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Institutional Economics And The Dual Labor Market Theory

  • Yngve Ramstad
Part of the Recent Economic Thought book series (RETH, volume 31)

Abstract

No one has put it better than Wesley Clair Mitchell: “The only reason, the only excuse, for the study of economic theory is to make this world a better place in which to live.”2 What Mitchell was insisting, of course, is that economic theory is most fundamentally an instrument for guiding the process of institutional adjustment in such fashion that “better” flows of real income will be produced. From this standpoint, accordingly, it becomes the task of the practicing economist to develop valid theories which can be used to devise or evaluate specific proposals for altering the institutions patterning specific subsystems of the market economy,3 for example, the “labor market.” For only if a theory, or the model through which it is expressed, is believed to be valid will policymakers be able to use it for institutional impact analysis,4 that is, to anticipate (predict) whether, in the context of a concrete issue, proposed adjustments of existing rules or practices actually are likely to alter the future “economic” attainments (real incomes) of individuals or groups in a “good” way.

Keywords

Labor Market Institutional Economic Institutional Theory Mobility Chain Neoclassical Economic 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

  1. 4.
    Throughout this essay the term theory is used to connote a coherent group of general propositions used as a principle of explanation for a class of phenomena. The term model is used in reference to a simplified representation of the structure/process through which a system produces specific observed phenomena. I am borrowing the term institutional impact analysis from A. Allan Schmid, who in turn attributes it, along with a companion term, institutional development analysis, to a dichotomy forwarded by Frederic C. Pryor. See A. Allan Schmid, Property, Power ⇐p; Public Choice: An Inquiry into Law and Economics, 2nd ed. (New York: Praeger, 1987), p. xv. note 1.Google Scholar
  2. 5.
    For various overviews of the intellectual orientation reflected in dissident labor economics, see Bruce E. Kaufman, “The Postwar View of Labor Markets and Wage Determination,” in How Labor Markets Work: Reflections on Theory and Practice by John Dunlop, Clark Kerr, Richard Lester, and Lloyd Reynolds edited by Bruce E. Kaufman (Lexington, MA: DC Heath and Company, 1988), pp. 145–203; Clark Kerr, Labor Markets and Wage Determination: The Balkanization of Labor Markets and Other Essays (Berkeley and Los Angeles: University of California Press, 1977); Paul J. McNulty, The Origins and Development of Labor Economics: A Chapter in the History of Social Thought (Cambridge: The MIT Press, 1980); and Martin Segal, “Post-Institutionalism in Labor Economics: The Forties and Fifties Revisited,” Industrial and Labor Relations Review 39 (April 1986): 388–403.Google Scholar
  3. 7.
    This is not to deny the existence of isolated individuals who adhere to “institutional” precepts in explaining wage and employment outcomes. For an example, see Clair Brown, “Income Distribution in an Institutional World,” in Garth Mangum and Peter Phillips, eds., Three Worlds of Labor Economics (Armonk, NY: M.E. Sharpe, 1988), pp. 51–63.Google Scholar
  4. 8.
    In this essay, the term institutional economics refers only to the “traditional” or “old” type of institutional economics; contributions to the “new” institutional economics—see Richard N. Langlois, “The New Institutional Economics: An Introductory Essay,” in Richard N. Langlois, ed., Economics as a Process: Essays in the New Institutional Economics (Cambridge: Cambridge University Press, 1986), pp. 1–25, for an overview—are thus excluded. See the various contributions to the Journal of Economic Issues, Volume 21, Numbers 3 and 4 (September and December 1987), for a collection of excellent essays pertaining to the character and practice of the old type of institutional economics. By “mainstream” institutional economists, I refer to 1) those who regularly publish in contemporary institutional journals, especially the Journal of Economic Issues, and who regularly attend the annual meeting of institutionalist associations such as the Association for Evolutionary Economics and the Association for Institutional Thought and 2) those to whom numerous members of the first group trace their intellectual antecedents, such as, for example, Thorstein Veblen, John R. Commons, Clarence Ayres, Karl Polanyi, and J. Fagg Foster. All subsequent references to institutional economists refer to these individuals, just as all subsequent references to institutional economics refer to their published writings.Google Scholar
  5. 9.
    Marc R. Tool, “The Compulsive Shift to Institutional Analysis,” Journal of Economic Issues 15 (September 1981): 569–592.Google Scholar
  6. 10.
    C._ Brown, “Income Distribution in an Institutional World,” is a partial exception.Google Scholar
  7. 12.
    For various attempts to characterize the central features of the institutional approach, see the sources cited in Yngve Ramstad, “‘Reasonable Value’ Versus ‘Instrumental Value:’ Competing Paradigms in Institutional Economics,” Journal of Economic Issues 23 (September 1989): 761–777.Google Scholar
  8. 13.
    Clarence E. Ayres, The Theory of Economic Progress, 2nd ed. (New York: Schocken Books, 1962), p. xii; Allan G. Gruchy, The Reconstruction of Economics: An Analysis of the Fundamentals of Institutional Economics (Westport, CT: Greenwood Press, 1987), ch. 1.Google Scholar
  9. 15.
    See Yngve Ramstad, “The Institutionalism of John R. Commons: Theoretical Foundations of a Volitional Economics,” in Warren J. Samuels, ed., Research in the History of Economic Thought and Methodology, Vol. 8 (Greenwich: JAI Press, Inc., 1990), pp. 53–104, for an overview of Commons’s “volitional” conception of economic activity; and Yngve Ramstad, “Free Trade versus Fair Trade: Import Barriers as a Problem of Reasonable Value,” Journal of Economic Issues 21 (March 1987): 5–32, for an overview of Commons’s “citizenship theory of labor.” For complementary explanations as to why Commons had such a difficult time communicating his views to others, see Jeff Biddle, “The Ideas of the Past as Tools for the Present: The Instrumental Presentism of John R. Commons,” in JoAnne Brown and David van Keuren, eds., The Estate of Social Knowledge (Baltimore: Johns Hopkins University Press, 1991), pp. 84–105; and Yngve Ramstad, “A Pragmatist’s Quest for Holistic Knowledge: The Scientific Methodology of John R. Commons,” Journal of Economic Issues 20 (December 1986): 1067–1105.Google Scholar
  10. 16.
