View source for Hodgson on the Essence of Old Institutional Economics

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Geoffrey M. Hodgson is a heterodox economist in the tradition of the Old American Institutionalism of Thorstein Veblen and the later Keynesian John Kenneth Galbraith (As an aside, Hodgson also co-founded the fascinating The Other Canon website with Erik Reinert.)

There is of course a subtle blending of some Old American Institutionalists with Post Keynesian economics; indeed, the great economist John Kenneth Galbraith could really be understood as both a Post Keynesian and Institutionalist.

Hodgson (2000) describes the essence of Old Institutionalist Economics, which is of great interest.

One must carefully distinguish the New Institutionalist economics (say, of Ronald Coase and Douglass North) from the Old American Institutionalist tradition, because the New Institutionalism is really just a variant of modern neoclassical theory.

Old Institutionalism had a major role in the landscape of academic economics in the United States from the late 19th century down to the 1940s (Hodgson 2000: 317).

It is important to note that Old Institutionalism itself developed and amongst the many Institutionalist economists there has been historically different policy and political viewpoints, ranging from conservative, centrist, liberal and even socialist (Hodgson 2000: 320). Some older Institutionalists such as Commons, Mitchell, J. M. Clark, Paul Douglas, and Arthur F. Burns even saw their disciple as being compatible with, or complementary to, neoclassical theory (Hodgson 2000: 325).

Nevertheless, Old American Institutionalism came to distinguish itself from neoclassical economics. 

Hodgson sets out some fundamental ideas of Old Institutionalist Economics as follows:
(1) Economics must draw on other disciplines such as psychology, history, sociology and anthropology to study both human behaviour and social structures (such as institutions) relevant in economic life;

(2) Institutions must be seen as key elements in any economy, and the economist must analyse institutions;

(3) Any economy is a evolving system that is open ended, with very complex relations between its elements such as human beings, social life, culture, technology, resources, and politics.

(4) The neoclassical idea of basing economics on the individual utility-maximising agent is mistaken. Individuals and their action can be shaped by social and cultural factors and institutions. “Downward causation” from the social world and institutions can significantly alter and shape human behaviour. (Hodgson 2000: 318).
Hodgson rightly sees point (4) above as what distinguishes Old Institutionalism from mainstream, neoclassical economics. 

Hodgson makes an interesting and insightful observation about neoclassical economics:
“It really concedes too much to neoclassical theory to suggest that it has an adequate theoretical foundation upon which to build any pro- (or anti-) market policy. Neoclassical theory is essentially neither pro-market nor anti-market, because it has no adequate theory of markets at all. Instead of associating it with markets, it would be more accurate to say that neoclassical theory was blind to real markets, and consequently to their virtues or vices.” (Hodgson 2000: 321).
So what we need is not bad theory about markets, but a proper, empirically-grounded and true theory of real world markets.

For that, study of social life and institutions is paramount. Although obviously human beings are agents of economic life, there is a two-way process involved: the dependence of institutions on individuals, but also the institutional moulding of individuals (Hodgson 2000: 326). That is to say, there is a need for understanding “both upward and downward causation” in an economy (Hodgson 2000: 327).

As an example, individual consumers are said to be the ultimate driver of capitalism, and the individual’s tastes and preferences are the ultimate driving force of production; “Consumer sovereignty” is the idea usually invoked to describe this idea.

But modern businesses and corporations can actively shape consumer tastes and preferences by means of multi-billion dollar programs of advertising, salesmanship and subtle manipulations of personal opinions and desires (Hodgson 2000: 325, citing the work of John Kenneth Galbraith). So much of modern advertising is based not only on deceptive advertising, but also on outright fraud. How does this affect production and efficiency when people are manipulated into buying things that do not actually do what they are supposed to do?

To sum up, Hodgson sees the essence of Old Institutionalism as the idea that “the individual is socially and institutionally constituted” and downwards causation is important in economic life (Hodgson 2000: 327).

Finally, you might ask: who were, and are, the Old Institutionalists?

I provide a list of them below:
OLD AMERICAN INSTITUTIONALIST SCHOOL

Early American Institutionalists and Associates
Francis A. Walker and the American Apologists 
Simon Nelson Patten 1852–1922
Henry Carter Adams, 1851–1921 
Richard T. Ely 1854–1943 
Edwin R.A. Seligman 1861–1939 
William Trufant Foster 1879–1950 
Waddill Catchings 1879–1969 
Adolf A. Berle 

Old Institutionalists
Thorstein Veblen 1857–1929 
John R. Commons 1862–1945 
John Maurice Clark 1884–1963 
Clarence E. Ayres 1890–1972 
Gardiner C. Means 1896–1988 
Arthur R. Burns 1895–1981 
Allan Gruchy 
Allyn A. Young 1876–1929 

Business Cycle Institutionalists
Wesley Clair Mitchell 1874–1948 
Leonard P. Ayres 1891–1972
Arthur F. Burns 
Frederick C. Mills 
Solomon Fabricant 
Simon Kuznets 

Modern Institutionalists 
Robert Heilbroner
John Kenneth Galbraith
Malcolm B. Rutherford 
Robert Frank 
John Adams 
Warren J. Samuels 
Mark R. Tool 
Rick Tilman 
Geoffrey Hodgson 
Anne Mayhew
BIBLIOGRAPHY

Hodgson, Geoffrey M. 2000. “What Is the Essence of Institutional Economics?,” Journal of Economic Issues 34.2: 317–329.
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