EVOLUTIONARY ~ ECONOMICS INSTITUTIONAL THEORY Volume II a Pauey Edited by Marc R. Tool M. E. SHARPE, INC. ARMONK, NEW YORK LONDON. FNCLAND:Copyright © 1988 by the Journal of Economic Isrues. All rights reserved. No part of this book may’ be reproduced in any fore without written permission from the Journal of Economic Issues yeramento, CA Deparment of Economics, California State University 95819. Published ia the United States by M. E. Sharpe. Enc $0 Business Park Drive, Armonk, New York 10804 Available in the United Kingdom and Europe from M. E. Sharpe: Publishers, 3 Henrietta Street, London WC2E SLU, Library of Congress Cataloging-in-Publication Data Evolutionary economics. [Essays originally published in the Sept. and Dee. 1987 issues of the Journal of economic issues. Bibliogeaphy: p. 1, Institutional Evolutionary Econom HBOO.S.FO5 1988330 ISBN 0-87332-483-8 (set) ISBN 0-87322-481-1 (v1) ISBN 0-87332-482 ‘onomies. I. Tool, Mare R. TL. Association Zor Printed in the United States of Amc: Dedicated to Recipients of the Veblen-Commons Award presented annually by the Association for Evolutionary EconomicsEVOLUTIONARY ECONOMICS II: INSTITUTIONAL THEORY AND POLICY Introduction Mage R Toor 1 Part t ‘The Nature and Necessity of the Mixed Economy Jenuy L, PeTe Part 11 Institutional Economies and the Theory of Production Ropwey E, STEVENSON 53 Disteibution and Economie Progress Jamas T, PEACH 77 Institutional Beonomies and Consumption Davie BHammron 113 Prices and Pricing ALFRED S. EICHNER 137 Part Hl ‘Macroeconomic Theory and Policy in.an Institutionalist Perspective WALLACE C. Peterson 169 Money as an Institution of Capitalism — DvDLey DILLARD 205 An Institutionalist Theory of Economic Planning WILLIAM M. DuccER 231 Part 1V ‘The Existence and Exercise of Corporate Power: An Opaque Fact. «= Jouw RR. Munsirs 261 Regulation of Industry: ‘An Institutionalist Approach HARRY M. TRESINGElements of a Neoinstitutional Environmental Economics JAMES A. SWANEY Power in the Labor Market: Institutionalist Approaches 10 Labor Problems Law and Economies From Different Perspectives STEPHEN A. Woopsury 363 HLH. Liganarsey 391 Part ¥ ‘Trade and Payments as Instituted Process: ‘The Institutional Theory of the Eaternal Sector Joux Abas 421 The Institutionalist Theory of Economic Development Multinationals and the Third World About the Authors Janes H. Street 443 WILLIAM P. GLADE INTRODUCTION This collection of solicited papers fs the second of a two-volume ‘work bearing the general title of Evolutionary Economics. The first vol ume (Journal of Economic Issues, September 1987) is addressed to the Foundations of fnstitutional Thought, This volume, Institutional The- dorv andi Policy, builds on the philosophic underpinnings and basic con- structs of Vohime | and extends and applies institutional analysis to a broad range of economic fields of inquiry and issues therein, These pa~ pets analyze basie economic processes, consider aggregate stabilizing and planning functions and structure, explore the locus and use of eco- hhomic power, and examine growing international interdependence. In this volume, then, the focus shifts from matters of basic assump- tions, methodological issues, and the formulation and clarification of analytical constructs of Volume |, to the general and significant areas Of production, distribution, pricing, planning, economic power, regula tion, labor, trade, development, and the like. In each selected areca of inquiry, the basic purpose is to demonstrate how institutional econo- mists analyze problems and generate credible policy options, As is the case in Volume I, contributing authors to Volume [I have 6 their peimary concern the presentation of the institutionalist per- spective and an affirmation of its pertinence and significance in a num- bber of major areas, The principal effort is no! the provision of enother elaborate critique of mainstream orthodoxy. Criticisms of neoclassi- ism appear, but they are flagmentary and incidental te the main re- ‘onsiructive purpose of these volumes. The genesis of these two volumes of institutionalist papers is de-2 Introduction seribed in the Introduction to Volume T and need not be repeated here. Tt is sulficient to reiterate that the contributors and topics were chosen. throngh an extensive deliberative process involving participation by many contemporary institutionalists. Because of its immediate significance for readers of this volume, however, it is desirable to repeat a paragraph from the Introduction to Volume I as follows; “Guidelines for contributing authors related mainly to scope, length, and format. The respective papers reflect pri- marily the author's own formulations and syntheses of the topics ad- dressed. Accordingly, readers will observe differences in perception and analysis among the several contributors indicating somewhat divergent backgrounds, notions of pertinence, and analytical styles and tech~ niques. The quest, then, was not for a homogenized symposium. The concern, rather, was that moderately divergent