The Institutionalist Challenge: Beyond Dissent

  • Philip A. Klein
Part of the Recent Economic Thought book series (RETH, volume 31)


No charge is leveled more consistently at institutionalism (when it is referred to at all) than that it has nothing positive to offer—it is “mere dissent.”


Public Sector Business Cycle Economic Issue Rational Expectation Institutional Economic 
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  1. 1.
    Cf. Evolutionary Economics: Volume I Foundations of Institutional Thought, Journal of Economic Issues 21 (September 1987) and Evolutionary Economics Volume II, Institutional Theory and Policy, Journal of Economic Issues 21 (December 1978). Both were re-published in 1988 by M.E. Sharpe, Inc., Armonk, New York.Google Scholar
  2. 2.
    This is the view of Joseph Dorfman as expressed in his introduction to Walton H. Hamilton, Industrial Policy and Institutionalism, Selected Essays (Clifton, NJ: Augustus M. Kelley, 1974), p. 25. For another and interesting (and more recent) account of the origins of institutionalism cf. Anne Mayhew, “The Beginnings of Institutionalism,” Journal of Economic Issues 21 (September 1987): 971–998.Google Scholar
  3. 3.
    Quoted in ibid., p. 27.Google Scholar
  4. 4.
    Ibid., p. 28, footnote 29.Google Scholar
  5. 5.
    John R. Commons, Institutional Economics: Its Place In Political Economy, Two volumes published in one. (Madison: University of Wisconsin Press, 1934 and 1959).Google Scholar
  6. 6.
    Wesley Clair Mitchell, Types of Economic Theory: From Mercantilism to Institutionalism, Transcriptions of Mitchell’s Lectures issued in mimeograph form in 1949. (New York: Augustus M. Kelley, 1967).Google Scholar
  7. 7.
    Cf, for example, P.A. Klein, “Economics: Allocation or Valuation?” Journal of Economic Issues 8 (December 1974): 785–811; Marc R. Tool, The Discretionary Economy (Santa Monica, CA: Goodyear, 1979); Wendell Gordon, Institutional Economics, The Changing System (Austin and London: The University of Texas Press, 1980); Allan Gruchy, The Reconstruction of Economics (New York: Greenwood Press, 1987); Jerry Petr, “Fundamentals of an Institutional Perspective,” Journal of Economic Issues 18 (March 1984): 1–17; Gunnar Myrdal, “Institutional Economics,” Journal of Economic Issues 12 (December 1978) 771–784; Marc R. Tool, ed., Two volume study published as the September and December 1988 issues of the Journal of Economic Issues, republished by M.E. Sharpe; and Wendell Gordon and John Adams, Economics as a Social Science: An Evolutionary Approach (Riverdale, MD: Riverdale Press, 1989).Google Scholar
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    Thorstein Veblen, The Place of Science in Modern Civilization (New York: Russell and Russell, 1961), pp. 73–74.Google Scholar
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    All these themes are developed extensively. Cf, for example, not only Veblen’s most famous book, The Theory of The Leisure Class, in which he introduces many of his basic ideas (republished New York: New American Library, 1953) but also The Theory of Business Enterprise (New York: Scribner, 1904; Clifton, NJ: Augustus M. Kelley, 1975); The Instinct of Workmanship and the State of the Industrial Arts (New York: Macmillan, 1914); The Vested Interests and the Common Man, The Modern Point of View and the New Order, 1919 (republished New York: Augustus M. Kelley, 1964); and Absentree Ownership and Business Enterprise in Recent Times: The Case of America (New York: Viking, 1923, republished 1945). In addition to these books, these ideas are discussed in several published collections of Veblen’s essays, for example, The Place of Science in Modern Civilization, op. cit.Google Scholar
  10. 10.
    The view that Mitchell took toward business cycles developed over many years. This particular (and well-known) phrase is from the definition of cycles that occurs in Authur F. Burns and Wesley Clair Mitchell, Measuring Business Cycles (New York: National Bureau of Economic Reasearch, 1946), p. 2. For a discussion of the relationship between Mitchell’s institutionalism and his work on business cycles cf. Philip A. Klein, “The Neglected Insti-tutionalism of Wesley Clair Mitchell: The Theoretical Basis for Business Cycle Indicators,” Journal of Economic Issues 17 (December 1983): 867–898.Google Scholar
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    Cf., Victor Zarnowitz in an article on Mitchell in International Encyclopedia of Social Sciences, 1968, p. 373.Google Scholar
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    Joseph Dorfman in an article on Commons in International Encyclopedia of Sciences, 1968, p. 23.Google Scholar
  13. 13.
    Cf., among many other writings principally Clarence E. Ayres, The Theory of Economic Progress (Chapel Hill: The University of North Carolina Press, 1944); The Industrial Economy (New York: Houghton Mifflin Company, 1952); Toward A Reasonable Society (Austin: University of Texas Press, 1961). For Dewey’s instrumental theory of value, cf. John Dewey, Theory of Valuation (Chicago: University of Chicago Press, 1939).Google Scholar
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    John S. Gambs, Beyond Supply and Demand (Westport, CT: Greenwood Press, 1976 [1946]).Google Scholar
