Institutional Economics after 1945
American institutionalism did not disappear, but it certainly changed. As the other centers of institutionalism declined, the group at the University of Texas and Clarence Ayres gained in importance.
When Ayres arrived at the University of Texas in 1930 he found himself in a department that was already heavily institutionalist. A.B. Wolfe taught at Texas between 1914 and 1923, Max Handman between 1917 and 1930, Robert Montgomery began teaching at Texas in 1922, even before going to Brookings for his PhD, E.E. Hale joined the faculty in 1923, George Stocking was there between 1925 and 1946, and Ruth Allen joined in 1933. Until this time Ayres had taught philosophy but he transitioned into economics, although always retaining a philosophical orientation. A number of writers on institutionalism have commented on this “Texas School” (see Phillips 1995).Ayres’s first major work in economics was a book The Problem of Economic Order (1938). Ayres sent copies of this book to all and sundry with a covering note emphasizing the use of the definite article. The problem of the economic order, according to Ayres, lay in the unequal distribution of income that was responsible for the economic problem of depressions and more besides. Greater equality would be an instrumentally effective change. This remained a theme in Ayres’s work, but he was to very much broaden his scope in his next major book The Theory of Economic Progress (1944).
Ayres was to argue that one of his concerns in writing this book was to respond to the criticism of institutionalism as lacking in theory. In the book itself he seems to agree that institutionalism had been largely descriptive (Ayres 1944: 11-12). In order to develop his theory of progress Ayres turned back to Veblen: on the one hand, to Veblen’s emphasis on technology as the engine of economic growth and progress, and, on the other hand, to Veblen’s view of the existing institutional system as often blocking further progress through the power of established ways of thinking and doing.
Ayres took these ideas and gave them a particular interpretation, identifying technology with instrumental ways of thinking and institutions with “ceremonialism” (Ayres 1944). This “dichotomy” between the instrumental and the ceremonial is at the heart of Ayres’s system. For Ayres the institutions of the market and of orthodox economics were ceremonial in nature. Neither is seen as being instrumental in the service of human progress, which in turn is defined very broadly as a life process consisting at base of the growth of instrumental capacities.Ayres’s effort to define institutionalism in terms of his instrumental/ceremonial dichotomy was, at the time, not particularly well received by other institutionalists, and completely failed to make any headway among other economists. Even those who knew Ayres well, such as Dorfman and Clark, were decidedly cool. Other old friends, such as Alexander Meiklejohn and Morris Copeland, exchanged long and critical correspondences with Ayres concerning his dichotomy, neither becoming convinced by Ayres’s arguments (Rutherford 2000b).
There are key differences between Ayres and the institutionalist program as expressed by most of the interwar members of the movement. Hamilton, Mitchell, Clark, Commons, and Copeland always gave the market an important instrumental role, even while suggesting the need for new forms of social control, and none of them would have found Ayres’s tendency to see institutions as almost entirely ceremonial as a useful approach. Ayres’s attitude towards markets and the price system is much closer to Veblen’s than anyone else’s. Nevertheless, and despite the criticisms that can be made of Ayres, his work represents in an important way the primary institutionalist reaction to the new situation facing them. This reaction was to turn attention back to the ideas of Thorstein Veblen, as representing a source of more theoretical ideas and a more thorough rejection of orthodox economics. Ayres was able to produce a number of students (such as Fagg Foster, David Hamilton, and many others) who spread his ideas throughout many of the universities of the Southwest, and this Veblen/Ayres version of institutionalism became a major part of the post 1945 institutionalist movement. Of course, not everyone in the movement adopted the Ayresian system.
J.K. Galbraith developed a different analysis of American capitalism, although also derived from Veblen. Galbraith’s main arguments concerned the coexistence of private affluence and public squalor, and the emergence of a “new industrial state” controlled by managers and technocrats (Galbraith 1958, 1967). Allan Gruchy also maintained a greater emphasis on the structure of industry and on economic policy issues (Gruchy 1974, 1987), while Warren Samuels (1971), Allan Schmid (1978) and Dan Bromley (1989) have carried on very much in the Commons tradition. Overall, the movement became less coherent and more subject to internal disagreement than had previously been the case.Texas itself remained a center for institutionalism for many years with people such as Wendell Gordon, Walter Neal, and H.H. Liebhafsky. Outside Texas and the Southwest small institutionalist groups came to exist at Maryland (Allan Gruchy), the University of Massachusetts at Amherst (Ben Seligman), Cornell (Douglas Dowd), Michigan State (Samuels, Schmid, and Trebing) (Schmid 2004), and at a few other places, but nothing on the earlier scale. J.K. Galbraith was by far the highest profile institutionalist of the post-1945 period, but he was a lone figure at Harvard and did not produce academic followers. Interestingly, Gruchy, Dowd, and Galbraith all appear to have been introduced to institutionalism at Berkeley. Many economists continued to have concerns with neoclassical economics but became unwilling to associate themselves with “institutional economics”.
In 1959 a small group of ten people met at the Windsor Hotel (formerly the Wardman Hotel) during an AEA conference to discuss the future of institutional economics. The meeting had been called by Allan Gruchy. As a clear indication of the disrepute into which the term “institutional economics” had fallen, one of the major items of business was the name that the group should adopt. As an interim measure and in the face of nothing better, the group called itself the Wardman Group.
Joseph Gambs undertook to survey American economists with respect to their interest in institutional economics and produced a brief description of his talks with 45 economists described as “dissenters”. The largest group were those in the Veblen/Ayres tradition, but Gambs also noted another group who did not see themselves as in the tradition of Veblen or as institutionalists, but who were interested in the “reconstruction” of economics.The Wardman Group continued to meet at AEA conferences, growing to about 150 people on the mailing list by 1963. Two years later the Association for Evolutionary Economics was formed with a broad statement of purpose designed to attract both groups identified by Gambs, and a paid membership for 1966 of 110. Those involved at this point included Clarence Ayres, John Blair, Joseph Dorfman, Douglas Dowd, Fagg Foster, John Gambs, J.K. Galbraith, Carter Goodrich, Wendell Gordon, Allan Gruchy, Forest Hill, Louis Junker, William Kapp, Gardiner Means, Walter Neale, Warren Samuels, Ben Seligman, Marc Tool, and Harry Trebing. With some delay and difficulty the association’s Journal of Economic Issues appeared in 1966. The institutionalist tradition in America continues to exist, but it remains a relatively small heterodox movement existing, for the most part, outside the mainstream of American economics.
Perhaps the most important recent development within the institutionalist tradition has been the growing interest in the work of Veblen and Commons among a new generation of European economists attracted to institutional and evolutionary ideas. One outstanding example of this is to be found in the work of Geoffrey Hodgson, who has argued forcefully for the development of an institutional economics along lines he sees as having been originally pioneered by Veblen in his evolutionary and Darwinian approach to institutions and institutional change (Hodgson 1988, 2004).
Malcolm Rutherford
See also:
John Bates Clark (I); Historical economics (II); Institutional economics (III); Wesley Clair Mitchell (I); Gustav Friedrich von Schmoller (I); Thorstein Bunde Veblen (I).