essays be provocative ‘and compelling enough to set inquiry more vigorously in motion, 10 help sustain it, and, to the best of our collective abilities, to make the persuasive case that, despite some diversity, there is @ basic analytical core that reflects the cogency and relevance of the institutionalist per~ spective, The desire was to provide as definitive a treatment 2s con- ints would allow. Even so, we all recognize that open inquiry will rate differences as well as disclose commonalities, In this collec ion, we believe that the latter overwhelmingly exceed the former, and that the papers as a set are mutually reinforcing and preset generally An integrated institutionalist theory of political economy.” ‘What we intend, then, is the provision of referential material that will open new doors of inquiry and contribute fresh insights concerning both “what goes on here,” and “what ought to go on here.” To the more policy conseious, there are occasional suggestions of “What can be done” about an unresolved problem or a flawed policy. The Contents of Volume IT ‘The sinteen essays comprising Volume Il of Evolutionary Economics are arranged into five main sections: A single essay, as is the case in Volume I, constitutes Part I, It sets the stage for the papers that follow by offering an analysis of why modern economies must be non- dogmatically open systems and amenable to change. Responses of ‘cconomnies to change necessarily and predictably generate mixed econ- omies. Part IL, consisting of four articles, offers theoretical anslyses of ba- sic economic processes common to all medem economies: production, Introduction distribution, consumption, and pricing. “Production isa discretionary juaman enterprise” of economic provisioning, organized institutionally, tad “involving the application of current technology to practical tasks.” that are normatively chosen, Distribution arrangements are also dis- cetionary, reflect power relationships, affect economic progress. and Goiermine social goals, Consumption patterns arc culturally rooted horms, are institutionally determined, and are the object of continuous Judgments of present and anticipated consequences, Prices, 2s exchange tatios, are, for the modern economy, not free-market determined; they de largely administered peices set mainly by private pricing bodies of ten using cost-plus pricing principles ‘The choice of these conventional topic areas—production, disiri- bution, cansumption, pricing—is deliberately intended to permit the direct juataposing, Of institutional views presented herein with non- institutionalist views of conventional economists, and others. 1t is in the analytical consideration of these most basic facets of the economic provisioning process that one may observe most clearly that the inst: futvonal perspective is nota mere addendum to, or correction for minor “glitches” in, mainstream orthoxloxy er other heterodoxies. As a per spective on political economy, institutionalism is substantially dis- placemental of received modes of economic inquiry Part IL, consisting of three essays, presents analyses of aggregate ect omic institutions and operations. The lead essay is concerned with niaerneconamie theory and policy, especially how to get full employ ‘ent without inflation. The second paper explores money asan institu: tion of modern capitalism with special reference 10 its impact on ‘employment and output, The third offers # theory of economic plan: hing; “the economy is subject to human will working through collective action.” All three papers reflect the general institutionalist view that the most critical processes of the national economy must be conscien- ttously managed by politically responsible bodies if it is to function well. There is no significant deference here to market forces oF Isissez~ faite. Part IV, consisting of ve papers, is concemed with institutions, power, and accountability, All ive authors acknowledge the pervasive aggregation and use of economic power. All exhibit normative concerns to achieve democratic accountability. The lead paper addresses the extent and character of corporate power as it extends to include cen- ‘walired private sector planning. The second examines the knotty com~ plexities of the nature and effectiveness of economic regulation. The third considers the need for an environmental cthic end its application4 Introduction in environmental controls, The fourth considers the role and power of organized labor in the current period. The last paper in this set takes a critical look at relations between law and economics, including the judi cial use of economic precepts. Part V, consisting of three papers, moves analysis out of the provin- cial confines of the United States economy to consideration of institu tional configurations and performances in the interdependent global economy. The first paper in this section offers 2 fresh theoretical insti- tutional treatment of trade and payments in the external sector. The second provides an institutional theory of economic