the degree to which the emerging societal values are consonant with evolving technological values. Sooner or later, in Ayres's view, they would have to match. 30. Milton Friedman, "The Role of Government in a Free Society," in Capitalism and Freedom (Chicago: University of Chicago Press, 1962), p. 23. 31. Ibid., p. 24. 32. C. E. Ayres, The Industrial Economy (New York: Houghton Mifflin, 1952), p. 315. 33. He compared our problem to that of medicine, where "health" is the only required criterion and good and bad become more or less in terms of the relevant value criterion. One wonders what he would have said about abortion and euthanasia, both currently highly debatable value propositions. If, as he argued, "as between institutional and techno• logical systems of value, the technological values have always had the last word" (ibid., p. 314), which is the technological value side of these debates? Can one see far enough down "the continuum" to answer? 34. Institutionalists always have objected to the assumption of "given" tastes. Ayres stressed the inherently dynamic role of technology, and a fundamentally dy• namic view of resources as the only meaningful one for economists to take was stressed (although rather widely underrated and/or ignored by economists) many years ago by Erich W. Zimmerman in World Resources and Industries, rev. ed. (New York: Harper and Row, 1951). It is the technological process which converts matter or energy into resources. As Zimmerman put it, "resources are dynamic not only in response to increased knowledge, improved arts, expanding science, but also in response to changing individual wants and social objectives." E. W. Zimmerman, World Resources and Industries. In INSTITUT/oNALIS~A BASIC PERSPECTIVE 23

short, all the parameters within which economic models customarily are developed are essentially dynamic, and economics can hold them fixed indefinitely only at the peril of not developing in the most meaningful and viable way. 35. That the distinction is now attracting attention may be seen, for example, in The Economic Growth Controversy, ed. Andrew Weintraub, Eli Schwartz, and J. Richard Aronson (New York: Macmillan, International Arts and Science Press, 1973). In chapter 2, "Growth and Anti-Growth," E. J. Mishan, for example, writes: "It is surpassingly convenient for the professional economist to interpret people's market choices, or their economic judgment generally, as reflecting their mature judgment about what is condu• cive to their happiness. But I hope he is not such a fool as really to believe it" (p. 22). The central problem under discussion is: What can the professional economist bring to bear on perfecting the mechanisms by which market and nonmarket choices about resource alloca• tion by individuals, and by society collectively, are directed toward any meaningful notion of what society wishes to achieve? 36. Compare P. A. Samuelson, Economics, 9th ed. (New York: McGraw-Hili, 1973), pp.195-96. 37. "Disamenities" is a slightly expanded view of Marshallian externalities. In view of the venerability of the notion of externalities in economics and its failure significantly to affect economic theory, one cannot be too sanguine about concern for per capita net welfare transforming the perspective or approach of economic analysis in the near future. See W. Nordhaus and J. Tobin, "Is Growth Obsolete?" in National Bureau of Economic Research Inc., 50th Anniversary Colloquium, vol. 5 (New York: Columbia University Press, 1972). 38. It often has been said that institutionalists, including Ayres, did not develop their ideas in sufficiently precise form to command widespread acceptance among economists. Samuelson, for example, has said of institutionalism: "For the most part this school has not succeeded in reproducing itself and today it seems almost extinct." P. A. Samuelson, Collective Scientific Papers ofPaul A. Samuelson, vol. 2, no. 125 (Cambridge, MA: MIT Press, 1966), p. 1736 (from an article, "Economic Thought and the New Industrialism," published in 1963). While one does not find copious references to Ayres in recent litera• ture, there is considerable evidence that his ideas increasingly have worked themselves into current economic debate. For the views of one economist who argues this see Robert A. Gordon in Joseph Dorfman and others, Institutional Economics (Berkeley: University of California Press, 1963). An example of an unfortunate lack of specificity in Ayres in connection with his view of progress is the following: "Human progress consists in fmding out how to do things, finding out how to do more things, and fmding out how to do all things better." The Theory of Economic Progress (New YOlk: Schocken Books, 1962), p. v of Ayres's new Introduction. That sounds more like growth. Without consideration of which, of all the things human beings can do, they should concentrate their relatively scarce resources upon (time, if nothing else), this can hardly be taken as a very useful description of progress. 39. A critical part of Ayres's theory of economic progress revolved around the dyna• mism which he derived from his instrumental theory of value, which Was closely related to Dewey's means-end continuum. That this is closely related to the notion of progress emerging from valuation in an evolving political economy may be illustrated by Charles Schultze's comment: "We discover our objectives and the intensity we assign to them only in the process of considering particular programs of choices. We articulate ends as we indicate means." Public Spending, p. 38. Schultze suggests intuitively that economics is, after all, a science of value. 40. That this is the most likely perspective from which innovations in economic theory always have sprung is perhaps what Leo Rogin had in mind when he wrote that 24 BEYOND DISSENT

"new systems [of economic thought] first emerge in the guise of arguments in the context of social reform." The Meaning and Validity ofEconomic Theory (New York: Harper and Brothers, 1956), p. xiii. 41. A different path, in Ayresian terms, simply would be one more in accord now with emergent technological values. 42. The term is Samuelson's. "The competitive model is extremely important in pro• viding a bench mark to appraise the efficiency of an economic system." Economics, 9th ed. (New York: McGraw-Hili, 1973),p. 631. 43. An implicit assumption is that these emergent choices can embody Ayres's "tech• nological values." Whatever they embody, it appears ultimately to be the only defensible system, short of any imposed authoritarianism.

References

Arrow, Kenneth 1. Social Choice and Individual Values. 2d. ed. New York: John Wiley and Sons, 1963. Ayres, Clarence E. The Industrial Economy. New York: Houghton Mifflin, 1952. ---. The Theory of Economic Progress. Chapel Hill: University of North Carolina Press, 1944. Berle, Adolf A., and Means, Gardiner C. The Modern Corporation and Private Property. New York: Macmillan, 1932. Brady, Robert A. Business as a System ofPower. New York: Columbia University Press, 1943. Cameron, Burgess. Input-Output Analysis and Resource Allocation. Cambridge: Univer• sity Press, 1968. Freed, Edward R.; Rivlin, Alice M.; Schultze, Charles L.; and Teeters, Nancy H. Setting National Priorities: The 1974 Budget. Washington, DC: Brookings Institution, 1973. Friedman, Milton. "The Role of Govemment in a Free Society." In Capitalism and Freedom. Chicago: University of Chicago Press, 1962. Galbraith, John Kenneth. The New Industrial State. New York: New American Library, 1967. ---. "Power and the Useful Economist." American Economic Review 63, no. 1 (March 1973). Gordon, Robert A. In Institutional Economics, Joseph Dorfman and others. Berkeley: University of California Press, 1963. Gruchy, AIIan. Contemporary Economic Thought. New York: Macmillan, 1972. Gurley, John. "The State of Economics." American Economic Review 62, no. 2 (May 1972): 53-Q2. Hutchison, T. W. The Significance and Basic Postulates ofEconomic Theory. New York: Augustus M. KeIley, 1965. Klein, Philip A. "A Critique of Contemporary Institutionalism." Quarterly Review of Economics and Business I, no. 2 (May 1961). ---. The Management of Market-Oriented Economies: A Comparative Perspective. Belmont, CA: Wadsworth Publishing Company, 1973. MarshaIl, Alfred. Principles ofEconomics. 8th ed. New York: Macmillan, 1949. Mishan, E. J. Cost-Benefit Analysis. London: AIIen and Unwin, Ltd. 1971. Myrdal, Gunnar. Against the Wind: Critical Essays on Economics. London: Macmillan, 1974. Nordhaus, W., and Tobin, 1. "Is Growth Obsolete?" In National Bureau of Economic Research, Inc., FifliethAnniversary Colloquium, vol. 5. New York: Columbia Univer• sity Press, 1972. Robbins, Lionel. An Essay on the Nature and Significance ofEconomic Science. London: Macmillan, 1946. INSTITUTIONALISM-A BASIC PERSPECTIVE 25

Rogin, Leo. The Meaning and Validity of Economic Theory. New York: Harper and Brothers, 1956. Samuelson, Paul A. "Economic Thought and the New Industrialism." Reprinted in Col• lected Scientific Papers ofPaul A. Samuelson, vol. 2, no. 125. Cambridge: MIT Press, 1966. ---. Economics. 9th ed. New York: McGraw-Hill, 1973. Schultze, Charles. The Politics and Economics of Public Spending. Washington, DC: Brookings Institution, 1968. Weintraub, Andrew; Schwartz, Eli; and Aronson, J. Richard, eds. The Economic Growth Controversy. New York: Macmillan, International Arts and Science Press, 1973. Zimmerman, Erich W. World Resources and Industries. Rev. ed. New York: Harper and Row, 1951. Dissent from Orthodox Theory

2 American Institutionalism: Premature Death, Permanent Resurrection

Institutionalism is still far too often dismissed as "mere dissent." It is much more than that, as I will here try to show. While we have carved out a coherent, meaningful place for institutionalism, or evolutionary economics, much remains to be done. Following the lead of Walter Heller, who devoted his presidential address to the American Economic Association several years ago to "What's Right with Economics,"i this article will be an effort to go beyond the customary stance we all too often assume. Eschewing both excessive defeatism and self• criticism, these remarks are an effort to state positively what's right with evolu• tionary economics. I am similarly concerned with what is right with institutionalism. So that you may know precisely where I am going, let me indicate the plan of this discus• sion. I shall consider the current mainstream view of institutionalism and the current institutionalist view of mainstream economics. In this connection I shall attempt a summary characterization of the methodology of institutionalism, its premises, and its perspective toward the evolving norms of political economy. Next I shall considf)l" the essential views of the founders of American institution• alism, the contributions of the "second generation," and the current thinking of

Reprinted by pennission of the publisher from Journai ofEconomic Issues, vol. 12, no. 2 (June), pp. 251-76. Copyright 1978 by Journal of Economic Issues. Authorization #: 557701. This was the presidential address presented at the annual meeting of the Association for Evolutionary Economics, New York City, December 27-29, 1977.

26 INSTITUT/oNALlS~A BASIC PERSPECTIVE 27

institutionalists as epitomized by the views of my predecessors in the presidency of AFEE. With this as background, I shall attempt to cull a list of principles on which I would argue institutionalists today have reached some sort of consensus. Finally, I will look briefly to the future of institutionalism. We may still have no good name for ourselves: "Institutionalism" Clarence Ayres called "singularly unfortunate,"2 "instrumentalism" is intolerably awk• ward; "evolutionary economics" describes only part of our concern, and that none too clearly; "holistic economics" may well be a better term, but it is un• likely now to catch on; "heterodox economics" served once, but like "neo" is always in danger of becoming out of date. Many of us still refer to ourselves as "dissenters," and I shall be at pains here to suggest the limitations of that term. My theme can be stated quite simply. Whatever we call ourselves, we are not given much credit generally among our fellow economists, but I think there is evidence that an ever wider group of economists has begun to hear what we are saying and to accept a number of our premises. On the basis of the consensus principles, I hold one can demonstrate that the appropriateness of institutionalist principles to a vast array of economic problems is being recognized. The prob• lems are urgent. Far from dying out, as some appear to think, institutionalism must be viewed as either never having died or as being in the process of a resurrection which I suggest will endure.

The Current Mainstream View of Institutionalism

I have searched through a great many introductions to economics texts look• ing for awareness that institutionalism exists. One is presented with a para• dox. The most conspicuous reference to institutionalism is in Paul Samuelson's basic text. In the tenth edition, as indeed in quite a few earlier ones, he proclaims that economics of a new sort-"factual, policy-oriented economics"-was introduced in the United States by Richard T. Ely and John R. Commons, as an outgrowth of the German Historical School. The greatest institutionalist, in Samuelson's view, was Thorstein Veblen, and a major follower was that "theory-eschewing taxonomist of business cycles, Wesley Clair Mitchell." For Samuelson that is it. There was no second generation of institutionalists---the men who people Allan Gruchy's Contemporary Eco• nomic Thought and their associates. Writes Samuelson: "40 years ago Institu• tionalism withered away as an effective counterforce in economics. Who can explain it when a movement turns sterile? Perhaps it was the case that main• stream American economics had always been more pragmatic and empirical than mainstream English or French economics; it was therefore able, so to speak, to absorb and take over with superior analytical and econometric tools the descriptive tasks and policy formulations of the Institutionalists."3 I doubt I have ever read a statement more likely to infuriate institutionalists. One is tom in deciding where to attack first. Is it the failure to acknowledge that 28 BEYOND DISSENT

Ayres, J. K. Galbraith, Gunnar Myrdal, and others consider themselves to be institu• tionalists, or is it the smugness of Samuelson's assumption of the superiority of econometric tools, or his certainty that institutionalists have in fact "withered away"? I comfort myself with the realization that Paul Samuelson's batting average as economic prognosticator is not quite 1,000. In 1970 he thought business cycles were virtually passe and the National Bureau in danger of obsolescence.4 After the al• most worldwide recession of 1973-75, no one any longer feared that business cycles would soon be viewed as fossilized relics of a bygone world. Perhaps Samuelson could be equally incorrect in his view of the continued existence of institutionalism. Samuelson at least mentions institutionalism. One is hard pressed to find other basic textbooks discussing current institutionalism and institutionalists. We mostly are ignored. We had better face it. Part of the reason is that the economics profession today fails to recognize institutionalism as a movement and instead comments on individual institutionalists. Again Samuelson is a vivid case in point. Shortly after commenting on the "withering away" of institutionalism he discusses Galbraith and concludes that in viewpoint he does provide "a critique against the prevailing orthodoxy in economics."s What is missing, therefore, is only the realization that Galbraith is not alone. One voice recently raised in behalf of institutionalists is that of Lee E. Pres• ton: "The institutionals are by far the largest, most varied, and most influential group of contributions and contributors to the corporate-society literature.'>6 Preston specifically mentions Gruchy, Robert Heilbroner, Benjamin Ward, and R. A. Solo, in addition to Galbraith. My joy at Preston's disagreement with Samuelson's assessment of current institutionalism would be greater were Pres• ton not a member of this association. On the other hand, he was writing in the Journal of Economic Literature, surely a mainstream publication. So I permit myself to be minutely cheered. In connection with the general standing of institutionalism it is not unim• portant to note that at least three and possibly four institutionalists have been elected president of the American Economic Association in the past twenty years. I refer to Galbraith, Edwin E. Witte, and Morris Copeland (whose presidential address was titled "Institutionalism and Welfare Economics"V The fourth possible institutionalist was George W. Stocking, AEA president in 1958. Samuelson suggests that Galbraith has "no disciples," but he certainly has many who find his general orientation congenial, whether or not they accept every Galbraithian position. The "unique" niche accorded to Galbraith suggests the major task confronting institutionalists today. Veblen was no doubt viewed as unique in his day also, but a generation ago there was clear recognition that Veblen, Commons, and Mitchell were all talking about economic problems from a reasonably consistent perspective. It is that realization about modem institu• tionalists which is lacking today. INSTITUTIONALISM-A BASIC PERSPECTIVE 29

The Institutionalist View of Mainstream Economics

Growth ofa School

Say "Chicago School" to any economist and he will know that you refer to Milton Friedman, Friedrich Hayek, George Stigler, and others at the University of Chicago and elsewhere who share a point of view in common with the pr

Rigor

Mainstream economists usually characterize economic theory as rigorous and pride themselves on their own theoretical rigor. They regard economic theory as 30 BEYOND DISSENT

the most rigorous theory to be found in the social sciences. Precisely what is meant by rigor? The term is rarely defined, but presumably "rigorous theory" consists in making whatever explicit assumptions one must make to establish the veracity of, say, A =Band B = C and then discoursing at length on the profundi• ties flowing from the precise deductive conclusion that A = C. The contribution lies presumably in finding the way in which the two propositions can be both "proved" and related to one another. In price theory, for example, a set of assumptions about downward sloping demand curves (consumer rationality, knowledge of alternatives, and so forth) is juxtaposed to a set of assumptions about the nature of upward sloping supply curves (diminishing returns, increas• ing costs to factors, profit maximizing). The resulting juxtaposition leads to equilibrium price and quantity, cleared markets, and to a group of welfare no• tions based on the implications of the equality of marginal utility and marginal revenue. 10 It can be argued that such formal consistency is rigor of the most superficial sort. More fundamentally, I argue rigor refers to the precision with which analy• sis is structured so as to advance genuine insight into real problems. If this is the case, then the theory of price just considered is far less rigorous than is customar• ily thought because the problem it addresses has been radically distorted from the way in which the world presents it to us. We argue as economists that "abstraction" and "simplification" are necessary, and so we must resort to analy• ses on the basis of a set of "givens." Simplification and abstraction may be necessary, but the first thing to note is that the givens in economic analysis are not givens, but chosens. It is surpassingly convenient for the economist to as• sume that consumer tastes are "given" and that consumers are "rational," but the economist chooses so to assume, and whether the resulting theory conforms sufficiently to the real world to be useful in solving economic problems is an important and seldom asked question. Are these assumptions both unavoid• able and the most realistic one can make, judged by the ability of the result• ing analyses to advance our understanding of the problem we set out to investigate? The difficulty with much conventional theory is that there has always been a penchant for assuming as given those factors which can lead logically to the greatest precision in outcomes. Ceteris paribus is, therefore, to the economist who equates rigor with precision, always preferable to mutatis mutandis. But can one not say that mutatis mutandis theory could conceivably be more rigorous if less precise than ceteris paribus theory by the criteria just suggested? There can be no doubt, for example, that oligopoly theory opens the door to all sorts of possibilities involving recognized or partially recognized inter• dependnce, that the assumptions can be highly complicated involving sophisti• cated game-theoretical givens, and that the results may well be logically indeterminate. But this does not mean the theory is less rigorous; it is merely far more complicated. Many-perhaps the majority of--economists have never INSTITUT/oNALlS~A BASIC PERSPECTIVE 3/

been too happy with oligopoly theory, and they regard the results as less satisfac• tory than is the case with either the theory of pure competition or monopoly. Much conventional economic theory, moreover, has been predicated on the notion that quantification is a surefire route to greater rigor. It mayor it may not be, depending on the objectives sought and achieved by the introduction of mathematics. The primary danger is that economists have come to assume that their theory is more rigorous and more relevant because it is quantified and deals with a larger number of variables simultaneously. I I In sum, precision, quantifiability, and the number of variables encompassed are not automatic guarantors of rigorous theory.

Theory as "Benchmark" Theory

I quote from the first elementary text I happened to pick up, having found the quotation I wanted in about one minute: "Does the price system of American capitalism function in the same fashion as the price system discussed in this chapter? In principle, yes; in detail, no. Our discussion of the price system provides us with a working model-a rough approximation-of the actual price system of American capitalism. Our analysis presents a much simplified, yet useful, picture of the real thing. The competitive price system also gives us a norm, or standard, against which the real-world economy can be compared."12 If we really believe this, then we who teach elementary economics are hard pressed to explain what frequently happens next in beginning economics courses. In approaching the subject of agriculture we tell our students that struc• turally agriculture traditionally conformed to the requirements of competition to a far greater extent than any other sector of the American (or any other market• oriented) economy; nonetheless, it was one of the first to be the object of vast government intervention to alter the results emerging from the "free, competitive market." Until relatively recently there were many buyers and sellers of Kansas wheat, free entry and exit, and a homogeneous product. Were the results emerg• ing from the market considered a "norm"? Obviously, they were not, and they were radically altered by a variety of governmental interventions designed to make the market results conform to the actual norm or standard. And where did such a standard come from? It came from where such standards have always come--it emerged from the political economy itself, because producing such standards is a critical part of what the economy is all about. The market is a part of the economy, not vice versa, and it has ever been so. When the market fails to conform to the norm it is the market, not the norm, which is manipulated. I underscore that this does not mean that institutionalists are or should be uninterested in prices and the market. Clearly, these are very important economic variables. But institutionalists stress that the norms come from the economy which is a vehicle for emergent societal values as they reveal themselves in economic choices. It is to norms so acquired that prices as they emerge from 32 BEYOND DISSENT markets are compared. It is a question of the tail and the dog. Mainstream economists argue that for the discipline of economics the market and its determi• nation of prices is the dog, and the underlying values are the tail, safely sterilized in the off-limits compound called ceteris paribus. Institutionalists argue that for economics the critical entity to study is the economy and its emergent values, in particular how they are changed and what their implications are both for the participants in the economic process and the environment in which their choos• ing activities occur. \3 Values emerge through the economy over time-a process. This view of the economy is precisely what Clarence Ayres had in mind when he introduced John Dewey's means-end continuum into economic analysis. He commented that, for Dewey, "'means' and 'ends' are no more distinct orders of phenomena than causes and effects."14 Ayres chose to express the dynamism of the political economy in terms of what he called ''the continuity of technological process"15 and to argue that we must "recognize as a misconception the idea of progress as movement toward the attainment of some previsioned 'end.' "16 That this notion of progress has gained credence in the years since Ayres first suggested it is clear. Charles L. Schultze, for example, has expressed the same notion a number of times, most recently in an article in which he declared that "ends and means cannot and should not be separated. In the real world they are inextricably joined: we formulate our ends only as we debate the means of satisfying them. "17 If we do indeed formulate our ends as we debate the means of satisfying them, it follows that we can have no preconceived norm such as the values of the competitive market toward which we inevitably try to move the system. In the final analysis, the competitive model cannot possibly encompass our evolving norms, although they have included some notion of efficiency and productivity from the days of Adam Smith, if not before. It is this that lends credence to our view that it is from the political economy that the norms evolve and to which economic performance both in and outside the market is compared in the devel• opment of public policy.

