749157

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AEXXXX10.1177/0569434517749157The American EconomistMayhew

Article
The American Economist
2018, Vol. 63(1) 3­–17
An Introduction to Institutional © The Author(s) 2018
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DOI: 10.1177/0569434517749157
https://doi.org/10.1177/0569434517749157
Understanding Evolving journals.sagepub.com/home/aex

Economies

Anne Mayhew1

Abstract
The analytical approach, that is, the Original Institutional Economics (OIE), is shown to be
founded on three interrelated concepts—enculturation, empiricism in aid of both understanding
and policy, and evolution—that are crucial to understanding economic systems. The theoretical
framework that has been constructed by institutional economists over the past 100 or so
years is explored as are some of the theoretical controversies of recent decades. Differences
and similarities between OIE and textbook economics, as well as noninstitutionalist heterodox
approaches to economics, are delineated. Finally, three recent works of Institutional
Economics—a study of the use of consumer credit, of the labor market associated with casinos,
and differences among markets—are used to illustrate the OIE approach in use.
JEL Classifications: A12, B15, B25, B40

Keywords
Institutional Economics, enculturation, empiricism, evolution, Veblen, Commons

Institutional Economics is an analytical approach to the study of economies, which are patterned
systems that are always and everywhere embedded in larger sociopolitical systems.
Institutional economists investigate a wide array of problems and issues, including but not
limited to patterns of employment, wages, prices, economic growth and causes thereof, macro-
economic fluctuations, business behavior, and systems of taxation and of government provision
of goods and services. In other words, institutional economists concern themselves with any and
all aspects of the systems through which humans provision themselves through organized pro-
duction and distribution.
Because the areas studied by institutional economists are many and because Institutional
Economics has been practiced for more than 100 years, I will not be able in one brief essay to
review the entire literature of Institutional Economics. What I will do instead, in Section I is
describe the core propositions that set Institutional Economics apart from what I will call stan-
dard textbook economics. In Section I will also describe the theoretical framework that is built
upon these propositions and, which, guides Institutionalist studies of economies. In Section II of

1The University of Tennessee, Knoxville, TN, USA

Corresponding Author:
Anne Mayhew, Professor Emerita of Economics, The University of Tennessee, Knoxville, TN 37917, USA.
Email: amayhew@utk.edu
4 The American Economist 63(1)

the article, I will survey some of the theoretical controversies of recent decades, and in
Section III, I will summarize and discuss three recent works done in the Institutionalist tradition
(Brown, 2008; Prasch, 2008; Mutari and Figart, 2015). These summaries will illustrate both
Institutionalist method and the importance of the underpinnings that I will lay out in Part I.
Before I begin, however, I need to write briefly about what I mean by “Institutional Economics.”
This is important because the phrase is sometimes used very loosely to mean little more than the
study of what are also loosely called “institutions.” To confuse matters further, in very recent
years, the name “Institutional Economics” has been used to describe an approach that is directly
contradictory to what I am describing in this article. The Institutional Economics dealt with in
this article is, perhaps, best called “OIE” meaning either “Original” or “Old” Institutional
Economics. This contrasts with “NIE” or “New Institutional Economics,” an approach devel-
oped from the work of Douglass North and others, in which neoclassical, or textbook, decision
theory is used to explain different institutional patterns in different economies. Although Original
Institutional (OI) economists, as I will call them throughout the rest of this article, also want to
explain variation in institutional patterns, they do not accept that the kind of commercial rationality1
used by New Institutional (NI) economists plays an important role in the evolution of institu-
tional patterns.
OIE is sometimes called Evolutionary Economics (as in the title of the major OIE organiza-
tion, the Association for Evolutionary Economics). To confuse matters further, there is also a
newer form of evolutionary economics that remains deeply wedded to the textbook neoclassi-
cism brought over into the 20th century by followers of Alfred Marshall, Leon Walras, and, in the
United States, John Bates Clark. The Marshallian–Walrasian–Clark model is, as we shall see,
firmly and totally rejected by OI economists in favor of a truly evolutionary understanding of
continuing change. I will return to this idea below.

Section I: Enculturation, Empiricism, and Evolution

Three ideas are fundamental to the OIE approach: enculturation, empiricism in service of both
scientific understanding and of social control, and evolution. To understand the nature and impor-
tance of these concepts, it helps to recognize that OIE uses much the same toolkit as other social
sciences, so that those who have studied sociology or anthropology or social psychology will find
the concepts to be discussed to be familiar ones.2

Enculturation and the Importance of Culture

Primary among the fundamental concepts of OIE is the proposition that actions and interactions
of humans are patterned by a process of enculturation. Each of us learns a primary language as
part of growing up in a group that speaks that language. In similar fashion, we acquire what eco-
nomics texts call “tastes and preferences” from our families and friends and those whom we
emulate. Our perceptions of fairness and of appropriate behavior in a wide variety of circum-
stances are part of what we learn through this process of enculturation.
Acceptance of the importance of enculturation and of culture, which is the term we use to
describe a conglomerate of social patterns, including language, dress, beliefs about our-
selves and our relationships to the universe, and so on, means that OI economists do not
begin analysis with an individual whose unexplained and unexamined “tastes and prefer-
ences” lead him or her to action that is then modeled as avoidance of pain and pursuit of
pleasure. Although there is a role for individuals in their analysis, OIE always begins with
analysis of group rather than individual behavior. Homo sapiens are, by nature, social
animals.
Mayhew 5