    See, for example, the general neglect of Commons’s substantive theoretical propositions in the “Foundations of Institutional Thought” volume published by the Journal of Economic Issues in September 1987 (Vol. 21,No. 3). It ought perhaps to be noted that the same point can be made regarding the contributions of Walton Hamilton, who also deserves to be classified as a “founder” of institutional economics. See in particular Walton Hamilton and Stacy May, The Control of Wages, reprint edition (New York: Augustus M. Kelley, Publishers, 1968), where an institutional theory of wages is articulated.Google Scholar
  11. 17.
    The important partial exception is the scattered theoretical insights of William Dugger; Ramstad, “Free Trade versus Fair Trade,” might also be considered an exception. For various perspectives on “instrumental valuing,” see Wendell Gordon, Institutional Economics: The Changing System (Austin and London: University of Texas Press, 1980); Wendell Gordon and John Adams, Economics as Social Science: An Evolutionary Approach (Riverdale, MD: The Riverdale Company, 1989); and Walter C. Neale, “Language and Economics,” Journal of Economic Issues 16 (June 1982): 355–369; and “Institutions,” Journal of Economic Issues 21 (September 1987): 1177–1206. Excellent discussions of “instrumental value theory” are provided in Paul D. Bush, “An Exploration of the Structural Characteristics of a Veblen-Ayres-Foster Defined Institutional Domain,” Journal of Economic Issues 17 (March 1983): 35–66; and “The Theory of Institutional Change,” Journal of Economic Issues 21 (September 1987): 1075–1116; Steven Hickerson, “Instrumental Valuation: The Normative Compass of Institutional Economics,” Journal of Economic Issues (September 1987): 1117–1143; Marc R. Tool, Essays in Social Value Theory: A Neoinstitutionalist Contribution (Armonk, NY: M.E. Sharpe, 1986); and William T. Waller, Jr., “The Evolution of the Veblenian Dichotomy: Veblen, Hamilton, Ayres and Foster,” Journal of Economic Issues 16 (September 1982): 757–771. I should perhaps make explicit my own belief that no valid inferences can be made about aggregate phenomena in the absence of an accurate conception of “micro-economic” processes.Google Scholar
  12. 18.
    Peter Gottschalk, “A Synthesis of Contour and Flexible Wage Hypotheses,” Journal of Economic Issues 15 (September 1981): 629–640; Irvin Sobel, “Human Capital and Institutional Theories of the Labor Market: Rivals or Complements?” Journal of Economic Issues 16 (March 1982): 255–272; and Stephen A. Woodbury, “Power in the Labor Market,” Journal of Economic Issues 21 (December 1987): 1781–1807.Google Scholar
  13. 19.
    Marvin E. Rozen, “Segmented Work and Divided Workers: A Review Article,”Journal of Economic Issues 17 (March 1983): 215–224; and “Labor Markets, Wage Policy, and Macroeconomic Equilibrium: A Review of Annable’s The Price of Industrial Labor,” Journal of Economic Issues 19 (March 1985): 153–174.Google Scholar
  14. 20.
    Bennett Harrison and Andrew Sun, “The Theory of ‘Dual’ or Segmented Labor Markets,”Journal of Economic Issues 13 (September 1979): 687–706; Stephen A. Woodbury, “Methodological Controversies in Labor Economics,” Journal of Economic Issues 13 (December 1979): 933–955; Gregory C. Weeks, “Labor Markets, Class Interests, and the Technology of Production,” Journal of Economic Issues 14 (June 1980): 553–556; Robert N. Horn, “A Case Study of the Dual Labor Market Hypothesis,” Journal of Economic Issues 14 (June 1980): 615–630; Robert Cherry, “What Is So Natural about the Natural Rate of Unemployment?” Journal of Economic Issues 15 (September 1981): 729–743; and Michael J. Carter, “Competition and Segmentation in Internal Labor Markets,” Journal of Economic Issues 16 (December 1982): 1063–1077.Google Scholar
  15. 21.
    Daphne Greenwood, “Determining Comparable Worth,” Journal of Economic Issues 18 (June 1984): 457–464.Google Scholar
  16. 22.
    Yngve Ramstad, “Institutional Economics: How Prevalent in the Labor Literature?” Journal of Economic Issues 15 (June 1981): 339–350.Google Scholar
  17. 23.
    Ramstad, “Free Trade versus Fair Trade.”Google Scholar
  18. 24.
    William M. Dugger, “The Administered Labor Market: An Institutionalist Analysis,” Journal of Economic Issues 15 (June 1981): 397–407.Google Scholar
  19. 25.
    Cf William M. Dugger, An Alternative to Economic Retrenchment (New York and Princeton: Petrocelli Books, 1984); W. Gordon, Institutional Economics; Gruchy, The Reconstruction of Economics; Wallace C. Peterson, Our Overloaded Economy: Inflation, Unemployment, and the Crisis in American Capitalism (Armonk, NY: M.E. Sharpe, 1982); J. Ron Stanfield, Economic Thought and Social Change (Carbondale and Edwardsville, IL: Southern Illinois University Press, 1979); and Marc R. Tool, The Discretionary Economy: A Normative Theory of Political Economy (Santa Monica, CA: Goodyear Publishing Company, 1979).Google Scholar
  20. 26.