The Evolving Norms for Political Economy

There are clearly some notions in the conventional competitive model that we all might find attractive and appealing. Characteristics such as automaticity, pro• gressivity, and efficiency are hard to resist, assuming we can agree on what they mean. Even on its own terms, however, the competitive model is suspect, as it has been all along. The automaticity of the competitive model is attractive, but it is doubtful that it ever existed. The Invisible Hand has long since turned into what Joan Robinson calls the Paralyzed Hand. The internal impetus to ever greater technological efficiency as the guarantee of optimal progress has been overridden by the superior impetus of economies of scale as a mechanism for efficiency. But along with that realization has come concern about the concentra- INSTITUTIONALISM-A BASIC PERSPECTIVE 33

tion of power which scale economies demand; the concentration of power be• yond scale requirements; the implication of structures which permit but do not compel social sensitivity; the relationship of both growth and power via concen• tration to incentives; the complex issues of intertemporal trade-off's (more rapid growth in this generation versus balanced expansion over a number of genera• tions); and the impact of the functioning of the political economy on the rest of society, on environmental contamination, on changing perspectives toward the acquisition of material goods and services, and on explicit emphasis on the quality as opposed to the quantity of life. Concern has grown about the norma• tive implications which are attached to economic growth per se, the long-run significance attached to endless proliferation of consumer goods in the private sector at the expense of a variety of public goods, and so forth. In short, there is very little left of the competitive model that appears "good." It is not just that competition does not now exist. It is that there are very few of the characteristics of that model which we apparently still wish the economy to emulate even if it could. It is true that we in the United States have a stronger wish seemingly to keep down the role of government than do other market• oriented economies, but even in this country the role of government (state, local, and federal) is enormous. This could not have been more sharply underscored than when President Richard Nixon, the most relentlessly conservative of mod• em presidents to that time, adopted an incomes policy in 1971. It is clear, therefore, that today the norms are what the evolving political economy chooses to make them. This clearly involves a multiplicity of cur• rent concerns, including a notion of technological efficiency, changing ideas of equity, and increasing concern about the future and the impact of the allocational activities of the economy on the environment. It is clear that what we seek today is not a competitive economy, but Clarence Ayres's "reasonable society,"18 christened the Great Society by Lyndon Johnson, and sometimes called the humane society. Its name and characteristics may change, in fact, probably will change, but it is clear that the notion of effi• ciency does not refer only to mechanistic input-output relations, but encom• passes the degree to which the economy is accomplishing whatever we collectively wish it to achieve.

Institutionalism Reconsidered, Once More with Feeling

When the resurrection of institutionalism mentioned earlier is appreciated, I believe that what is customarily termed "economics" will be more appropriately viewed as "market mechanics." The area of traditional concern to institutional• ists will then be viewed as "economics" or, more properly, political economy. In my judgment, this transformation of our discipline is already under way. This association has long been concerned with defining institutionalism, as a perusal of the Journal of Economic Issues over the past decade substantiates. 34 BEYOND DISSENT

Institutionalism is a great deal more than dissent, and the essential principles of modem institutionalism are increasingly visible as a logical outgrowth of what earlier American institutionalists wrote. As the twelfth president of this association, it occurred to me that we have begun to have a body of scholarly thought in the form of previous presidential addresses. Against these one may assess modem evolutionary economics, for the addresses may well be regarded as the views the association's members collec• tively have been advancing. Our first president, Clarence Ayres, devoted his address to the notion of productivity in economics. The conventional use of the tenn---as when econo• mists say factors of production "earn" returns, or savings bonds "earn" interest• totally obscures what it is that furthers progress. For Ayres it is advances in technology which enhance productivity, not capital or labor per se, and it is our "ideological responsibility," he suggests, to differentiate the true source of pro• ductivity from the myth embedded in current institutions that it is the factors of production which provide creative potency. Viewing productivity accurately was part of the process of understanding the notion of progress. The economy's concern was movement toward the creative state or the creative society---a no• tion radically different from mere maximum material GNP---as our objective. The distinction was not only vintage Ayres, but also proved remarkably prescient in terms of many current concerns. Ayres truly set the Association for Evolution• ary Economics on an appropriate path. 19 Several other AFEE presidents have concerned themselves with closely re• lated themes. The second president, John S. Gambs, was concerned about where AFEE should go and suggested that its major effort should be directed at ''the attainment of a more harmonious relationship between slowly changing institu• tions and a dynamic technology and also toward a more harmonious relationship among changing institutions."2o He stressed our concern with valuation through his use of the term "harmonious" and suggested that the "values" which standard theory ceaselessly argues it does not have are nonetheless palpably real. At bottom they reflect "hedonistic utilitarianism." In contrast, institutionalists face squarely the fact that norms are inevitable, even in a positive science, and should therefore be stated explicitly. Gambs suggested that the institutionalist norm can be expressed in Albert Schweitzer's "reverence for life" or more narrowly by John B. Hobson's distinction between wealth and illth.21 Gambs, as did Ayres, was thus addressing the implications of the technology-institutions distinction and the implied valuational perspective which emerges from it. Our third president, Allan G. Gruchy, chose to underscore the institutionalist dissent from excessive preoccupation with the market, but through his remarks runs a consistent thread of concern with the ultimate wayan economy reaches value decisions. The economy must distinguish progress from growth. Efficiency as a characteristic of the relationship between inputs and outputs was for Gruchy excessively narrow, and he stressed that the economy must ask "efficiency for INSTITUTJONALlS~A BASIC PERSPECTIVE 35

what"? He differentiates the standard view of economics as a "science of effi• ciency" from the institutionalist view that, as Ayres once expressed it, "econom• ics is nothing ifit is not a science ofvalue."22 Ben Seligman was concerned with the historical origins of institutional preoc• cupations and traced some of them back to the ancient Greeks. Seligman re• flected the perspective of his predecessors by calling for a new paradigm which would reflect the crucial importance of the public sector, the costs of market• based economic growth in environmental contamination, and the need therefore for what he called a "social economics."23 This presumably is an economics which is capable of charting the evolving path to a creative society.24 Daniel Fusfeld concerned himself with one critical characteristic of the insti• tutional structure reflected in standard economics, but traditionally ignored, or at least played down. His concern was the impact of huge concentrations of corpo• rate economic power on the presumed normative acceptability of the im• plications of actual resource allocation emerging from the U.S. economy, in contrast to those of standard theory.2s Fusfeld thus stressed a theme with which economists, including some standard economists, have increasingly been con• cerned. J. K. Galbraith, one of the few institutionalists to become president of the American Economic Association, devoted his AEA presidential address to it.26 More recently, presidents of AFEE have chosen to focus on particular aspects of the economy from an institutionalist perspective. David Hamilton was con• cerned with the inadequacy of utility theory as a valuational basis for consump• tion theory, and he noted the difficulties encountered by the concept of consumer sovereignty in the modern world, even the world of standard price theory. Hamilton's view is Veblenian in origin, and he quotes Veblen's observation that the test to which consumer goods must be put is not only whether they are useful (rather than "wasteful"), but also whether they serve "directly to enhance human life on the whole ... the life process."27 Harry Trebing, as did Fusfeld, chose to concentrate on the power question, but specifically on public utility regulation.28 Although less broad, his perspec• tive was thoroughly in the tradition of institutionalism. Noting the early institutionalists' attitude toward monopoly, he analyzed the behavior of public utilities in the light of the regulations applied to them and came to several insightful conclusions, including his view that early institutionalists did not pay enough attention to market conduct. Another insight was that, in the task of improving the regulation of public utilities, ''the opportunities for the application of sophisticated institutional analysis as part of the process of reform are virtu• ally unlimited."29 Willard F. Mueller, in a closely related area, assessed the whole problem of antitrust enforcement from an institutionalist perspective.3o He recognized that in many very real ways ours has become a "planned economy"--directed toward our emerging vision of the Great Society. Antitrust so viewed, although of im• port, plays a different role than it does in the paradigm of a competitive market. 36 BEYOND DISSENT

The role of the antitrust laws is thus related directly to the amount of concen• trated economic power in the private sector and the extent of the public sector. This is a long-standing institutionalist view. If ultimately Mueller comes to re• gard antitrust as an essential complement to planning in the modem political economy it is because he shares the view of so many of his predecessors that the economy is part and parcel of the impetus to a reasonable society, or call it what you will. Our tenth president, Seymour Melman, as was Ayres, was concerned with productivity. Differentiating a ceremonial or institutional view of productivity from a technological view, Melman focused on the effect of militarism on our thinking with regard to economic decisions. He concluded that if productivity is viewed from what he calls "a value-theoretic approach of the Veblenian sort," then the measure of "productivity" and "product" "is defined by the essential life-serving attributes of serviceability to consumption and to further means of production."31 To be life serving is, I should judge, Melman's way of distin• guishing mere growth from progress, a fundamental and long-standing institu• tionalist distinction. Finally, Wallace Peterson chose to consider the current reappraisal of Keynes• ian economics in the light of institutionalism and to suggest that they meet via the relationship between ''the unequal distribution of power, income, and wealth in our society and the relationship of this to chronic inflation."32

Contemporary Institutionalism: Some Consensus Principles

Gruchy's distinction between institutionalism and neoinstitutionalism may be superfluous except as a means of differentiating the current crop of institutional• ists from their ideological parents. I have devoted some time to summarizing the views of past AFEE presidents because to me they demonstrate an extraordinary consensus about fundamentals in the implications for a wide variety of current societal dilemmas.33 In my judgment, therefore, it is no longer necessary or appropriate to say that institutionalists as a group can be identified only by what they are against. To say only that they dissent from standard price theory is neither accurate, very reveal• ing, nor particularly interesting. There are critical principles which distinguish institutionalism from other ways of examining economic problems. They emerge from the views of Veblen, Commons, and Mitchell, as well as from the work of subsequent generations, including current evolutionary economists. While we may differ in a number of particulars, we can, I think, agree on at least nine basic principles. First, institutionalism distinguishes sharply between the universal determi• nants ofwhat is economically possible and the culturally limited determinants of what in fact we choose actually to do. Veblen called this a distinction between INSTITUTIONALISM-A BASIC PERSPECTIVE 37

the industrial and pecuniary; Ayres, between the technological and the ceremo• nial or institutional. Ayres struggled with this distinction and its importance all his professional life. Whether he finally elucidated it adequately each person must decide. The process of technological development, broadly construed, mayor may not strike everyone as a satisfactory source from which to elicit a meaningful theory of value. For Ayres it did, and for him it served sharply to distinguish values and valuation in the economy, on the one hand, from prices and price setting in markets, on the other. Therefore, the second principle that institutionalists agree on is that the em• phasis in economics should be on the economy itself, as a sociopolitical, cultur• ally conditioned entity from which society's economic choices emerge. Unmistakably, this is not a process coterminous with the market, because what emerges in markets is frequently considered controversial, and it suggests cor• rectly that we have a standard of value-a dynamically conditioned standard, against which we judge the allocational results emanating from markets. While expressing the matter this way clearly includes notions about the role of the public as well as the private sector, it encompasses more. It is not entirely accurate to argue that emphasis on the economy means only that we remove parts of the allocation process from private markets and the rule of dollar votes and accomplish the remaining allocation through a politico-economic process involving taxation, legislation, and governmental allocation. This would be like saying that the neoclassical concept of externalities fully covered current con• cerns about extensive environmental damage in the course of economic activity. To focus on the economy is to ask how the economy makes choices, what emergent values economic choices reflect, how the choices are conditioned and shaped, in what direction the economy appears to be heading, and with what consequences. These are not questions which come easily to standard Western economists, certainly not American ones, who are taught to distinguish sharply between normative and positive and to make enough assumptions, ultimately to the point of emasculating the discipline, so that economic analysis can proceed deductively rather than inductively to precise conclusions. The third principle follows from this distinction between the economy and the market: Institutionalists give a very different meaning to the word value than do standard economists, who more often than not simply equate value with price. Ayres saw this clearly when he called economics a "science of values,"34 a phrase which many mainstream economists simply cannot comprehend. For them, the terms price theory and value theory are simply different words for the same thing. Even Joan Robinson, that remarkable economist who has made some of the most significant contributions to standard economics, but who has lived and grown as well to see many of the inadequacies of neoclassical theory, saw that price and value were not the same, although her view of value is not that of Ayres or other institutionalists.35 38 BEYOND DISSENT

Fourth, to focus on the economy rather than the market is to give a radically different meaning also to both the concept of "productivity" and the related concept of "efficiency. "36 Standard economics treats the notion of efficiency as though the economy were a relatively brainless input-output mechanism, with increased output per constant inputs a measure of greater efficiency in produc• tion and hence an increase in productivity. But as we have been at pains to suggest, efficiency and productivity are rather more complicated if they must be related to the path along which economic activity moves through time, and if they must be related to emergent choice, broadly viewed, rather than mechanistically and myopically simply to whatever it is that happens to emerge as the allocational result of market price formation. There are current controver• sies, for example, about the appropriate way to price natural gas, about our strategy with respect to both domestic and imported petroleum, about sound public policy with respect to automobile size and safety, as well as highway construction and financing. The environmental and resource conservation im• plications of all of these possibilities as well as urban and interurban public transportation development in general constitute one critical facet of current public economic policy debate. Whatever position one takes, it is clear that what is economically efficient is not simply what is the most immediately productive means of harnessing energy or applying it to transportation problems. Nor is it entirely clear that what one "ought" to do can be separated from the "facts," that is, what "is." The line between normative and positive in the standard economic perspective is fuzzy precisely because it is a superb example of Schultze's notion that we articulate ends as we consider means. The economy is indeed a valuating mechanism, not the knee-jerk "if-then" mechanism that standard theorists never tire of telling us about. The process of articulating ends as we consider means is very close to the notion of a means-end continuum, which idea Ayres took from John Dewey and found so useful a perspective for viewing the economy. It suggests a fifth princi• ple: Institutionalism is and always has been essentially dynamic. This is, of course, why institutionalists have looked to the biological sciences and to anthro• pology for their comparisons rather than to the physical sciences, which have held so much allure for many mainstream economists. Growth and progress, conflict and its resolution through change, these are the processes that interest institutionalists, not mechanistic equilibrium. It may be that Ayres exaggerated the influence of equilibrium on the thinking of mainstream economics,37 but he surely did not err in distinguishing the economy as a dynamic instrument for evolving choice from the mechanistic allocative market. Precisely because institutionalists have always regarded the economy as an evolving culturally conditioned entity, it is often acknowledged parenthetically that institutionalism has had its greatest impact in the field of development economics.38 The reasons are clear. First, in the process of economic develop• ment, problems of valuation are glaringly apparent; the role of the economy in INSTITUTIONALISM-A BASIC PERSPECTIVE 39

developing and transmitting evolving societal values cannot be blinked away. Second, and equally important, is Veblen's point that it is always easier to gain an accurate perspective on a distant economy, distinguishing the dynamics of a broadly conceived technology from the statics of the institutional structure, than is the case closer to home, where we tum myopic. Development economics is, of course, not the only field to which the pro• cessual approach (to use Gruchy's term) leads institutionalism. It led Wesley Clair Mitchell to concern himself with business cycles long before mainstream economics developed an interest in what is now called "economic dynamics." Mitchell's original book Business Cycles was published in 1913,39 and it is clear that his impact on methodology, perspective, and approach is very much in evidence in economic dynamics to this day. The methodology and approach of institutionalism lead us to regard the mar• ket as only a part of the economy rather than coterminous with it. It follows that the standards by which we judge economic performance and its impact on both the polity and the culture of the society do not come from the market but from the economy itself. The complexities of the modem industrialized economy have moved far beyond the confines of the competitive model of classical theory. A sixth principle, therefore, is that institutionalists recognize that the results emerging from markets are judged against the norms of the economy, not vice versa. We explicitly reject the frequently asserted claim that the competitive model provides a norm or a benchmark against which to judge the results emerg• ing "in the real world." One of the major reasons why what happens in the economy is so different from what happens in competitive markets involves a seventh principle: One of the preeminent conditioning factors in the modern political economy is concen• trated economic power. There is scarcely an assumption or an implication of conventional economic theory which is not altered when the realities of eco• nomic power are incorporated in the analysis. The "sovereign" consumer is manipulated so that instead of producing in response to demand, firms create demands according to their own calculations.40 The impact of concentration on the operation of firms is, of course, discussed in the imperfect competition theory of standard economics. But that theory has never been regarded as very satisfac• tory, even by standard theorists who dislike imprecise results.41 More important, however, the theory of imperfect competition scarcely deals at all-let alone adequately-with the dangers to a democratic political economy posed by con• centrated economic power. But the problem has been discussed by many institu• tionalists, including R. A. Brady, Galbraith, Ben Lewis, and others.42 Ben Lewis's position was well stated in 1949 when he underscored the criti• cal difference concentrated power makes between the market system of competi• tive theory and that of the mixed U.S. economy. Recalling J. M. Clark's widely used concept of "workable competition," Lewis wrote: "[If the economy is judged workably competitive, have the acceptable results] been compelled by the 40 BEYOND DISSENT

system-by competition-or do they represent simply the dispensations of man• agements which, with a wide latitude of policy choices at their disposal, hap• pened for the moment to be benevolent or 'smart'?''''3 It is "workability" only by the sufferance of big corporations which in the end holds the potential for disaster in a system characterized by concentrated eco• nomic power. Clark's notion of workable competition never did deal adequately with these critical implications. Conventional economists traditionally simply define power out of their area of concern. The relationships between concen• trated economic power and the flow of information, control of communication media, the integrity of the political process, and so forth are tangled indeed. Brady, Galbraith, and even Dwight D. Eisenhower in his celebrated farewell warn• ing concerning the military-industrial complex are among those who have acknowl• edged this. These implications have always been a concern of institutionalists. The eighth principle on which I believe institutionalists can agree is that the appropriate framework from which to regard the economy through time involves progress rather than growth. Progress suggests movement in chosen directions as opposed to mere quantitative increase over time.44 Concern about where the economy is headed, rather than mindless concentration on getting bigger, is increasingly being expressed. The issue is prominently associated, of course, with the name ofE. J. Mishan, but it also has been explicitly discussed by James Tobin and William Nordhaus, as well as others.4s In fact, the Nordhaus-Tobin suggestion that GNP be supplemented by a qualitative "measure of economic welfare" (MEW) has now been enshrined (and renamed) in Samuelson's princi• ples text as net economic welfare (NEW).46 Whatever the limitations of MEW, it carries concern about the disamenities of growth considerably beyond the "exter• nalities" customarily mentioned in passing in price theory courses. But it still fails to encompass explicitly the valuational process, that is, concern about how the economy chooses to utilize resources in one direction rather than another. Institutionalists would argue that economic theory needs to take more explicitly into account the process of choosing directions as well as the speed with which the chosen paths are traversed. The path-choosing process is the heart of ongoing economic activity, as opposed to mere market activity. A final principle upon which institutionalists can agree involves the emerging goals of the economy. Ayres called the goal "the reasonable society," others have called it just or humane. The name is unimportant. What matters is to recognize that the goal is not part of a teleological prQcess, but of an ongoing one. We do, indeed, articulate ends as we articulate means. And we can comprehend the significance of the economy through time only by recognizing clearly that it is far more than the allocational record of the market over a period of years. It is these principles which appear to emerge from a review of what institu• tionalists from Veblen to the present have been saying. The significance of these principles is increasingly recognized, even by economists who do not regard themselves as institutionalists. INSTITUT/oNALIS~A BASIC PERSPECTIVE 41

Boulding's Economics: A Case in Point

It is particularly fitting that the 1977 Clarence Ayres Memorial Session was devoted to the economics of Kenneth Boulding; he, perhaps more than any other economist, epitomizes the changes which have been developing in mainstream economics. Although he is a member of AFEE, Boulding has never claimed to be an institutionalist, and indeed he recently stated that prior to 1956 he "had been fairly rude about institutionalists."47 In 1956, however, upon rereading the work of a number of institutionalists, including Commons and Ayres, Boulding wrote that he "had greatly underestimated their contribution.'>48 Whether an institutionalist or not, Boulding has long been known as one of our most sensitive and ethically oriented economists. As the leading spirit of the Association for the Study of the Grants Economy, as the author of the Economy of Love and Fear, and so forth, he has displayed concern about many of the matters we discuss in AFEE and which most mainstream economists eschew. But if one looks, for example, at the revised edition of Boulding's 1948 Eco• nomic Analysis, one finds precious little to suggest his interest in anything out• side the confines of the neoclassical economics pasture. Early on he declares that ''the economist studies choices; he does not judge them.'>49 Here is a separation of the normative from the positive with which Lionel Robbins would be comfortable. In Economic Analysis Boulding discourses on all the conventional subjects of price theory and employment theory. One finds discussions of competitive and im• perfectly competitive markets complete with all the trimmings-iso-product curves, the "boundary of in differences," the marginal revenue of utility, production reve• nue contours, and so on. This is not the economics principles text of a man concerned passionately with allocation outside the market; with the responsibili• ties of the public sector; with the impact of economic power on the allocative and other operations of the economy; with the economics of discrimination, pollution, and so forth. Nonetheless, the Boulding under consideration in the Ayres Memorial Session is undoubtedly an economist who, in his capacity as an economist-not Boulding qua citizen, or Boulding qua Quaker, or Boulding qua anything else---is very much concerned with all these matters.