Empiricism and the Use of Descriptive Statistics

The empirical nature of OIE is closely intertwined with the fact that group behavior is the basic
unit of OIE analysis. Modern social science and OIE developed in the late 19th and early 20th
century alongside modern collection of economic and social data. Collection of the statistics that
we use to talk about modern economies—GDP, price indices, measures of employment and
unemployment, and so on—began, at least in their modern form, to be both defined and collected
approximately 100 years ago. This OI emphasis on empiricism stands in contrast to textbook
economics’ preference for a priori assumptions. Rather than rely on deduction for a set of
unchanging principles to determine how the entrepreneur sets price, for example, the OI econo-
mist seeks to collect qualitative and quantitative data to make this determination.
In his 1924 Presidential Address to the American Economic Association, one of the earliest
and most important of OI economists—Wesley C. Mitchell—wrote of the growth of the kind of
“realistic statistics.” Mitchell thought that the statistics that were being collected by organiza-
tions such as the National Bureau of Economic Research, which he had founded in 1920, would
transform the practice of economics.3
The empiricism that is characteristic of OIE differs, it should be noted from what is gener-
ally thought of as an empirical approach in textbook economics, and the story of how the
same word—empiricism—came to have two starkly different meanings in use of the new
statistics is useful for understanding OIE and its differentiation from textbook economics. In
1930, there was no sharp differentiation between OIE and the work done by a large number
of economists. However, by the 1930s, it became clear that the increasing volume of data
available to economists could not always be treated as simply illustrative of the propositions
put forth by earlier economists. When Mitchell wrote in 1924 of the coming transformation
of economics, he also wrote that the increased volume of statistical data would not be able to
solve the problems that earlier economists, such as Jevons and Marshall, had framed (see
Mitchell, 1925). Instead, said Mitchell (1925), “. . . economic theory will change not merely
its complexion but also its content” (p. 23).
And, in some ways, economic theory did change its content. It is clear, for example, that
national income data that were compiled in the United States were fundamental to the develop-
ment of Keynesian economics in the 1930s and 1940s.4 But in other ways, and at different times,
statistics were forced into the older framing of issues. A stark example of how and why this hap-
pened is provided by the debates over how to estimate the relationship between the price of sugar
and the quantity purchased. The problem, as Henry Schultz and others, recognized was that the
observed points of observation—the statistical measurements—were points of intersection
between a theoretical and unknown demand curve with a theoretical and unknown supply curve.5
Schultz concentrated on agricultural products where the demand schedule was likely to be rela-
tively stable, so that variation in quantity taken could be reasonably assumed, at least over a rela-
tively short period of time, to be a function of price. But still, Schultz was cautious in concluding
that measurements of quantities purchased in different periods could be attributed in textbook
fashion to price and that the measurements revealed the classic textbook downward sloping line.
The view that won out against this cautious approach was that of Ragnar Frisch and Frederick
Waugh who wrote about the problem in the first issue of the journal Econometrica.6 This is what
Frisch and Waugh (1933, p. 38) wrote,

An empirically determined relation is “true” if it approximates fairly well a certain well-defined

theoretical relationship, assumed to represent the nature of the phenomenon studied. There does not
seem to be any other way of giving a meaning to the expression “a true relationship.” For clearness of
statement we must therefore first define the nature of the a priori relationship that is taken as the idea.
(As quoted by Morgan, 1990, p. 150)7
6 The American Economist 63(1)

What Frisch and Waugh’s maxim meant was that the practice of economics, as it has come to
be in most textbooks, involves a fitting of observed data to the relationships already assumed to
be true by 19th-century economists such as Jevons, Marshall, and, in the United States, John
Bates Clark. What then, an OI economist may be led to ask, was the point of collecting the data?
Nevertheless, for many economists—and in the post–World War II (WWII) era most econo-
mists—Mitchell’s prediction that economics would change not only its complexion but also its
content did not come true. There are a lot more numbers and a much greater use of formal math-
ematics than in the economics of the 1890s, but the theoretical framework—the a priori relation-
ships—are those assumed to be true before the availability of massive amounts of reliable data.8
But OI economics took a different path. From the late 1930s and onward, Institutional
Economics—the OI economics of this essay—became an increasingly differentiated branch of
economics, a branch in which descriptive statistics rather than theoretical relationships arrived at
by deduction were regarded as both the true and the important relationships for describing the
economy. Because OI economists in adopting this stance rejected the relevance of many of the
earlier truths, they were accused of having no theory, just description.9 Although it may remain
well camouflaged to economists expected the textbook theory, OI economists do in fact have
theory that informs their empiricism, and I now turn to that theory.

Adding Evolution to Enculturation

The starting point for OIE theory is the proposition, discussed above, that human behavior is
learned behavior.10 Of course, there are individual idiosyncrasies but the patterns of behavior, the
patterns of interaction among humans in any society, are learned patterns. These patterns are the
institutions that can be discovered by collection of statistics or by observation. The motivating
questions for OI economists who start with this conception of socioeconomic systems are two:
(a) How can we account for change and variation in socioeconomic systems across space and
time? (b) Can socioeconomic change be managed, altered, or controlled?
The OIE answer to the first question is that human cultures, the matrix of institutional patterns
of behavior and their associated systems of understanding and belief, developed from the interac-
tions of humans who, as social animals, live and provision themselves as part of groups. Early
evolution took place in an era for which we have no written history. Archaeological evidence can
tell us that people carried things from one place to another but we know little about the organiza-
tion of that movement. What we do know is that human cultures and the economies that are part
of these cultures evolve.
In an essay published in 1898, Veblen wrote of the need for economics to become an “evolu-
tionary science,” and pursuit of this goal has been a unifying theme of OIE ever since.11 In OIE
theory, and the description of events upon which that theory is based, all aspects of any socioeco-
nomic system are subject to a process of cumulative and path-dependent change that results from
changes in technology and from the socioeconomic conflict that changes in technology cause.12
Evolution as conceived by OI economists is an open process meaning that there are no ele-
ments or subsystems that are assumed to be unchanging or unchangeable. The importance of
systemic variation through time can be illustrated with a simple example. Almost all economics
textbooks (of the non-OIE variety) begin with a small cast of actors whose motives and possibili-
ties remain largely unchanged through time: consumers, land (resource) owners, firms, govern-
ments, and perhaps foreigners. Interactions among these groups determine the functional
distribution of national income and the sum of their shares equals national income. That the
textbook story begins this way can be explained by thinking about the United Kingdom in the late
18th and early 19th centuries, the years in which Adam Smith, Thomas Malthus, and David
Ricardo wrote. In that world, economic change was conceived as a process of changing the role
and the rewards of one of these four (or, in an open economy, five) groups. Today, economists,
Mayhew 7