    A review of articles published during the 1980s in the American Journal of Economics and Sociology, another outlet for institutional writers, produced results that only reinforce this conclusion. A review of articles published during the 1980s in Industrial Relations, which among the labor journals is perhaps most receptive to a diversity of views regarding the nature of labor markets, similarly failed to provide evidence that mainstream institutional economics has produced a coherent alternative conception of the labor market. However, see Martin Brown and Peter Phillips, “The Decline of Piece Rates in California Canneries: 1890–1960,” Industrial Relations 25 (Winter 1986): 81–91, for a recent article in Industrial Relations by nonmainstream labor economists in which an explicitly institutional model of labor market processes is employed.CrossRefGoogle Scholar
  21. 27.
    Thomas Kuhn, The Structure of Scientific Revolutions, 2nd ed. (Chicago: University of Chicago Press, 1970); Imre Lakatos, “Falsification and the Methodology of Scientific Research Programmes,” in Imre Lakatos and Alan Musgrave, eds., Criticism and the Growth of Knowledge (New York: Cambridge University Press, 1970), pp. 91–196. For an overview of Lakatos’s framework, see Mark Blaug, The Methodology of Economics (New York: Cambridge University Press, 1980), pp. 34–44; or Bruce Caldwell, Beyond Positivism: Economic Methodology in the Twentieth Century (London: George Allen ⇐p; Unwin, 1982), pp. 85–89.Google Scholar
  22. 28.
    Ramstad, “‘Reasonable Value’ versus ‘Instrumental Value.’”Google Scholar
  23. 29.
    Clarence E. Ayres, “The Legacy of Thorstein Veblen,” in Institutional Economics: Veblen, Commons and Mitchell Reconsidered (Berkeley and Los Angeles: University of California Press, 1964), p. 55.Google Scholar
  24. 30.
    Clarence E. Ayres, “A New Look at Institutionalism—Comment,” American Economic Review, Proceedings 41 (May 1957): 26, emphasis added.Google Scholar
  25. 31.
    J. Fagg Foster, “The Relation Between the Theory of Value and Economic Analysis,” Journal of Economic Issues 15 (December 1981): 900.Google Scholar
  26. 32.
    Institutionalists have long noted that written rules often make formal implicit rules of long standing. For example, in an extremely interesting and meticulously documented study, Benjamin M. Selekman and Sylvia K. Selekman, “Productivity—And Labor Relations,” Harvard Business Review 27 (May 1949): 373–392, demonstrate conclusively that “feather-bedding” has a long history, predating “restrictive union work rules” by centuries.Google Scholar
  27. 33.
    Sanctions are of three fundamental types: 1) the moral sanction of disapproval from those whose approval is desired, 2) the economic sanction of poverty or bankruptcy, and 3) the physical sanction of violence. See John R. Commons, Institutional Economics, reprint edition (Madison: The University of Wisconsin Press, 1961), pp. 77–78.Google Scholar
  28. 34.
    Social role is a principal organizing concept in the sociological theory of symbolic interaction developed by George Herbert Mead. Within Mead’s framework, a “role” is a distinctive way of behaving associated with a specific status or position. For an extended discussion, see Robert A. Nisbet, The Social Bond: An Introduction to the Study of Society (New York: Alfred A. Knopf, 1970), especially pp. 148–156.Google Scholar
  29. 35.
    For an excellent overview, see Neale, “Institutions.” The classic discussion is Walton Hamilton, “Institution,” in Encyclopaedia of the Social Sciences, vol. 8, edited by Edwin R. A. Seligman (New York: The Macmillan Company), pp. 84–89. Benjamin Ward, “Institutions and Economic Analysis,” in Roy Krupp, ed., The Structure of Economic Science (Englewood Cliffs, NJ: Prentice-Hall, Inc., 1966), pp. 184–200, also provides an interesting overview. It should perhaps be noted that critics of institutional economics have repeatedly argued that when used as an analytical category, the meaning of institution is very difficult to tie down. See, for example, E.H. Burns, “Does Institutionalism Complement or Compete with ‘Orthodox’ Economics?” American Economic Review 21 (March 1931): 86; Abram L. Harris, “Types of Institutionalism,” Journal of Political Economy 40 (December 1932): 732; Talcott Parsons, “Sociological Elements in Economic Thought,” in Harry Elmer Barnes et al., eds., Contemporary Social Theory (New York: D. Appleton-Century Company, 1940), p. 643; and Louis Schneider, The Freudian Psychology and Veblen’s Social Theory (New York: King’s Crown Press, 1948), pp. 81–85. Certainly, it cannot be denied that institution has been defined by self-avowed institutionalists in a number of ways. Whatever the specific definition, however, careful examination will reveal it to embody the same meaning: rules revealed in conduct.Google Scholar
  30. 36.
    W. Hamilton, “Institution,” p. 84.Google Scholar
  31. 37.
    Commons, Institutional Economics, p. 69.Google Scholar
  32. 38.
    I am here using Commons’s framework to organize the discussion. See ibid., pp. 77ff.Google Scholar
  33. 39.
    Albert O. Hirschman, Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations, and States (Cambridge: Harvard University Press, 1970).Google Scholar
  34. 40.
    Commons, Institutional Economics, p. 226.Google Scholar
  35. 41.
    See Commons, Institutional Economics, p. 703. Also cf. W. Hamilton, “Institution,” and David Hamilton, Evolutionary Economics: A Study of Change in Economic Thought (Albuquerque: University of New Mexico Press, 1970), ch. 3.Google Scholar
  36. 42.
