ideas on the theory institutional economics, written for various (important) purposes

I can still remember what my initial reaction was when I was first exposed to institutional economics as an undergraduate. Basically, what attracted me to it was my realization of just how fundamental were the questions being asked, essentially what was at stake, in those views. For whatever reason, I've always been drawn to these big questions in my studies -- economics, math or whatever. I have this obsession with understanding what's at the core of any one particular idea or event. In institutional economics, I was struck by the discussion of the fundamental rules shaping economic activity in whatever capacity, and also how variations in those rules can explain variations in economic performance.

Surprisingly enough (given where I ended up on the political spectrum), that first exposure to institutional economics was from some work by Douglass North, the Nobel Prize-winning institutionalist and economic historian. Still, there is a lot of at stake in some of these views, in particular the idea that the West developed so quickly in part because of its institutions of private property, free markets, and so on.

Nevertheless, regardless of the politics involved, the combination of a "big question" approach and a set of tools and conclusions privy to the majority of the mainstream's political agenda (look no further than the Washington Consensus) made this type of institutionalism highly applicable to economics and economic theory in particular. In other words, Douglass North and others in the new institutionalist tradition were able to answer a very important, if under-appreciated question at the time in a very attractive way (to the neoclassical paradigm):

Why should economists care about institutions? What kind of primary explanatory power can economists give to institutions?

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Fast-forward to graduate school, roughly 4 years later, and I am sitting here at my desk with a stack of books on legal and social history of all kinds, written in academic fields where such a question, "why should we care about institutions?" is not even entertained. Obviously, social history is all about how different cultural, political, and economic institutions develop through (and in turn shape) the course of history. Staring at them now, my mind dips in and out of the ideas captured in them, searching for the reasons why I'm in an economics department... My question is, why should economists care about that stuff? For example, why should economists care about the cultural or economic reasons why women might or might not have become some of the earliest workers in the textile mills?

Of course, I've tried to answer some of these questions here on this blog. But aside from using the social history to point out mistakes in economists' explanations, sort of an ad hoc critical style, I haven't gone far enough. Certainly this kind of approach lacks the analytics to form a powerful critique of new institutionalism, or of economics in general. In other words, in the abstract, why ought economists to be concerned with the writings of Alice Kessler-Harris, Christopher Tomlins, and other social or legal historians?

Just as the nature of institutional economics is "big" and "fundamental" in and of itself, so is the answer to this question. And I don't pretend to know all the answers. But what follows is a suggested way of thinking about the issue.

The way in which historians and social scientists conceive of the path that institutions take, including where they arrive, has important effects on how we should see economic agents' behavior in those institutions, either over time (e.g., historically, the transition from feudalism to capitalism) or in a particular phenomenon (e.g., socially, racial discrimination). The job of the theoretician is of course to separate out analytically the processes deemed most crucial to understanding economic behavior, and this is partly a political decision. But still, to the extent that a phenomenon is subjected to rigorous economic analysis, that phenomenon is embedded in institutions, and we can therefore see the historians and social scientists as doing the necessary "legwork" for the economist by enriching his understanding of that context. The point is then to understand economic behavior in that context.

The kind of rigorous economic analysis to which I refer above is not immediately evident in some of the older works in the new institutionalist tradition, which I think was highly influenced by the very political project of neoclassical economic theory. There is more evidence for it in more recent work. We still have far to go.

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Looking ahead, the kind of institutional analysis that works best for economists is the work on the social, i.e. the ground-up work being done by various scholars in other social sciences. Also, any close analysis of how political structures have evolved over time, which would give us a better idea of the ordering of power and the economic interests of those vested in different orderings, can be a powerful explanatory factor for understanding the behavior of economic agents. Such pressing questions and controversies over the nature and origin of the political institutions of capitalism, I would contend, shed light on the economic behavior of agents during the rise of a market economy.