Conclusion

Increasingly, all of mainstream economics is perforce required by the ongoing logic of the discipline to concern itself with just such questions as those Bould• ing confronts. Institutionalism's traditional concerns are finding a wider audi• ence as their applicability to diverse areas in economics is recognized. Several past AFEE presidents have shown the close affinity of the institution• alist perspective to problems of microeconomic theory and industrial organiza• tion. Last year's president demonstrated the essential applicability of that perspective to macroeconomics and macropolicy. It is not difficult similarly to 42 BEYOND DISSENT

delineate the relationship between institutionalism and labor economics, interna• tional trade, business cycles and stabilization policy, income distribution, public finance, consumer economics, development economics, and welfare economics. In short, institutionalism today offers a consistent coherent position, which moves it far beyond "mere dissent." More important, it is being heard by ever more economists. The march of events (far more, alas, than our own eloquence) is forcing our fellow economists out of their comfortable ceteris paribus world. The soothing self-satisfaction of the post-World War II economist, happy with his rigor, his quantification, and his elegant models, is being replaced by the realization of a growing number of economists that even if this is the Age of the Economist, we are not doing terribly well in solving economic problems. And, whatever else, that is the bottom line. In short, economists in ever greater num• bers are being forced to concern themselves with precisely the sort of questions institutionalists have always insisted economics could not escape.

Institutionalism and the Future ofEconomics

Does this mean that institutionalism is passe? Not at all. What we have before us is a fine example of the instrumental push for change plus institutional resistance of precisely the sort that Ayres always emphasized. Because the institutional structure within which economics currently operates has been forced to incorpo• rate much of what institutionalists have long said does not mean that the perspec• tive of institutionalism has carried the day. It is far from clear that economics is ready to accept the basic valuational premises from which institutionalism be• gins. If the marketplace of ideas has proved institutionalism perceptive and pre• scient in some areas, there is no real likelihood that anyone will give us carte blanche to remake establishment economics; we shall probably have to fight as hard for the next round of changes as we have always fought. Institutionalists do not need to suffer from a superiority complex, even if in some areas we may begin to feel vindicated. We can have confidence that our views will not be found wanting if given a fair hearing long enough. But in trying to convince others, our work is cut out for us, just as it has always been.

A Personal Postscript

It is difficult for me to realize that it is thirty years since I sat enraptured in Clarence Ayres's classroom. Ayres always treated his students as peers. This meant we were all engaged together in a great adventure-trying to straighten out the chaos which he taught us modem economics had become. For Ayres there was no conflict between teaching and research because the quest for under• standing was all of a piece. Ayres told us that there were five then current books attempting to explain institutionalism: Radhakamal Mukerjee's The Institutional Theory ofEconomics, INSTITUT/oNALlS~A BASIC PERSPECTIVE 43

Commons's Institutional Economics, Allan Gruchy's Modern Economic Thought, John S. Gambs's Beyond Supply and Demand, and his own Theory of Economic Progress. We somehow got the feeling in Austin in the 1940s that we were the only students in the country who had latched onto these books, and that institutionalism, anticipating Samuelson's phrase, had indeed just about "with• ered away" except for Ayres and his students. What do I find today? I find myself the twelfth president of the Association for Evolutionary Economics (a Walter Mitty dream itself from the perspective of that seventeen-year-old Texas student). But of my predecessors, after Ayres, only one was from our Texas cocoon (although another Texan looks hard over my shoulder toward next year's presidency). The other AFEE presidents, as do our members, have come from universities in Virginia, New York, Wisconsin, Tennessee, Nebraska--in short, from all over the country. It is true, as I have been at pains here to spell out, that institutionalists still have their work cut out for them. Weare, for example, almost the only one of the "allied" social sciences with which the American Economic Association does not annually hold at least one joint session. Perhaps it is asking too much. Priests rarely long to lie down with the infidels. But as I have also tried to suggest, the ideas which institutionalism has long espoused are receiving a wider and wider hearing, even if institutionalism rarely is given much credit. As I was writing these remarks, Clarence Ayres's old group of five books explaining institutionalism was once again in front of me, and I discovered rummaging through my files that I have here been wrestling with many of the very same problems I wrestled with in Ayres's classes so long ago. I hope I have wrestled more successfully this time. There is a certain reassurance in realizing how many economists today regard our discipline from the perspective from which I was originally introduced to it and which I have always found so conge• nial. I can still remember the horror with which I discovered in my graduate school days at Berkeley that there were many economists who regarded Sir John Hicks's Value and Capital as what economics really was all about, and how upset I was when asked to regard E. H. Chamberlin's Monopolistic Competition as a giant step forward. Now here we an.~.far from Texas, and in far larger numbers. We know that Hicks was not at all concerned about value and capital, but only about price and capital. I am back where I began. Plus ~a change, plus c 'est la meme chose. What would Clarence Ayres have to say about that?

Notes

1. Walter W. Heller, "What's Right with Economics?" American Economic Review 65 (March 1975): 1-26. 2. Clarence E. Ayres, The Theory ofEconomic Progress (Chapel Hill: University of North Carolina Press, 1944), p. 155. 44 BEYOND DISSENT

3. Paul Samuelson, Economics, 10th ed. (New York: McGraw-Hill, 1976), p. 847. This view is a long-standing assessment by Samuelson. In 1963 he wrote ofinstitu• tionalism: "For the most part this school has not succeeded in reproducing itself and today seems to be almost extinct." "Economic Thought and the New Industrialism," in Patterns ofAmerican Thought, edited by A. M. Schlesinger and Morton White (Boston: Houghton Mifflin, 1963); reprinted in Collected Scientific Papers of Paul Samuelson, vol. 2, pp. 1729-47. 4. In 1970 at the Fiftieth Anniversary Colloquium of the National Bureau of Eco• nomic Research, in commenting on the initial work of lise Mintz on growth cycles, he wrote: "Now that the National Bureau is fifty years old it has worked itself out of one of its first jobs, namely the business cycle. I don't know when the American Cancer Society was founded, but by similar reasoning fifty years after that date some optimist could hope to cross cancer off his list. The Bureau was thus in danger of becoming just a museum of fossils; but nobody likes to work himself out of a job, so you naturally redefine the field of study." Paul Samuelson in The Business Cycle Today, ed. by Victor Zarnowitz, Fiftieth Anniversary Colloquium, vol. I (New York: Columbia University Press, 1972), p. 167. 5. Samuelson, Economics, 10th ed., p. 849. 6. Lee E. Preston, "Corporation and Society: The Search for a Paradigm," Journal of Economic Literature 13 (June 1975): 437-38. 7. Morris Copeland, "Institutionalism and Welfare Economics," Presidential Ad• dress, American Economic Review 48 (March 1958): 1-17. 8. Allan G. Gruchy, Contemporary Economic Thought (Clifton, NJ: Augustus M. Kelley, 1972). Chapters in Gruchy's recent book are devoted to each of the first three. However, in his article in the Encyclopedia of the Social Sciences on the institutional school Gruchy includes Leon Keyserling in this group (see vol. 4, p. 467). 9. For one recent example of the latter, see the views of one of Lionel Robbins's proteges, David Seckler, who writes: "The place of institutionalism in the history of economic thought is a matter of some perplexity. That the term itself served as a war cry to quite a number of muddled and slightly disturbed spirits is clear enough. At the time of its publication in the twenties, the volume entitled The Trend in Economics (edited by Rexford Guy Tugwell), which, so far as it had any unity at all, was a sort of manifesto of dissidence, had an enormous reclame until it was quietly and courteously deflated by a masterly essay by Allyn Young. Nowadays I doubt whether five percent of the youn• ger generation of economists have even heard of it. ... As for any influence or progress on the lines indicated, it must be admitted that it has been negligible." David Seckler, Thorstein Veblen and the Institutionalists (Boulder: Colorado Associated University Press, 1975), p. ix. 10. One recent example of the desperation with which mainstream economics faces the task of making economic theory more realistic without sacrificing what is regarded as rigor is contained in a recent review article of current work in the theory of the firm. "The crucial problem of finding a substitute process for maximization and maintaining rigor is not easily solved." Richard M. Cyert and Charles L. Hedrick, "Theoty of the Firm: Past, Present, and Future: An Interpretation," Journal ofEconomic Literature 10 (June 1972): 407. II. A typical statement of what "rigorous economic thinking" involves, this time in a book on input-output analysis, is the following: "The analysis in this book has been concerned only with the implications of specifying a national objective such as maximiz• ing production or consumption. Before one can examine how such objectives might in fact be reached, it is first necessary to describe the actual operation of the economy in terms of a set of lagged behavior functions in market prices." Burgess Cameron, Input-Output Analysis and Resource Allocation (London: Cambridge University Press, 1968), pp. 94-95. INSTITUTJONAL/SM-A BASIC PERSPECTIVE 45

12. Campbell R McConnell, Economics, 6th ed. (New York: McGraw-Hili, 1975), p. 94. 13. Stressing this dichotomy is, of course, a primary purpose of an article I wrote several years ago, "Economics: Allocation of Valuation?" Journal of Economic Issues 8 (December 1974): 785-811. 14. Ayres, Theory ofEconomic Progress, p. 224. 15. Ibid., p. 225. 16. Ibid., p. 248. 17. Charles L. Schultze, "The Public Use of Private Interest," Journal of Government and Society, reprinted in Regulation, the American Enterprise Institute (September/Octo• ber 1977): 14. 18. Clarence E. Ayres, Toward a Reasonable SOCiety, The Values ofIndustrial CiVili• zation (Austin: University of Texas Press, 1961). 19. Clarence E. Ayres, "Ideological Responsibility," Journal of Economic Issues 1 (June 1967): 3-11. 20. John S. Gambs, "What Next for the Association for Evolutionary Economics?" Journal ofEconomic Issues 2 (March 1968): 69. 21. Ibid.,p. 71. 22. Allan G. Gruchy, "Neoinstitutionalism and the Economics of Dissent," Journal of Economic Issues 3 (March 1969): 11. The quotation from Ayres is from Theory ofeco• nomic Progress, p. 208. 23. Ben B. Seligman, "Philosophic Perspectives in Economic Thought," Journal of EconomicJssues 5 (March 1971): 21. 24. Ayres would surely disagree with the characterization of technology as "malign," although he would accept much of the rest. Ayres was a thoroughgoing optimist, but there is reason to wonder whether he would still be able today to adhere to that comforting perspective. In a remarkable passage he summarized many of the difficulties with the paradigm of standard economics: "A new paradigm must be constructed because pure competition no longer describes the realities of the market, private capital accumulation has lost its religious imperative; resources and factors are less mobile; technology, a dominant element in change, is often malign; scarcity is no longer a prod to achievement, having been displaced for many by at least a modest affluence, the Puritan ethic does not convince anyone; natural law is now a matter of educated superstition; and primarily because the public sector now conditions much of our daily lives" (ibid., pp. 19-20). 25. Daniel Fusfeld, "The Role of the Corporate State in American Power," Journal of Economic Issues 6 (March 1972): 1-22. 26. John Kenneth Galbraith, "Power and the Useful Economist," American Economic Review 63 (March 1973): 1-11. 27. David Hamilton, "What Has Evolutionary Economics to Contribute to the Theory of Consumption?" Journal ofEconomic Issues 7 (June 1973): 197-207. 28. Harry M. Trebing, "Realism and Relevance in Public Utility Regulations," Jour• nal ofEconomic Issues 8 (June 1974): 209-33. 29. Ibid., p. 229. 30. Willard F. Mueller, "Antitrust in a Planned Economy: An Anachronism or an Essential Complement?" Journal ofEconomic Issues 9 (June 1975): 159-79. 31. Seymour Melman, "Decision Making and Productivity as Economic Variables," Journal ofEconomic Issues 10 (June 1976): 236. 32. Wallace Peterson, "Institutionalism, Keynes, and the Real World," Journal of Economic Issues 11 (June 1977): 218. These constitute the tangency between Keynesian• ism, as applicable to the modem world, and institutionalism. As such it constitutes a major effort to relate institutionalism to conventional macroeconomics, in contrast to the more frequent efforts to relate it to microeconomics. 46 BEYOND DISSENT

33. In saying this I am not unaware of some inconsistencies in what institutionalists have written. Thus I have already commented on what Ayres might have thought of Seligman's characterization of technology today as often "malign." Similarly, Melman dichotomizes the economics of Smith, Marx, and Keynes from that of Veblen ("Decision Making," p. 235), whereas Peterson finds much in Keynes as currently under appraisal to be compatible with institutionalism. Peterson does distinguish what he calls the "radical reformist side" of Keynes-presumably in contrast to another Keynes-and it is the former on which Peterson focuses ("Institutionalism," p. 218). I regard these differences as less than fundamental on the ground that extended discussion between the adherents of these views would reduce, if not eliminate, what may well be semantic differences. There are no doubt other differences on which I have not commented, but I know of none which could not be viewed as I have viewed these two. 34. Ayres, Theory of Economic Progress, pp. 84-85. 35. She has written of value: "It does not mean market prices, which vary from time to time, under the influence of casual accidents; nor is it just an historical average of actual prices. Indeed, it is not simply a price; it is something which will explain how prices come to be what they are. What is it? Where shall we find it? Like all metaphysical concepts, when you try to pin it down it turns out to be just a word." Joan Robinson, Economic Philosophy (Chicago: Aldine, 1962), p. 26. Institutionalists would disagree that it is "only a word"-the very word valuating describes precisely what the major function of an economy is. Markets determine price, whereas economies value, and the distinction is of incalculable importance. 36. Ayres, "Ideological Responsibility." 37. I once myself commented on this aspect of Ayres's work at length. I now feel that I exaggerated the importance of Ayres's exaggeration! See Philip A. Klein, "A Critique of Contemporary Institutionalism," Quarterly Review of Economics and Business 1 (May 1961): 77-91. In that article I wrote, for example: "As a result of their continuing myopia conceming present-day price theory, institutionalists can argue that economists are unduly hypnotized by price, by clearing the market, and by attaining equilibrium" (p. 84). What I had in mind was that in theories of imperfect competition, for example, oligopoly theory as discussed in Wil• liam Fellner's Competition among the Few (New York: Knopf, 1949), equilibrium surely plays a somewhat different role than it does in competitive theory. The normative implications are surely different. But what I failed to see then was that whether it was competitive or imperfectly competitive theory with which mainstream economists were concerned, they were still fixated on prices and the market rather than on values and the economy. The critical economic questions were still largely defined away. This Ayres always saw. 38. See my article, "An Institutionalist View of Development Economics," Journal of Economic Issues 11 (December 1977): 785-807, for a discussion of this point. Suffice it here to note that R. A. Gordon, for example, says of the impact of evolutionary economics on development economics: "Here economics has truly 'gone institutional.''' R. A. Gordon, "Institutional Elements in Contemporary Economics," in Institutional Economics: Veblen, Commons, and Mitchell Reconsidered (Berkeley: University of California Press, 1963). 39. Mitchell's list of those having devoted attention to instability after his original work in this field is a veritable Who's Who of mainstream was well as heterodox econo• mists-Albert Aftalion, Jean Lescure, Mentor Bouniatian, S. A. Pervushin, Gustav Cassel, J. M. Clark, William T. Foster and Waddill Catchings, Alvin Hansen, H. L. Moore, Ralph Hawtrey, John A. Hobson, A. C. Pigou, Dennis Robertson, Emil Lederer, Joseph Schumpeter, and Arthur Spiethoff. See Wesley Clair Mitchell, Business Cycles: The Prob• lem and Its Setting (New York: National Bureau of Economic Research, 1927), p. ix. 40. I attempted some years ago to consider the implications of dropping the assump• tion of fixed tastes and incorporating taste manipUlation in a conventional model. The INSTITUTIONALlSM-A BASIC PERSPECTIVE 47 normative implications are assuredly different from what otherwise they would be. See "Demand Theory and the Economist's Propensity to Assume," Journal of Economic Issues 7 (June 1973): 209-39. 41. See, for example, the recent review article on the theory of the firm by R. M. Cyert and C. L. Hedrick; at the end of it they declare: "On the basis of our brief survey we conclude that there is growing uneasiness with the neoclassical approach ... but that the above rationale is still held by most economists. This position plus the other virtues of mathematical models (prestige as well as rigor) maintain the importance of the role of maximization .... The real world still escapes our models." Cyert and Hedrick, "Theory ofthe Firm," p. 409. 42. See, for example, R. A. Brady, Business as a System of Power (New York: Columbia University Press, 1943) for a discussion on a worldwide scale of the dangers to democracy inherent in big business. Galbraith's views are too well known to require special reference. For reference to Ben Lewis, see note 43. 43. Ben Lewis, "Symposium on the Antitrust Laws," in American Economic Re• view, quoted in Walter Adams, "The 'Rule of Reason': Workable Competition or Workable Monopoly?" in Antitrust Policy: Economics and Law, ed. Sylvester E. Berki (Boston: D. C. Heath, 1966), p. 49. 44. I once suggested that "the customary emphasis in economic dynamics is on growth rather than progress for precisely the same reasons that the traditional empha• sis in statics is on allocation rather than valuation." Klein, "Economics Allocation or Valuation?", p. 801. 45. See, for example, E. J. Mishan, The Costs of Economic Growth (New York: Frederick A. Praeger, 1967); and William Nordhaus and James Tobin, "Is Growth Obso• lete?" in Economic Growth, National Bureau of Economic Research, Fiftieth Anniversary Colloquium, vol. 5 (New York: Columbia University Press, 1972), pp. 1-80. 46. See Samuelson, Economics, 10th ed., p. 195. 47. Kenneth Boulding in a review symposium of William Breit and William Culbert• son, Jr., Science and Ceremony, Journal ofEconomic Issues 11 (September 1977): 657. 48. Ibid., p. 657. 49. Kenneth Boulding, Economic Analysis, rev. ed. (New York: Harper and Brothers, 1948), p. 10. Dissent from Orthodox Theory

3 Of Paradigms and Politics

Although Nassau Senior and John Stuart Mill earlier laid the groundwork, by com• mon consensus the current practice in mainstream economics of distinguishing sharply between positive and nonnative economics was introduced by John Neville Keynes in 1890. He declared that "a positive science may be defined as a body of systematized knowledge concerning what is; a nonnative or regulative science as a body of systematized knowledge relating to criteria of what ought to be" (Keynes 1890, p. 34). He argued further that the objective of a positive science was to establish uniformities, while a nonnative science was preoccupied with the ideal. To be sure, Keynes went on to note that the German Historical School, which has often been referred to as a forerunner of American institutionalism, had "the conception of political economy as an ethical, realistic, and inductive science" (Keynes 1890, p. 20), but having noted the existence of that viewpoint Keynes tells us that in the remainder of his book he would be concerned to show that one can indeed study economics as a "positive science"--that it was possible to consider economic "laws" and their ''uniformities'' without "passing ethical judgments" (Keynes 1890, p. 37). Setting a pattern that others have followed, Keynes-having distinguished the nonna• tive from the positive-proceeds to ignore the normative for the remainder of his book. It is almost impossible to overemphasize the completeness of the victory of this perspective on the subsequent mainstream consideration of scope and method in economic theory. In England the J. N. Keynes tradition was espoused principally and most influentially by Lionel Robbins. Robbins took over the Keynesian distinction between "ought" and "is" as differentiating normative from positive economics, and concentrated on developing certain methodological questions that derived from his definition of economics. That definition ("Economics is the science which studies

Reprinted by permission of the publisher from Journal ofEconomic Issues, vol. 22, no. 2 (June), pp. 435-41. Copyright 1988 by Journal of Economic Issues. Authorization #: 557727.