    Radhakamal Mukerjee, The Institutional Theory of Economics (London: Macmillan ⇐p; Co., Ltd., 1940), pp. 15, 199–200.Google Scholar
  37. 43.
    Commons, Institutional Economics, p. 699.Google Scholar
  38. 44.
    Kenneth E. Boulding, “Toward the Development of a Cultural Economics,” in Louis Schneider and Charles Bonjean, eds., The Idea of Culture in the Social Sciences (New York: Cambridge University Press), p. 47; Charles M.A. Clark, “Equilibrium for What? Reflections on Social Order in Economics,” Journal of Economic Issues 23 (June 1989): 599ff; Maurice Dobb, Theories of Value and Distribution Since Adam Smith: Ideology and Economic Theory (Cambridge: Cambridge University Press, 1973), p. 38.Google Scholar
  39. 45.
    Economists have generally forgotten that the “invisible hand” was Adam Smith’s way of bringing a deistic natural law into economics. On this point, see Charles M.A. Clark, “Adam Smith and Natural Law,” paper presented to the History of Economics Society (June 1988). While the deistic overtones have long since been stripped from the concept, the natural law implications have not. See Neale, “Language and Economics,” pp. 355–356, or Kurt Dopfer, “Causality and Consciousness in Economics: Concepts of Change in Orthodox and Heterodox Economics,” Journal of Economic Issues 20 (June 1986): 509–523.Google Scholar
  40. 46.
    W. Hamilton, “Institution,” pp. 84–89. The term coercive surveillance was used by Veblen in a critical swipe at the putative influence of natural law over the course of economic events. See Thorstein Veblen, The Place of Science in Modern Civilization and Other Essays (New York: B.W. Heubsch, 1919), p. 61.Google Scholar
  41. 47.
    Warren J. Samuels, “On the Nature and Existence of Economic Coercion: The Correspondence of Robert Lee Hale and Thomas Nixon Carver,” Journal of Economic Issues 18 (December 1984): 1027–1048. Also see John S. Gambs, Beyond Supply and Demand: A Reappraisal of Institutional Economics (Morningside Heights, NY: Columbia University Press, 1946), p. 11; and John R. Commons, A Sociological View of Sovereignty, reprint edition (New York: Augustus M. Kelley Publishers, 1964), p. 62.Google Scholar
  42. 48.
    Neale, “Language and Economics” and “Institutions.”Google Scholar
  43. 49.
    For an excellent overview of “spontaneous” institutional change, see Robert Sugden, “Spontaneous Order,” Journal of Economic Perspectives 3 (Fall 1989): 85–97. In his analysis, Sugden emphasizes that, since individual values evolve pari passu with new practices, it will generally be the case that others will not imitate deviant individuals, especially in those cases where established practices have an important bearing on individual real income attainments. It is of course a central insight of the instrumental value theory school of institutional economists that ceremonial institutions are generally what inhibit the adoption of new practices. See Bush, “The Theory of Institutional Change.”Google Scholar
  44. 50.
    Commons always traced the development of market institutions in the Anglo-American experience back to the year 1066 and the conquest of William the Conqueror. It was one of Commons’s central points that within the Anglo-American tradition all individual rights and empowerments were, in the formal sense, rights and powers taken from the king. In other words, from Commons’s point of view, “Property is sovereignty taken from the king” (John R. Commons, Legal Foundations of Capitalism [New York: The Macmillan Company, 1924], p. 221).Google Scholar
  45. 51.
    See Ramstad, “The Institutionalism of John R. Commons,” for a more extended discussion of this issue. It should not be forgotten that a corporation is a legal entity created by the state in which the “owner(s)” is authorized to determine intra-concern rules except as proscribed by law (as, for example, with respect to health and safety). For reasons already indicated, it should be apparent that in determining what rules to adopt, authoritative figures (“owners”) generally act in ways that are consistent with the “habitual assumptions” (“institutions”) through which their mental impulses obtain content.Google Scholar
  46. 52.
    Philip A. Klein, “Power and Economic Performance: The Institutionalist View,” Journal of Economic Issues 21 (September 1987): 1341–1377; Marc R. Tool and Warren J. Samuels, eds., The Economy as a System of Power, 2nd rev. ed. (New Brunswick: Transaction Books, 1988).Google Scholar
  47. 53.
    In using the term instrumental valuing, I am adopting the usage forwarded by Walter N. Neale, namely, “the proposition that valuing emerges in the process of trying to solve problems, in contrast to such other putative sources as intuition (conscience), revelation, or unanalyzable tastes” (Neale, “Institutions,” p. 1197). It should be added that there is at present considerable debate among institutionalists as to whether the evolution of economic institutions manifests an inherent dynamic toward “instrumentally warranted” (nonsubjectively legitimated) values. For the strongest argument that there is, see Tool, Essays in Social Value Theory. For an opposing view, see Warren J. Samuels, “The Self-Referentiability of Thorstein Veblen’s Theory of the Preconceptions of Economic Science,” Journal of Economic Issues 24 (September 1990): 695–718.Google Scholar
  48. 54.
    For various views of institutional economists regarding the nature of human action, see Thorstein Veblen, “Why Is Economics Not An Evolutionary Science?” Quarterly Journal of Economics 12 (July 1898): 373–397; Wesley C. Mitchell, “The Rationality of Economic Activity, I,” Journal of Political Economy 18 (February 1910): 97–113; and “Human Behavior and Economics: A Survey of Recent Literature,” Quarterly Journal of Economics (November 1914): 1–47; John Maurice Clark, “Economics and Modern Psychology,” Journal of Political Economy 26 (January, February 1918): 1–30, 136–166; Walton Hamilton, “The Institutional Approach to Economic Theory,” American Economic Review 9 (Supplement 1919): 309–318; Commons, Institutional Economics; Clarence E. Ayres, “Fifty Years’ Developments in Ideas of Human Nature and Motivation,” American Economic Review 26 (Supplement 1936): 224–236; Karl Polanyi, in George Dalton, ed., Primitive, Archaic and Modern Economies (Boston: Beacon Press, 1968); Tool, The Discretionary Economy; W. Gordon, Institutional Economics; and Geoffrey M. Hodgson, Economics and Institutions: A Manifesto for a Modern Institutional Economics (Philadelphia: University of Pennsylvania Press, 1988).Google Scholar
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    See, for example, Commons, Institutional Economics, p. 725, on marginal utility.Google Scholar
  50. 56.