development—a fietd in which institutionalists have long figured prominently. The final paper examines the role and import of multinational corporations in the Third World, In sum, these sixteen papers provide a largely comprehensive view ‘of how institutionalists explain and appraise the character and perfor- mance of the modern economy in its global setting. It is ar encompass- ing view, we think, It is nota final or exhaustive view, however, There an be no final word on any of the areas of discourse, These essays rep- fesent the authors’ present distillation of insight and comprehension. Since such inquiry is continuing, further revisions in these theoretical formulations are to be expected A More Extensive Overview As isthe case with Volume I, so also here, the serious reader deserves, and the respective papers warrant, 2 more extensive introduction than the foregoing sketch provides. We consider them in the order of their appearance: Jerry L. Peir opens this volume with an essay on “The Nature and. Necessity of the Mixed Economy.” Concurrently rejecting ideological worldviews of laissez-faire capitalism and Marxism, Petroffers, not “a third set of answers,” but “perspective on analysis that may lead to mul- liple seis of answers—none of them universal or eternal.” His approach is pragmatic, evolutionary and instrumental. In Pet's view, “the study of the mixed economy is. in large part, the study of public processes of attaining public objectives; and the nature of the mixed cconomy is @ complex mixture ef web of private and public institutions that seem able ata particular time to move the community “forward,” in its quest for adequate economic provisioning, The power to decide the nature and purposes of the mix must be a part of such study. Moving the community “forward” for Petr involves successful real- Induction 5 jration of four continuing objectives: Adequacy—levels and variety of real output must meet community's needs and expectations. Sus tainability—production must not threaten long-run continuity of the society. Equity—income distribution and employment access must provide for broad and continuing participation. Democracy— roninv idious discretionary involvement must occur both in the politi= cal process and in other decision arcas as well, “The mixed economy. then, is an evolving attempt at shaping a pragmatic, sensible, instri- mental combination of institutions and policies, drawn from diverse points in the intellectual universe, not dedicated to adherence to any ne version of revealed truth, sid directed toward the creation and ‘maintenance ofan adequate, sustainable, equitable, democratic system of provisioning,” Ptr concludes his essay by considering the necessity for a mixed economy as reflecting the relationships among the provisioning re- quicement, the growth of knowledge about such provisioning, and the shaping of institutional structures to facilitate such provisioning. Rodney E, Stevenson's essay on “Institutional Economies and the Theory of Production” opens with an affirmation: “Production is a uni- versal activity. Though the concept of production is culturally encoded, the process of production is common to all socictics.” Production is “the social provisioning process... . that provides a society and its members with ‘real ineome..” Bul the inclusiveness of the concept, and the difficulty of bounding it, aad Stevenson to espouse not * a theory ff praduction’ but rather a theory of economics manifest through @.con- cept of production—a set of values manifest through a concept of eco- nomics.” His task is “to consider the institutional economic conception of the process and role of production.” He presents insights of institu- tionalists on this basic economic process through the analytical and ex- pository device of a dichotomous juxtaposing of neoclassical and Institutional views in nearly a dozen different areas relating to the pro- ductive process. Stevenson views neoclassical theory generally asa parsimonious ac- comptishment of conspicuous assumption” in which production is explained by “initial endowments of human and material resources, technology, preferences, and motivations.” Itis “an erector set science, the pieees are given; they can only be rearranged.” He continues: “The neoclassical construct of production is that ofa value neutral conduit for transmiting self-interest and resources into economic welfare, This consiruct is developed within the context of stasis, The neoclassical homiletic emphasizes scarcity, insatiability and the omnipresence of6 Introduction trade-oils, The neoclassical construct is basically akistorical, acultural and amoral.” "The institutionalist view of production, in Stevenson's essay. emerges gradually in consequence of successive confrontations with neoclassicism in the following areas: instrumental-ceremonial dickot- omy; the role of technology; motivation aad psychology; power, prop- erty rights and information; production and distribution: production ‘and consumption: production and