continue to lay out their analyses and to frame debates in terms of these same groups. In short,
they are still using models based on the 18th- and 19th-century United Kingdom, with the implicit
assumption that nothing is significantly different. When economists who recognize the impor-
tance of change but, nevertheless, continue to operate within this framework, produce what is
sometimes called evolutionary analysis, it is at best partially evolutionary and involves adapta-
tion of one of the four groups, usually firms.
Beginning with Veblen’s (1904) Theory of Business Enterprise, OI economists have stressed
that the cast of characters change in the process of economic change. Veblen described the way
in which merchants—the capitalists of the late 18th and early 19th centuries—were transformed
into industrialists by the advent of industrial production.13 The early capitalists might be traders
who bought and resold or, perhaps, merchants in England who took raw wool to cottagers to be
spun and woven, and then took the transformed material to market. By the late 19th century,
management of large-scale industrial processes required technical managers and allowed for
ownership of “shares” by individuals who had no direct involvement in the production or distri-
bution process. “Firms” had become multiheaded organizations with, in Veblen’s terms, both
engineers and financial owners, both cooperating and, at times, in conflict over the running of
the enterprise.14 Only in the most superficial way is Ford Motor Company like an English mill
owner in 1776.
A few years later, two other OI economists, Gardiner Means and Adolf Berle (1932), carried
Veblen’s analysis further and wrote of the separation of ownership and control in the modern
corporation. Their work was part of a larger body of work done by OI economists, J. M. Clark
(1923), Bonbright and Means (1932), and others, who challenged the textbook versions of firm
agency and whether or not one can assume that firms will indeed attempt to maximize profits.
But, the important point for this essay is that the work of these pioneering OI economists was part
of a larger effort to show how economic evolution is a systemic process. This means that no pri-
ors as to the role or characteristics of agents can be taken for granted. Conclusions about these
roles and characteristics must be based on observations (see above) of a system at a given time.
This, of course, means that for OI economists, it makes little sense to talk of a system, such as
capitalism, as having a relatively fixed structure.
Evolution as understood by OI economists is characterized by what economic historians call
path dependency. Change may seem abrupt for those living through it but all socioeconomic
change involves changes to existing practices and forms of interaction, in other words, change to
existing institutions. There is no way to “wipe the slate clean” and start again with completely
new institutions. We go on talking about firms as though the globally integrated Toyota, Wal-
Mart, JPMorgan Chase were the shipping partnerships of the 18th century, or the banking houses
of 19th-century London, even though they are in actuality quite different organizations, with
different motivations, possibilities, and limitations. Another way in which OI economists, begin-
ning with Veblen and continuing through the work of Gunnar Myrdal, put this proposition is that
socioeconomic change is a process of cumulative causation. What has been (the past) shapes
what emerges, and what emerges shapes the future in a manner that produces distant echoes.
There are such echoes but it would be a mistake to think that the “capitalist” economy of the early
21st-century United States bears much resemblance at all to the “capitalist” economy of Adam
Smith’s Scotland.
What, for OI economists drives the constant change that is said to be a feature of all socio-
economic systems? In textbook economics, the sources of change are treated as largely exoge-
nous to the economy: demographic change, changes in technology, wars, and the like. OI
economists from Veblen on have sought to explain evolution as endogenous, which is to say part
of the system that economists should seek to explain. Veblen postulated that one of the human
instincts was something that he called “idle curiosity.” This was the tendency of humans (and
perhaps, modern evolutionary biologists would say, more generally of mammals and other
8 The American Economist 63(1)