Such matters are certainly not to be left, for example, to the political rhetoric of "private property" and "freedom of contract". The other social scientists have gotten us too far for us to turn around and be so sloppy.

keynesian orchestration

[Technically a repost of an earlier article ("Keynes our lord and master"), it is considerably revised in particular regard to how detailed the story is as well as more quotes. Enjoy!]

As a PhD student in economic history, I am always trying to turn my teaching duties into opportunities for uncovering the historical background of concepts economists usually take for granted. Unemployment is a perfect example – it’s one of the most-watched statistics in the news, nearly every economist you talk to will have a different explanation for why we have it, and for a year and a half now the official unemployment rate has been over 9%. So, walking to my macroeconomics class one morning, I started to rethink the entire idea of unemployment through the lens of history. In particular, since his name has been thrown around quite a lot lately, I was interested in uncovering what was the particular historical circumstance of the Keynesian view of unemployment.

As most of us have read or heard about in the news, Keynesian policies revolve around the importance of government spending in stimulating a weak economy. For example, John Maynard Keynes saw the problem of chronic unemployment in the U.S. during the Great Depression as primarily a result of insufficient spending and investment in the economy. His prescription was a demand-centric view of economic stimulus: the government should invest more money in the economy, through either the creation of jobs or the spending of money on goods and services. In either case, government spending puts money directly into people’s pockets. Those people then go out and spend that money, fueling more job growth and funneling more money back into the system. And so on. The process has been termed a “multiplier” process because of its continuously compounding effects on economic activity.

Simply put, I wanted to know the historical circumstances of these views: how social perceptions of employment have changed over time and what it might all mean for understanding these basic Keynesian views of both the causes of unemployment and how we might get around to fixing the problem. I started thinking about how society has viewed and treated the unemployed, past and present. And when I started thinking about the history I realized a few things.

I realized that, at least since feudal times, society has always been concerned with the unemployed in some way or another. I also realized that when viewed in historical context, Keynes' views of how to alleviate unemployment have much stronger implications for the role of state policies than many people realize. This surprising finding is against the more conservative “New Keynesians” such as Greg Mankiw (who admit that there is a very limited set of problems which government spending can solve) as well as some of the more “extreme Keynesians” such as Paul Krugman (who generally have argued in our current downturn for a very large stimulus package, much larger than that which was actually passed in Congress, i.e., the ARRA, in 2009). The ultimate implications of this finding are huge. I will argue that Keynes' program for investment-led stabilization by the government, fueled by a desire to solve the "unemployment problem," are a modern example a feudal state in which the government itself controls investment. In this (twentieth century!) policy, the state becomes the director of investment (through the planned system) in order to maintain as close to full employment as possible.

This article is a sketch of the two-pronged argument made above. The end goal is to arrive at a synthesis of social understandings of unemployment with Keynes' policy proposals for investment-driven stimulus by constructing a powerful continuity between the two concepts.

Our story, interestingly enough, begins in fourteenth century England.

After the Black Death had run its course through England, the nobles passed a law titled “Statute of Laborers” (1351). Reacting to the drastic cut in labor supply and the economic consequences associated with it (e.g., a better position for laborers to bargain for higher wages), the statute intended to save and protect the economy from the destabilizing tendencies of the Plague. The statute required every able-bodied person to work – either for wages, serving under a lord, or serving as an apprentice in some trade. (It was considered a crime if one weren't working.) And since the shortage of laborers meant that the economy really depended on them, the statute did something to curtail the ability of these workers to bargain for ever-higher wages. The statute placed a ceiling on wages and regulated several other terms of the labor contract, regulations enforced by town governments who were allowed to determine "fair values" for wages. This was intended to maintain the viability of the local economy (these fair values were also imposed on bread and other goods at the local market where farmers could sell their surplus).

This statute represents the birth of the modern relationship between the state and unemployment. When the English landed on the shores of the New World, many of their institutions and social practices were carried over, including the Statute of Artificers (passed in 1583, it was the 16^th century revision to the original Statute of Laborers, containing many of the basic features of the original statute). Towns in the middle colonies and New England regulated wages and enforced the assize on bread, people were coerced into work when needed, and town officials took care of their poor by feeding them temporarily and getting them jobs.