48 INSTITUTIONALISM-A BASIC PERSPECTIVE 49

human behaviour as a relationship between ends and scarce means which have alternative uses") is the quintessential mainstream definition of the discipline to this day (Robbins 1946, p. 16). In the Preface to the second edition of his book, Robbins reacted to the criticism to the effect that in distinguishing economics from "moral philosophy" he was advocating "abstention of the economist from all interest or activity outside his own subject" (Robbins 1946, p. viii). This, of course, gives the game away. For Robbins, any time an economist expresses value-oriented views he is "outside economics." The bedrock institutionalist point is that normative economics is most emphatically "inside economics." The traditional Robbins position is taken most prominently in the United States by Milton Friedman. "Positive economics is in principle independent of any particu• lar ethical position or normative judgments" (Friedman 1953, p. 4). The bulk of his well-known essay ''The Methodology of Positive Economics," is devoted to devel• oping the notion that the objective of any positive economics must be to improve our ability to forecast accurately. Friedman dismisses the criticism that neoclassical theory is unrealistic by insisting that lack of realism is not a problem provided that the theory so developed enables us accurately to predict human behavior. In short, there is virtually no disagreement or disarray among mainstream economists concerning their value orientation: the distinction between positive and normative economics is in principle sharp, and positive economics can be a deductive discipline whose progress can be charted by the ability to predict events accurately. Ethical questions are left to normative economics, an area presumably best approached inductively, beginning with individual values. How• ever, mainstream economists who make this sharp distinction customarily have virtually nothing to say about normative economics. "Values" are nothing for scientific economists to fret over.

Mainstream Qualifications

Even for "pure positive economics," values seem to be difficult to keep totally banished. Again Keynes set the tone by suggesting that "economic activities ... can [not] be made independent of moral laws" (Keynes 1890, p. 41). Keynes simply insisted that first the economist engages in value-free positive analysis and then he applies the moral laws. But he says little of how the economist as an economist applies the moral laws, or where they come from, or whether in fact the economists have anything to do with evolving moral laws (if indeed they see them as evolving). For Keynes, again setting the mainstream pattern, economic science and "ideals" are totally separable. Similarly, Ludwig von Mises noted that economic discussions are peppered with words like "better and worse." His perspective was that these words "in• volve judgments of value accepted by all mankind, or certainly by almost all men" (Mises 1981, p. 35). Despite this, Mises's economists must carefully sepa• rate analysis from "value judgments." 50 BEYOND DISSENT

Friedman, on the other hand, takes his cue from Keynes. After distinguishing normative from positive economics, he devotes himself exclusively to develop• ing his views on the correct methodology for positive economics to pursue.

Science and Normative Assumption

It is not surprising, therefore, that there is virtually no discussion in mainstream literature of the correct methodology, let alone the appropriate development of normative economics. If indeed it is a branch of economics, one would think that economists should have something to do with its development and its role. Customarily, mainstream discussions simply use "normative" as a term defining the opposite ofthe kind of dispassionate research in which economists engage. It is used to contrast economists "making value judgments" from economists who are "doing scientific work," pursuing the scientific method, and enabling non• economists (or economists playing a non-economist's role) to make more in• formed value judgments about current economic policy options. Friedman does comment that economists have special difficulty keeping their research objective because it is so important to everyday life. This importance "impedes objectivity and promotes confusion between scientific analysis and normative judgment" (Friedman 1953, p. 40). It is useful to compare this posi• tion with that taken by the Association of Los Alamos Physicists in 1945. Phys• ics, after all, is the field that is most admired methodologically by mainstream economists. It is precise, experiments are controlled, and it gives a prominent role to equilibrium. By now it ought not to be necessary to remind anyone of the profound impact the development of the atomic bomb in particular and the burgeoning prospects for nuclear warfare in general had on nuclear scientists. The Los Alamos physicists formed an organization that adopted a statement reading in part:

The objective of this organization is to promote the attainment and use of scientific and technological advances in the best interests of humanity. The members of the organization recognize that scientists, by virtue of their special knowledge, have, in certain spheres, special political and social responsibilities beyond their obligations as individuals (Quoted in Strickland 1968, p. 38).

Is this not precisely the point institutionalists have always made? Economists "by virtue of their special knowledge" have responsibilities in public policy debates about economic questions that other people do not have. This is not the same thing as being partisan or abandoning the scientific method. It is about recognizing that the status quo is itself fraught with all sorts of value judgments that are reflected both in current resource allocation and in how over time the dynamics of resource allocation change. Economists must ultimately focus on the process of change and dynamic valuation. INSTITUTIONALISM-A BASIC PERSPECTIVE 51

Let us put this point in terms to which every mainstream economist can relate. It is not sufficient for an economist to pronounce "if ... then" on public policy questions. A fundamental reason is that the first task facing the mainstream economist (as indeed all economists) is a choice concerning which question or questions to pronounce on? Inflation has attracted the attention of virtually all macro-economists. Unemployment, too, has attracted attention, although most recently it has conveniently been defined away as "natural." (Economists know about the necessity of making choices. They have thus tried to absolve them• selves of the necessity to make a nasty choice here between reducing inflation and reducing unemployment.) The critical factor of course is that what interests economists has not traditionally been happenstance or inexplicable. It has been economic problems as defined by the value system of the times, although the mainstream often tries to obscure this orientation.

Passion and the Status Quo

What economic analysis indeed reflects is the attitude of the analyst toward the status quo, and that in tum suggests that value systems are influenced by per• sonal experience. Advocates of diverse kinds of intervention in the economy have little in common perhaps beyond the conviction that the current societal arrangements for the economy are unacceptable. Hence the mainstream economists' penchant for beginning economic analysis with a series of "givens" is precisely where the dissent begins. The argument here, then, is that one's attitude toward the status quo is the preeminent conditioner of the paradigm an economist is likely to embrace. Ini• tially to take "no value position" is in fact to embrace all the values embedded in the status quo, whether this is done explicitly or implicitly. It is the inevitability of this that ultimately vitiates the distinction between the normative and the positive as conventionally made. The Los Alamos physicists not only set a standard for all physicists but indeed for all scientists, including social scientists. They most particularly set a standard for economists. Among social scientists, it is preeminently economists who think they can escape the necessity of confront• ing value questions by embracing the perspective of physics. Modem physicists know better.

Formulating the Life Process

Questions of stability and growth, of poverty, of health, of education and train• ing, differ from questions of survival in a nuclear age only in degree, not in kind. All involve formulation and reformulation of the life process. Indeed the con• stant reformulation of the life process in light of developing technology and within changing cultural parameters was precisely what Thorstein Veblen had in mind as the task of economics when he stated, "There is the economic life 52 BEYOND DISSENT

process still in great measure awaiting theoretical formulation" (Quoted in Ayres 1944, p. x.). The task has not changed, but it has been obscured in ever more sophisticated ways by many economists who have turned their backs on the central responsibility of the discipline.

Conclusion

We come then to the implications of all this for the distinction between main• stream economists and institutionalists. It is not a coincidence that the econo• mists who insist most strongly that economics is a positive science are those who can remain most tranquil in the face of the status quo. Even successful econo• mies have an unfinished agenda. It is a major anomaly in economics: customarily those economists whose political persuasions happen to be toward leaving decision making to the market are most likely to be those who insist most vociferously that economics must be a positive science. Those whose political predilections are toward intervention• ism of one sort or another are far more likely to argue that there is such a thing as normative economics even in economic analysis. The recent reemergence of classical economics in the guise of rational expec• tations has presented this distinction in particularly vivid form. For instance, it is now appropriate in the name of positive economics to argue that the unemployed simply prefer leisure, and that long periods of unemployment--like all of the 1930s----can be regarded as "labor markets not clearing." There are many other examples. Institutionalists have always argued that economics is a science of value, not simply price, and that therefore normative economics is an integral part of economic analysis. For institutionalists, affirming the life process is what economics is all about. To affirm the life process is not normative or positive. It is descriptive. That there can be differences in how to affirm the life process is another matter. But an affirmation of the life process requires as a first step recognition that the economy we have does a less than adequate job in this process. Far from taking the status quo as "given," institutionalists constantly reevaluate and re-analyze the status quo for indications of how, in light of dynamic technology and the emergent values it brings with it, the status quo can be altered to affirm the life process more effectively. Like the Los Alamos physicists-indeed like the Union of Concerned Scientists today-institutionalists recognize that economists, be• cause of their training, have special expertise and special responsibilities that they must accept and speak to in making economic theory a more efficient tool for the analysis of public problems. The great potential value of economists is they can make a distinctive contribution to policy debates. Joan Robinson has perceptively noted that the first essential for economics to be a real science is ''to combat, not foster, the idealogy which pretends that values which can be mea• sured in terms of money are the only ones that ought to count" (Robinson 1962, INSTITUTJONALISM-A BASIC PERSPECTIVE 53

p. 47). In sum, to enhance "the life process," economists must embrace the pursuit of value rather than measure, temporize, and dichotomize endlessly in the arid fields of what they are pleased to call their positive science. Reliance on the instrumental theory of value may stand economic analysis in better stead than the rigid normative-positive division doggedly insisted upon by mainstream economists, who in the end frequently have as a major characteristic an ability to be comfortable with a status quo against which interventionists of all persuasions are led to rail.

References

Ayres, Clarence E. 1944. The Theory of Economic Progress. Chapel Hill: University of North Carolina Press. Eichner, Alfred S. 1985. Towards a New Economics. Armonk, NY: M. E. Sharpe. Friedman, Milton. 1953. Essays in Positive Economics. Chicago: University of Chicago Press. Keynes, John Neville. 1890 (1965). (reprint). The Scope and Method of Political Econ- omy. New York: Augustus M. Kelley. Machlup, Fritz. 1978. Methodology ofEconomics and Other Social Sciences. New York: Academic Press. Mises, Ludwig von. 1981. Epistemological Problems of Economics. New York: New York University Press. Robbins, Lionel. 1946. An Essay on the Nature and Significance of Economic Science. London: Macmillan. Robinson, Joan. 1962. Economic Philosophy. Chicago: Aldine. Strickland, Donald A. 1968. Scientists in Politics: The Atomic Scientists Movement, 1945-46. Lafayette, IN: Purdue University Studies. References

Dissent from Orthodox Theory

Arrow, Kenneth 1. Social Choice and Individual Values. 2d. ed. New York: John Wiley and Sons, 1963.

Ayres, Clarence E. The Industrial Economy. New York: Houghton Mifflin, 1952.

---. The Theory of Economic Progress. Chapel Hill: University of North Carolina

Press, 1944.

Berle, Adolf A., and Means, Gardiner C. The Modern Corporation and Private Property.

New York: Macmillan, 1932.

Brady, Robert A. Business as a System of Power. New York: Columbia University Press,

1943.

Cameron, Burgess. Input-Output Analysis and Resource Allocation. Cambridge: Univer sity Press, 1968.

Freed, Edward R.; Rivlin, Alice M.; Schultze, Charles L.; and Teeters, Nancy H. Setting

National Priorities: The 1974 Budget. Washington, DC: Brookings Institution, 1973.

Friedman, Milton. "The Role of Govemment in a Free Society." In Capitalism and

Freedom. Chicago: University of Chicago Press, 1962.

Galbraith, John Kenneth. The New Industrial State. New York: New American Library, 1967.

---. "Power and the Useful Economist." American Economic Review 63, no. 1

(March 1973).

Gordon, Robert A. In Institutional Economics, Joseph Dorfman and others. Berkeley:

University of California Press, 1963.

Gruchy, AIIan. Contemporary Economic Thought. New York: Macmillan, 1972.

Gurley, John. "The State of Economics." American Economic Review 62, no. 2 (May

1972): 53-Q2.

Hutchison, T. W. The Significance and Basic Postulates of Economic Theory. New York:

Augustus M. KeIley, 1965.

Klein, Philip A. "A Critique of Contemporary Institutionalism." Quarterly Review of

Economics and Business I, no. 2 (May 1961).

---. The Management of Market-Oriented Economies: A Comparative Perspective.

Belmont, CA: Wadsworth Publishing Company, 1973.

MarshaIl, Alfred. Principles of Economics. 8th ed. New York: Macmillan, 1949.

Mishan, E. J. Cost-Benefit Analysis. London: AIIen and Unwin, Ltd. 1971.

Myrdal, Gunnar. Against the Wind: Critical Essays on Economics. London: Macmillan, 1974.

Nordhaus, W., and Tobin, 1. "Is Growth Obsolete?" In National Bureau of Economic

Research, Inc., FifliethAnniversary Colloquium, vol. 5. New York: Columbia Univer sity Press, 1972.

Robbins, Lionel. An Essay on the Nature and Significance of Economic Science. London:

Macmillan, 1946.

Rogin, Leo. The Meaning and Validity of Economic Theory. New York: Harper and

Brothers, 1956.

Samuelson, Paul A. "Economic Thought and the New Industrialism." Reprinted in Col lected Scientific Papers of Paul A. Samuelson, vol. 2, no. 125. Cambridge: MIT Press, 1966.

---. Economics. 9th ed. New York: McGraw-Hill, 1973.

Schultze, Charles. The Politics and Economics of Public Spending. Washington, DC:

Brookings Institution, 1968.

Weintraub, Andrew; Schwartz, Eli; and Aronson, J. Richard, eds. The Economic Growth

Controversy. New York: Macmillan, International Arts and Science Press, 1973.

Zimmerman, Erich W. World Resources and Industries. Rev. ed. New York: Harper and

Row, 1951. Dissent from Orthodox Theory 2 American Institutionalism: Premature Death, Permanent Resurrection

Institutionalism is still far too often dismissed as "mere dissent." It is much more than that, as I will here try to show. While we have carved out a coherent, meaningful place for institutionalism, or evolutionary economics, much remains to be done. Following the lead of Walter Heller, who devoted his presidential address to the American Economic Association several years ago to "What's

Right with Economics,"i this article will be an effort to go beyond the customary stance we all too often assume. Eschewing both excessive defeatism and self criticism, these remarks are an effort to state positively what's right with evolu tionary economics. I am similarly concerned with what is right with institutionalism. So that you may know precisely where I am going, let me indicate the plan of this discus sion. I shall consider the current mainstream view of institutionalism and the current institutionalist view of mainstream economics. In this connection I shall attempt a summary characterization of the methodology of institutionalism, its premises, and its perspective toward the evolving norms of political economy.

Next I shall considf)l" the essential views of the founders of American institution alism, the contributions of the "second generation," and the current thinking of

Reprinted by pennission of the publisher from Journai of Economic Issues, vol. 12, no.

2 (June), pp. 251-76. Copyright 1978 by Journal of Economic Issues. Authorization #:

557701.

This was the presidential address presented at the annual meeting of the Association for

Evolutionary Economics, New York City, December 27-29, 1977.

26 institutionalists as epitomized by the views of my predecessors in the presidency of AFEE. With this as background, I shall attempt to cull a list of principles on which I would argue institutionalists today have reached some sort of consensus.

Finally, I will look briefly to the future of institutionalism. We may still have no good name for ourselves: "Institutionalism" Clarence

Ayres called "singularly unfortunate,"2 "instrumentalism" is intolerably awk ward; "evolutionary economics" describes only part of our concern, and that none too clearly; "holistic economics" may well be a better term, but it is un likely now to catch on; "heterodox economics" served once, but like "neo" is always in danger of becoming out of date. Many of us still refer to ourselves as

"dissenters," and I shall be at pains here to suggest the limitations of that term.

My theme can be stated quite simply. Whatever we call ourselves, we are not given much credit generally among our fellow economists, but I think there is evidence that an ever wider group of economists has begun to hear what we are saying and to accept a number of our premises. On the basis of the consensus principles, I hold one can demonstrate that the appropriateness of institutionalist principles to a vast array of economic problems is being recognized. The prob lems are urgent. Far from dying out, as some appear to think, institutionalism must be viewed as either never having died or as being in the process of a resurrection which I suggest will endure.

The Current Mainstream View of Institutionalism

I have searched through a great many introductions to economics texts look ing for awareness that institutionalism exists. One is presented with a para dox. The most conspicuous reference to institutionalism is in Paul

Samuelson's basic text. In the tenth edition, as indeed in quite a few earlier ones, he proclaims that economics of a new sort-"factual, policy-oriented economics"-was introduced in the United States by Richard T. Ely and John

R. Commons, as an outgrowth of the German Historical School. The greatest institutionalist, in Samuelson's view, was Thorstein Veblen, and a major follower was that "theory-eschewing taxonomist of business cycles, Wesley

Clair Mitchell." For Samuelson that is it. There was no second generation of institutionalists---the men who people Allan Gruchy's Contemporary Eco nomic Thought and their associates. Writes Samuelson: "40 years ago Institu tionalism withered away as an effective counterforce in economics. Who can explain it when a movement turns sterile? Perhaps it was the case that main stream American economics had always been more pragmatic and empirical than mainstream English or French economics; it was therefore able, so to speak, to absorb and take over with superior analytical and econometric tools the descriptive tasks and policy formulations of the Institutionalists."3

I doubt I have ever read a statement more likely to infuriate institutionalists.

One is tom in deciding where to attack first. Is it the failure to acknowledge that

Ayres, J. K. Galbraith, Gunnar Myrdal, and others consider themselves to be institu tionalists, or is it the smugness of Samuelson's assumption of the superiority of econometric tools, or his certainty that institutionalists have in fact "withered away"?

I comfort myself with the realization that Paul Samuelson's batting average as economic prognosticator is not quite 1,000. In 1970 he thought business cycles were virtually passe and the National Bureau in danger of obsolescence. 4 After the al most worldwide recession of 1973-75, no one any longer feared that business cycles would soon be viewed as fossilized relics of a bygone world. Perhaps

Samuelson could be equally incorrect in his view of the continued existence of institutionalism.