animals) to “mess around.” Because of manual dexterity and speech, for humans new ways of
interacting with the physical world give rise to new ways of doing things and to new tools that
become part of cultures that are carried forward in time. Clarence Ayres (1944), who did much
to perpetuate Veblenian thought, noted that this development of technology and of the science
that accompanies technological development, appears to be “inherently developmental” (p.
111). Although Veblen and Ayres theorized about the nature of tool combination, economic
historians, though not identifying as OI economists, have described the process in detail and
have done so in a way that corroborates theoretical arguments of both Veblen and Ayres. Joel
Mokyr (1990, 2002), in particular, in both The Lever of Riches and The Gifts of Athena, stressed
the development during the 19th century of positive feedback loops that hasten the pace of tech-
nological change and make the process a built-in—an endogenous characteristic—of modern
industrial economies.15
Two additional features of this technological process are of note. The first is that it is a process
that, as Mokyr puts it, provides a “free lunch” for society (Mokyr, 1990). Textbook economics
begins with the proposition that both resources and, therefore, output are scarce, so that the fun-
damental economic problem becomes one of allocation of scarce goods and services. To the
contrary, say OI economists, the technological process has allowed ever-greater output in indus-
trial economies, output that is, however, sometimes restricted by the managers of the industrial
system and sometimes significantly reduced by the cycles that are a consequence of the way in
which most industrial economies are managed.
The second noteworthy consequence of a technological process that has, it appears, become
self-propelling is that change is not only continuous but is also nonteleological. The historical
record as well as the OIE theory formulated by Veblen and Ayres support the proposition that
change is both path dependent and contingent. There is no inevitable path along which industrial
societies will inevitably follow.16 But, and most importantly, for OI economists, the contingent
nature of change means that humans may influence the direction of that change. Social control
becomes possible. Humans can affect their own future.
However, to understand how social control works and to consider the implications of such
control, other questions must and have been asked and (partially) answered by OI economists.
The first question is how the technological process, which we have postulated to have become
self-propelling, induces socioeconomic change. The second question is toward what goals should
social control be used.
Veblen thought that self-propelling technological change induced socioeconomic change
primarily by changing the habitual ways of thinking and of perceiving reality, but he dealt
with this at an abstract level. John R. Commons, another of the pioneers of OIE, came at the
problem from the perspective of a reformer and activist.17 More importantly, for present pur-
poses, was the proposition that technological change produced conflict as it altered both
workplaces and the distribution of the growing output of the economy. The close connection
between Commons and other faculty at the University of Wisconsin and Robert M. La Follette,
Governor of and then Senator from Wisconsin, made Wisconsin a center for development of
tools of “social control” such as workmen’s compensation, unemployment compensation, and
later, through the work of students trained by Commons, the social security legislation of the
1930s.
In Legal Foundations of Capitalism, published in 1924, Commons provided a fundamental
theory of change at the ground level that is consistent with Veblen’s more abstract explanation.
In various combinations, OI economists continue to use the Veblen–Commons conception of
how economies change. When technology changes, existing patterns of production and distribu-
tion are altered, along with community-based expectations of what is right and fair as to alloca-
tion of both work and distribution of the advantages (or burdens) of the new technology. Conflict
results. None of this is present in textbook economics because, as argued above, it assumes that
such changes do not occur.
Mayhew 9

Commons stressed the ways in which we in the United States, and in most other industrialized
countries, use the courts and political processes to settle the conflicts that arise as change occurs,
but the model that he offered can be generalized to incorporate other forms of political and quasi-
judicial dispute resolution.18 Although, in practice, OI economists, most influenced by Veblen
and Ayres, tend to look to technological change as the proximate origin of disputes, it is entirely
possible and congruent to identify some aspect of the dispute → resolution → dispute → resolu-
tion → process itself as proximate. Two examples will make this clearer.
In Legal Foundations, Commons wrote about how the railroad network and associated grain
elevators that developed after the U.S. Civil War forced U.S. courts, and eventually Congress, to
reconsider and redefine what the concept of property meant. To greatly oversimply a complex
process, this is what happened: Before the advent of the rail network, monopoly power existed
because it had been granted by government. A government would grant the exclusive right to
build a bridge or provide some service that was understood at the time to be the responsibility of
that government. Now, however, railroads had gained considerable monopoly power not by vir-
tue of government grant of monopoly but by virtue of a technology that carried with it very high
fixed costs, thus creating a significant barrier to entry. These costs were paid out to build an
operation that would, it was anticipated, operate far into the future and would yield payments to
the owners of debt or equity. Both the physical presence of the railroad tracks themselves as well
as the financial obligations required to finance the building of these tracks involved expectations
and obligations that stretched far into the future. The new railroad technology also meant that it
made little to no economic sense to build a railroad line that ran for three miles. To build a rail-
road at all meant building long and interconnecting lines.19
The new railroad enterprises came quickly into conflict with farmers who now had opportuni-
ties to sell in distant markets and who also faced new costs. Among these costs, those for rail
transport were of vital importance and were controlled by distant and powerful firms with whom
the farmers could have little direct contact.20 Note here the evolution of the actors that was taking
place, and thereby causing uncertainty and discomfort. Legislators in states such as Illinois
reacted to farmer anger and passed legislation controlling what the railroads could charge. The
railroads complained that such legislation amounted to a taking of property and it was this that
the courts had to rule on. This is the place where Commons picked up the story. In his analysis,
the legal definition of property was gradually changed by the courts, so that it came to include the
expected earning power rather than simply the physical things. Furthermore, and following from
the Munn v. Illinois case of 1876, the police power of the state came to be understood to extend
to control and restriction of use of both physical things and expected earnings.21 These decisions
of the late 19th century took their shape because of legal precedent and also from the pressures
of the time. They were path dependent, contingent upon prior decisions, and were initiated
because of a technological change, which itself was a result of the long cumulative process that
led to steam power being connected to conveyances that ran on tracks.
If we combine Veblen’s understanding of technological change with Commons’s model, we
get the following sequence as the sequence that is of central concern to OI economists: techno-
logical change → socioeconomic conflict → political/legal changes. Note that the process of
technological change → socioeconomic conflict → is likely to be occurring within a context of
other similar processes, so that part of the task of the analyst is to isolate the process of interest
from the larger social whole. For Commons in the example given above, this meant focusing on
the changing definition of property held by railroads, and setting aside the larger context of
industrialization and urbanization.