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    Allan G. Gruchy, Modern Economic Thought, The American Contribution (New York: Prentice-Hall, 1947). Cf. also Philip A. Klein, “A Reconsideration of Holistic Economics,” in John Adams, ed., Essays in Honor of Allan Gruchy (Boston: Martinus Nijhoff, Publisher, 1980), pp. 45–58.Google Scholar
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    Allan G. Gruchy, Contemporary Economic Thought: The Contribution of Neo-Institutional Economics (Clifton, NJ: Augustus M. Kelley, 1972).Google Scholar
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    Allan G. Gruchy, The Reconstruction of Economics: An Analsis of the Fundamentals of Institutional Economics (New York: Greenwood Press, 1987).Google Scholar
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    Cf., for example, Gunnar Myrdal, Against the Wind; Critical Essays on Economics (London: Macmillan, 1974). Much earlier in his career Myrdal, the economist trained in the Swedish school, had demonstrated his breadth as a social science in his classic, An American Dilemma, published in 1944. Widely regarded at the time as “a book on sociology written by a trained economist,” it might have been described by an institutionalist as a book about economic problems (among others) which paid attention to class and race as well as income and wealth distribution. Consider in contast a treatise that contemplated the welfare and status of the black in the United States in the 1940s but hewed to the constraint of Pareto optimality.Google Scholar
  19. 19.
    John Kenneth Galbraith has published widely. Among his works: The Affluent Society (First edition, 1958; second edition, Boston: Houghton Mifflin Company, 1969); The New Industrial State (Boston: Houghton Mifflin Company, 1967); Economics and the Public Purpose (Boston: Houghton Mifflin Company 1973); The Anatomy of Power (Boston: Houghton Mifflin Company, 1983).Google Scholar
  20. 20.
    Robert Heilbroner, too, has written extensively. Among his books are The Worldly Philosophers (New York: Simon and Schuster, 1953); An Inquiry Into the Human Prospect (New York: W.W. Norton, 1974); Business Civilization In Decline (New York: W.W. Norton, 1976); Beyond Boom and Crash (New York: W.W. Norton, 1976); The Nature and Logic of Capitalism (New York: W.W. Norton, 1985); Behind the Veil of Economics (New York: W.W. Norton, 1988).Google Scholar
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    Robert Lekachman in “Comment on P.A. Klein’s ‘Demand Theory and the Economist’s Propensity to Assume’,” Journal of Economic Issues 7 (June 1973): 243.Google Scholar
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    Lionel Robbins, An Essay on the Nature and Significance of Economic Science (London: Macmillan and Company, Ltd., 1946), p. 16.Google Scholar
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    Ibid., p. viii.Google Scholar
  24. 24.
    This example is from P.A. Klein, “Institutionalist Reflections on the Role of The Public Sector,” Journal of Economic Issues 18 (March 1984): 58.Google Scholar
  25. 25.
    Quoted in Donald A. Strickland, Scientists in Politics: The Atomic Scientists Movement, 1945–46 (Layfayette, IN: Purdue University Studies, 1968), p. 38. Cf., also P.A. Klein, “Of Paradigms and Politics,” Journal of Economic Issues (June 1988: pp. 435–441).Google Scholar
  26. 26.
    Cf., for example, James M. Buchanan and Gordon Tullock, The Calculus of Consent (Ann Arbor: The University of Michigan Press, 1962); James M. Buchanan, Public Finance in the Democratic Process (Chapel Hill: University of North Carolina Press, 1967); and James M. Buchanan and R.D. Tollison, Theory of Public Choice (Ann Arbor: University of Michigan Press, 1972).Google Scholar
  27. 27.
    Some years a suggestion, known as the “Hicks-Kaldor Compensation Principle,” was introduced into economic discourse. If the persons who gain gain sufficiently so that they could recompense those who lose to their satisfaction and still have some gain, the change is a Pareto optimum, even if, of course, the suggested transaction remains unearned out. It is a cosmetic mathematical improvement designed to make Pareto optimality appear more measurable, even though, of course, it is not. (For a recent discussion of this point cf. Edythe S. Miller, “Economic Folklore and Social Realities,” Journal of Economic Issues 23 (June 1989): 339–356.Google Scholar
  28. 28.
    Kenneth Arrow, Social Choice and Individual Values, 2nd ed. (New York: John Wiley and Sons, 1963), p. 106. I discussed this point at some length in P.A. Klein, “Economics: Allocation or Valuation?” Journal of Economic Issues 7 (December 1974): 797.Google Scholar
  29. 29.
    As I noted in the earlier study, however, “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” Ibid., footnote 25, p. 807). Arrow made the comment originally in 1963; I commented on his comment in 1974, and to my knowledge no mainstream economist has been perturbed about this matter in the intervening years. The institutionalist objections discussed in the text are, in our view, still valid.Google Scholar
  30. 30.
    Clarence E. Ayres, The Theory of Economic Progress (Chapel, Hill: The University of North Carolina Press, 1944), pp. 84–85. (Lionel Robbins once said that he could not make any sense out of this statement. Mainstream economists have been confused about this for many years. As a graduate student I was forced to read John R. Hicks’s book, Value and Capital. My immediate reaction was that this book was not about value and capital at all, but about price and capital. What mainstream economics often calls value theory is only price theory.)Google Scholar