Samuelson at least mentions institutionalism. One is hard pressed to find other basic textbooks discussing current institutionalism and institutionalists. We mostly are ignored. We had better face it. Part of the reason is that the economics profession today fails to recognize institutionalism as a movement and instead comments on individual institutionalists. Again Samuelson is a vivid case in point. Shortly after commenting on the "withering away" of institutionalism he discusses Galbraith and concludes that in viewpoint he does provide "a critique against the prevailing orthodoxy in economics."s What is missing, therefore, is only the realization that Galbraith is not alone.

One voice recently raised in behalf of institutionalists is that of Lee E. Pres ton: "The institutionals are by far the largest, most varied, and most influential group of contributions and contributors to the corporate-society literature.'>6

Preston specifically mentions Gruchy, Robert Heilbroner, Benjamin Ward, and

R. A. Solo, in addition to Galbraith. My joy at Preston's disagreement with

Samuelson's assessment of current institutionalism would be greater were Pres ton not a member of this association. On the other hand, he was writing in the

Journal of Economic Literature, surely a mainstream publication. So I permit myself to be minutely cheered.

In connection with the general standing of institutionalism it is not unim portant to note that at least three and possibly four institutionalists have been elected president of the American Economic Association in the past twenty years. I refer to Galbraith, Edwin E. Witte, and Morris Copeland (whose presidential address was titled "Institutionalism and Welfare Economics"V

The fourth possible institutionalist was George W. Stocking, AEA president in 1958.

Samuelson suggests that Galbraith has "no disciples," but he certainly has many who find his general orientation congenial, whether or not they accept every Galbraithian position. The "unique" niche accorded to Galbraith suggests the major task confronting institutionalists today. Veblen was no doubt viewed as unique in his day also, but a generation ago there was clear recognition that

Veblen, Commons, and Mitchell were all talking about economic problems from a reasonably consistent perspective. It is that realization about modem institu tionalists which is lacking today. INSTITUTIONALISM-A BASIC PERSPECTIVE 29

The Institutionalist View of Mainstream Economics

Growth of a School

Say "Chicago School" to any economist and he will know that you refer to

Milton Friedman, Friedrich Hayek, George Stigler, and others at the University of Chicago and elsewhere who share a point of view in common with the pr

Cooley, J. M. Clark, Rexford Guy Tugwell, and Gardiner Means. Others some times mentioned include Arthur J. Altmeyer, Mordecai Ezekial, Walton Hamil ton, Robert F. Hoxie, William M. Leiserson, lsador Lubin, Selig Perlman,

Sumner Slichter, C. H. Parker, A. B. Wolfe, M. A. Copeland, and Edwin E.

Witte. By 1972, Gruchy was using the term "neoinstitutionalists" for the second generation, which would include prominently Galbraith, Ayres, Myrdal, Gerhard

Colm, and perhaps Leon Keyserling.8 As a third generation one might name many of the economists who are affiliated with this association and who write in this journal.

What can one say of all these economists? Do we indeed have a common point of departure and a consistent perspective of the appropriate place for eco nomics? Is our weltanschauung meaningfully to be differentiated from that of mainstream economics? The answer, as I shall try here to demonstrate, is in the affirmative, and I shall endeavor to suggest why. The failure of mainstream economists currently to recognize institutionalism as a viable school is only partially due to the fact that all institutionalists are not as prominent as Galbraith and Myrdal, to name two who clearly are well known. How often are these two even regarded as offering any common position to the discipline? I shall argue that institutionalists still have much to do in articulating their views, but we have done more than our professional associates are very often willing to acknowl edge. We are mostly ignored, sometimes regarded as dead (as with Samuelson), and occasionally dismissed as hopelessly wrong and muddle-headed. 9

Among the reasons we are dismissed so cavalierly, one still often hears the charge that we lack "rigor."

Rigor

Mainstream economists usually characterize economic theory as rigorous and pride themselves on their own theoretical rigor. They regard economic theory as the most rigorous theory to be found in the social sciences. Precisely what is meant by rigor? The term is rarely defined, but presumably "rigorous theory" consists in making whatever explicit assumptions one must make to establish the veracity of, say, A = Band B = C and then discoursing at length on the profundi ties flowing from the precise deductive conclusion that A = C. The contribution lies presumably in finding the way in which the two propositions can be both

"proved" and related to one another. In price theory, for example, a set of assumptions about downward sloping demand curves (consumer rationality, knowledge of alternatives, and so forth) is juxtaposed to a set of assumptions about the nature of upward sloping supply curves (diminishing returns, increas ing costs to factors, profit maximizing). The resulting juxtaposition leads to equilibrium price and quantity, cleared markets, and to a group of welfare no tions based on the implications of the equality of marginal utility and marginal revenue. 10

It can be argued that such formal consistency is rigor of the most superficial sort. More fundamentally, I argue rigor refers to the precision with which analy sis is structured so as to advance genuine insight into real problems. If this is the case, then the theory of price just considered is far less rigorous than is customar ily thought because the problem it addresses has been radically distorted from the way in which the world presents it to us. We argue as economists that

"abstraction" and "simplification" are necessary, and so we must resort to analy ses on the basis of a set of "givens." Simplification and abstraction may be necessary, but the first thing to note is that the givens in economic analysis are not givens, but chosens. It is surpassingly convenient for the economist to as sume that consumer tastes are "given" and that consumers are "rational," but the economist chooses so to assume, and whether the resulting theory conforms sufficiently to the real world to be useful in solving economic problems is an important and seldom asked question. Are these assumptions both unavoid able and the most realistic one can make, judged by the ability of the result ing analyses to advance our understanding of the problem we set out to investigate?

The difficulty with much conventional theory is that there has always been a penchant for assuming as given those factors which can lead logically to the greatest precision in outcomes. Ceteris paribus is, therefore, to the economist who equates rigor with precision, always preferable to mutatis mutandis. But can one not say that mutatis mutandis theory could conceivably be more rigorous if less precise than ceteris paribus theory by the criteria just suggested?

There can be no doubt, for example, that oligopoly theory opens the door to all sorts of possibilities involving recognized or partially recognized inter dependnce, that the assumptions can be highly complicated involving sophisti cated game-theoretical givens, and that the results may well be logically indeterminate. But this does not mean the theory is less rigorous; it is merely far more complicated. Many-perhaps the majority of --economists have never been too happy with oligopoly theory, and they regard the results as less satisfac tory than is the case with either the theory of pure competition or monopoly. Much conventional economic theory, moreover, has been predicated on the notion that quantification is a surefire route to greater rigor. It mayor it may not be, depending on the objectives sought and achieved by the introduction of mathematics. The primary danger is that economists have come to assume that their theory is more rigorous and more relevant because it is quantified and deals with a larger number of variables simultaneously. I I

In sum, precision, quantifiability, and the number of variables encompassed are not automatic guarantors of rigorous theory.

Theory as "Benchmark" Theory

I quote from the first elementary text I happened to pick up, having found the quotation I wanted in about one minute: "Does the price system of American capitalism function in the same fashion as the price system discussed in this chapter? In principle, yes; in detail, no. Our discussion of the price system provides us with a working model-a rough approximation-of the actual price system of American capitalism. Our analysis presents a much simplified, yet useful, picture of the real thing. The competitive price system also gives us a norm, or standard, against which the real-world economy can be compared."12

If we really believe this, then we who teach elementary economics are hard pressed to explain what frequently happens next in beginning economics courses. In approaching the subject of agriculture we tell our students that struc turally agriculture traditionally conformed to the requirements of competition to a far greater extent than any other sector of the American (or any other market oriented) economy; nonetheless, it was one of the first to be the object of vast government intervention to alter the results emerging from the "free, competitive market." Until relatively recently there were many buyers and sellers of Kansas wheat, free entry and exit, and a homogeneous product. Were the results emerg ing from the market considered a "norm"? Obviously, they were not, and they were radically altered by a variety of governmental interventions designed to make the market results conform to the actual norm or standard. And where did such a standard come from? It came from where such standards have always come--it emerged from the political economy itself, because producing such standards is a critical part of what the economy is all about. The market is a part of the economy, not vice versa, and it has ever been so. When the market fails to conform to the norm it is the market, not the norm, which is manipulated.

I underscore that this does not mean that institutionalists are or should be uninterested in prices and the market. Clearly, these are very important economic variables. But institutionalists stress that the norms come from the economy which is a vehicle for emergent societal values as they reveal themselves in economic choices. It is to norms so acquired that prices as they emerge from markets are compared. It is a question of the tail and the dog. Mainstream economists argue that for the discipline of economics the market and its determi nation of prices is the dog, and the underlying values are the tail, safely sterilized in the off-limits compound called ceteris paribus. Institutionalists argue that for economics the critical entity to study is the economy and its emergent values, in particular how they are changed and what their implications are both for the participants in the economic process and the environment in which their choos ing activities occur. \3 Values emerge through the economy over time-a process.

This view of the economy is precisely what Clarence Ayres had in mind when he introduced John Dewey's means-end continuum into economic analysis. He commented that, for Dewey, "'means' and 'ends' are no more distinct orders of phenomena than causes and effects."14 Ayres chose to express the dynamism of the political economy in terms of what he called ''the continuity of technological process"15 and to argue that we must "recognize as a misconception the idea of progress as movement toward the attainment of some previsioned 'end.' "16

That this notion of progress has gained credence in the years since Ayres first suggested it is clear. Charles L. Schultze, for example, has expressed the same notion a number of times, most recently in an article in which he declared that "ends and means cannot and should not be separated. In the real world they are inextricably joined: we formulate our ends only as we debate the means of satisfying them. "17

If we do indeed formulate our ends as we debate the means of satisfying them, it follows that we can have no preconceived norm such as the values of the competitive market toward which we inevitably try to move the system. In the final analysis, the competitive model cannot possibly encompass our evolving norms, although they have included some notion of efficiency and productivity from the days of Adam Smith, if not before. It is this that lends credence to our view that it is from the political economy that the norms evolve and to which economic performance both in and outside the market is compared in the devel opment of public policy.

The Evolving Norms for Political Economy

There are clearly some notions in the conventional competitive model that we all might find attractive and appealing. Characteristics such as automaticity, pro gressivity, and efficiency are hard to resist, assuming we can agree on what they mean. Even on its own terms, however, the competitive model is suspect, as it has been all along. The automaticity of the competitive model is attractive, but it is doubtful that it ever existed. The Invisible Hand has long since turned into what Joan Robinson calls the Paralyzed Hand. The internal impetus to ever greater technological efficiency as the guarantee of optimal progress has been overridden by the superior impetus of economies of scale as a mechanism for efficiency. But along with that realization has come concern about the concentra tion of power which scale economies demand; the concentration of power be yond scale requirements; the implication of structures which permit but do not compel social sensitivity; the relationship of both growth and power via concen tration to incentives; the complex issues of intertemporal trade-off's (more rapid growth in this generation versus balanced expansion over a number of genera tions); and the impact of the functioning of the political economy on the rest of society, on environmental contamination, on changing perspectives toward the acquisition of material goods and services, and on explicit emphasis on the quality as opposed to the quantity of life. Concern has grown about the norma tive implications which are attached to economic growth per se, the long-run significance attached to endless proliferation of consumer goods in the private sector at the expense of a variety of public goods, and so forth.

In short, there is very little left of the competitive model that appears "good."

It is not just that competition does not now exist. It is that there are very few of the characteristics of that model which we apparently still wish the economy to emulate even if it could. It is true that we in the United States have a stronger wish seemingly to keep down the role of government than do other market oriented economies, but even in this country the role of government (state, local, and federal) is enormous. This could not have been more sharply underscored than when President Richard Nixon, the most relentlessly conservative of mod em presidents to that time, adopted an incomes policy in 1971.

It is clear, therefore, that today the norms are what the evolving political economy chooses to make them. This clearly involves a multiplicity of cur rent concerns, including a notion of technological efficiency, changing ideas of equity, and increasing concern about the future and the impact of the allocational activities of the economy on the environment. It is clear that what we seek today is not a competitive economy, but Clarence Ayres's

"reasonable society,"18 christened the Great Society by Lyndon Johnson, and sometimes called the humane society. Its name and characteristics may change, in fact, probably will change, but it is clear that the notion of effi ciency does not refer only to mechanistic input-output relations, but encom passes the degree to which the economy is accomplishing whatever we collectively wish it to achieve.

Institutionalism Reconsidered, Once More with Feeling

When the resurrection of institutionalism mentioned earlier is appreciated, I believe that what is customarily termed "economics" will be more appropriately viewed as "market mechanics." The area of traditional concern to institutional ists will then be viewed as "economics" or, more properly, political economy. In my judgment, this transformation of our discipline is already under way.

This association has long been concerned with defining institutionalism, as a perusal of the Journal of Economic Issues over the past decade substantiates.

Institutionalism is a great deal more than dissent, and the essential principles of modem institutionalism are increasingly visible as a logical outgrowth of what earlier American institutionalists wrote.

As the twelfth president of this association, it occurred to me that we have begun to have a body of scholarly thought in the form of previous presidential addresses. Against these one may assess modem evolutionary economics, for the addresses may well be regarded as the views the association's members collec tively have been advancing.

Our first president, Clarence Ayres, devoted his address to the notion of productivity in economics. The conventional use of the tenn---as when econo mists say factors of production "earn" returns, or savings bonds "earn" interest totally obscures what it is that furthers progress. For Ayres it is advances in technology which enhance productivity, not capital or labor per se, and it is our

"ideological responsibility," he suggests, to differentiate the true source of pro ductivity from the myth embedded in current institutions that it is the factors of production which provide creative potency. Viewing productivity accurately was part of the process of understanding the notion of progress. The economy's concern was movement toward the creative state or the creative society---a no tion radically different from mere maximum material GNP---as our objective.

The distinction was not only vintage Ayres, but also proved remarkably prescient in terms of many current concerns. Ayres truly set the Association for Evolution ary Economics on an appropriate path. 19 Several other AFEE presidents have concerned themselves with closely re lated themes. The second president, John S. Gambs, was concerned about where

AFEE should go and suggested that its major effort should be directed at ''the attainment of a more harmonious relationship between slowly changing institu tions and a dynamic technology and also toward a more harmonious relationship among changing institutions."2o He stressed our concern with valuation through his use of the term "harmonious" and suggested that the "values" which standard theory ceaselessly argues it does not have are nonetheless palpably real. At bottom they reflect "hedonistic utilitarianism." In contrast, institutionalists face squarely the fact that norms are inevitable, even in a positive science, and should therefore be stated explicitly. Gambs suggested that the institutionalist norm can be expressed in Albert Schweitzer's "reverence for life" or more narrowly by

John B. Hobson's distinction between wealth and illth. 21 Gambs, as did Ayres, was thus addressing the implications of the technology-institutions distinction and the implied valuational perspective which emerges from it.

Our third president, Allan G. Gruchy, chose to underscore the institutionalist dissent from excessive preoccupation with the market, but through his remarks runs a consistent thread of concern with the ultimate wayan economy reaches value decisions. The economy must distinguish progress from growth. Efficiency as a characteristic of the relationship between inputs and outputs was for Gruchy excessively narrow, and he stressed that the economy must ask "efficiency for what"? He differentiates the standard view of economics as a "science of effi ciency" from the institutionalist view that, as Ayres once expressed it, "econom ics is nothing ifit is not a science ofvalue."22 Ben Seligman was concerned with the historical origins of institutional preoc cupations and traced some of them back to the ancient Greeks. Seligman re flected the perspective of his predecessors by calling for a new paradigm which would reflect the crucial importance of the public sector, the costs of market based economic growth in environmental contamination, and the need therefore for what he called a "social economics."23 This presumably is an economics which is capable of charting the evolving path to a creative society.24

Daniel Fusfeld concerned himself with one critical characteristic of the insti tutional structure reflected in standard economics, but traditionally ignored, or at least played down. His concern was the impact of huge concentrations of corpo rate economic power on the presumed normative acceptability of the im plications of actual resource allocation emerging from the U.S. economy, in contrast to those of standard theory.2s Fusfeld thus stressed a theme with which economists, including some standard economists, have increasingly been con cerned. J. K. Galbraith, one of the few institutionalists to become president of the

American Economic Association, devoted his AEA presidential address to it. 26

More recently, presidents of AFEE have chosen to focus on particular aspects of the economy from an institutionalist perspective. David Hamilton was con cerned with the inadequacy of utility theory as a valuational basis for consump tion theory, and he noted the difficulties encountered by the concept of consumer sovereignty in the modern world, even the world of standard price theory.

Hamilton's view is Veblenian in origin, and he quotes Veblen's observation that the test to which consumer goods must be put is not only whether they are useful

(rather than "wasteful"), but also whether they serve "directly to enhance human life on the whole ... the life process."27

Harry Trebing, as did Fusfeld, chose to concentrate on the power question, but specifically on public utility regulation. 28 Although less broad, his perspec tive was thoroughly in the tradition of institutionalism. Noting the early institutionalists' attitude toward monopoly, he analyzed the behavior of public utilities in the light of the regulations applied to them and came to several insightful conclusions, including his view that early institutionalists did not pay enough attention to market conduct. Another insight was that, in the task of improving the regulation of public utilities, ''the opportunities for the application of sophisticated institutional analysis as part of the process of reform are virtu ally unlimited."29

Willard F. Mueller, in a closely related area, assessed the whole problem of antitrust enforcement from an institutionalist perspective. 3o He recognized that in many very real ways ours has become a "planned economy"--directed toward our emerging vision of the Great Society. Antitrust so viewed, although of im port, plays a different role than it does in the paradigm of a competitive market.

The role of the antitrust laws is thus related directly to the amount of concen trated economic power in the private sector and the extent of the public sector.

This is a long-standing institutionalist view. If ultimately Mueller comes to re gard antitrust as an essential complement to planning in the modem political economy it is because he shares the view of so many of his predecessors that the economy is part and parcel of the impetus to a reasonable society, or call it what you will.

Our tenth president, Seymour Melman, as was Ayres, was concerned with productivity. Differentiating a ceremonial or institutional view of productivity from a technological view, Melman focused on the effect of militarism on our thinking with regard to economic decisions. He concluded that if productivity is viewed from what he calls "a value-theoretic approach of the Veblenian sort," then the measure of "productivity" and "product" "is defined by the essential life-serving attributes of serviceability to consumption and to further means of production."31 To be life serving is, I should judge, Melman's way of distin guishing mere growth from progress, a fundamental and long-standing institu tionalist distinction.

Finally, Wallace Peterson chose to consider the current reappraisal of Keynes ian economics in the light of institutionalism and to suggest that they meet via the relationship between ''the unequal distribution of power, income, and wealth in our society and the relationship of this to chronic inflation."32

Contemporary Institutionalism: Some Consensus Principles

Gruchy's distinction between institutionalism and neoinstitutionalism may be superfluous except as a means of differentiating the current crop of institutional ists from their ideological parents. I have devoted some time to summarizing the views of past AFEE presidents because to me they demonstrate an extraordinary consensus about fundamentals in the implications for a wide variety of current societal dilemmas. 33

In my judgment, therefore, it is no longer necessary or appropriate to say that institutionalists as a group can be identified only by what they are against. To say only that they dissent from standard price theory is neither accurate, very reveal ing, nor particularly interesting. There are critical principles which distinguish institutionalism from other ways of examining economic problems. They emerge from the views of Veblen, Commons, and Mitchell, as well as from the work of subsequent generations, including current evolutionary economists. While we may differ in a number of particulars, we can, I think, agree on at least nine basic principles.

First, institutionalism distinguishes sharply between the universal determi nants of what is economically possible and the culturally limited determinants of what in fact we choose actually to do. Veblen called this a distinction between the industrial and pecuniary; Ayres, between the technological and the ceremo nial or institutional. Ayres struggled with this distinction and its importance all his professional life. Whether he finally elucidated it adequately each person must decide. The process of technological development, broadly construed, mayor may not strike everyone as a satisfactory source from which to elicit a meaningful theory of value. For Ayres it did, and for him it served sharply to distinguish values and valuation in the economy, on the one hand, from prices and price setting in markets, on the other. Therefore, the second principle that institutionalists agree on is that the em phasis in economics should be on the economy itself, as a sociopolitical, cultur ally conditioned entity from which society's economic choices emerge.

