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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 2 Inquiry Behaving - emerge out of problematic situation Valuation What is a situation? What is knowledge – terminus of inquiry How do we acquire it? How many teeth in the mouth of a horse? Clarence Darrow story. Knowledge and Action-- inseparable Nature of Theory and practice – properly done also inseparable Evolutionary Process Darwin -- Importance of ocean islands is that it reduces confusion of task to simpler proposition – assumed marooned evidence of past connection with nearest continent Finches on the Galapagos – had great variety of beaks – nowhere but on the islands – must have evolved there. The Grand synthesis Evolution by natural selection Genetics Knowing–Doing–Valuing –>Behavior

3 3 Veblen’s synthesis Evolution by natural selection Concept of Culture – anthropology Veblen’s point of view – cumulative causation – instincts – habits

4 4 Elements of Theory  Culture  Evolution of institutions  Consumption theory Class Analysis – Leisure class – pecuniary emulation canons of taste conspicuous consumption conspicuous waste  dress v clothing  Production theory Resources industrial arts – tools – machine process – combination – cumulative causation Business – purchase and sale – profit max – money as the key variable Nature of capital  Value Theory  Theory of Progress

5 5 Veblen Commons Mitchell Veblen – Theory—Critique of standard, classical and Marxian. Commons – applied and policy Mitchell – built on Veblen’s theory to create empirical foundation for economics, especially business cycles, theory of money Veblen Brief Biography Criticisms of Classical Theory pre-Darwinian Taxonomy pre- conceptions of human nature - natural order

6 6 Schematic of Veblen – Dewey Theoretical Heritage Veblen Mitchell Kusnets– NBER Major Theoretical Developments Ayres Pecuniary Employments/Industrial Employments And all the rest of the distinctions he made Evolutionary approach to theory and method Class analysis Dewey Seek for security, Ceremonial arts, sacrifice, ceremonial rite, magical cult, sacrifice of contrite heart (more pleasing than oxen or bull) Industrial arts, turn powers of nature to account, make friend instead of enemy. Instrumental theory of value Veblenian Dichotomy, Combined: Veblen’s distinctions With Dewey’s value theory Business cycles, Quantitative Data, GNP

7 7 Mitchell -- Business Cycles – Data, Quantification, NBER, Biography on Mitchell Born Rushville Illinois 1874 Decatur Ill High school University of Chicago 1892 – entered in first class of U of Chicago Veblen introduced him to economics Dewey – taught him Philosophy Dissertation – role of money -- greenbacks Continued statistics experiments Institute of U of Chicago Univ of California head of dept Columbia University 1913 there for next 33 years Kusnets, National Income and Product accounts Types of writing Statistical Series – business cycles National income accounts – Kuznets Aspects of human nature -- institutional factors mass behavior Quantitative statistical approach to human behavior

8 8 Schematic of Commons Contributions and Heritage Commons Theoretical Labor Policy social experiments Reasonable value

9 9 Commons Brief Biography -- Myself Indiana – discharged for ineffectiveness and dishonesty Syracuse – discharged due to views on business and religion. Suggested baseball on Sunday so working people could have a form of recreation on only day off University of Wisconsin– rest of career Definition of Institution -- collective action in control and liberation of individual action Natural Law -- problems – monopoly – what to do about – public utility

10 10 Behavior Theory – The nature of Human Nature A valid way of thinking about economics derives from a valid conception of human nature. What constitutes a valid conception of human nature? Rationality – irrationality – what constitutes these Economic Man and the Standard Perspective Human Nature – what everybody thinks human nature is such that..... It is only human nature to..... You can’t change human nature.... The traditional view – assumptions about human behavior hedonism lack of evolution rationality – in the form of economic man – calculator of pleasure and pain determined or shaped by motives – profit motive

11 11 The contemporary-- traditional view Human nature, at bottom, is based on self-interest and greed. Richard Posner has stated the position in its most stark form. Suppose we were to give humans an acid bath. What would be left? Greed and self-interest is Posner’s reply. What can we make of this one reaction may be to dismiss it as simplistic nonsense not deserving of attention Another possibility is understand that significant numbers of people, including many social scientists (economists especially) agree with Posner so a more complete response is called for.

12 12 Where to start – no genuine inquiry can proceed, tabula rosa, without some antecedent presumption and facts. Control theory – A use later on in consumption theory Veblen on Instincts Veblen --The Instinct of Workmanship Not Tropismatic - – FunctionalWorkmanshipOwnership irrational ProgressiveParental BentPredation Past -binding InstrumentalIdle CuriosityVested Interest Ceremonial Technological

13 13 Institutional View – assumptions about human nature/behavior humans have a natural (biological) existence nature of the species genetic structure etc – relationship of head and hands human reproduction is bi-sexual – requiring two genders human infants require physiological care for an extended period in the early stages of life (unlike fish for example and many other species) human children, without the production of which there would be no more humans, usually are nurtured within a group of other humans (family, tribe, community etc.) for an extended period, often several years. Assertion – hypothesis – proposition -- Most people adopt the cultural habits and behaviors of the group they associate with, especially early in life, e.g., most children adopt the religion and language of their parents, family, community. Language contains cultural relationships – conceptualizations, -- cognitions If all behavior is traced to self-interest, by someone saying that all behavior is self-interest, i.e., I gave money to my mother because I felt guilty, therefore it was for my own self-interest, not hers, that the money exchanged, or other e.g., ad infinitium

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