    Whether hedonism, as a psychological thesis, is in fact implicit in the neoclassical framework is a disputed point. For example, see James Griffen and Derek Parfit, “Hedonism,” in John Eatwell, Murray Milgate, and Peter Newman, eds., The New Palgrave: A Dictionary of Economics, Vol. 2 (London, New York, and Tokyo: The Macmillan Press, Limited, 1987), pp. 634–635. Whether it is or not makes little difference to the themes I am developing.Google Scholar
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    Veblen, “Why Is Economics Not An Evolutionary Science?”Google Scholar
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    Cf. Hodgson, Economics and Institutions, ch. 11.Google Scholar
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    See, for example, Commons, Institutional Economics, p. 97; Clarence E. Ayres, “The Co-ordinates of Institutionalism,” American Economic Review, Proceedings 41 (June 1951): 44–49. Also cf Gambs, Beyond Supply and Demand, ch. 2; D. Hamilton, Evolutionary Economics, ch. 3; W. Hamilton, “The Institutional Approach to Economic Theory,” p. 316; and K. W. Kapp, “In Defense of Institutional Economics,” Swedish Journal of Economics 70 (1968): 2.Google Scholar
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    Cf. Gambs, Beyond Supply and Demand, p. 49; W. Gordon, Institutional Economics, p. 104; and Robert F. Hoxie, Trade Unionism in the United States (New York: D. Appleton and Company, 1917), p. 369.Google Scholar
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    See Hans Jensen, “The [Institutional] Theory of Human Nature,” Journal of Economic Issues 21 (September 1987): 1039–1073, for an illustration of the impossibility of circumscribing the institutional interpretation.Google Scholar
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    For example, see Veblen, The Place of Science, pp. 73,239, versus Veblen ibid., p. 156.Google Scholar
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    Cf. W. Gordon, Institutional Economics, p. 19; Allan G. Gruchy, Modern Economic Thought: The American Contribution (New York: Prentice-Hall, 1947), pp. 56, 564. Neoclassical economists will no doubt acknowledge that much behavior is habitual. However, given the neoclassical concept of man, such behavior is interpreted to be just another rational adjustment to constraints, that is, to be the product of a “rational” endeavor to economize in the use of one’s limited decision-making capabilities (A.P. Barten, “Trends in the Analysis of Consumer Demand,” in T.J. Kastelein et al., eds., 25 Years of Economic Theory (Leider, The Netherlands: H.E. Steufert Kroese, 1976), p. 17). Institutionalists clearly cast the role of habit in a fundamentally different mold.Google Scholar
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    For an excellent discussion of the social roots of individual perception and “preferences,” see Geoffrey M. Hodgson, “The Rationalist Conception of Action,” Journal of Economic Issues 19 (December 1985): 825–851. Also see Mukerjee, The Institutional Theory of Economics, ch. 6.Google Scholar
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    See Neale, “Institutions,” p. 1188, for the argument that institutional theory can actually dispense with the issue of what it is that motivates individual economic actors.Google Scholar
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    For a careful analysis, from a noninstitutional standpoint, showing that economic behavior is infused with “irrational” behavior (behavior that does not advance the objective interests of the actor), see Jon Elster, “Social Norms and Economic Theory,” Journal of Economic Perspectives 3 (Fall 1989): 99–117.Google Scholar
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    For an attempt to transcend the whole problem of subjectivity in identifying “good” ends/values, see Tool, Essays in Social Value Theory, chs. 2 and 3.Google Scholar
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    This orientation is often labeled “holist.” Cf D.C. Phillips, Holistic Thought in Social Science (Stanford: Stanford University Press, 1976), or W.H. Dray, “Holism and Individualism in History and Social Science,” in Paul Edwards, ed., The Encyclopedia of Philosophy, Vol. 4 (New York: The Macmillan Company and The Free Press, 1967). The term “holism” has taken on a somewhat different meaning in the institutionalist literature; cf. Charles K. Wilber and Robert S. Harrison, “The Methodological Basis of Institutional Economics: Pattern Model, Storytelling, and Holism,” Journal of Economic Issues 12 (March 1978): 61–90; Ramstad, “A Pragmatist’s Quest for Holistic Knowledge;” F. Gregory Hayden, “Social Fabric Matrix: From Perspective to Analytical Tool,” Journal of Economic Issues 16 (September 1982): 637–662; and F. Gregory Hayden, “Integration of Social Indicators into Holistic Geobased Models,” Journal of Economic Issues 17 (June 1983): 325–334.Google Scholar
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    Philosophers have noted that the assumption of utility maximization in the context of fixed tastes in effect removes free will—the power to not maximize or to alter one’s “preferences”*3-from the neoclassical “theory of action.” See Brian J. Loasby, Choice, Complexity and Ignorance: An Enquiry into Economic Theory and Practice of Decision Making (Cambridge: Cambridge University Press, 1976), p. 5.Google Scholar
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    This is a very important point, for a central element of the orthodox mindset is a belief in the possibility, indeed, the necessity, of developing a theory whose logic (“principles”) can be applied across the economic landscape. By requiring of institutional economics that it also must provide such a theory in order to be considered as a viable alternative to neoclassical economics, mainstream economists in effect already have settled the issue of which theory is “superior” without considering a single substantive issue. This is exactly the approach Paul Samuelson, “Economic Theory and Wages,” in David McCord Wright, ed., The Impact of the Union (New York: Kelly ⇐p; Millman, 1951), p. 323, took in asserting, “In economics it takes a theory to kill a theory; facts can only dent the theorist’s hide.” For a similar defense of neoclassical economics, see Mark Blaug, Economic Theory in Retrospect, 3rd ed. (London: Heinemann, 1978), pp. 710–713.Google Scholar
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    “Institutionalism represents—to institutionalists, at least—a revolutionary way of observing economic phenomena. It is not complementary to [neoclassical economics, merely completing the sociological aspects of an otherwise logically tight system. Nor does institutionalism present a body of maxims such as all the varieties of classical economics have done. Institutionalism and classicism stem from different backgrounds and have different antecedents; they are products of antithetical ways of thinking about economic behavior. Where classicism was developed out of eighteenth-century Newtonianism, institutionalism is a product of the Darwinian revolution of the nineteenth century” (D. Hamilton, Evolutionary Economics, p. 4).Google Scholar