Unmistakably, this is not a process coterminous with the market, because what emerges in markets is frequently considered controversial, and it suggests cor rectly that we have a standard of value-a dynamically conditioned standard, against which we judge the allocational results emanating from markets. While expressing the matter this way clearly includes notions about the role of the public as well as the private sector, it encompasses more. It is not entirely accurate to argue that emphasis on the economy means only that we remove parts of the allocation process from private markets and the rule of dollar votes and accomplish the remaining allocation through a politico-economic process involving taxation, legislation, and governmental allocation. This would be like saying that the neoclassical concept of externalities fully covered current con cerns about extensive environmental damage in the course of economic activity.

To focus on the economy is to ask how the economy makes choices, what emergent values economic choices reflect, how the choices are conditioned and shaped, in what direction the economy appears to be heading, and with what consequences. These are not questions which come easily to standard Western economists, certainly not American ones, who are taught to distinguish sharply between normative and positive and to make enough assumptions, ultimately to the point of emasculating the discipline, so that economic analysis can proceed deductively rather than inductively to precise conclusions.

The third principle follows from this distinction between the economy and the market: Institutionalists give a very different meaning to the word value than do standard economists, who more often than not simply equate value with price.

Ayres saw this clearly when he called economics a "science of values,"34 a phrase which many mainstream economists simply cannot comprehend. For them, the terms price theory and value theory are simply different words for the same thing. Even Joan Robinson, that remarkable economist who has made some of the most significant contributions to standard economics, but who has lived and grown as well to see many of the inadequacies of neoclassical theory, saw that price and value were not the same, although her view of value is not that of

Ayres or other institutionalists. 35

Fourth, to focus on the economy rather than the market is to give a radically different meaning also to both the concept of "productivity" and the related concept of "efficiency. "36 Standard economics treats the notion of efficiency as though the economy were a relatively brainless input-output mechanism, with increased output per constant inputs a measure of greater efficiency in produc tion and hence an increase in productivity. But as we have been at pains to suggest, efficiency and productivity are rather more complicated if they must be related to the path along which economic activity moves through time, and if they must be related to emergent choice, broadly viewed, rather than mechanistically and myopically simply to whatever it is that happens to emerge as the allocational result of market price formation. There are current controver sies, for example, about the appropriate way to price natural gas, about our strategy with respect to both domestic and imported petroleum, about sound public policy with respect to automobile size and safety, as well as highway construction and financing. The environmental and resource conservation im plications of all of these possibilities as well as urban and interurban public transportation development in general constitute one critical facet of current public economic policy debate. Whatever position one takes, it is clear that what is economically efficient is not simply what is the most immediately productive means of harnessing energy or applying it to transportation problems. Nor is it entirely clear that what one "ought" to do can be separated from the "facts," that is, what "is." The line between normative and positive in the standard economic perspective is fuzzy precisely because it is a superb example of Schultze's notion that we articulate ends as we consider means. The economy is indeed a valuating mechanism, not the knee-jerk "if-then" mechanism that standard theorists never tire of telling us about.

The process of articulating ends as we consider means is very close to the notion of a means-end continuum, which idea Ayres took from John Dewey and found so useful a perspective for viewing the economy. It suggests a fifth princi ple: Institutionalism is and always has been essentially dynamic. This is, of course, why institutionalists have looked to the biological sciences and to anthro pology for their comparisons rather than to the physical sciences, which have held so much allure for many mainstream economists. Growth and progress, conflict and its resolution through change, these are the processes that interest institutionalists, not mechanistic equilibrium. It may be that Ayres exaggerated the influence of equilibrium on the thinking of mainstream economics,37 but he surely did not err in distinguishing the economy as a dynamic instrument for evolving choice from the mechanistic allocative market.

Precisely because institutionalists have always regarded the economy as an evolving culturally conditioned entity, it is often acknowledged parenthetically that institutionalism has had its greatest impact in the field of development economics. 38 The reasons are clear. First, in the process of economic develop ment, problems of valuation are glaringly apparent; the role of the economy in developing and transmitting evolving societal values cannot be blinked away.

Second, and equally important, is Veblen's point that it is always easier to gain an accurate perspective on a distant economy, distinguishing the dynamics of a broadly conceived technology from the statics of the institutional structure, than is the case closer to home, where we tum myopic.

Development economics is, of course, not the only field to which the pro cessual approach (to use Gruchy's term) leads institutionalism. It led Wesley

Clair Mitchell to concern himself with business cycles long before mainstream economics developed an interest in what is now called "economic dynamics."

Mitchell's original book Business Cycles was published in 1913,39 and it is clear that his impact on methodology, perspective, and approach is very much in evidence in economic dynamics to this day.

The methodology and approach of institutionalism lead us to regard the mar ket as only a part of the economy rather than coterminous with it. It follows that the standards by which we judge economic performance and its impact on both the polity and the culture of the society do not come from the market but from the economy itself. The complexities of the modem industrialized economy have moved far beyond the confines of the competitive model of classical theory. A sixth principle, therefore, is that institutionalists recognize that the results emerging from markets are judged against the norms of the economy, not vice versa. We explicitly reject the frequently asserted claim that the competitive model provides a norm or a benchmark against which to judge the results emerg ing "in the real world."

One of the major reasons why what happens in the economy is so different from what happens in competitive markets involves a seventh principle: One of the preeminent conditioning factors in the modern political economy is concen trated economic power. There is scarcely an assumption or an implication of conventional economic theory which is not altered when the realities of eco nomic power are incorporated in the analysis. The "sovereign" consumer is manipulated so that instead of producing in response to demand, firms create demands according to their own calculations. 40 The impact of concentration on the operation of firms is, of course, discussed in the imperfect competition theory of standard economics. But that theory has never been regarded as very satisfac tory, even by standard theorists who dislike imprecise results. 41 More important, however, the theory of imperfect competition scarcely deals at all-let alone adequately-with the dangers to a democratic political economy posed by con centrated economic power. But the problem has been discussed by many institu tionalists, including R. A. Brady, Galbraith, Ben Lewis, and others.42

Ben Lewis's position was well stated in 1949 when he underscored the criti cal difference concentrated power makes between the market system of competi tive theory and that of the mixed U.S. economy. Recalling J. M. Clark's widely used concept of "workable competition," Lewis wrote: "[If the economy is judged workably competitive, have the acceptable results] been compelled by the system-by competition-or do they represent simply the dispensations of man agements which, with a wide latitude of policy choices at their disposal, hap pened for the moment to be benevolent or 'smart'?''''3

It is "workability" only by the sufferance of big corporations which in the end holds the potential for disaster in a system characterized by concentrated eco nomic power. Clark's notion of workable competition never did deal adequately with these critical implications. Conventional economists traditionally simply define power out of their area of concern. The relationships between concen trated economic power and the flow of information, control of communication media, the integrity of the political process, and so forth are tangled indeed.

Brady, Galbraith, and even Dwight D. Eisenhower in his celebrated farewell warn ing concerning the military-industrial complex are among those who have acknowl edged this. These implications have always been a concern of institutionalists.

The eighth principle on which I believe institutionalists can agree is that the appropriate framework from which to regard the economy through time involves progress rather than growth. Progress suggests movement in chosen directions as opposed to mere quantitative increase over time. 44 Concern about where the economy is headed, rather than mindless concentration on getting bigger, is increasingly being expressed. The issue is prominently associated, of course, with the name ofE. J. Mishan, but it also has been explicitly discussed by James

Tobin and William Nordhaus, as well as others. 4s In fact, the Nordhaus-Tobin suggestion that GNP be supplemented by a qualitative "measure of economic welfare" (MEW) has now been enshrined (and renamed) in Samuelson's princi ples text as net economic welfare (NEW).46 Whatever the limitations of MEW, it carries concern about the disamenities of growth considerably beyond the "exter nalities" customarily mentioned in passing in price theory courses. But it still fails to encompass explicitly the valuational process, that is, concern about how the economy chooses to utilize resources in one direction rather than another.

Institutionalists would argue that economic theory needs to take more explicitly into account the process of choosing directions as well as the speed with which the chosen paths are traversed. The path-choosing process is the heart of ongoing economic activity, as opposed to mere market activity.

A final principle upon which institutionalists can agree involves the emerging goals of the economy. Ayres called the goal "the reasonable society," others have called it just or humane. The name is unimportant. What matters is to recognize that the goal is not part of a teleological prQcess, but of an ongoing one. We do, indeed, articulate ends as we articulate means. And we can comprehend the significance of the economy through time only by recognizing clearly that it is far more than the allocational record of the market over a period of years.

It is these principles which appear to emerge from a review of what institu tionalists from Veblen to the present have been saying. The significance of these principles is increasingly recognized, even by economists who do not regard themselves as institutionalists.

Boulding's Economics: A Case in Point

It is particularly fitting that the 1977 Clarence Ayres Memorial Session was devoted to the economics of Kenneth Boulding; he, perhaps more than any other economist, epitomizes the changes which have been developing in mainstream economics. Although he is a member of AFEE, Boulding has never claimed to be an institutionalist, and indeed he recently stated that prior to 1956 he "had been fairly rude about institutionalists."47 In 1956, however, upon rereading the work of a number of institutionalists, including Commons and Ayres, Boulding wrote that he "had greatly underestimated their contribution.'>48

Whether an institutionalist or not, Boulding has long been known as one of our most sensitive and ethically oriented economists. As the leading spirit of the

Association for the Study of the Grants Economy, as the author of the Economy of Love and Fear, and so forth, he has displayed concern about many of the matters we discuss in AFEE and which most mainstream economists eschew.

But if one looks, for example, at the revised edition of Boulding's 1948 Eco nomic Analysis, one finds precious little to suggest his interest in anything out side the confines of the neoclassical economics pasture. Early on he declares that

''the economist studies choices; he does not judge them.'>49 Here is a separation of the normative from the positive with which Lionel Robbins would be comfortable.

In Economic Analysis Boulding discourses on all the conventional subjects of price theory and employment theory. One finds discussions of competitive and im perfectly competitive markets complete with all the trimmings-iso-product curves, the "boundary of in differences," the marginal revenue of utility, production reve nue contours, and so on. This is not the economics principles text of a man concerned passionately with allocation outside the market; with the responsibili ties of the public sector; with the impact of economic power on the allocative and other operations of the economy; with the economics of discrimination, pollution, and so forth. Nonetheless, the Boulding under consideration in the

Ayres Memorial Session is undoubtedly an economist who, in his capacity as an economist-not Boulding qua citizen, or Boulding qua Quaker, or Boulding qua anything else---is very much concerned with all these matters.

Conclusion

Increasingly, all of mainstream economics is perforce required by the ongoing logic of the discipline to concern itself with just such questions as those Bould ing confronts. Institutionalism's traditional concerns are finding a wider audi ence as their applicability to diverse areas in economics is recognized.

Several past AFEE presidents have shown the close affinity of the institution alist perspective to problems of microeconomic theory and industrial organiza tion. Last year's president demonstrated the essential applicability of that perspective to macroeconomics and macropolicy. It is not difficult similarly to delineate the relationship between institutionalism and labor economics, interna tional trade, business cycles and stabilization policy, income distribution, public finance, consumer economics, development economics, and welfare economics.

In short, institutionalism today offers a consistent coherent position, which moves it far beyond "mere dissent." More important, it is being heard by ever more economists. The march of events (far more, alas, than our own eloquence) is forcing our fellow economists out of their comfortable ceteris paribus world.

The soothing self-satisfaction of the post-World War II economist, happy with his rigor, his quantification, and his elegant models, is being replaced by the realization of a growing number of economists that even if this is the Age of the

Economist, we are not doing terribly well in solving economic problems. And, whatever else, that is the bottom line. In short, economists in ever greater num bers are being forced to concern themselves with precisely the sort of questions institutionalists have always insisted economics could not escape.

Institutionalism and the Future of Economics

Does this mean that institutionalism is passe? Not at all. What we have before us is a fine example of the instrumental push for change plus institutional resistance of precisely the sort that Ayres always emphasized. Because the institutional structure within which economics currently operates has been forced to incorpo rate much of what institutionalists have long said does not mean that the perspec tive of institutionalism has carried the day. It is far from clear that economics is ready to accept the basic valuational premises from which institutionalism be gins. If the marketplace of ideas has proved institutionalism perceptive and pre scient in some areas, there is no real likelihood that anyone will give us carte blanche to remake establishment economics; we shall probably have to fight as hard for the next round of changes as we have always fought. Institutionalists do not need to suffer from a superiority complex, even if in some areas we may begin to feel vindicated. We can have confidence that our views will not be found wanting if given a fair hearing long enough. But in trying to convince others, our work is cut out for us, just as it has always been.

A Personal Postscript

It is difficult for me to realize that it is thirty years since I sat enraptured in

Clarence Ayres's classroom. Ayres always treated his students as peers. This meant we were all engaged together in a great adventure-trying to straighten out the chaos which he taught us modem economics had become. For Ayres there was no conflict between teaching and research because the quest for under standing was all of a piece.

Ayres told us that there were five then current books attempting to explain institutionalism: Radhakamal Mukerjee's The Institutional Theory of Economics,

Commons's Institutional Economics, Allan Gruchy's Modern Economic

Thought, John S. Gambs's Beyond Supply and Demand, and his own Theory of

Economic Progress. We somehow got the feeling in Austin in the 1940s that we were the only students in the country who had latched onto these books, and that institutionalism, anticipating Samuelson's phrase, had indeed just about "with ered away" except for Ayres and his students.

What do I find today? I find myself the twelfth president of the Association for Evolutionary Economics (a Walter Mitty dream itself from the perspective of that seventeen-year-old Texas student). But of my predecessors, after Ayres, only one was from our Texas cocoon (although another Texan looks hard over my shoulder toward next year's presidency). The other AFEE presidents, as do our members, have come from universities in Virginia, New York, Wisconsin,

Tennessee, Nebraska--in short, from all over the country.

It is true, as I have been at pains here to spell out, that institutionalists still have their work cut out for them. Weare, for example, almost the only one of the

"allied" social sciences with which the American Economic Association does not annually hold at least one joint session. Perhaps it is asking too much. Priests rarely long to lie down with the infidels. But as I have also tried to suggest, the ideas which institutionalism has long espoused are receiving a wider and wider hearing, even if institutionalism rarely is given much credit.

As I was writing these remarks, Clarence Ayres's old group of five books explaining institutionalism was once again in front of me, and I discovered rummaging through my files that I have here been wrestling with many of the very same problems I wrestled with in Ayres's classes so long ago. I hope I have wrestled more successfully this time. There is a certain reassurance in realizing how many economists today regard our discipline from the perspective from which I was originally introduced to it and which I have always found so conge nial. I can still remember the horror with which I discovered in my graduate school days at Berkeley that there were many economists who regarded Sir John

Hicks's Value and Capital as what economics really was all about, and how upset I was when asked to regard E. H. Chamberlin's Monopolistic Competition as a giant step forward.

Now here we an.~.far from Texas, and in far larger numbers. We know that

Hicks was not at all concerned about value and capital, but only about price and capital. I am back where I began. Plus ~a change, plus c 'est la meme chose.

What would Clarence Ayres have to say about that?

Notes 1. Walter W. Heller, "What's Right with Economics?" American Economic Review

65 (March 1975): 1-26. 2. Clarence E. Ayres, The Theory of Economic Progress (Chapel Hill: University of

North Carolina Press, 1944), p. 155. 3. Paul Samuelson, Economics, 10th ed. (New York: McGraw-Hill, 1976), p.

847. This view is a long-standing assessment by Samuelson. In 1963 he wrote ofinstitu tionalism: "For the most part this school has not succeeded in reproducing itself and today seems to be almost extinct." "Economic Thought and the New Industrialism," in Patterns of American Thought, edited by A. M. Schlesinger and Morton White (Boston: Houghton

Mifflin, 1963); reprinted in Collected Scientific Papers of Paul Samuelson, vol. 2, pp.

1729-47. 4. In 1970 at the Fiftieth Anniversary Colloquium of the National Bureau of Eco nomic Research, in commenting on the initial work of lise Mintz on growth cycles, he wrote: "Now that the National Bureau is fifty years old it has worked itself out of one of its first jobs, namely the business cycle. I don't know when the American Cancer Society was founded, but by similar reasoning fifty years after that date some optimist could hope to cross cancer off his list. The Bureau was thus in danger of becoming just a museum of fossils; but nobody likes to work himself out of a job, so you naturally redefine the field of study." Paul Samuelson in The Business Cycle Today, ed. by Victor

Zarnowitz, Fiftieth Anniversary Colloquium, vol. I (New York: Columbia University

Press, 1972), p. 167. 5. Samuelson, Economics, 10th ed., p. 849. 6. Lee E. Preston, "Corporation and Society: The Search for a Paradigm," Journal of

Economic Literature 13 (June 1975): 437-38. 7. Morris Copeland, "Institutionalism and Welfare Economics," Presidential Ad dress, American Economic Review 48 (March 1958): 1-17. 8. Allan G. Gruchy, Contemporary Economic Thought (Clifton, NJ: Augustus M.

Kelley, 1972). Chapters in Gruchy's recent book are devoted to each of the first three.

However, in his article in the Encyclopedia of the Social Sciences on the institutional school Gruchy includes Leon Keyserling in this group (see vol. 4, p. 467). 9. For one recent example of the latter, see the views of one of Lionel Robbins's proteges, David Seckler, who writes: "The place of institutionalism in the history of economic thought is a matter of some perplexity. That the term itself served as a war cry to quite a number of muddled and slightly disturbed spirits is clear enough. At the time of its publication in the twenties, the volume entitled The Trend in Economics (edited by

Rexford Guy Tugwell), which, so far as it had any unity at all, was a sort of manifesto of dissidence, had an enormous reclame until it was quietly and courteously deflated by a masterly essay by Allyn Young. Nowadays I doubt whether five percent of the youn ger generation of economists have even heard of it. ... As for any influence or progress on the lines indicated, it must be admitted that it has been negligible." David Seckler,

Thorstein Veblen and the Institutionalists (Boulder: Colorado Associated University

Press, 1975), p. ix.

10. One recent example of the desperation with which mainstream economics faces the task of making economic theory more realistic without sacrificing what is regarded as rigor is contained in a recent review article of current work in the theory of the firm. "The crucial problem of finding a substitute process for maximization and maintaining rigor is not easily solved." Richard M. Cyert and Charles L. Hedrick, "Theoty of the Firm: Past,

Present, and Future: An Interpretation," Journal of Economic Literature 10 (June 1972): 407.

II. A typical statement of what "rigorous economic thinking" involves, this time in a book on input-output analysis, is the following: "The analysis in this book has been concerned only with the implications of specifying a national objective such as maximiz ing production or consumption. Before one can examine how such objectives might in fact be reached, it is first necessary to describe the actual operation of the economy in terms of a set of lagged behavior functions in market prices." Burgess Cameron, Input-Output

Analysis and Resource Allocation (London: Cambridge University Press, 1968), pp. 94-95. 12. Campbell R McConnell, Economics, 6th ed. (New York: McGraw-Hili, 1975), p. 94. 13. Stressing this dichotomy is, of course, a primary purpose of an article I wrote several years ago, "Economics: Allocation of Valuation?" Journal of Economic Issues 8

(December 1974): 785-811. 14. Ayres, Theory of Economic Progress, p. 224. 15. Ibid., p. 225. 16. Ibid., p. 248. 17. Charles L. Schultze, "The Public Use of Private Interest," Journal of Government and Society, reprinted in Regulation, the American Enterprise Institute (September/Octo ber 1977): 14. 18. Clarence E. Ayres, Toward a Reasonable SOCiety, The Values of Industrial CiVili zation (Austin: University of Texas Press, 1961). 19. Clarence E. Ayres, "Ideological Responsibility," Journal of Economic Issues 1

(June 1967): 3-11.