Section II. Theoretical Controversies

Like other economists, OI economists have become embroiled in theoretical arguments with
each other, which can be obscure to those not engaged in the practice of OI economics. I have
10 The American Economist 63(1)

chosen two such controversies to discuss here, one because of the amount of time and print that
has been devoted to it and the other for its relevance to those who work within other analytical
traditions.
During the years of greatest acceptance of OI economics as an important alternative to text-
book economics, which is to say the years of 1918 to 1947, the interrelated goals of identifying
and describing the patterns—the institutions—of the economic system and of controlling and
directing changes in those institutions coexisted without major challenge.22 Understanding socio-
economic change was important for OI economists not only as a matter of scientific inquiry but
also, and very importantly, as an aid to reform of existing economic systems.23 However, in the
post-WWII era, with the rise to dominance in Anglo-American economic thought of what is now
the standard textbook economics, with its strong prescription of “free markets” and minimal
government involvement (in theory if not in fact), OI economists faced a new challenge. How
could they justify the reforms that seemed to them likely to lead to a “better society”? What
would or could constitute a “better society”?
To understand how these questions led to intense theoretical debate among OI economists, it
is important to know that OI economics grew out of the philosophical tradition of Pragmatism
that is most closely associated with 19th- and early 20th-century philosophers such as Charles S.
Peirce, William James, and John Dewey.24 Pragmatism, as it influenced social thought, was first
a theory of knowledge and then a theory of how knowledge and action interacted. The Pragmatists
rejected the idea that the world in which humans live has an external reality. Rather, “The world,
as known, is a product of the knowing activity. That activity moves forward to meet new prob-
lems raised by new data, and the world as known changes” (Rucker, 1969, p. 29, emphasis in
original). Veblen, though he did not always so identify, was heavily influenced by Pragmatic
philosophy, and the OI economists of the 1918 to 1947 era were so influenced as well. Put most
simply, this meant that individuals and groups of people were seen as adapting “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” (Veblen, 1898, pp. 74-75). As humans figured out how to
manipulate the world about them, they not only used this power to serve their existing goals but
also changed those goals as their capabilities change.
What Pragmatism, combined with the reality of the enculturation that gives us our “tastes and
preferences,” means is that our ability to produce new things and to produce old things differently
changes what we want and what we see as possible. It changes what we think of as possibly a
better society. In 1917, it would have made no sense to ask whether or not heart transplants
should be covered as part of a federally provided health insurance program. The question was not
even conceivable. Similarly, it would have made no sense in 1870 to have asked what the U.S.
policy about foreign aid to drought or war stricken regions of Africa should be. Neither commu-
nication nor transportation made these reasonable questions.
These are obvious examples, in fact too obvious to make it simple to sort out what constitutes
progress to a better society. To understand the problem that this fundamental uncertainty about
long-term goals presented for OI economists, consider that, in post-WWII textbook economics,
economists were increasingly assumed to be neutral scientists advising policy makers on how to
move the economy toward full employment of resources, with stable prices, and with something
like Paretian optimality of distribution, meaning that no one can be made better off without mak-
ing someone else worse off. Their assumption was that competition among factors of production
and among producers and sellers of output would guarantee that with a given distribution of
ownership of resources and with given tastes and preferences, the best possible outcome would
be achieved. Of course, the textbook version of economic analysis says that there may be “market
failures” because of asymmetric or incomplete information or because of market power, and
these market failures may require government intervention. Even in these cases, however, the
goal is to move toward full employment, stable prices, and Paretian optimality.
Mayhew 11

OI economists see the real issues as much more complex (and interesting). As OI economists
do not take for granted that any given distribution of ownership of resources is stable or neces-
sarily desirable, and reject the notion of fixity of tastes and preferences that are indicated in the
italicized phrase in the previous paragraph, the end toward which policy should be directed can-
not be given with any certainty. To cite Commons’s analysis of the courts and the railroads once
again, it is obvious that changing legal interpretations change the distribution of ownership. If
ownership of a railroad means ownership of expected proceeds rather than ownership of physical
things, property is redistributed. Similarly, if there are restrictions placed on the hours and condi-
tions of work, or on the employment of children, potential income is redistributed. Furthermore,
if advertisers do, as we know they do, alter tastes and preferences, then these are not “given” by
nature but altered by deliberate human action. Would a better society be achieved by restricting
advertisements that make smoking look sophisticated and attractive? For OI economists, this is a
legitimate question as are many, many others that are opened up by recognizing the distribution
of ownership evolves through mechanisms other than those of the “the market” and that tastes
and preferences are not built in to individuals.
The question that remains is what constitutes progress. Toward what end should we seek to
move. Some OI economists have sought to use an amplified version of what John Dewey and
then Clarence Ayres called “instrumental value.” Taken by itself, “instrumental value” means that
something, whether technological or organizational, can be shown by scientific method to
advance toward a stated goal. The thing, whatever it is, accomplishes the goal. Fire applied to a
container of water can be shown to convert liquid into steam, and if steam is the goal, then fire
applied to water is a good thing. Payments to people without income increases the spending
power of those people. If the goal is to increase spending power, this is a good thing. This much
is obvious. The question is do such actions bring about a better state of affairs for society. That
depends on the nexus of ends deemed desirable. Ayres (1944, 1961) argued, in both The Theory
of Economic Progress and in Toward a Reasonable Society, that by making use of a dichotomy
between technologies and institutional patterns that were deemed valuable because they were
inherited from the past, and those deemed valuable because of demonstrable instrumental value,
it was possible to state with some degree of certainty what constituted better forms of economic
organization and of economic policy.
Marc Tool (1977), an OI economist who took Ayres’s theory a step further, proposed to answer
the question of what constituted progress by establishing a criterion of social value, with the
proposed criterion being “the continuity of human life and the noninvidious recreation of com-
munity through the instrumental use of knowledge.” Tool and others, such as Dale Bush, who
worked on application of this criterion, stressed the “ceremonial” foundation of most existing
institutions (social patterns) in comparison with the technological or instrumental nature of most
technology.25 For Tool and Bush, the dichotomy that Ayres proposed as a working guideline to
thinking about socioeconomic issues, took on an increasingly taxonomic form.26
As both the social biases that shape technological change and as undesirable side effects of
new technologies have become more widely recognized, some of the allure of this unabashedly
protechnology approach has dimmed. Even more importantly as those dedicated to the Pragmatic
tradition in which OIE is rooted pointed out, it is difficult to provide cross-cultural and non-time-
specific meanings to such terms as “noninvidious,” “instrumental,” or “community” (Mayhew,
1987; Samuels, 1990).
There is probably general agreement among OI economists that saying that we want a better
society does not, and cannot, provide us with absolute guidelines for making policy choices at
ground level. What most OI economists can provide, and believe they should provide, however,
is expertise that explains possibilities for achieving goals that they, through analysis that is as
objective as possible, believe to be emerging goals of those parts of society that recognize new
possibilities. OI economists understand themselves to be scientists but do not pretend to be
12 The American Economist 63(1)