efficiency; valuation of production; proposals for reform, and production and values. Near the end of the paper, in summary form, Stevenson sets off “key components of the institutionalist theory of production.” ‘jamies T. Peach, in his paper on “Distribution and Economic Prog- ress," sees the central characteristic of the institutionalist approach to distribution issues as “an emphasis on the relationship between distri- bution and economic progress.” For institutionalists, unlike neoclassi- cists, inequality in the receipt of income is not a necessary condition for economic growth. On the contrary, inequality is a probable impedi- meni to economic progress. The institutionalist alternative to ortho- doxy and its marginal productivity theory is developed by Peach through a consideration first of the basic premises of institutional dis- tribution theory, second, through an analysis of critical reiationships between distribution and economic progress, and third, byan empirical study of the current extent of inequality in the United States. ‘Among the basic premises of institutional distribution theory, is the central tenet that distribution arrangements are not primarily market ‘or natural law determined; they are established by discretionary agents, ‘and agencies holding powers of decision. Power relationships are “both 2 cause and effect of the distribution of income and wealth.” A second Contention is that all distribution theory incorporates social value premises. Distribution analyses are nol, and cannot be, value free. Peach incorporates institutionalists’ instrumental value theory as a fin damental judgmental criterion in distribution theory. A third under gitding construct for Peach is the institutionalist conception of economic progress as a reflection of knowledge (and technology) driven. by institutional change to enhance productivity. An economy of com- parative abundance is feasible! The existence of inequality and poverty indicates grossly flawed distributional arrangements. Peach then tums to the rélation between distribution and progress ang considers the real and imagined constraints inhibiting more exten sive growth end greater equality in distribution. Among the real con- Straints is the control of the economy by corporations and other power navoituction centers whose governing riterion is ot economic well-being for people evally, Among the imagined restraints are the alleged need for in- cent) 10 Benerate savings of the rich to fuel investment spending aly che presumed scarcity of resouroes that interdits further growth Fe jastitutionalists, the real constraints can be fruitfully addressed and eluced: the imagined constraints can be dismissed, afler analytic ex~ posure. After factually characterizing actual inequality in the United States as extensive and static, Peach summarizes the institutionalist distriba- ‘ion position. The credibility of the neoclassical marginal productivity theory is revoked in the Appendix, David B. Hamilton's essay on “Institutional Economies and. Con sumption” demonstrates that the comparative de-emphasis, if not Yenigration, of consumption theory at the hands of mainstream econ seve is and must be dramatically reversed in institutional analysis. Pens qveated in Hamilton's recourse to nineteenth- and twentieth- ae tusy economic thought, this de-emphasis seems to have been engen- seit by a myopie concert with production in a niggerdly word of aermcivy and invatiable wants, The allocation question through free urkets became the focus of concern; consumption remained unen Flored, It was suficient, following Jeremy Bentham, 40 abide hedonis- fic psychology and the felicific calculus of pleasure and pain, transposed into utility and disutility). In consequence, consumer be ave was not explained: it was assumed to be a cultural given so far te eeonomic inquiry was concerned, Though the referential terms changed, the “given wants” dictum was passed forward, largely ancrit ‘cally. from classical thought to neoclassical analysis. Aecordinely ‘wants were not only insatiable, they were given. There was no orthodox heoretieal eeknowledgement ar inquiry concerning the cultural origins wants, mechanisms of their development, oF of the inescapable need to appraise or choose aniong them: Hemilton shows how the institutionalist contribution beginning with Thorstein Veblen’s Theory of the Leisure Class delivers on all three of these dimensions. The cultural origins of tastes and preferences and {heir embodiment in habits were described by Veblen. The class-based ‘ecculturation (Veblenian, not Maraian) through a process of lower class mulation of upper class tastes, was explained. (The cultural determing {on of consumption habits has, of course, been further reinforced by JK. Galbraith's “revised sequence,” where the conventional consumption-determines-production sequence Is inverted.) And the Jindgmental criteria reflected in the still-used Veblenian expressions of8 Introduction “invidious display” and “conspicuous consumption” permit choices