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    For a creative and highly promising research program with a “positive heuristic” of developing “pattern models” in conformity with this institutional conception of explanation, see Hayden, “Social Fabric Matrix”; “Integration of Social Indicators”; “Defining and Articulating Social Change Through the Social Fabric Matrix and System Digraph,” Journal of Economic Issues 20 (June 1986): 383–392; and “Values, Belief, and Attitudes in a Sociotechnical Setting,” Journal of Economic Issues 22 (June 1988): 415–426.Google Scholar
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    Galbraith’s “market system” versus “planning system” constitutes such a typology. See John K. Galbraith, Economics and the Public Purpose (Boston: Houghton Mifflin, 1973).Google Scholar
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    Perhaps the outstanding example of such a research program in institutional economics is the “instrumental value theory” developed out of Veblen’s ceremonial-technological dichotomy. For by far the best explication of the logic of this approach, see Bush, “An Exploration of the Structural Characteristics” and “The Theory of Institutional Change.”Google Scholar
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    Cf, for example, Lower, “Evolution of the Institutionalist Theory of Consumption,” p. 84; Mukerjee, The Institutional Theory, p. 155.Google Scholar
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    On this point, see W. Gordon, Institutional Economics, pp. 99ff. The phrase, “economics without equilibrium” is actually Nicholas Kaldor’s; see Kaldor, Economics without Equilibrium (Armonk, NY: M.E. Sharpe, 1985). While the phrase is felicitous, Kaldor’s reference was not to institutional economics. In fact, Kaldor’s work has never been associated with mainstream institutionalism (see note 8 above), and certainly one will not learn anything about the institutional approach from his writings. For a devastating technical critique of the manner in which the concept of equilibrium has been employed in economics, see Philip Mirowski, “The Rise and Fall of the Concept of Equilibrium in Economic Analysis,” Recherches Economiques de Louvain 55 (December 1989): 447-468. For an interesting argument in support of the self-conscious development of a “nonequilibrium” approach, see C. Clark, “Equilibrium for What?”Google Scholar
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    I am not considering in this essay the structure that institutional theories directed at the process of economic evolution itself must take. See Bush, “The Theory of Institutional Change,” and Ramstad, “The Institutionalism of John R. Commons,” for extended discussion of two quite different models of that process, both of which are clearly institutional according to the criteria developed here.Google Scholar
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    Commons acknowledged that “comments and criticism by readers and students of both my Legal Foundations of Capitalism and the various mimeographed copies and revisions of [Institutional Economics]” revealed that they “could not understand my theories nor what I was driving at” (Commons, Institutional Economics, p. 1).Google Scholar
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    See John R. Hicks, The Theory of Wages (London: Macmillan and Company, 1932). Hicks later repudiated his early perspective and characterized The Theory of Wages as “a juvenile work” and “a thoroughly bad book.” See John R. Hicks, The Theory of Wages, 2nd ed. (London: Macmillan and Company, 1963), pp. 310–311.Google Scholar
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    See John T. Dunlop, “The Task of Contemporary Wage Theory,” in John T. Dunlop, ed., The Theory of Wage Determination (London: Macmillan & Co., Ltd., 1957), pp. 3–27; Charles A. Myers, “Labour Market Theory and Empirical Research,” in Dunlop, The Theory of Wage Determination, pp. 317–326; Albert Rees, “The Economic Impact of Collective Bargaining in the Steel and Coal Industries During the Postwar Period,” in Proceedings (Industrial Relations Research Association, 1950), pp. 203–212; and Melvin W. Reder, “Wage Determination in Theory and Practice,” in Neil W. Chamberlain, ed., A Decade of Industrial Relations Research (New York: Harper and Brothers Publishers, 1958), pp. 64–97.Google Scholar
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    Reder, “Wage Determination in Theory and Practice.” It should be noted that “wage contours,” as a concept, is fully separable from the neoclassical framework; that is, its meaning remains the same when removed from the neoclassical-plus context in which it was first presented.Google Scholar
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    Dunlop, “The Task of Contemporary Wage Theory,” p. 14. The reference to a political theory of wages is a pointed rejection of the theory forwarded by Arthur M. Ross, a prominent member of the neorealist group to be discussed next.Google Scholar
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    This is true whether or not, as Clark Kerr has insisted, members of this group were in “dialogue” with conventional theorists. See Kerr, “The Neoclassical Revisionists in Labor Economics,” p. 13.Google Scholar
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    See Kerr, Labor Markets and Wage Determination; Arthur M. Ross, Trade Union Wage Policy (Berkeley and Los Angeles: University of California Press, 1948); Arthur M. Ross, “The State of Wage Theory-Discussion,” in Proceedings (Industrial Relations Research Association, 1953), pp. 266–269; Richard A. Lester, “Shortcomings of Marginal Analysis for Wage-Employment Problems,” American Economic Review 36 (March 1946): 63–82; Richard A. Lester, “The State of Wage Theory-Discussion,” in Proceedings (Industrial Relations Research Association, 1953), 269–272.Google Scholar
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    Cf. Clark Kerr, “Labor Markets: Their Character and Consequences,” American Economic Review, Supplement 40 (May 1950): 278–291.Google Scholar
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    “Satisficers” are individuals who evaluate multidimensional alternatives solely on the basis of whether or not they are satisfactory along all dimensions without in any way attempting to “maximize,” that is, optimally trade off more of this for less of that, with respect to any criterion. In particular, the search for additional information will end as soon as a “satisfactory” alternative has been identified. See Flemming Hansen, Consumer Choice Behavior: A Cognitive Theory (New York: The Free Press, 1972), p. 452.Google Scholar