unaffected by the values and currents of change present in the societies in which they work. They
do not claim certainty.27 In spite of this détente between advocates of the Tool–Bush approach on
one hand, and the less absolutist Pragmatists on the other, echoes of this debate still echo in the
OI literature.
A second and not entirely unrelated theoretical debate that has been a feature of the OI litera-
ture of the last several decades has to do with the relationship between OI economics and other
forms of “heterodox” economic thought. In the post-WWII world, where most departments of
economics have been dominated by textbook economic thought, there has been a natural ten-
dency for all who use a different approach to consider whether or not an alliance among these
varied approaches is purely tactical or might be founded upon shared propositions. Do heterodox
economists, as they are generally known, share more than rejection of the textbook propositions
that are founded on the neoclassical precepts of Walras, Marshall, J. B. Clark, and the modern
econometrician followers of Frisch and Waugh.
Consideration of common theoretical elements among Marxian, post-Keynesian, Austrian,
and other forms of heterodoxy is a task beyond this article, but it is important in this article to
note that a source of theoretical friction among OI economists has been the extent to which prac-
titioners have been willing to accept fundamental commonalities. There are, of course, some
obvious commonalities. Both Marxists and OI economists share the notion that changing tech-
nology drives socioeconomic change. And, both are deeply concerned with inequity in both
income and power in existing economic systems. Furthermore, OI economists share a great deal
with post-Keynesians, with long-standing (from Veblen forward) emphasis on cyclical instability
and resulting waste of potential output.
However, and in spite of the obvious appeal of alliances, the reality is that it is difficult to
reconcile the deeply classical nature of Marxian analysis with the OI proposition of total sys-
temic variability over time. For those working in a Marxian tradition, the central conflict that
drives socioeconomic change is between labor and capital. As against that conflict, which was
central to the mid-19th-century economy of the United Kingdom upon which Marx based his
analysis, OI economists would, as noted earlier, take it as part of their task to identify evolving
groups with conflicting goals. Karl Polanyi, a Hungarian émigré who found an intellectual home
with the OI economists at Columbia University during the early 1950s, emphasized that it is a
mistake to think of classes or interest groups as being based purely on economic interests or as
independent of changes in society and economy.28 One part of the task of the OI economist is to
identify coalitions and what binds them together during a period of change. Today, one of the
puzzles is to identify the causes that have produced the coalitions that have supported the various
“populist” movements in many Western countries. Rather than looking to an eternal conflict
between labor and capital, this is a puzzle that OI economists take very seriously.
Associated with this conflict over the role of traditional “classes” in analysis is another and
even more fundamental conflict between Marxism and OIE is over the nature of change itself. As
Veblen emphasized in two articles on the subject, there is a strong teleological element of Marx’s
analysis. As a practical matter today, this manifests itself in the Marxist proposition that a com-
plete overthrow of “capitalism” is a necessary part of the Hegelian process that is inevitably
being played out. For most OI economists, the word capitalism itself is problematic as the ongo-
ing evolution of economic systems has now produced so many different kinds of economies that
are roughly lumped together as being “capitalist” that the term has little descriptive value. And,
it is even more unclear what an overthrow of the various systems would actually mean.
In spite of these fundamental conflicts, an alliance of interests within the academic world, and
within the social network of individuals who people that world, has resulted in some useful inter-
change of ideas and work among OI economists and Marxists. In like manner, though for differ-
ent reasons, those economists who identify themselves as post-Keynesians have formed alliances
with OI economists even though the post-Keynesians operate within the Marshallian framework
Mayhew 13

to which Keynes grafted his radical notion of an always uncertain and unknowable future. OI
economists certainly accept that the future is yet to be and, therefore, unknowable, but find
troublesome the use of an accounting identity (I + G + X = S + T + M) as a quasi-statement of
equilibrium and as a causal force in the unfolding of business cycles.29

Section III: So What Do OI Economists Actually Do?