to be made between forms of consumption that significantly contribute 1 the life process and those that do not. These normative dimensions are routinely exhibited as we judge products and services “in terms of pre~ sent and future known consequences.” Among the many institutionalist insights contributed by Hamilion is his showing of the intricate interdependence of production and con- sumption to the point where their very distinguishability is threatened. Isa meal in a plant cafeteria part of production or consumption? Institutional theory, then, moves consumption back into prominence as an integral part of the general theory of the economic process where it contributes 10 our understanding and resolution of problems of poverty, maldistribution, and economic instability in Hamitton’s view. Alfred S. Eichner, in his “Prices and Pricing” paper, offers an institutionalist/post-Keynesian analysis of pricing behavior for the “most recently evolved set" of social institutions—the megacorps who have come, in the last century, overwhelmingly to dominate modem western economies, Accordingly, in the case of pricing, one must rec ognize “that commodity markets have been largely superseded by in dustrial markets and the family business by the megacorp as the representative firm within those markets.” Drawing on institutionalists (carly and current), post-Keynesians, be- havioralists, and others, Eichner seeks an encompassing account of pricing behavior in industrial markets by megacorps. Such firms, “by virtue of their size and dominant market position, have considerable discretion in setiing prices” in an advanced industrial economy. Afier establishing the relevant “institutional parameters of the analysis,” Eichner presents an empirically testable model of ~(1) how the set of longterm relative prices are determined based on a cost-plus pricing formula, and (2) which of the several pricing models that can be found in the economics literature is the relevant one when the firm is produc- ing an industrial good and is either (a) just starting out in business, (b) already successful selling a differentiated product, or c) alarge corpora tion or megacorp.” The analysis and model apply to the 90 percent or more of the aggregate output that passes through industrial markets. Eichner’s analytical model is descriptive, rather than prescriptive. It cogently explains how the overwhelming bulk of industrial prices arc Getermined, in his judgment. But the import of his analysis should not bbe missed. In implicitly denying the claims of orthodoxy to generality ‘and explanatory relevance for their theory of price in free competitive Introduction 9 markets (commodity markets for Efchner) as the normal and preferred account, Eichner is challenging the mast fundamental claim to signi cance and pertinence of neaclassicism. The simple terminological shift, incorporated by Eichner, from price takers to price setters, butiressed hy his testable model, means that administered pricing, albeit under constraints, is not the exception; itis the rule, With such insights, para igi shifts become more probable, if not compalsive. ‘Wallace C. Peterson opens Part IIL on aggregate stabilizing and pian- ring institutions and processes with an essay on “Macroeconomic The- hry and Policy in an Institutional Perspective.” Peterson insists theoughout his paper that the only pertinent test of macroeconomic theory is its realism and relevance in guiding our collective quest for full caxployment without inflation, in the short run, and for satisfactory economic growth and reduced inequality in the longer term, He finds nd develops such realistic and pertinent theory through an imagina- five and judicious merging of primarily institutionalist and Keynesian contributions Elforts to achieve the above-noted macroeconomic goals, he argues, wave, over the post-World War II period, produced mixed results: In the "Age of Keynes” from 1945 10 1970, the goals were generally well conceived, significant gains were made, but not all policy was effec tively implemented. In the stagnation inflation confusion of the 1970s, and the Reaganomics “counter-revolution” experiments of the 1980s, inassive and destructive shortfalls on goal achievement were experi- fenced in the United States and elsewhere. The reasons for the massive hortialls since 1970 (high unemployment, major recessions, high in- flation, low productivity, slow growth) are of course multiple and com plex but the following must, in Peterson's view, be included in eny useful assessment First, theory confusion prevailed: The mistakes and difficulties ofthe late 19605 and carly 1970s (Vor example, Lyndon Johnson's tax increase refusal and the OPEC oil price increases) discredited Keynesian ortho- doxy in the minds af many. This theoretical unease encouraged resur- gence of nco-conservative economics as monetarism, rational expectations theory, and supply-side economics, all of which offered arguments for a retum to the View thal the modern economy is. oF ought 10 be, a