  31. 31.
    Thorstein Veblen, The Place of Science in Modern Civilization (New York: Russell and Russell, 1919, 1961), p. 70. It is quoted by Clarence Ayres on the Frontpiece, ibid.Google Scholar
  32. 32.
    Cf. “Institutionalist Reflections on the Role of the Public Sector,” op. cit., pp. 58–60. Reprinted in M.R. Tool and W.J. Samuels, ed., The Methodology of Economic Thought, 2nd ed. (New Brunswick: Transactions Publishers, 1989), pp. 541–564.Google Scholar
  33. 33.
    It is necessary to clarify the terminology. It has become common for institutionalists to follow Allan Gruchy in referring to the economy as both an allocating and a provisioning entity. (Gruchy has written, “A short definition of economics from the institutionalist point of view is that it is the science of social provisioning.” [Cf. Allan G. Gruchy, The Reconstruction of Economics, op. cit, p. 21.) This terminology is designed to convey the fundamental institutionalist insistence on the view that in any realistic market-oriented economy some resources are allocated via market forces and some through decisions made in the public sector. For a good many years I have included both decision-making routes by referring to “the total allocational thrust of the economy” rather than merely to the part of allocation mainstream economics is mostly concerned about (and which they call simply “allocation” for which read “market allocation”). In the institutionalist perspective, as I see it, total allocation has never been carried out solely by the market since the initial public expenditure was made based on social welfare criteria rather than individual firm profit criteria. In conforming to recent usage by referring to both “allocation and provisioning” I mean to encompass precisely what earlier I have included in the notion “total allocation.” On occasion, the term “total allocational thrust of society” appears in the text and means “allocation and provisioning” in Gruchy’s usage.Google Scholar
  34. 34.
    I discussed this point at some length in ibid., p. 60.Google Scholar
  35. 35.
    This section is based on an earlier article of mine. Cf., footnote 34.Google Scholar
  36. 36.
    Ibid., pp. 63–65.Google Scholar
  37. 37.
    This section is based heavily on P.A. Klein, “Power and Economic Performance: The Institutionalist View,” Journal of Economic Issues 21 (September 1987): 1341–1377.Google Scholar
  38. 38.
    Robert H. Bork, The Antitrust Paradox (New York: Basic Books, Inc., Publishers, 1978), p. 418. Cf, also my discussion of this in “Changing Perspectives on the Factors of Production,” Journal of Economic Issues 22 (September 1988): 795–809.Google Scholar
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    Robert A. Brady, Business As A System of Power (New York: Columbia University Press, 1943).Google Scholar
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    Marc Tool and Warren Samuels, eds., The Economy As System of Power, and State, Society and Corporate Power (New Brunswick: transaction Books, 1989). These are second revised editions of 1979 publications.Google Scholar
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    For a consideration of the TNEC hearings in this context, cf. Marc Tool, The Discretionary Economy.Google Scholar
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    Robert E. Lucas, Jr., “Understanding Business Cycles,” in Studies in Business Cycle Theory (Cambridge, MA: The MIT Press, 1981).Google Scholar
  43. 44.
    The notion is now a key part of the mainstream methodological armor against encroachments by the actual world into the attractive world of economic theory so rudely (if as it turns out only temporarily—for half a century) jolted by Keynes. It was initially introduced in a pair of widely noted articles, one Milton Friedman’s Presidential Address to the American Economic Association (cf. Milton Friedman, “The Role of Monetary Policy,” American Economic Review 58 (March 1986): 1–17) and the other by Edmund Phelps (cf. Edmund S. Phelps, “Money Wage Dynamics and Labor Market Equilibrium,” Journal of Political Economy 76 (July/August 1968): 687–711). In connection with the Freidman-Phelps hypothesis it is worth noting that Lucas has asserted that Friedman was still trying in his own-that is, “monetarist”—way to study cycles “along the line initiated by Mitchell,” while Phelps’ work represented “an attempt to complete the unity promised by the neoclassical synthesis.” Despite their different perspectives, Lucas argues that they proved that any inflation rate was consistent with any unemployment rate (the italics are his) and that subsequent developments have proved “subversive of the main positive and policy presumptions underlying the neoclassical synthesis” (Robert Lucas, ibid., pp. 282–283). Translation: attempting interventionist policy to reduce unemployment below its “natural rate” is futile. I discussed this hypothesis at some length earlier. (Cf. “What’s Natural About Unemployment?” Paper presented at an American Economic Association-Association for Social Economics meeting, Chicago, December 1987. Published in Philip A. Klein, ed., Analyzing Modern Business. Cycles, Essays Honoring Geoffrey H. Moore (Armonk, NY: M.E. Sharpe, 1990).Google Scholar
