Tuesday, January 05, 2010

Economics old and new

There are a number of ways of distinguishing between different economic traditions or positions. One way is to talk of orthodox versus heterodox economics. A more recent way is that of Cassidy in How Markets Fail and talk about utopian and reality economics.

An earlier distinction was between classical and institutional economics. I stumbled upon* an interesting paper yesterday. It is a 1957 review of "institutionalism" by Kenneth Boulding. He is reviewing the Institutionalism of Veblen, Commons and Mitchell. He makes a distinction between people who sit outside the mainstream (Kuhn's paradigms, Lakatos's reserach rogram or Galbraith's conventional wisdom) between challengers and dissenters. He says;

The challenger sets out to create a new orthodoxy; the dissenter cannot really bear the loss of something to dissent from, and hence would not really want to destroy that from which he dissents even if he could.

This in many ways sumarises some of the early institutionalists and their followers. I recall noting on the death of Galbraith the comment that "his sweeping ideas might have gained even greater traction had he developed disciples willing and able to prove them with mathematical models." That is he might have gained greater traction as a challenger rather than as a dissenter.

After undertaking his review he notes;

In a letter to me a few months ago, Professor Ayres accused me of having become an institutionalist. If a somewhat despairing concern for dynamics in theory (without losing a sense of the very real ac- complishments of statics); if a very strong concern for integration in the social sciences and for the bringing of contributions from psychology, sociology, and the biological sciences into the construction of better theories of individual behavior and social change; if a strong (if skeptical) interest and sympathy with empirical methods is enough to make me an institutionalist, then I gladly accept the title.

This article was published in 1957 (the year of my birth)! Those same three concerns - with dyanamics, with realitic agents and with empirical methods - constitute the ongoing core of the criticism of the orthodoxy.

Ayers himself comments on the article and takes issue with the Boulding description saying;

First, as I see it, the object of dissent is the conception of the market as the guiding mechanism of the economy or, more broadly, the conception of the economy as organized and guided by the market. It simply is not true that scarce resources are allocated among alternative uses by the market. The real determinant of whatever allocation occurs in any society is the organizational structure of that society-in short, its institutions. At most, the market only gives effect to prevailing institutions. By focusing attention on the market mechanism, economists have ignored the real allocational mechanism. Hence the hiatus between economics and the other social studies, all of which are concerned with various aspects of the institutional structure of society. Economics is more advanced than those others - in the wrong direction.

Second, what determines the relative scarcity or relative plentifulness of all resources is the state of the industrial arts. Ours is an industrial econ- omy. That is the paramount fact of the modern economic system; and the recognition of that fact is the most constructive achievement of institutionalists generally.

The latter point is an institutional one as the "state of the industrial arts" includes all the machinery of the modern corporation. Whether there is a distinction between the question of the primacy of markets or other institutions and the critique of market theory as ignoring dynamics, real decision making and data is a point for another day.

Boulding concludes by saying;

"In the work of the National Bureau, the Cowles Foundation, and the Survey Research Center; in cybernetics, operations research, general systems theory, organization theory, even in the humble contributions of a few economic theorists and in many other places, one detects -the ground swell of a "movement." If anybody wants to call this "neo- institutionalism," I shall only complain the word is too long."

In fact we wound up with both a neo-institutionalism and New Institutional Economics, though the first is grounded in property rights and law, and the latter in transaction cost theory. We also wound up with "behavioural economics" which focuses on the real agent question, and "evolutionary economics" which focusses on the dynamics.

The real worry is that - fifty years on - the orthodoxy is still the unrealistic market model.

* When I go to find a paper in a journal I usually look at the contents list of a few issues around the one I'm actually looking for. It is a useful way to stumble on stuff.

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