The term “institutionalism” denotes a movement that was a major part of American economics during the interwar period, and is a tradition of economics that still exists today.

As the name suggests, it is an approach to economics that stresses the central role of institutions in shaping economic behavior, and is usually identified with the work of Thorstein Veblen, Wesley Mitchell, Walton Hamilton, John M.

The explicit identification of something called the “institutional approach” to eco­nomics, or “institutional economics,” goes back to 1918 and to Walton Hamilton’s American Economic Association (AEA) conference paper, “The institutional approach to economic theory” (Hamilton 1919). Hamilton’s paper was deliberately a manifesto for an institutional economics. For Hamilton, this institutional approach was to be relevant to the problem of “social control” or the solution of social problems; related to institu­tions as the agencies through which the “changeable elements of life could be directed”; concerned with “process” in the form of an awareness of the constantly changing nature of institutions; and based on an acceptable theory of human behavior, one in harmony with the conclusions of “modern” psychology (Hamilton 1919: 312-14). Walter Stewart (Hamilton’s friend and colleague) chaired the session, and argued that economics needed to be “organized around the central problem of control”, should utilize the “most com­petent thought in the related sciences of psychology and sociology”, and combine “the statistical method and the institutional approach” (Stewart 1919: 319), a reference to his own and Wesley Mitchell’s quantitative work. J.M. Clark and William Ogburn also par­ticipated in the session. The organization of the session also involved Harold Moulton who discussed the idea with Veblen and Mitchell (Rutherford 2000a).

There were other early attempts to define institutional economics by J.M. Clark, Wesley Mitchell, by many of the contributor to Rexford Tugwell’s 1924 volume The Trend of Economics, as well as by others.

In terms of social control, Helen Everett, a student of Hamilton’s, defined the concept as the “active intelligent guidance of social processes” or “the consciously planned guid­ance of economic processes”, and argued that the concept formed a “central organizing principle” for the “institutionalist school of economics” (Everett 1931: 345). In terms of the need for economics to become more “scientific,” Wesley Mitchell’s empirical work on business cycles (Mitchell 1913) was often referred to as a paradigm. Mitchell explicitly linked quantitative and statistical work to an institutional perspective. He argued that it is institutions that standardize behavior and that create the patterns, regularities, and cycles that are to be observed in the data (Mitchell 1924 [1971]: 27). In his Presidential address Mitchell suggested that quantitative methods would transform economics by dis­placing traditional theory and leading to a much greater stress on institutions (Mitchell 1925: 7). Lionel Edie called this address “a genuine manifesto of quantitative and

institutional economics”, that stated “the faith of a very large part of the younger genera­tion of economists” (Edie 1927: 417). The notion of “science” in institutional economics was, however, not limited to quantitative work. As J.M. Clark argued: “Economics must come into closer touch with facts” and achieve this “by becoming more inductive, or by much verification of results, or by taking over the accredited results of specialists in other fields, notably psychology, anthropology, jurisprudence and history” (Clark 1927: 221).

During the interwar period institutionalism developed a significant following, with a concentrated presence at a number of major schools and research institutes. In addition to Veblen, Hamilton, Clark, Mitchell, and Commons, who were the most visible pro­ponents of institutionalism, there were many others associated with the movement. The two major centers for institutionalism over the whole interwar period were Columbia and Wisconsin, at that time among the four leading doctoral departments of economics in the country. Wisconsin’s department included Commons (until he retired in 1933), E.E. Witte, Harold Groves, Martin Glaeser, Selig Perlman, Don Lescohier and several others. Columbia was an even bigger centre for institutionalism with Mitchell, Clark, Tugwell, F.C. Mills, A.R. Burns, Joseph Dorfman, Leo Wolman, Carter Goodrich, James Bonbright and Robert Hale all in the Economics Department or Business School at various times, and Gardiner Means, Adolf A. Berle, John Dewey and many other people of related views in other departments. Chicago had an institutionalist contingent at least until Clark left for Columbia in 1926, and Walton Hamilton was at the center of groups first at Amherst (1915-23) and later at the Robert Brookings Graduate School (1923-28). Other institutionalist groups existed at Texas, where Clarence Ayres joined Robert Montgomery in 1930, and in a number of other schools and colleges (Rutherford 2003, 2004, 2006).

Among research institutes, the Institute of Economics, which later became part of the Brookings Institution, was heavily institutionalist in character. The institute was headed by Harold Moulton and the research staff included Isador Lubin and Edwin Nourse among others. The National Bureau of Economic Research (NBER) was founded by Wesley Mitchell and closely associated with Mitchell’s quantitative approach and his program of business cycle research, and employed many of his Columbia colleagues and students. The quantitative and policy orientation of the work done by these organiza­tions attracted funding from foundations such as Carnegie and Rockefeller (Rutherford 2005a).