20. John S. Gambs, "What Next for the Association for Evolutionary Economics?"

Journal of Economic Issues 2 (March 1968): 69.

21. Ibid.,p. 71.

22. Allan G. Gruchy, "Neoinstitutionalism and the Economics of Dissent," Journal of

Economic Issues 3 (March 1969): 11. The quotation from Ayres is from Theory of eco nomic Progress, p. 208.

23. Ben B. Seligman, "Philosophic Perspectives in Economic Thought," Journal of

EconomicJssues 5 (March 1971): 21.

24. Ayres would surely disagree with the characterization of technology as "malign," although he would accept much of the rest. Ayres was a thoroughgoing optimist, but there is reason to wonder whether he would still be able today to adhere to that comforting perspective. In a remarkable passage he summarized many of the difficulties with the paradigm of standard economics: "A new paradigm must be constructed because pure competition no longer describes the realities of the market, private capital accumulation has lost its religious imperative; resources and factors are less mobile; technology, a dominant element in change, is often malign; scarcity is no longer a prod to achievement, having been displaced for many by at least a modest affluence, the Puritan ethic does not convince anyone; natural law is now a matter of educated superstition; and primarily because the public sector now conditions much of our daily lives" (ibid., pp. 19-20).

25. Daniel Fusfeld, "The Role of the Corporate State in American Power," Journal of

Economic Issues 6 (March 1972): 1-22.

26. John Kenneth Galbraith, "Power and the Useful Economist," American Economic

Review 63 (March 1973): 1-11.

27. David Hamilton, "What Has Evolutionary Economics to Contribute to the Theory of Consumption?" Journal of Economic Issues 7 (June 1973): 197-207.

28. Harry M. Trebing, "Realism and Relevance in Public Utility Regulations," Jour nal of Economic Issues 8 (June 1974): 209-33.

29. Ibid., p. 229.

30. Willard F. Mueller, "Antitrust in a Planned Economy: An Anachronism or an Essential

Complement?" Journal of Economic Issues 9 (June 1975): 159-79.

31. Seymour Melman, "Decision Making and Productivity as Economic Variables,"

Journal of Economic Issues 10 (June 1976): 236.

32. Wallace Peterson, "Institutionalism, Keynes, and the Real World," Journal of

Economic Issues 11 (June 1977): 218. These constitute the tangency between Keynesian ism, as applicable to the modem world, and institutionalism. As such it constitutes a major effort to relate institutionalism to conventional macroeconomics, in contrast to the more frequent efforts to relate it to microeconomics.

33. In saying this I am not unaware of some inconsistencies in what institutionalists have written. Thus I have already commented on what Ayres might have thought of

Seligman's characterization of technology today as often "malign." Similarly, Melman dichotomizes the economics of Smith, Marx, and Keynes from that of Veblen ("Decision

Making," p. 235), whereas Peterson finds much in Keynes as currently under appraisal to be compatible with institutionalism. Peterson does distinguish what he calls the "radical reformist side" of Keynes-presumably in contrast to another Keynes-and it is the former on which Peterson focuses ("Institutionalism," p. 218). I regard these differences as less than fundamental on the ground that extended discussion between the adherents of these views would reduce, if not eliminate, what may well be semantic differences. There are no doubt other differences on which I have not commented, but I know of none which could not be viewed as I have viewed these two.

34. Ayres, Theory of Economic Progress, pp. 84-85.

35. She has written of value: "It does not mean market prices, which vary from time to time, under the influence of casual accidents; nor is it just an historical average of actual prices. Indeed, it is not simply a price; it is something which will explain how prices come to be what they are. What is it? Where shall we find it? Like all metaphysical concepts, when you try to pin it down it turns out to be just a word." Joan Robinson, Economic

Philosophy (Chicago: Aldine, 1962), p. 26. Institutionalists would disagree that it is "only a word"-the very word valuating describes precisely what the major function of an economy is. Markets determine price, whereas economies value, and the distinction is of incalculable importance.

36. Ayres, "Ideological Responsibility."

37. I once myself commented on this aspect of Ayres's work at length. I now feel that I exaggerated the importance of Ayres's exaggeration! See Philip A. Klein, "A Critique of

Contemporary Institutionalism," Quarterly Review of Economics and Business 1 (May 1961):

77-91. In that article I wrote, for example: "As a result of their continuing myopia conceming present-day price theory, institutionalists can argue that economists are unduly hypnotized by price, by clearing the market, and by attaining equilibrium" (p. 84). What I had in mind was that in theories of imperfect competition, for example, oligopoly theory as discussed in Wil liam Fellner's Competition among the Few (New York: Knopf, 1949), equilibrium surely plays a somewhat different role than it does in competitive theory. The normative implications are surely different. But what I failed to see then was that whether it was competitive or imperfectly competitive theory with which mainstream economists were concerned, they were still fixated on prices and the market rather than on values and the economy. The critical economic questions were still largely defined away. This Ayres always saw. 38. See my article, "An Institutionalist View of Development Economics," Journal of

Economic Issues 11 (December 1977): 785-807, for a discussion of this point. Suffice it here to note that R. A. Gordon, for example, says of the impact of evolutionary economics on development economics: "Here economics has truly 'gone institutional.''' R. A. Gordon,

"Institutional Elements in Contemporary Economics," in Institutional Economics: Veblen,

Commons, and Mitchell Reconsidered (Berkeley: University of California Press, 1963). 39. Mitchell's list of those having devoted attention to instability after his original work in this field is a veritable Who's Who of mainstream was well as heterodox econo mists-Albert Aftalion, Jean Lescure, Mentor Bouniatian, S. A. Pervushin, Gustav Cassel,

J. M. Clark, William T. Foster and Waddill Catchings, Alvin Hansen, H. L. Moore, Ralph

Hawtrey, John A. Hobson, A. C. Pigou, Dennis Robertson, Emil Lederer, Joseph

Schumpeter, and Arthur Spiethoff. See Wesley Clair Mitchell, Business Cycles: The Prob lem and Its Setting (New York: National Bureau of Economic Research, 1927), p. ix. 40. I attempted some years ago to consider the implications of dropping the assump tion of fixed tastes and incorporating taste manipUlation in a conventional model. The normative implications are assuredly different from what otherwise they would be. See

"Demand Theory and the Economist's Propensity to Assume," Journal of Economic

Issues 7 (June 1973): 209-39.

41. See, for example, the recent review article on the theory of the firm by R. M.

Cyert and C. L. Hedrick; at the end of it they declare: "On the basis of our brief survey we conclude that there is growing uneasiness with the neoclassical approach ... but that the above rationale is still held by most economists. This position plus the other virtues of mathematical models (prestige as well as rigor) maintain the importance of the role of maximization .... The real world still escapes our models." Cyert and Hedrick, "Theory ofthe Firm," p. 409.

42. See, for example, R. A. Brady, Business as a System of Power (New York:

Columbia University Press, 1943) for a discussion on a worldwide scale of the dangers to democracy inherent in big business. Galbraith's views are too well known to require special reference. For reference to Ben Lewis, see note 43.

43. Ben Lewis, "Symposium on the Antitrust Laws," in American Economic Re view, quoted in Walter Adams, "The 'Rule of Reason': Workable Competition or

Workable Monopoly?" in Antitrust Policy: Economics and Law, ed. Sylvester E.

Berki (Boston: D. C. Heath, 1966), p. 49. 44. I once suggested that "the customary emphasis in economic dynamics is on growth rather than progress for precisely the same reasons that the traditional empha sis in statics is on allocation rather than valuation." Klein, "Economics Allocation or

Valuation?", p. 801.

45. See, for example, E. J. Mishan, The Costs of Economic Growth (New York:

Frederick A. Praeger, 1967); and William Nordhaus and James Tobin, "Is Growth Obso lete?" in Economic Growth, National Bureau of Economic Research, Fiftieth Anniversary

Colloquium, vol. 5 (New York: Columbia University Press, 1972), pp. 1-80.

46. See Samuelson, Economics, 10th ed., p. 195.

47. Kenneth Boulding in a review symposium of William Breit and William Culbert son, Jr., Science and Ceremony, Journal of Economic Issues 11 (September 1977): 657.

48. Ibid., p. 657.

49. Kenneth Boulding, Economic Analysis, rev. ed. (New York: Harper and Brothers,

1948), p. 10. Dissent from Orthodox Theory 3 Of Paradigms and Politics

Although Nassau Senior and John Stuart Mill earlier laid the groundwork, by com mon consensus the current practice in mainstream economics of distinguishing sharply between positive and nonnative economics was introduced by John Neville

Keynes in 1890. He declared that "a positive science may be defined as a body of systematized knowledge concerning what is; a nonnative or regulative science as a body of systematized knowledge relating to criteria of what ought to be" (Keynes

1890, p. 34). He argued further that the objective of a positive science was to establish uniformities, while a nonnative science was preoccupied with the ideal.

To be sure, Keynes went on to note that the German Historical School, which has often been referred to as a forerunner of American institutionalism, had "the conception of political economy as an ethical, realistic, and inductive science" (Keynes 1890, p.

20), but having noted the existence of that viewpoint Keynes tells us that in the remainder of his book he would be concerned to show that one can indeed study economics as a "positive science"--that it was possible to consider economic "laws" and their ''uniformities'' without "passing ethical judgments" (Keynes 1890, p. 37).

Setting a pattern that others have followed, Keynes-having distinguished the nonna tive from the positive-proceeds to ignore the normative for the remainder of his book.

It is almost impossible to overemphasize the completeness of the victory of this perspective on the subsequent mainstream consideration of scope and method in economic theory. In England the J. N. Keynes tradition was espoused principally and most influentially by Lionel Robbins. Robbins took over the Keynesian distinction between "ought" and "is" as differentiating normative from positive economics, and concentrated on developing certain methodological questions that derived from his definition of economics. That definition ("Economics is the science which studies

Reprinted by permission of the publisher from Journal of Economic Issues, vol. 22, no.

2 (June), pp. 435-41. Copyright 1988 by Journal of Economic Issues. Authorization #:

557727.

48 human behaviour as a relationship between ends and scarce means which have alternative uses") is the quintessential mainstream definition of the discipline to this day (Robbins 1946, p. 16). In the Preface to the second edition of his book,

Robbins reacted to the criticism to the effect that in distinguishing economics from "moral philosophy" he was advocating "abstention of the economist from all interest or activity outside his own subject" (Robbins 1946, p. viii). This, of course, gives the game away. For Robbins, any time an economist expresses value-oriented views he is "outside economics." The bedrock institutionalist point is that normative economics is most emphatically "inside economics."

The traditional Robbins position is taken most prominently in the United States by Milton Friedman. "Positive economics is in principle independent of any particu lar ethical position or normative judgments" (Friedman 1953, p. 4). The bulk of his well-known essay ''The Methodology of Positive Economics," is devoted to devel oping the notion that the objective of any positive economics must be to improve our ability to forecast accurately. Friedman dismisses the criticism that neoclassical theory is unrealistic by insisting that lack of realism is not a problem provided that the theory so developed enables us accurately to predict human behavior.

In short, there is virtually no disagreement or disarray among mainstream economists concerning their value orientation: the distinction between positive and normative economics is in principle sharp, and positive economics can be a deductive discipline whose progress can be charted by the ability to predict events accurately. Ethical questions are left to normative economics, an area presumably best approached inductively, beginning with individual values. How ever, mainstream economists who make this sharp distinction customarily have virtually nothing to say about normative economics. "Values" are nothing for scientific economists to fret over.

Mainstream Qualifications Even for "pure positive economics," values seem to be difficult to keep totally banished. Again Keynes set the tone by suggesting that "economic activities ... can [not] be made independent of moral laws" (Keynes 1890, p. 41). Keynes simply insisted that first the economist engages in value-free positive analysis and then he applies the moral laws. But he says little of how the economist as an economist applies the moral laws, or where they come from, or whether in fact the economists have anything to do with evolving moral laws (if indeed they see them as evolving). For Keynes, again setting the mainstream pattern, economic science and "ideals" are totally separable.

Similarly, Ludwig von Mises noted that economic discussions are peppered with words like "better and worse." His perspective was that these words "in volve judgments of value accepted by all mankind, or certainly by almost all men" (Mises 1981, p. 35). Despite this, Mises's economists must carefully sepa rate analysis from "value judgments." Friedman, on the other hand, takes his cue from Keynes. After distinguishing normative from positive economics, he devotes himself exclusively to develop ing his views on the correct methodology for positive economics to pursue.

Science and Normative Assumption

It is not surprising, therefore, that there is virtually no discussion in mainstream literature of the correct methodology, let alone the appropriate development of normative economics. If indeed it is a branch of economics, one would think that economists should have something to do with its development and its role.

Customarily, mainstream discussions simply use "normative" as a term defining the opposite ofthe kind of dispassionate research in which economists engage. It is used to contrast economists "making value judgments" from economists who are "doing scientific work," pursuing the scientific method, and enabling non economists (or economists playing a non-economist's role) to make more in formed value judgments about current economic policy options.

Friedman does comment that economists have special difficulty keeping their research objective because it is so important to everyday life. This importance

"impedes objectivity and promotes confusion between scientific analysis and normative judgment" (Friedman 1953, p. 40). It is useful to compare this posi tion with that taken by the Association of Los Alamos Physicists in 1945. Phys ics, after all, is the field that is most admired methodologically by mainstream economists. It is precise, experiments are controlled, and it gives a prominent role to equilibrium. By now it ought not to be necessary to remind anyone of the profound impact the development of the atomic bomb in particular and the burgeoning prospects for nuclear warfare in general had on nuclear scientists.

The Los Alamos physicists formed an organization that adopted a statement reading in part: The objective of this organization is to promote the attainment and use of scientific and technological advances in the best interests of humanity. The members of the organization recognize that scientists, by virtue of their special knowledge, have, in certain spheres, special political and social responsibilities beyond their obligations as individuals (Quoted in Strickland 1968, p. 38). Is this not precisely the point institutionalists have always made? Economists

"by virtue of their special knowledge" have responsibilities in public policy debates about economic questions that other people do not have. This is not the same thing as being partisan or abandoning the scientific method. It is about recognizing that the status quo is itself fraught with all sorts of value judgments that are reflected both in current resource allocation and in how over time the dynamics of resource allocation change. Economists must ultimately focus on the process of change and dynamic valuation. Let us put this point in terms to which every mainstream economist can relate.

It is not sufficient for an economist to pronounce "if ... then" on public policy questions. A fundamental reason is that the first task facing the mainstream economist (as indeed all economists) is a choice concerning which question or questions to pronounce on? Inflation has attracted the attention of virtually all macro-economists. Unemployment, too, has attracted attention, although most recently it has conveniently been defined away as "natural." (Economists know about the necessity of making choices. They have thus tried to absolve them selves of the necessity to make a nasty choice here between reducing inflation and reducing unemployment.) The critical factor of course is that what interests economists has not traditionally been happenstance or inexplicable. It has been economic problems as defined by the value system of the times, although the mainstream often tries to obscure this orientation.

Passion and the Status Quo

What economic analysis indeed reflects is the attitude of the analyst toward the status quo, and that in tum suggests that value systems are influenced by per sonal experience. Advocates of diverse kinds of intervention in the economy have little in common perhaps beyond the conviction that the current societal arrangements for the economy are unacceptable. Hence the mainstream economists' penchant for beginning economic analysis with a series of "givens" is precisely where the dissent begins.

The argument here, then, is that one's attitude toward the status quo is the preeminent conditioner of the paradigm an economist is likely to embrace. Ini tially to take "no value position" is in fact to embrace all the values embedded in the status quo, whether this is done explicitly or implicitly. It is the inevitability of this that ultimately vitiates the distinction between the normative and the positive as conventionally made. The Los Alamos physicists not only set a standard for all physicists but indeed for all scientists, including social scientists.

They most particularly set a standard for economists. Among social scientists, it is preeminently economists who think they can escape the necessity of confront ing value questions by embracing the perspective of physics. Modem physicists know better.

Formulating the Life Process

Questions of stability and growth, of poverty, of health, of education and train ing, differ from questions of survival in a nuclear age only in degree, not in kind.

All involve formulation and reformulation of the life process. Indeed the con stant reformulation of the life process in light of developing technology and within changing cultural parameters was precisely what Thorstein Veblen had in mind as the task of economics when he stated, "There is the economic life process still in great measure awaiting theoretical formulation" (Quoted in Ayres

1944, p. x.). The task has not changed, but it has been obscured in ever more sophisticated ways by many economists who have turned their backs on the central responsibility of the discipline.

Conclusion

We come then to the implications of all this for the distinction between main stream economists and institutionalists. It is not a coincidence that the econo mists who insist most strongly that economics is a positive science are those who can remain most tranquil in the face of the status quo. Even successful econo mies have an unfinished agenda.

It is a major anomaly in economics: customarily those economists whose political persuasions happen to be toward leaving decision making to the market are most likely to be those who insist most vociferously that economics must be a positive science. Those whose political predilections are toward intervention ism of one sort or another are far more likely to argue that there is such a thing as normative economics even in economic analysis.

The recent reemergence of classical economics in the guise of rational expec tations has presented this distinction in particularly vivid form. For instance, it is now appropriate in the name of positive economics to argue that the unemployed simply prefer leisure, and that long periods of unemployment--like all of the

1930s----can be regarded as "labor markets not clearing." There are many other examples. Institutionalists have always argued that economics is a science of value, not simply price, and that therefore normative economics is an integral part of economic analysis.

For institutionalists, affirming the life process is what economics is all about.

To affirm the life process is not normative or positive. It is descriptive. That there can be differences in how to affirm the life process is another matter. But an affirmation of the life process requires as a first step recognition that the economy we have does a less than adequate job in this process. Far from taking the status quo as "given," institutionalists constantly reevaluate and re-analyze the status quo for indications of how, in light of dynamic technology and the emergent values it brings with it, the status quo can be altered to affirm the life process more effectively. Like the Los Alamos physicists-indeed like the Union of Concerned Scientists today-institutionalists recognize that economists, be cause of their training, have special expertise and special responsibilities that they must accept and speak to in making economic theory a more efficient tool for the analysis of public problems. The great potential value of economists is they can make a distinctive contribution to policy debates. Joan Robinson has perceptively noted that the first essential for economics to be a real science is ''to combat, not foster, the idealogy which pretends that values which can be mea sured in terms of money are the only ones that ought to count" (Robinson 1962, INSTITUTJONALISM-A BASIC PERSPECTIVE 53 p. 47). In sum, to enhance "the life process," economists must embrace the pursuit of value rather than measure, temporize, and dichotomize endlessly in the arid fields of what they are pleased to call their positive science. Reliance on the instrumental theory of value may stand economic analysis in better stead than the rigid normative-positive division doggedly insisted upon by mainstream economists, who in the end frequently have as a major characteristic an ability to be comfortable with a status quo against which interventionists of all persuasions are led to rail.

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An old expression says, "If it ain't broke, don't fix it." Economists by the drove have recently taken this message to heart and concluded that in the industrialized market-oriented economies we have spent a disastrous half-century trying to fix systems that have nothing wrong with them after all. My generation was taught that John Maynard Keynes's special genius was to develop macrotheory on which useful macropolicy might be based. His unique contribution was to drop the unrealistic assumptions adhered to so tenaciously by his neoclassical fellow economists-Say's Law of Markets and full employment of all resources in all but the most trivial short-run and self-correcting circumstances. Economists of the fifties and early sixties specialized in attacking Say's Law. In retrospect, institutionalists missed a golden opportunity to make a point with the main stream. Say's Law requires, if it is to remain both valid and operational, that the economy-including both its technological and institutional underpinnings function smoothly. The possibility that a technologically producible supply and an institutionally sanctionable demand might not at all times mesh per fectly is something that any institutionalist would have expected but that neoclassical economists, with their fixation on market clearing, have had trouble confronting.

