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1 Institutional Economic Theory Economics 451 University of Missouri-Kansas City.

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1 1 Institutional Economic Theory Economics 451 University of Missouri-Kansas City

2 These are ways of thinking about economic activity –frames of reference, -- paradigms? Change is perhaps the most important fact of life and in economic activity To see differences in framework and perspective look at pre- Copernican, Pre-Newtonian, Newtonian, pre-Darwinian, Darwin - General Outline of Philosophy, 13 th – 18 th centuries – Table 1

3 Table 1 General Outline of the Western Philosophy of Knowledge and Social Theory in the 13 th and 18 th Centuries Philosophy of Knowledge ____________________________________________________________________________ CenturyDominantPrevailingDominant method of InquiryBeliefs Institution ____________________________________________________________________________ 13 th innate thoughtGod, sinReligious Doctrine logic-AristotelianSalvation/Heaven(Christian Story) 18 th rational proofnature, reason"scientific spirit" Newtonian era experimentalismnatural law, natural rights 20-21thExperimentalismNation, God, Me"Pragmatic" view Darwinnature

4 ____________________________________________________________________________ Social Theory CenturyDominantPrevailingDominant method of Inquiry Beliefs Institution ____________________________________________________________________________ 13 th -18 th innate thought/logic theocracyChurch Aristotelian divine right of kingsMonarchy 18 th rational proof democracyParliament religious freedom divine right of capitalBusiness Church th empirical data divine right of capitalBusiness Scientific method democracyParliament Cultural analysis educationSchool __________________________________________________________________________________________

5 Teleology – primacy of – working toward an end. Types of Teleological “Systems ” a. Telenomic Processes - Development (individual development – ontogeny --life cycle). Guided by a program existence of some end point which is foreseen in regulating development. If breed like specie, get like offspring. b. Telematic Processes -- Especially related to physical objects – a definite end is reached as a result of physical laws. But no goal seeking is involved. A river is inexorably flowing toward a river and to a sea. c. Adapted Systems -- adaptive & evolutionary – not end-directed, e.g., Heart, kidneys -- evolved -- A major achievement of Darwin is to have shown that these evolved by natural selection d. Cosmic teleology -- all things are guided toward a specific end—no, or almost no, scientist accepts this view

6 From Veblen - Why is Economics Not an Evolutionary Science The reason for the Austrian failure seems to lie in a faulty conception of human nature, -- faulty for the present purpose, however adequate it may be for any other. In all the received formulations of economic theory, whether at the hands of English economists or those of the Continent, the human material with which the inquiry is concerned is conceived in hedonistic terms; that is to say, in terms of a passive and substantially inert and immutably given human nature. The psychological and anthropological preconceptions of the economists have been those which were accepted by the psychological and social sciences some generations ago. The hedonistic conception of man is that of a lightning calculator of pleasures and pains who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact. He has neither antecedent nor consequent. He is an isolated definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another. Self-imposed in elemental space, he spins symmetrically about his own spiritual axis until the parallelogram of forces bears down upon him, whereupon he follows the line of the resultant. When the force of the impact is spent, he comes to rest, a self- contained globule of desire as before. The activity is itself the substantial fact of the process, and the desires under whose guidance the action takes place are circumstances of temperament which determine the specific direction in which the activity will unfold itself in the given case. These circumstances of temperament are ultimate and definitive for the individual who acts under them, so far as regards his attitude as agent in the particular action in which he is engaged. But, in the view of the science, they are elements of the existing frame of mind of the agent, and are the outcome of his antecedents and his life up to the point at which he stands. They are the products of his hereditary traits and his past experience, cumulatively wrought out under a given body of traditions conventionalities, and material circumstances; and they afford the point of departure for the next step in the process. The economic life history of the individual is a cumulative process of adaptation of means to ends that cumulatively change as the process goes on, both the agent and his environment being at any point the outcome of the last process. His methods of life today are enforced upon him by his habits of life carried over from yesterday and by the circumstances left as the mechanical residue of the life of yesterday.

7 But what does all this signify? If we are getting restless under the taxonomy of a monocotyledonous wage doctrine and a cryptogamic theory of interest, with involute, loculicidal, tomentous and moniliform variants, what is the cytoplasm, centrosome, or karyokinetic process to which we may turn, and in which we may find surcease from the metaphysics of normality and controlling principles? What are we going to do about it? The question is rather, What are we doing about it? There is the economic life process still in great measure awaiting theoretical formulation. The active material in which the economic process goes on is the human material of the industrial community. For the purpose of economic science the process of cumulative change that is to be accounted for is the sequence of change in the methods of doing things, -- the methods of dealing with the material means of life.

8 Taxonomy the science of classification, esp. in relation to principles or laws Monocotyledon ‑ a plant that produces seed with only one cotyledon and by endogenous growth cotyledon ‑ the primary leaf of the embryo of plants loculicidal ‑ dissect longitudinally so as to bisect each loculus loculus ‑ a receptacle, coffin, recess in an ancient tomb or catacomb. involute ‑ curled inwardly, spirally, like a sea shell evolute ‑ uncurled, unfolding Cryptogamic ‑ an old division of plants comprising those with out true flowers or seeds, as ferns, mosses, thallophytes tomentous covered with densely matted hair moniliform ‑ jointed at regular intervals so as to resemble a string of beads ‑‑ like some insects cytoplasm ‑ the living substance or protoplasm of a cell, exclusive of the nucleus. centrosome ‑ minute protoplasmic body regarded as the active center of cell division karyokinetic ‑ the series of active changes that take place when the nucleus of a living cell is in the process of division, combining, resulting in motion

9 9 Evolutionary Economics: Process and Change in Economic Activity Way of thinking – frame of reference Historical Perspective – Alternative Approaches Carl Becker The Heavenly City of the 18 th Century Philosophers The Climate of Opinion Robert Montgomery- Historical Fact - what happened at the Bastille? Paradigms -- Thomas Kuhn The Structure of Scientific Revolutions Nature of Paradigms Scientific evolution v scientific revolution – but more complicated than this Do practitioners usually ask questions they are confident the paradigm will answer? Analyzed in terms of ability to explain facts Criticisms of Paradigms from physical science, Newton v Einstein, or in geology, plate tectonics from biological science, evolution – spontaneous generation setting for inquiry guide to problem definition guide to research


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