self-regulating one. Peterson offers critiques of each of the three and finds virtually nothing of a substantive contribution in any, ‘Second, institutional ignorance was evident: neither the scholarly community nor the public generally recognized well enough that there10 Tntreduction has occurred a structural iransformation of the economy into large cen- ters of economic power sufficiently potent 10 become fixeprice setters and to have an aggregate influence, through wage and price escalation, on macrocconomic policy and goal seeking. Third. there was policy timidity and ineptness: post-1970 poor eco- ‘nomic performance is in part attributable to the inability to make good policy effective, as with the wage-price guidelines, and to the choice of il-conceived policy that did not produce the consequences anticipated, ‘asin the supply-side-sanctioned tax cut of the carly 1980s, or the invest- ‘ment tax breaks and credits that did not significantly increase invest- ‘ment spending. Peterson's recommendations include a return to Keynesian maero-management theory and policy, the addition of critical institu- tional understanding of how the actual economy operates, including its decision structure, and the development of policy based on this theo- retical reorientation, He recommends, for example, the use of incomes policies and full employment measures as the quickest way to reduce inequality of incomes and to ease income transfer burdens Dudley Dillard, in his essay on “Money as an Institution of Capital- offers a special institutionalist view of money and its role. His concern is “with money as a special form of private property” and “with the impact of this strategic institution on employment and output in the economy asa whole.” ‘This strategic significance of money derives from its unique institu- tional characier under capitalism. It isa special form of money capital which, as private property, may be used oF withheld from productive use. In his monetary theory of production, Dillard includes money cap- ital along with physical capital and labor as required inputs of the pro- ductive process, Under capitalism, “owners will offer employment to ‘wage camers if, and only if, they expect to get back more money from the sale of cutput than the moncy cost of the output.” A monetary the- ory of production, then, must explain a process in which money capital is used to purchase materials, capital equipment, and labor, and through which a product is generated and sold in private exchange. The capitalist must “realize” more money out of the sale than he contri buted to generate the product, or he will not continue to so engage his moncy capital, Thus, the capitalist’s monetary power and motivation permit him, with his cohorts, to impinge heavily on productive output and employment. Dillard traces the development of these and related insights through the writings and contributions of Thorstein Veblen, Wesley Mitchell, Introduction uw John Maynard Keynes, Karl Mark, Morris Copeland, and Hyman Min- sky. Use is made of Veblen's dichotomy of industrial and pecuniary eniploy ments and of Mitchell's business eycle theory. Extensive atten- tion is given to Keynes's contributions especially in the Gerieral The ory. Keynes, for example, saw the “singular importance” of money a5 including the properties of “high liquidity premiums,” “low carrying cost.” and “zero or neghitble elasticities of production and substitu- tion.” Money isan institutional monopoly, and "monopoly means con- {vol over supply.” Control is held by capitalists. Also of significance for Dillard is Marx's “circuit of money capital," Copeland's “money flows analysis,” and finally, Minsky's “financial instability hypothesis.” Exch provides, in sophisticated ways, new insights on money as an institu- tion controlled as private wealth, Given the uncertainties of converting real output into money in the future, such controllers may withhold productive instruments from labor and generate unemployment and instability. William M. Dugger, in his essay on “An Institutionalist Theory of Feonomic Planning,” opens with a vigorous refutation of remamning nvoclassical notions about the economy beinggoverned by natural laws reilected in automatic market forces and of the metaphysical deference shown such illusions, Dugger will have none of the endemic freedom- verstis-planning dichotomy, Markets exist, of course. But they reflect “the underlying realities of social power and industrial process.” In effect, all economies are planning economics. AL issue is not the fact of planning but the locus, scope, goals, consequences and 2c- countability of planning decistons. In this vein, Dugger defines plan- ning as“a series of concerted, collective actions designed to consciously control the course of events.” In the United States, the historical emergence of private economic planning has been co-eatcnsive with the rise to power and hegemony Of the modern corporation. The latter's concems to control the major sources of uncertainty that affected their