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    P.A. Klein, “Reinventing the Square Wheel: A Behavioral Assessment of Inflation,” in Benjamin Gilad and Stanley Kaish, eds., Handbook of Behavioral Economics, Volume B (Greenwich, CT: JAI Press, 1986).Google Scholar
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    Marc Tool, Essays in Social Value Theory (Armonk, NY: M.E. Sharpe, 1986), p. 10.Google Scholar
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    P.A. Klein, “Economics: Allocation or Valuation?” Journal of Economic Issues 1 (December 1974): 785–811; and “Institutionalist Reflections on the Role of the Public Sector,” Journal of Economic Issues 18 (March 1984): 43–68.Google Scholar
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    Paul D. Bush, “Theory of Institutional Change,” Journal of Economic Issues 21 (September 1987): 1075–1116. The term “cultural lag” was popularized in the 1920s by William F. Ogburn, Social Change (New York: The Viking Press, 1950 [1922]), (Cf., also Bush, p. 1113, footnote 46) “Past-binding” is Ayres’s term. Cf. Toward A Reasonable Society, op. cit., pp. 30, 137, and 233. Cf. also Bush, p. 1113, footnote 45.Google Scholar
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    Milton D. Lower, “The Concept of Technology Within the Institutionalist Perspective,” Journal of Economic Issues 21 (September 1987): 1147–1176.Google Scholar
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    Anne Mayhew, “The Beginnings of Institutionalism,” Journal of Economic Issues 21 (September 1987): 971–998.Google Scholar
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    Trebing, op. cit., 1984, p. 246.Google Scholar
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    Ibid., p. 247.Google Scholar
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    William M. Dugger, An Alternative to Economic Retrenchment (Princeton: Petrocelli, 1984).Google Scholar
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    Wallace G. Peterson, Our Overloaded Economy (Armonk, NY: M.E. Sharpe, 1982).Google Scholar
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    P.A. Klein, “What’s Natural About Unemployment?,” in Klein, Essays in Honor of Geoffrey H. Moore.Google Scholar
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    Wallace Peterson, “Concluding Observations,” in Wallace Peterson, ed., Market Power and the Economy (Boston: Kluwer Academic Publishers, 1988).Google Scholar
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    David Hamilton, “The Myth is not the Reality: Income Maintenance and Welfare,” Journal of Economic Issues 17 (March 1984): 143–158.Google Scholar
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    James A. Swaney, “The Future Be Damned: Economists’ Optimism and Nuclear Proliferation,” Journal of Economic Issues 18 (June 1984): 527–536.Google Scholar
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    The term has been widely employed since its use by Thomas S. Kuhn in The Structure of Scientific Revolutions, 2nd ed. (Chicago: University of Chicago Press, 1962 and 1970). Kuhn described a paradigm as “… a set of recurrent and quasi-standard illustrations of various theories in their conceptual, observational, and instrumental application” (p. 43). He further described a paradigm as “accepted principles and rules…” or “shared beliefs” (p. 43). Finally he termed a paradigm “… the search for a body of rules competent to constitute a given normal research tradition” and added that this search is “a source of continual and deep frustration” (p. 44). In the case of economics the mainstream does not appear frustrated at all with their paradigm. Their inflexibility is, however, a source of frustration to institution-alists.Google Scholar
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    P.A. Klein, “Confronting Power in Economics: A Pragmatic Evaluation,” Journal of Economic Issues 14 (December 1980): 882–883.Google Scholar
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    Ibid., p. 890.Google Scholar
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    Anthony Downs, An Economic Theory of Democracy (New York: The Free Press, 1973).Google Scholar
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    Cf. P.A. Klein, “What’s Natural About Unemployment?” op. cit. Google Scholar
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    P.A. Klein, “Economics: Allocation or Valuation?” Journal of Economic Issues 1 (December 1974): 785–786.Google Scholar
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    For example, Ken Dennis has written on the alleged precision and rigor of economic theory in mathematical terms as is currently so widely practiced by mainstream economists. He has commented, “I have argued in this paper not that mathematical economics is impossible, but that its present claims to logical rigor are dubious, and that the construction of rigorous theories of human behavior is more difficult than has hitherto been acknowledged.” cf. Ken Dennis, “Scientific Theory and the Problem of Translation,” Journal of Economic Issues 16(3):691–712; and 16(4):1039–1062 Quotation is from the latter issue, p. 1060.Google Scholar