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    See Kerr, Labor Markets and Wage Determination, for a collection of essays reflective of this standpoint.Google Scholar
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    See the selections in Michael J. Piore, ed., Unemployment & Inflation: Institutional and Structuralist Views (White Plains, NY: M.E. Sharpe, 1979).Google Scholar
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    Peter B. Doeringer and Michael J. Piore, Internal Labor Markets and Manpower Analysis (Lexington, MA: D.C. Heath and Company, 1971). This landmark work must be understood as an attempt to develop in much more careful fashion generalizations about labor markets originally outlined many years earlier by Clark Kerr in his landmark essay, “The Balkanization of Labor Markets” (included in Kerr, Labor Markets and Wage Determination). Significantly, Kerr is in my judgment the prototype neorealist (that is, institutional researcher). See Ramstad, “‘Neoclassical Revisionist’or ‘Neoinstitutionalist.’”Google Scholar
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    See, for example, Peter B. Doeringer, Phillip I. Moss, and David G. Terkla, “Capitalism and Kinship: Do Institutions Matter in the Labor Market,” Industrial and Labor Relations Review 40 (October 1986): 48–60.Google Scholar
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    Doeringer and Piore were John T. Dunlop’s students and did this work under his guidance. In “’Neoclassical Revisionist’or ‘Neoinstitutionalist,’” I have, with some misgivings, associated Dunlop’s work with the neoclassical-plus orientation. Certainly, Professors Dunlop and Rees would represent the opposite ends of the spectrum within this grouping.Google Scholar
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    My characterization of the dual labor market theory follows closely, indeed is but a condensation of, that provided in Michael J. Piore, “Notes for a Theory of Labor Market Stratification,” in Richard C. Edwards, Michael Reich, and David M. Gordon, eds., Labor Market Segmentation (Lexington, MA: D.C. Heath and Company, 1975), pp. 125–150. The reader familiar with the logic of the dual labor market theory may want to skip to the next section.Google Scholar
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    Michael J. Piore, “Introduction,” in Piore, Unemployment & Inflation, p. xiii.Google Scholar
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    Since the not insignificant problems involved in integrating craft jobs into the dual labor market theory have no bearing on the present analysis, the existence of a separate category, “crafts,” is ignored in the ensuing discussion. For an extended discussion of this matter, see Piore, “Notes.”Google Scholar
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    Ibid., p. 130.Google Scholar
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    Piore uses the term instrumental to connote decision-making where “decisions involve the selection of the most efficient means for the achievement of given ends” (Piore, “Introduction,” p. xiii). Whereas orthodox economists assume all behavior is instrumental within this meaning, Piore “assumes [it] is true, if at all, only for professional and managerial workers” (ibid., p. xiii, emphasis added). It must be remembered, however, that within mainstream institutional economics, the term instrumental is widely employed in reference to actions that are rooted in standards of judgment tied to the logic of “efficient cause.” See Bush, “The Theory of Institutional Change,” p. 1080.Google Scholar
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    Again, see Piore, “Notes,” for an overview.Google Scholar
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    Cf. Suzanne Berger and Michael J. Piore, Dualism and Discontinuity in Industrial Societies (New York: Cambridge University Press, 1980), p. 49.Google Scholar
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    Cf. Michael J. Piore, “Upward Mobility, Job Monotony, and Labor Market Structure,” in James O’Toole, ed., Work and the Quality of Life (Cambridge: The MIT Press, 1974), p. 86.Google Scholar
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    There is obviously much more to the dual labor market theory treatment of the learning process than what is conveyed in this short paragraph. For a more complete treatment, see Piore, “Notes.”Google Scholar
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    Michael J. Piore, “Labor Market Segmentation: To What Paradigm Does It Belong?” American Economic Review, Papers and Proceedings 73 (May 1983): 252.Google Scholar
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    David M. Gordon, Theories of Poverty and Unemployment: Orthodox, Radical, and Dual Labor Market Perspectives (Lexington, MA: D.C. Heath and Company, 1972), p. 43; Piore, “Notes,” p. 125.Google Scholar
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    Cf. Michael J. Piore, “Pricing Rules,” in Piore, Unemployment & Inflation, p. 144. Contrast this to the position articulated by Piore’s mentor, John Dunlop, on p. 199 above.Google Scholar
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    Michael J. Piore, “Fragments of a’ sociological’Theory of Wages,” in Piore, Unemployment & Inflation, pp. 144–149.Google Scholar
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    Cf. Michael J. Piore, “Wage Determination in Low-Wage Labor Markets and the Role of Minimum Wage Legislation,” in Piore, Unemployment & Inflation, p. 198.Google Scholar
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    Piore, “Introduction,” p. xiii.Google Scholar
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    Piore, “Introduction,” p. xiii; “Pricing Rules,” p. 146.Google Scholar
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    Arthur Ross coined the phrase “orbits of coercive comparisons.” See Ross Trade Union Wage Policy, p. 53. Ross similarly utilized the phrase “process of equitable comparison” in reference to the tendency for interfirm wage structures to remain more or less in place despite destabilizing “market pressures.” It is worth noting that Ross’s analysis is included in Piore, Unemployment & Inflation, and is explicitly cited to support Piore’s own assertions about the intrafirm wage structures (cf. Piore, “Fragments,” n. 2).Google Scholar
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    Piore, “Labor Market Segmentation,” p. 251.Google Scholar
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    Piore, “Fragments,” p. 134.Google Scholar
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    Piore, “Fragments,” p. 135. The reader is reminded that the “labor economists in the 1940s and 1950s” were themselves unfamiliar with the ontological and epistemological beliefs, or “preconceptions,” reflected in the writings of mainstream institutional economists.Google Scholar
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    Berger and Piore, Dualism and Discontinuity, p. 3, emphasis added.Google Scholar
  178. 191.