The American Revolution changed some of these feudal institutions, but not all of them. Surely a republican society was no place for shackled workers and regulated wages. And some of these institutions did slowly began to fade away, particularly unfree forms of labor in the North, as ideological contradictions developed between the North and South with the growth of slavery.

However, the simple fact that the North was using the South as a baseline for celebrating their free labor institutions should set off some bells and whistles. For example, controls on unemployment in many northeast states stuck pretty well. Overseers of the Poor in towns were still a prevalent part of the local political economy, housing the poor and distributing apprenticeships when needed (and, in some states such as Massachusetts, as compelled by statute). Workhouses, another British-inspired institution, were also quite prevalent in early America.

As we move further into the nineteenth century, and as capitalism develops as the dominant economic system in society, the unemployed take on a role in the ideology of this new system. The case for understanding this transition that I know best is the U.S.: previously, in colonial times and through the antebellum period, the poor were taken care of by the public because of traditional laws and institutions. But two trends in the evolution of capitalism roughly beginning sometime after the Civil War led to fundamental changes in how the unemployed were conceived: the privatization of welfare institutions such as the workhouses mentioned above, and the success and rapid development of industrialization.

Allow me to explain.

In this new world of industrialized capitalism, poor relief took on a new, private character as charity became increasingly supported by agents outside government. And the success of industrialization led to a new ideology of society where the unemployed are seen as “mistakes,” people who had failed to integrate themselves into the new system. (This is not an alien concept – Tea Party arguments against unemployment insurance assert that such policies foster laziness and ineptitude at finding a job, and should therefore be cut back significantly.) For this group of unemployed, the threat of poverty and of being an outcast from the new socioeconomic system was enough incentive to keep all employed – no public programs were needed to get people to work, and if people didn’t work, they were to be corrected for their mistakes. As Alex Keyssar argues in his history of unemployment in the U.S. titled Out of Work, a variety of forces acting on labor markets after the Civil War made unemployment a more acute problem, leading to crime and other social problems. In turn, unemployment itself was considered a crime just like it had been five hundred years ago in England: various tramping laws passed in the 1870s and 1880s saw the poor as having failed the system and who were therefore criminals. Such a contradictory state of policy indeed! The late 1800s and the onset of the “Progressive Era” saw the state having a hand in both punishing the unemployed and (marginally) helping workers out through factory inspections and reform!

Alex Keyssar documents how in the early twentieth century various pamphlets argued that American capitalism needs to be saved from the threats to social stability of joblessness. These pamphlets spelled out movements for an expansive program for state policy in addressing unemployment, including proposals for public employment programs. So there we are, early 20th century, still faced with the problem of trying to cure the issue of unemployment. In several ways, as I noted above, things sound quite familiar from previous eras. Social pressures to eliminate unemployed were bound up in state policies which are strikingly similar to the same regulatory controls placed on the unemployed over 500 years earlier in England. But as we turn to the last part of our story, enter John Maynard Keynes, we see that he added a remarkable twist.

Keynes took a long history of social concerns with the unemployed and coupled it with a precise answer for why unemployment fluctuates; thereby producing both a diagnosis and radical prescription for curing spells of protracted unemployment. The logic of his argument is straightforward and parts of it remind one of the events surrounding our latest financial crisis.

Keynes takes private investment as the primary variable in his story, focusing on how it determines cycles of growth and stagnation in an economy. The problem with investment behavior is that it is highly volatile in a capitalist economy with a developed financial sector. Essentially, the reason for the volatility is that stock markets in capitalist economies promote short-sightedness on the part of its investors: investor behavior on the stock market floor fails to reflect the “genuine expectations of the professional entrepreneur” (151). Instead, investors in the stock market focus on short-run expectations concerning the value of stock prices in a future world that is fundamentally uncertain. Thus, not only does short-run investment fail to meet the needs of a stable, growth-focused economy, but since investment affects cycles in the economy, it has perverse effects on employment. These cycles are certainly not natural. Indeed, Keynes noted in the General Theory that “[d]ay-to-day fluctuations in the profits of existing investments, which are obviously of an ephemeral and non-significant character, tend to have an altogether excessive, and even an absurd, influence on the market” (154).