  1. 1.
    Philip A. Klein, “Institutionalism As a School-A Reconsideration,” Journal of Economic Issues 24 (June 1990): 381–388.Google Scholar
  2. 2.
    John R. Commons, Institutional Economics (Madison: The University of Wisconsin Press, 1961 [1934]); p. 73.Google Scholar
  3. 3.
    An early statement of this perspective is found in Milton Friedman, “The Methodology of Positive Economics,” in Essays in Positive Economics (Chicago: the University of Chicago Press, 1953). Friedman states “… under a wide range of circumstances individual firms behave as if they were seeking rationally to maximize their expected returns … and had full knowledge of the data needed to succeed in this. … Now, of course, businessmen do not actually and literally solve the system of simultaneous equations in terms of which the … economist finds it convenient to express this hypotheses.… [But] unless the behavior of businessmen in some way or other approximated behavior consistent with the maximization of returns, it seems unlikely that they would remain in business for long.…” (pp. 21–22, emphasis in original).Google Scholar
  4. 4.
    This includes a body of work often designated as the work of the Chicago School of economics. I have elsewhere suggested that a foundation stone of this structure of thought was a 1960 article of Ronald Coase. See Ronald E. Coase, “The Problem of Social Cost,” in The Firm, The Market and The Law (Chicago: The University of Chicago Press, 1988 [1960]). For additional citations of work in this tradition see my “Economic Efficiency, The Economics Discipline and the ‘Affected-With-A-Public-Interest’ Concept,” Journal of Economic Issues 24 (September 1990): 719–732.Google Scholar

Copyright information

© Kluwer Academic Publsihers 1993

Authors and Affiliations

  • Philip A. Klein
    • 1
  1. 1.Department of EconomicsPennsylvania State UniversityUniversity Park

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