    Cf. Piore, “Fragments,” p. 136.Google Scholar
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    Ibid., p. 137.Google Scholar
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    Cf. Piore, “Pricing Rules,” p. 148.Google Scholar
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  187. 201.
    See p. 189 above.Google Scholar
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    See Piore, “Wage Determination in Low-Wage Labor Markets.” The next several paragraphs are taken entirely from this article.Google Scholar
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    Piore, “Pricing Rules,” p. 203.Google Scholar
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    Piore, “Wage Determination in Low-Wage Labor Markets,” p. 201.Google Scholar
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    Ibid., p. 206.Google Scholar
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    Piore, “Labor Market Segmentation.”Google Scholar
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    Ibid., p. 252. One is reminded here of Mukerjee’s assertion that “Institutional economics … is a branch of social psychology.” See p. 186 above.Google Scholar
  194. 208.
    Ibid., p. 253. Thus the subtitle of Unemployment & Inflation—namely, Institutionalist and Structuralist Views, where the term institutionalist views emcompasses both of the views of the postwar labor economists I referred to above as neoclassical plus and neorealist.Google Scholar
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    See pp. 193–194 above. The reader will recall that the present analysis is premised on a belief that there exist in principle many possible theories, perhaps even incompatible ones (see Ramstad, “’Reasonable Value’versus ‘Instrumental Value’”), that would be consistent with the institutional standpoint delineated above.Google Scholar
  196. 210.
    Cf Tool, “The Compulsive Shift to Institutional Analysis.”Google Scholar
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    See Dugger, “The Administered Labor Market,” for a promising start, even if it is not self-consciously articulated in the lexicon of the dual labor market theory, toward the construction of an explicitly institutional theory of wage-determination in the upper tier.Google Scholar
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    Actually, Piore has proposed that dualism is in fact a transnational phenomenon (Berger and Piore, Dualism and Discontinuity, p. xx). Thus the significance of the theory transcends its applicability to the American setting.Google Scholar
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    Cf. Berger and Piore, Dualism and Discontinuity, Part I.Google Scholar
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    Cf Michael J. Piore, “Unemployment and Inflation: An Alternative View,” in Piore, Unemployment & Inflation, pp. 3–16.Google Scholar
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    The career of John Blair probably best exemplifies what I am talking about here. See John Blair, The Control of Oil (New York: Pantheon Books, 1976), for the “pattern model” resulting from his endeavors.Google Scholar
  202. 217.
    Benjamin Ward of the University of California, Berkeley, who supervised my unpublished PhD dissertation (Yngve Ramstad, “The Analytical and Methodological Orientations of Institutional Economists: Inferences from the Case of Labor Economics” [University of California, Berkeley, 1981]), told me on more than one occasion that it was his belief that the transformation of Berkeley’s economics department during the 1950s, from one including a large number with institutional leanings in the late 1940s to one in which nearly all were of the neoclassical persuasion by the early 1960s, was facilitated enormously by the fact that the institutionalists within the department could never agree as to which of the institutional applicants for an opening was actually doing good work. Serious disputes were avoided by settling on a neoclassical applicant whose facility at employing that framework could be ascertained much more objectively.Google Scholar

Notes

  1. 1.
    Clark Kerr, “The Neoclassical Revisionists in Labor Economics (1940—1960)-R.I.P.,” in Bruce E. Kaufman, ed., How Labor Markets Work: Reflections on Theory and Practice (Lexington, MA: Lexington Books, 1988), p. 14.Google Scholar
  2. 2.
    Ibid., pp. 12–13.Google Scholar
  3. 3.
    Ibid., p. 9.Google Scholar
  4. 4.
    Michael Piore, “Fragments of a’ sociological’Theory of Wages,” in Michael Piore, ed., Unemployment and Inflation: Institutionalist and Structuralist Views (New York: M.E. Sharpe, 1979, p. 134).Google Scholar
  5. 5.
    Ibid., p. 135.Google Scholar
  6. 6.
    Ibid., p. 136.Google Scholar
  7. 7.
    Michael Piore, “Labor Market Segmentation: To What Paradigm Does It Belong?” The American Economic Review: Papers and Proceedings 73 (May 1983): 249–253.Google Scholar

Copyright information

© Kluwer Academic Publsihers 1993

Authors and Affiliations

  • Yngve Ramstad
    • 1
  1. 1.Department of EconomicsUniversity of Rhode IslandKingston

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