Thus the diagnosis; what about the prescription? Most Keynesians today, in one form or another, argue that government stimulus is necessary in times of economic distress. Governments should take over some of the responsibility of investment in times of high unemployment because private investors are unwilling to take risks necessary to boost job growth. In this way, governments can act to stabilize the system.

Keynes himself was more explicit: government investment should not be a temporary solution – it should actively control the investment of resources in an economy, because that is the only way we can wrestle investment out of the hands of hot-headed private investors in order to stabilize employment levels and eliminate unemployment. “Our final task,” he tells us in the General Theory, “might be to select those variables which can be deliberately controlled or managed by central authority in the kind of system in which we actually live” (247). And in the final book (VI) of the General Theory titled “Short Notes Suggested by the General Theory” he discusses the variables influencing investment behavior and how they may be controlled in order to bring about full employment. He states his case simply, that investment should be directed by the state: “It is not the ownership of the instruments of production [i.e. tools and machines] which is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary” (378).

In conclusion, Keynes is part of a long tradition of those wishing to solve the “unemployment problem” in society. Many of the solutions involved major government policy at either the local, state, or federal level – this was as true in the 14^th as in the 20^th century. There’s nothing new in that. The novelty of Keynes’ approach was that by tying investment decisions to problems of unemployment, the natural response in terms of the historical circumstances was to make investment a crucial matter of state policy.

This is not Keynes as stimulus check-writer: this is Keynes as state conductor of the orchestra that is the economy. With diagnoses of a 9%+ unemployment rate, Depression-era symptoms, and no end in sight, isn’t it time for a new prescription?

John Maynard Keynes, The General Theory of Employment, Interest, and Money (Harcourt edition, 1964)

Alex Keyssar, Out of Work (Cambridge University Press, 1986)

class and technology in history

Anything to give me a boost in confidence during these times of thesis writing! Here is Brenner talking about why technological determinism cannot explain social transformations. His argument is for power and the role it plays in bringing about the conditions for technological advance. The method is similar to saying "O.K., we have the economic conditions in place, but there are still political processes which need to occur in tandem with the economic in order to bring about change in the social system." At any rate, here it is: enjoy!

There were, in fact, known and available agricultural improvements -- including the ultimately revolutionary 'convertible husbandry' -- which could have brought significant improvements in demesne output. Indeed, as Professor Searle has recently demonstrated, fully-fledged convertible husbandry was systematically adopted on Battle Abbey's manor of Marley from the early fourteenth century. It is most significant that this manor consisted entirely of a single consolidated demesne (with no customary tenancies) and was farmed entirely on wage labour, marking a total break from feudal organization of production and class relations. ... Because these tenants were freeholders, Battle Abbey had not been able to increase its rents, although it had tried to do so.

Brenner, "Agrarian Class Structure and Economic Development," Past and Present (1976)

quote of the day, tomlins part MLXII

Another great excerpt from an excellent scholar:

Though unquestionably an important source of early colonial-era labor power, migrant indentured servitude was nevertheless considerably less significant in establishing a foundational character for the performance of work in the colonial era than has been assumed. Participation in the performance of work was widespread in the population as a whole -- virtually everyone worked in some capacity -- and the institutional structure of performance far more diverse. Correspondingly, the companion assumption that the American political economy followed a clear trajectory from ubiquitous 'unfreedom' toward a late eighteenth and nineteenth-century 'free' waged workforce norm (market driven allocation of individual capacities to labor through unregulated wage contracts) also becomes suspect, or at the very least vastly more complicated than prevailing analyses have supposed.

From Christopher Tomlins, Freedom Bound: Law, Labor, and Civic Identity in Colonizing English America, 1580-1865 (Cambridge, 2010)

are property and contract efficient?