As I wrote in the first paragraph of this article, OI economists do many things, and a reader inter-
ested in learning more can go to the Journal of Economic Issues, the journal of the Association
for Evolutionary Economics, which has been published since 1967, for examples. What I will do
in my brief summing up of what OI economics is about is to use three examples of work done by
OI economists in recent years that illustrates particularly well various facets of the OIE approach.
In the cases that I use for illustrative purposes, as well as in the work in the Journal of Economic
Issues (JEI), it will be noted that the best institutionalist analysis depends upon detailed knowl-
edge of a specific situation or process. This knowledge can be gained by careful analysis of
descriptive statistics, by an ethnographic approach involving close analysis of participants in a
particular economic context, or by generalization based on detailed primary sources. In all cases,
what is sought are patterns of interaction among people, whether individuals or groups, and the
ways in which those patterns change and under what circumstances. Generally speaking, a priori
assumptions based on intuition are not seen as sufficient bases for a theory or model.
My first example is Christopher Brown’s (2008) book, Inequality, Consumer Credit and the
Saving Puzzle. In this work, Brown shows how increasing income inequality has, over time,
given rise to a reliance on credit to maintain consumption expenditure and, in the process, funda-
mentally altered attitude toward consumer debt by those who borrow. Brown argues that the
human propensity to emulate the purchasing patterns of their own or more successful groups in
their social context has been the foundation for continuing growth in demand for consumer goods
and services, but that this increase in demand has not been matched by increased income.
Development of various forms of consumer credit from the establishment of finance companies
associated with manufacturing firms, to lengthening of debt obligations, to securitization of con-
sumer credit, and so on, are the changing patterns of borrower–lender interaction that have
allowed continued growth of consumption in the U.S. economy from the early 20th century
forward.
By use of detailed description of innovations in the provision of consumer finance and by use
of the statistics (which in many cases are themselves the product of the work of earlier OI econo-
mists30), what Brown also shows are the implications of growth and change in consumer lending
and borrowing for post-Keynesian economic theory. Without going into the details, suffice it to
say that the evolution of consumer credit should provide, if policy makers are to be able to
address cyclical instability, a model of the role of saving that better fits the modern economy than
the troubled definition that Keynes used. This is a case where a contradiction between heterodox
approaches is used to suggest a constructive change in analysis.
My second illustration of excellent work done in the OI tradition is found in the book How
Markets Work: Supply, Demand and the “Real World” by Robert E. Prasch (2008). What Prasch
does is use descriptive accounts of how various kinds of markets—spot markets for commodi-
ties, credit markets, labor markets among them—actually work. Although textbook economics
usually speaks of “the market” as though there is only one type, Prasch shows by detailed exam-
ple that markets vary in nontrivial ways. He argues that the concepts of supply and demand can
be useful tools but only if detailed knowledge, rather than abstract reasoning, is used to describe
the relationships of each to price and to each other.
My final illustration is the book, Just One More Hand: Life in the Casino Economy, by Ellen
Mutari and Debora M. Figart (2015). This study of casinos as workplaces illustrates how
14 The American Economist 63(1)

interviews with workers in combination with statistics on the changing finances of casinos, along
with good journalistic accounts, can reveal a far richer and more nuanced picture of “labor” in the
workplace and of the issues that matter to the workers. Their work also describes, again in detail,
the deep involvement of the public sector in the development and organization of casinos.
What all three of these examples of good institutionalist work reveal is an attention to detail,
which might suggest an aversion to abstraction. That is not the case. As any investigator must, OI
economists begin any study with preconceptions, all of which should be subject to questioning
during the progress of the study. The OI preconceptions are those with which I began this article:
Human beings are always and everywhere encultured, there are always discoverable patterns of
behavior, and these patterns change through time in a process of socioeconomic conflict and
resolution that is never ending. Telling that story is the work of OI economists.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or
publication of this article.

Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.

Notes
  1. By commercial rationality, I mean the rationality of measuring all inputs and outgoes using a common
measure, usually monetary value, so as to ensure viability of the concern and maximization of either
profit (in the case of the firm) or utility (in the case of the consumer). Other kinds of rationality prevail
where no common measure, no numeraire, of value exists and where there are multiple and sometimes
contradictory goals.
  2. It may help some readers to know that textbook economics belongs to an older tradition in which
human behavior was described in terms of natural laws. This is the tradition of Adam Smith, David
Ricardo, Karl Marx, Alfred Marshall, and others. Modern elaborations have not changed the underly-
ing structure. For more on this, see Tony Lawson (2013).
  3. By placing emphasis on the use of descriptive statistics, I do not mean to deny the importance of
ethnographic approaches that have been used by a number of Original Institutional (OI) economists,
particularly when they have done work in places where economic organization does not lend itself to
easy summary through the use of reliable statistics. For a good discussion, see Neale (1958).
  4. See Don Patinkin’s (1976), “Keynes and Econometrics: On the Interaction Between the Macroeconomic
Revolutions of the Interwar Period” and, in particular, his emphasis on what he calls “the greater inter-
est (relative to Britain) in empirical economics as contrasted with theoretical, that characterized the
United States in the first decades of this century.” (p. 116) Patinkin (1976) continued by saying that “In
part, this may have been one of the products of institutional economics, whose counterpart in Britain”
and gave credit to Wesley Mitchell as a “founding father” of this movement (p. 1116). Patinkin’s article
is well worth a close read for further exploration of the way in which an inherited theoretical frame-
work patterned, not always for the better, the use of newly available statistics.
  5. For a very clear statement of the problem and of the solution that Schultz offered, see Liebhafsky
(1968) and Patinkin (1976).
  6. For a thorough and detailed discussion of the debates about the use of statistical data and the rise of
modern econometrics, see Morgan (1990).
  7. I also quoted this passage in a related but somewhat different discussion in Mayhew (2016).
  8. It is interesting to note that “empirical research” in textbook economics usually means the use of math-
ematics to fit statistical data to the textbook theories.
  9. “Measurement Without Theory” is the title of a famous essay that criticizes “the empirical approach”
followed by Arthur F. Burns and Wesley Mitchell in their National Bureau of Economic Research
(NBER) study, Measuring Business Cycles (Burns & Mitchell, 1946).
Mayhew 15

