Chapter 12: Institutional and Historical Critics of Questions for Review, Discussion and Research 2, 6, 7, 8, 9

Introduction Neoclassical economics was dominant in Britain and France German historical school challenged its methodology, and “orthodox” theory – including the Austrian approach was often ignored American institutional school prevailed as a neoclassical theory gained ascendancy in major universities

First Generation of German Historical School Includes List – Father of modern protectionism Roscher Hildebrand – Stages of economic growth found in conditions of exchange: Barter, Money, Credit Knies – Opposed all abstract theory

Classical political economy only applicable to the emerging British industrial economy and is not appropriate for all times, cultures and places Ricardians were mistakes to emulate the methodology of the natural and physical sciences

Second Generation of German Historical School Schmoller was a leading advocate of moving away from grand theories and stages of development toward specific issues associated with economic growth and development Controversy with Austrian school over methodology lasted two decades

The debate lead to recognition that theory and history, deductive and inductive, abstract model building and statistical data gathering were not mutually exclusive

British Historical School Writers did not form a cohesive group and included  Leslie – Critic of Ricardo but admired Adam Smith  Toynbee – Coined the term Industrial Revolution

 Ashley – Founder of Dept of Political Economy at U of T  Cunningham  Bagehot  Ingram – First systematic account of history of economic thought in Britain

Thorstein Veblen Intellectual father of the American Institutional School Son of immigrants who never fully integrated onto the American mainstream Was an economic instructor at the University of Chicago and became editor of the JPE Overhead pp. 328 He coined the phrase neoclassical to emphasize the continuity of the classical and marginalists

Thorstein Veblen Cont’d He believed the assumptions of both doctrines were unscientific He completely rejected the theoretical structures of mainstream economics, Marxist political economy and the historical school

Sought to build a united social science from economics, anthropology, sociology, psychology, and history Prior to Smith, supernatural forces accounted for the order of society and was replaced with the idea of natural law which presumes harmonious relationships

Thorstein Veblen Cont’d Veblen viewed the concept of equilibrium as normative and challenged the presumption that the results are socially beneficial Veblen claimed that mainstream economics was 1.Teleological as it assumes that the economy was gravitating toward long run equilibrium before the analysis begins

Thorstein Veblen Cont’d 2. Pre-Darwinian as it focuses on static equilibrium and not a paradigm based on a continually evolving, organic nature of society 3. Taxonomic classification of economic sectors (households, firms) is not implanted in an institutional framework undergoing constant change

Thorstein Veblen Cont’d Mainstream economics was founded on Adam Smith’s concept of the invisible hand at the market – an assumption that is never critically examined believed that the public interest was constantly compromised and damaged by the pursuit of profit Challenged the assumption that markets under the control of capital would produce socially desirable results

Claimed that neoclassical models of consumers were based on a hedonistic psychology with unscientific notions of human nature and behaviour By doing so, “economic man” as a social being was abstracted out of the analysis

Veblen’s Approach Shift emphasis from the allocation of scarce resources to the evolution of institutional structures defined as the habits of thought of a particular time, place and culture The institutions of culture were central to Veblen’s evolutionary approach

He sought to understand the complex set of interrelationships that developed between culture and the traits of human nature Overhead pp. 332 Carefully read pp. 332 to 338 on your own

Veblen’s Contribution 1.Replace an atomistic paradigm that proceeds from a focus on its smallest units (individual households, firms) with one that amalgamates the disciplines of the social science and starts at the level of culture, society and economy

2. An evolutionary theory seeking a better understanding of the institutional structures formed by habits of the mind 3. Replace hedonistic concepts with a social psychology focused on instincts

Veblen’s Contribution Cont’d 4.Promoted a scientific method that includes the collection of factual material to test a hypothesis 5.His normative critique of pecuniary culture

6. Theoretical framework looked at the impact of ceremony and technology on institutions 7. Ceremonial institutions were perceived to be static and technological ones dynamic

Wesley Mitchell Student of Veblen and John Dewey at the University of Chicago Overhead pp. 340

John Commons Influenced by labour economist Richard Ely and the German Historical School Father of the institutional approach known as the Wisconsin School

John Hobson Economic ideas became the intellectual foundation of the British Welfare State Never found favour in intellectual circles until Keynes praised him