Anastasia writes in the comments of this post:

Isn't that sort of contradictory that the same neoliberal or libertarian thought-path would lead to a legal structure that hinders its own model to efficiently operate? Is this an example of the inefficiency of the legal system itself, as you explained, especially in that it is a "passive" institution in this case. Maybe I read into this wrong?

[By the way, the point about "passive institutions" is something of my own invention. I tend to see two competing views of institutions which either treat property rights and other parts of the law as passive (in the sense that the economic agents involved simply respond to, say, carrots or sticks on the playing field) or active (in the sense that economic agents can actually be "pushed" by an institution in some way or another toward a path which they would not otherwise have gone in the absence of a change in that institution).]

At any rate, yes, I would agree that it is contradictory to the neoliberal model of, say, development which emphasizes the establishment of, e.g., secure private property rights and sound financial infrastructure as key elements to successful growth paths. I don't really know what to say to that, except that I agree. Does anyone else have any thoughts?

As I see it, one can go about developing a critique to the neoliberal worldview as contradicatory through two ways.

1. You adopt the trend which Horwitz does for the U.S. case, which is to show how states were necessary to capitalism's success everywhere and at every time. People should check out the work of Ha Joon Chang as an accessible introduction to this idea in support of the late developers such as S. Korea. Another good book here is Alice Amsden's Asia's Next Giant.

2. You adopt a more theoretical route, which is the path taken by people like Duncan Kennedy. On this route, you demonstrate the inconsistency of common neoliberal assertions, either by pointing out theoretical cases which are not covered by the model or you introduce some empirical inconsistencies with the theory. Kennedy has a great paper with Frank Michelman which addresses the theoretical problems with libertarian views titled "Are Property and Contract Efficient?" It's a really interesting critique of the law and economics movement from the perspective of CLS. Here is a link to the paper.

It's a tough paper so if anyone wants to see my notes on it feel free to email me. Here is a small summary that gives a flavor of their approach:

The authors use a unique methodology for analyzing the efficiency of systems of private property and enforceable contract. They identify the system, say private property (hereafter denoted PP, to stay consistent with the article). They then introduce two alternative systems: state of nature (SON) and forced sharing for needs (FSN). The former is simply a system with no enforceable private property, while the latter is characterized by rules similar to PP (i.e., enforceable private property in most dimensions except for one) but where ownership takes on an additional qualification: if someone “needs” something someone else owns (in order to stay alive), there can be state-enforced taking. The authors’ goal is to compare the variable “hours of work” across systems and see which systems maximize this variable under five different arguments popularly used in support of the PP regime.

The authors identify five arguments for PP: 1. security increases production; 2. theft is inefficient; 3. PP reduces uncertainty; 4. Coordinational Failure; 5. Distribution of the tradeoff between work and leisure. We will briefly sketch a one of these arguments in how they study the variable “hours of work” in the regime of PP vs. the alternative system of SON.

On (1), that security of property increases production. The standard argument is that the security which enforcement of property affords leads to greater incentives to work, increasing the maximal number of work hours. However, the authors argue that this is merely an empirical assertion: people may work more hours under the SON since the chance of theft is higher here, so they have to take account of this risk when supplying effort. However, one in support of PP may then argue that (5) this alters the distribution of the tradeoff between work and leisure, since people would work more but at the expense of less leisure and therefore efficiency is reduced in the SON. However, the authors argue that these same issues of efficiency over distortion of the tradeoff between work and leisure hold in PP. For example, consider a Crusoe economy where an individual chooses the optimal amount of work time given his preferences. Now, expand this model to imagine a multiple-Crusoe economy where each owns his own island. If one island is wiped out by a storm, the Crusoe on that island must work for another Crusoe in a kind of employer-worker relationship. Thus, for a specific amount of time each day, the unfortunate Crusoe is forced to work for another Crusoe just to be able to reproduce himself. This is time out of the unfortunate Crusoe’s day which cannot be devoted to a labor-leisure tradeoff on his own island and so the distribution of time between labor and leisure is distorted under PP as well.