10. Of course, humans share biological traits that shape and constrain these patterns. Thorstein Veblen,
writing at a time when William James and other pioneering psychologists were using the ideas of
habits and of instincts to explore human behavior, proposed several instincts as being important for
all human behavior: instincts of emulation, predation, workmanship, parental bent, and idle curiosity.
Modern sociobiology involves a partial return to the earlier instinct theory, which, though largely aban-
doned in 20th-century psychology, remained a foundation for Original Institutional Economics (OIE).
Given, however, the importance of emulation and the revolution in collection of statistics, research on
instincts themselves has never been an important part of the OIE research agenda.
11. The idea of evolution—of ongoing change—was part of the intellectual air that all scholars, whether
geologists, biologists, anthropologists, or psychologists breathed during the course of the 19th century
but the pervasive influence of this idea had had little effect on economics, which remained wedded to
the 19th century of a natural and fundamentally unchanging order.
12. The idea of a natural and unchanging meta-order is retained even in some of types of 21st-century
“evolutionary” economic studies. See Mayhew (2000) for my discussion of studies of “the firm” that
purport to be evolutionary in nature but, nevertheless, hold the relationships of firms and other con-
stituent parts of the economy to be unchanging.
13. Veblen included mechanized agricultural production in his category “Industrial.” “Wherever manual
dexterity, the rule of thumb, and the fortuitous conjunctures of the seasons have been supplanted by a
reasoned procedure on the basis of a systematic knowledge of the forces employed, there the mechani-
cal industry is to be found, even in the absence of intricate mechanical contrivances . . . Chemical,
agricultural, and animal industries, as carried on by the characteristically modern methods . . . are to be
included in the modern complex of mechanical industry” (Veblen, 1904, p. 6).
14. As noted, Veblen first presented this argument in The Theory of Business Enterprise, which was pub-
lished in 1904 and, being based on the Report of the Industrial Commission, which had been issued
in 1900 to 1902 (see Kyle & Albert, 1902). Veblen continued to write about the “engineers” and
businessmen as dueling managers of the industrial system. By 1919, when Veblen wrote the essays
that became the book The Vested Interests and the Common Man, he had moved from description to
vitriolic denunciation of the degree of financial control of an industrial system that, as he saw it, was
being limited in what it produced for the entire population.
15. For further discussion of Mokyr’s conclusion and of how it fits with OIE theorizing, see Mayhew
(2010).
16. This obviously contradicts the projections of Karl Marx and his followers. For more on this, see Veblen
(1904).
17. Veblen, for all of his occasionally fiery rhetoric, was never much of an activist. For a brief period right
after World War I (WWI), Veblen wrote for a literary and activist magazine, The Dial, but devoted little
to no time to developing real alternatives to the economic organizations of which he was so critical.
18. Commons’s actual model was much more complex than this simplified version presented here.
19. Some of the more densely populated regions of the country involved partial exceptions to this.
20. For a vivid and dramatic story of how this played out in one fictional but historically accurate account,
see Frank Norris’s The Octopus.
21. For details, see Commons (1924) and Norris (1901).
22. For an excellent summary of this era and of this coexistence, see Rutherford (2011).
23. The importance of reform has varied in intensity among OI economists. Thorstein Veblen was primar-
ily a detached observer and was seriously and not very effectively involved in trying to effect changes
in the U.S. economy for a relatively brief period of time after WWI. John R. Commons, however, was
first and foremost a reformer. The intensity of commitment to reform has continued even today to mark
these two strains of OIE.
24. Then and now, there is confusion between “pragmatism” meaning that which is expedient in the
moment and the much more complex and serious philosophical theory developed by Peirce, James,
and Dewey, among others. Darnell Rucker’s book cited elsewhere in this article provides a good intro-
duction to the importance of this thought in the social sciences.
25. See Harvey (2015) for more discussion of Bush’s work on “encapsulation,” a word meant to con-
vey the resistance against beneficial change (instrumental knowledge) created by existing patterns
(institutions).
16 The American Economist 63(1)

26. See, for example, this statement by John Harvey (2015) about the importance of ceremonially versus
instrumentally warranted behavior: “The basic aim of Institutionalist research is to determine by which
value set an economy is primarily driven” (p. 115). See also Bush (1987).
27. On this, see Mayhew (2016).
28. See Chapter 13 of Polanyi’s The Great Transformation for a fuller statement of this position. Veblen
(1904) made much the same point when he wrote that a characteristic of Marx’s class struggle was
that it was not Darwinian, nor “. . . legitimately Hegelian, whether of the Right or of the Left. It is of a
utilitarian origin and of English pedigree, and it belongs to Marx by virtue of his having borrowed its
elements from the system of self-interest. It is in fact a piece of hedonism, and is related to Bentham
rather than to Hegel” (Veblen 1906, pp. 417-418). Here, as elsewhere, Veblen is making the point
that Marx’s work was very much part of the “classical” economic analysis produced by Adam Smith,
Thomas Malthus, and David Ricardo.
29. This is an important point that deserves further exploration. I suggest that those who want to pursue the
topic begin by reading Part II of Dawson (1996).
30. The role of Wesley Mitchell in helping to create modern national income accounting is well known.
What is not so widely known is that one of his students—and an avowed OI economist—Morris
Copeland created the flow-of-funds accounts that are still published, though in somewhat mangled
form, by the Federal Reserve System (Dawson, 1996; Mayhew, 2011).

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Author Biography
Anne Mayhew is Professor Emerita of Economics at the University of Tennessee, Knoxville, Tennessee.
She served as editor of the leading Institutional Economic journal, The Journal of Economic Issues, from
1992 to 2000.