Like their neoclassical predecessors, the new classical economists, particu larly adherents to rational expectations (RE), no longer attack Say's Law, be cause in fact Say's Law once more represents for them the state of grace into which market economies naturally fall. The failure of markets to clear continu

Reprinted by permission of the publisher from Journal of Economic Issues, vol. 20, no.

2 (June), pp. 313-323. Copyright 1986 by Journal of Economic Issues. Authorization #:

557719. 105 ously was a major assumption of Keynes----now newly questioned. Just mix the notion of a natural rate of unemployment into the current brew, and the full employment assumption of neoclassical economics in the pre-Keynes period is re-anointed and placed once again in a pivotal position in macroeconomic analy sis. If existing unemployment is voluntary, no one need worry. All this raises an interesting question: was persistent unemployment as a problem requiring atten tion a figment of Keynes's imagination? Is it in fact true that the 25 percent of the American labor force out of work at the depth of the Great Depression can be said to have been essentially "voluntarily" unemployed, in the sense that lower wages could have employed them? Or was there, as Keynes thought, something essentially wrong with the way the macroeconomy was functioning at that time?)

The answer to this important question lies in what one assumes to be given in the institutional structure within which economic decision making occurs.

We suggest that institutionalists have always been better able to consider the institutional milieu in analyzing the macroeconomy than have mainstream economists.

The Institutional Character of the Keynesian Message

Some institutionalists have debated whether or not Keynes was an institutional ist. 2 We need not decide this issue to note that the Keynes of the General Theory had one characteristic in common with institutionalists: a penchant for facing the economy as in fact it was, and working at explaining how it functioned. In this he resembled, for example, Wesley Clair Mitchell, who insisted that economic theory could be usefully developed only if first we get ''the main facts of eco nomic history."3

Keynes's view of unemployment as a problem requiring action began with one realistic premise-namely, persistent, large-scale unemployment. Thus, if one wishes to argue that economics as a science is a deductive process beginning from "realistic" premises, one could say that both Keynes's premise and his methodology filled these requirements. Or, one could argue, as would a rational expectations adherent, that Keynes's theory was not realistic because the premise was false--in fact, markets, including labor markets, do clear, and therefore a

"realistic explanation" for unemployment must begin there.

Therefore, if one argues today that sound theory derives from logical deduc tive reasoning based on realistic premises, it is clear that the differences emerge from (1) how one concludes a premise is realistic, and (2) how close the realistic premise need be to the deductive chain presumably derived from it. Clearly, institutionalists would argue that Keynes was trying to explain the world in a more comprehensible way than are the new classical economists. If some con sider this proposition debatable, it does not seem so to institutionalists. We shall consider this below.

The New Classical Response to Keynes

The objections to Keynes by the new classical economists are well known. But it is important to underscore that all under the new classical label do not agree, nor necessarily make the identical charges against Keynes's analysis. Monetarists, for example, think interventionist policy may do more harm than good, and thus advocate their celebrated simple monetary rule as a substitute for discretionary monetary policy. Supply-siders object to interventionist fiscal policy on grounds that tax increases will usually do more harm through dampening incentives than good through stabilization. This leaves rational expectations adherents as the major challengers to the conventional Keynes message of deficient aggregate demand and underemploy ment. Today the common charge is that Keynes "erred" in failing to emphasize that without assuming price (and wage) rigidity, none of the implications of his analysis-most particularly, persistent underemployment and the positive role to be played by purposeful interventionist policy-could hold up.

Institutionalists ought to have a clear response to this line of attack because, as already suggested, the Keynesian approach seems appropriate to institutional ists because it assumed an institutional world we all could recognize, not one we could recognize only after a large number of assumptions were dropped.

A new assertion to the effect that "markets clear" cannot seem very promising to an economist examining labor markets in the 1930s, unless one ascribes to voluntary unemployment a level of importance that only new classical econo mists appear willing to assert.4 Any notion of a minimum wage is admittedly an institutional standard, just as what constitutes "adequate standards of living" is an institutional matter. Keynesians argued that unemployment was widespread and that expectations of wage adjustments alone were unlikely to solve the matter. In this connection, it is interesting to consider the view of a high priest of

RE, Robert E. Lucas, Jr.: I suspect that the unwillingness to speak of workers in recession as enjoying "leisure" is more a testimony to the force of Keynes's insistence that unemployment was "involuntary" than a response to observed phenomena. One doesn't want to suggest that people like depressions! Of course, the hypothesis of a cleared labor market carries with it no such suggestion, any more than the observation that people go hungry in cleared food markets suggests that people enjoy hunger. 5

If one wears the market-clearing equilibrium blinders of the stereotypic pre-Keynesian neoclassical economists, one can presumably be impressed with this new classical argument-the concern of the economists would in deed end with noting obstacles to market-clearing. Resource allocation ac cording to the rules of narrowly defined efficiency exhausts the responsibility of the economist.

A fundamental tenet of institutionalist thought is that resource allocation must be judged in light of what I have elsewhere called the higher efficiency. This refers to the ability of total resource allocation to reflect fully changing societal values, including notions of equity, security, compassion, and freedom along with economists' usual concern with narrow efficiency.6 I must have had Lucas unconsciously in mind when I wrote, "Mainstream economists argue that con fronting ... imperfections is not part of the economist's job, or that the task can be finessed by relying on Pareto optimality, or that it can simply be ignored.,,7

There is, quite simply, for mainstream economists, a very clear division of labor: economists concern themselves with market clearing, in this case, oflabor, and someone else worries about the level of wages at which the market clears.

Rational expectations adherents would have contented themselves, presumably, with claiming that the 25 percent of the labor force unemployed at the depth of the depression existed only because the 75 percent employed were still being paid too much-or alternatively, that the unemployed needed to drop their wage demands to what the market would have paid. There was some wage level at which no unemployment would have existed! Would they have starved at these wages? Would their standard of living have been below what prevailing institu tional standards of economic security required? To ask these questions--we would be told--is to move beyond economics. Professor Lucas's comment con cerning whether people go hungry in cleared food markets can be taken to its logical extreme: to ask whether people die of starvation (let alone enjoy going hungry) in cleared food markets is to raise a non-economic question.

An Institutional View of Expectations Formation

Unlike mainstream economists, institutionalists have not been engaged in a trau matic reexamination of their notions of expectations formation. They do not claim to have a perfect theory of how economic agents form their expectations, but they have a consistent point of view and a set of assumptions that have been building at least since Thorstein Veblen irritated his contemporaries by talking about the role of instincts in human motivation. The debate over whether expec tations are adaptive or rational is largely misplaced in the institutionalist frame work where the emphasis has always been on dynamic or processual analysis. If economic analysis is single-mindedly pointed toward static equilibrium, then the relationship of prior views and prior events toward the determination of that equilibrium is a major concern. Similarly, the way agents view future events that might impinge on the equilibrium would be important.

The relative virtues of institutional analysis in this regard are obvious. Being fundamentally dynamic, institutional analysis of how economic activity unfolds cannot be undertaken at all without recognizing that the only significance at tached to the present is that it happens to be where we are now. To understand it, however, requires recognition that current attitudes are tied to past views and events, and are equally tied to future events by a complex of expectations. It is the continuous unfolding of the process in each of us, and the meshing with those of all other economic agents and with exogenous events that simultaneously produces the future and determines whether the expectations of economic agents will be realized. Institutionalist views of expectation formation begin with the premise oftech nological change as a dynamic conditioning factor constantly altering the poten tial of the economy, the relations among all economic agents dependent on the technological base, and the consequent ways in which, at least potentially, the participants in economic activity will be interrelated. Moreover, technology changes in ways that constantly alter the basic tension that exists in any society.

The origin of the tension is the relative advantages and disadvantages that tech nological change alters. And the changing nature of social tension makes itself manifest in institutional response----both resistance and accommodation--to the technological change. That part of this institutional response involves processes resembling game theory is no surprise to institutionalists. With changed circum stances as the given, the way in which A perceives B's response, in light of what

B thinks A still perceives, et cetera, can easily be factored into the process. The complex of interactions which constitutes institutional adjustment to technologi cal change must, therefore, ineluctably involve expectations and changes in ex pectations.

How does this view differ from the mainstream view? Just in the recognition that it is human beings doing the interacting, that their reactions, including their expectations, involve their constantly changing values, and that the process by which values change cannot be reduced to anything so mechanistic as the as sumption that "agents use all information efficiently." This is tantamount to arguing that institutional adjustment is always and at all times a narrowly "effi cient" process. Recall the passage in which Ayres quoted Veblen, "It still re mains to prove whether machine technology will prevail or whether our civilization will provide another tragic instance of the triumph of imbecile insti tutions over life and culture."g

While I realize that this is probably the first time Veblen has been drawn into the debate about rational expectations, the point seems nonetheless apt. If the direction of the adjustment process of institutions to technological change is more or less predictable, as institutionalists have always insisted, this does not mean that the rate of adjustment can be viewed as smooth or "efficient," if by

"efficient" one means that none of the adjustment process is ever delayed for longer than the irreducible minimum for the impact of technological change to make itself felt. A large part of the adjustment process must involve learning from the past and changing one's views about the futurt}----in short, changing expectations. Policy makers can perhaps use the assumptions about the direction of change in setting policy. The lags in the adjustment process, and in the rate at which expectations change, explain part of the policy failures, but one need not argue that the adjustments are so inefficient as to render all policy efforts definitionally futile.

Changes in expectations reflect changing values. These involve the attitudinal changes encompassed in the higher efficiency. What an economy is charged to do is respond to the emergent values of its participants as they involve all five of the basic dimensions of the totality of economic performance which are sub sumed in the higher efficiency.9

One may ask, what has all this to do with the debate about rational expecta tions? The answer here is, quite simply, "Everything." The RE-view of human nature is the old simplistic view embedded in Economic Man and utility maximi zation, reduced to tautology. Flesh and blood individuals process information in complex ways--ways colored both by their subjective view of what they see happening around them in the institutional environment, and by how they inter act with that environment, and it with them.

The RE approach restores to Economic Man much of the precision and the mechanistic perfection that most of mainstream economics as well as institution alism would have denied half a century ago. The RE Man is simply Jeremy

Bentham's Pleasure-Pain Machine raised to new heights of precision via his accurate and complete processing of all available information (probably with a

PC). Economic life in an RE world conjures up a vision of miIIions of individu als plugged into their computers in the process of rendering dispassionate deci sions on a complex of factors, carefully processing endless streams of information. The institutionalists would ask, where is the impulse shopper; the price gouger; the lover suddenly driven to extravagant purchase; the taxpayer hell-bent on beating the government at its own game; the stock purchaser who has a hunch; the unemployed father, suddenly overcome with frustration, resort ing to stealing or cheating; the apprehensive consumer fearful of a rise (or fall) in prices? One may say that all these flesh and blood participants in economic life

(which have influenced institutionalist analysis from the beginning) will wash out in the macroeconomy. But they don't. If many larger movements in the economy are knowable, in the sense that expert economic analysis enables us to predict better than a naive forecast, many are not--naive forecasts are sometimes stiII the best, and small disturbances still cumulate into large disturbances. Thus purposeful interventionist policies stiII have a contribution to make.

In sum, mutual interaction influences both the individual and the institutional environment. This process is necessarily complex. It is the way emergent values are produced, and it determines not just how efficiency, narrowly defined, changes, but how the other dimensions of the higher efficiency change over time.

It is also the way one must approach the question, how wiII the economy respond to a given change in policy? The response is not so unpredictable as to sterilize interventionist policy in advance, but it is also not so precise as to reduce the reaction patterns to precise, predictable equilibrium paths. This may be one way of suggesting that public policy may always have difficulty INSTITUTIONALISM-A BASIC PERSPECTIVE Il I fine-tuning the economy, but there is no reason to conclude, therefore, that the tuner of the economy cannot, like the piano tuner, make it sound much better than it did before any tuning was tried. To an institutionalist, part of the economist's job is to analyze how and whether the economy allocates resources so as to achieve minimal standards of all the criteria by which the total allocational thrust of any economy must be judged-the higher efficiency.

In short, Keynes was right. If one defines persistent unemployment as a problem requiring intervention, it means that the system is very likely to allocate labor in such a way as to leave a significant part of the labor market either unemployed for a long period of time or employable at wages below institution ally sanctionable levels (or, one might add, inadequately trained, inappropriately trained, or socially regarded as "untrainable"). This gives economic meaning to the term. One can argue that insofar as the allocation of labor within the current institutional milieu is concerned, the economy is not operating satisfactorily. Effi ciency narrowly defined, in short, does not comprehend fully the higher efficiency. The "Natural Rate ofUnemployment"

Fudge Factor for the Black Box

Of all the recent additions to the apparatus of classical theorizing (both pre-Keynesian and recent) none has been more pemicious and ultimately self-serving than the notion of the "natural" rate of unemployment. What is the natural rate? Paul

Samuelson and his new co-author, William Nordhaus, are telling students that the natural rate is "The unemployment rate at which pressures on wages are to balance, tending to neither increase nor decrease the rate of inflation."lo Hence, one could derive the natural rate empirically-anytime one finds efforts to re duce unemployment further are associated with an increase in inflation, one knows that unemployment has already been reduced to its natural rate.

The use of the word "natural" is interesting-it is surely deliberate. Blacks have been described as "naturally" musical, dyslexics as "naturally" stupid, suf ferers from Parkinson's disease as "naturally" jittery, men as "naturally" aggres sive, et cetera. In all this mixed bag of examples the word naturally is used to suggest that no known purposeful action was or had to be taken to produce the postulated condition and, by the same token, since the unemployment condition is natural, policy designed to overturn it is not likely to be effective. Changing

"natural" conditions is difficult, if not impossible, so whether "natural unem ployment" is good, bad, or indifferent we had best learn to live with it.

And so to call unemployment of a given rate "natural" is at once to suggest it cannot be reduced and to absolve economists from significant responsibility for searching for ways to reduce it. Accordingly, if the inflation rate must be reduced to whatever rate we target (including zero) through policies selected to achieve this end, the associated unemployment (whether resulting or merely concomi tant) is simply the way things are.!!

The only way economists can so reason is to use an exclusively market-clearing mentality focused on prices and quantities and "equilibrium" to the exclusion of all the other criteria that institutionalists insist are as critical for judging eco nomic performance as the narrow market efficiency reflected in market clearing.

Rational expectations adherents have made a large impact by charging that the Keynesian system cannot explain the stagflation of the 1970s. Keynesian orthodoxy or the neoclassical synthesis is in deep trouble, the deepest kind of trouble in which an applied body of theory can find itself. It appears to be giving seriously wrong answers to the most basic questions of macroeconomic policy. Proponents of a class of models which promised 3-1 ;2 to 41 ;2 percent unemployment to a society willing to tolerate annual inflation rates of 4 to 5 percent have some explaining to do after a decade such as we have just come through. 12

But the assumptions that markets clear has seemingly not presented any prob lems at all for rational expectations adherents. The unemployment rate in the

United States was 3.2 percent in 1929 and did not again achieve this level until

1943. RE adherents pillory Keynes, who set out to explain this persistent unem ployment, and instead persuade mainstream economists that thirteen years of excessive unemployment rates was "voluntary" and hence not really an eco nomic problem. A mention of voluntary unemployment for thirteen years is a small blemish on the RE world. But the stagflation of the 1970s presumably was the death knell for Keynesianism.

There is surely some irony in this state of affairs. To modem mainstream policy makers inflation reduction looms far larger than unemployment reduction.

And our major "solution" to unemployment is what it was in the pre-Keynesian world---tlimply assume it away. "Markets clear"--including labor markets. What problem can there be?

Conclusions

An implication of the foregoing argument is not that every word written by

Keynes should be chiseled in granite. Rather it is that the Keynesian perspective was essentially sound-one must analyze the economy as it in fact operates rather than the economy we might like to investigate. The ultimate implication of the new classical economics is to narrow once more the focus of the economist to a world that resembles the world about us only if one engages in heroic simplification via assumption, and if one severely restricts the obligations of the economist qua economist.

Institutionalists are driven to argue that analysis which is restricted to market clearing, in which equilibrium is the exalted "end," in which the natural rate of unemployment can comprehend any amount of misery for the worker, and the goal, in contrast, of inflation control must be a rate of price increase of 0 percent, is fatally flawed. In short, when the prime means of confronting the distance between the narrow efficiency of resource allocation and the higher efficiency the ability of total resource allocation to reflect fully the changing societal value structure--is simply to ignore it, no economist can legitimately rest content and conclude that the responsibilities of economic analysis have been fulfilled.

Notes 1. Milton Friedman in a well-known argument has labor supply depend on the nomi nal wage rate divided by the expected level. Labor demand, however, depends on real wages. In the end labor can be "fooled" into volunteering the wrong amount of labor.

Could this have continued for thirteen years? (Compare M. Friedman, "The Role of

Monetary Policy," American Economic Review 58 (March 1968): 1-17. 2. Among those who think he was not an institutionalist one finds prominently the name of Allan Gruchy. "Unlike the neo-institutionalists, Keynes and the Keynesians do not have a theory of capitalist development or a theory of industrialization. On this point they do differ from their orthodox MarshalIian predecessors." Allan G. Gruchy, Con temporary Economic Thought (Clifton, NJ: Augustus M. Kelley, 1972), p. 334. Wen dell Gordon takes another view, probably shared by many institutionalists, saying of

Keynes's General Theory: "The theory was, at least initially, a fine healthy antidote to some of the stereotypes of price theory, especially the one that pure competition

(and free enterprise), can be counted on to deal to best advantage with the business cycle problem." Wendell Gordon, Institutional Economics (Austin: University of

Texas Press, 1980), p. 124. 3. Mitchell has argued this many times. See, for example, Business Cycles: The

Problem and Its Setting (New York: National Bureau of Economic Research, 1927), p.

2. The debate about the requirement that economic theory be realistic, and so rele-/ vant, is very old. Lionel Robbins argued many years ago that useful economic analy sis required strict adherence to deductive logic. Provided always that the original premise was grounded in the real world, the results of deduction could be applied to that world. In this connection he ridiculed the institutionalists, including particularly

Mitchell, who tried to average diverse measures of variables in different time periods to find truths pertaining to the real world. Robbins, writing in the 1930s, concluded:

"A few isolated thinkers, using the despised apparatus of deductive theory, have brought our knowledge of the theory of fluctuations to a point from which the fateful events of the last few years can be explained in general terms, and a complete solu tion of the riddle of depressions within the next few years does not seem outside the bounds of probability." Lionel Robbins, An Essay on the Nature and Significance 0/

Economic Science (London: Macmillan Co., 1946), p. 115. 4. An alternative and less stringent interpretation might be that rational expectations adherents don't really assume that markets clear either, but that this assumption is a more convenient and useful assumption to begin from than the Keynesian assumption. This is the Keynesian-neoclassical debate revisited. 5. Robert E. Lucas, Jr., "Understanding Business Cycles," in Studies in Business

Cycle Theory (Cambridge, MA: The MIT Press, 1981), p. 226. 6. Philip A. Klein, "Institutionalist Reflections on the Role of the Public Sector,"

Journal o/Economic Issues 18 (March 1984): 45-68. 7. Ibid., pp. 61-62. 8. Clarence E. Ayres, The Theory of Economic Progress (Chapel Hill: University of North Carolina Press, 1944), p. 176. The quote is from T. Veblen, The Instinct of Work manship (New York: Viking Press, 1914), p. 25. 9. Compare Philip A. Klein, "Institutionalist Reflections on the Role of the Public

Sector" op. cit.

10. Paul A. Samuelson and William Nordhaus, Economics, 12th ed (New York:

McGraw-Hill, 1985), p. 911.

11. Say Samuelson and Nordhaus concerning options for reducing the natural rate of unemployment, "we must enter a cautionary note: two decades of research and labor market experiments . . . . have led objective analysts to be extremely modest in their claims .... It seems unlikely that a reduction of more than a few tenths of a percentage point could be accomplished by a set of politically acceptable reforms." Samuelson and

Nordhaus, Economics, p. 222. They do acknowledge that it is a "central flaw in modern mixed capitalism" (p. 258).

12. R. E. Lucas, "Tobin and Monetarism," Journal of Economic Literature 19 (June

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