survival, growth, and profita- bility, stimulated both horizontal and vertical imtegration of firms to facilitate private planning decisionmaking. Much public planning arose in an effort to find ways of holding the achieved power of corporations somewhat accountable, Greed may be a typical, private incentive, but it must often be constrained or even negated. Dugger distinguishes among three diflerent types of planning: corpo- rate, communist, and democratic. Corporate planning is generally short term, of narrow focus, self-serving, sophisticated, hierarchial, authori terian, and socially irresponsible. Communist planningis ostensibly di-ied Introduction rected to public purposes (as defined by the party), is long mun, hierarchical, totalitarian, and socially irresponsible, Democratic plan- ning is addressed 1 public purposes, is processual, inclusive, itcrative, participatory, long run, non-hierarchical, accountable, andiis fueled by open inguity. In proposing “clements of democratic economic planning,” Dugger grounds the whole effort in the instrumental social value theory of in: stitutionalists, drawing on contributions of Veblen, John Dewey, J. Fagg Foster, and others. Democratic planning is urgently needed cur- rently in planning for peace. for environmental quality, foragricultural prosperity, for small business performance, for an end to discrimina- tion, for real full employment, and for balanced sectoral growth. He acknowledges that new or revised planning bodies, planning docu ments, and implementing tools (policies) will be required if democratic planning is ever to be realized. Finally, he addresses directly and candidly some fundamental and continuing questions that will necessarily emerge in any such effort How can public awareness and support for planning be increased? How can competent, and publically committed planning staffs be recruited? How can coordination of, and cooperation for, planning be secured? How can appropriate sanctions and inducements be democratically de- vised and implemented? How can international participation be ar- ranged? Planning does and will continue, The task is to give it a much more democratic and efiectual character. John R, Munkirs's paper on “The Existence and Exercise of Corpo- sate Power: An Opaque Fact,” as the lead paper in Part IV, has a somewhat narrower scope than proceeding ones. In cansicering “insti- tutions, power, and accountability,” space was provided in this section, to probe a few topics more deeply. It will come as no surprise, then. ‘that Munkirs’s paper provides extensive cmpirical and theoretical sup- port for one facet of the Dugger essay summarized above. That topic is the generation and use of corporate power. especially through insti- tutional mechanisms of private sector planning. Munkirs grounds his case on the following reaffirmation of the insti- tutionalists’ power and coercion tenet: “(a) that production and distri- bution decisions are not determined by impersonal market forces, but rather, are determined through the exercise of power and coercion: (b) that the distribution of power among various groups within society is disproportional; and therefore, (c) that those who possess enormous c ercive power should always be subject to democratic controls.” He then seis an impressive agenda for his paper: “We will briefly sum- Tnereduetion B arize the theoretical and statistical foundations set forth in the senicr ‘uihor’s previous studies on the economy's centrally planned sector, suggest an analytical framework for categorizing power and coercion: illustrate how 2 significant number of economic enterprises usually ‘thought ofas being in the cconomy’s competitive or flexible sector are, jn fact, a subset of the economy's centrally planned sector; illustrate hhow leaders within and through the énsiinuion of centralized privare sector planning cxercise plenary power over many decisions made out- side the economic arena... and, finally, discuss how the decisions and actions of corporate leaders in the cconomy’s cenisally planned sector—decisions and actions based primarily on knowledge derived from a priani/ceremonial ways of knowing—are becoming increasingly dysfunctional.” ‘Munkirs’s general theory of centralized private sector planning is summarized in the following propositions: “the economy’s key indus- tries are technologically interdependent; technological interdependence begets recognition of pecuniary interdependence (profits, prices, sales): technological and pecuniary interdependence precipitated a change in the meaning and faxetion ef stocks, debt, and boards of directors; the primary function of stock, debt, and boards of directors is their use as instruments in the planning process; the end result is @ level of inter- industry cooperation and coordination best described as centralized private sector planning (CPSP); CPSP has led to intraindustry coopers- tion and coordination; CPSP leaders exercise plenary power over other important economic, social, and political institutions.” The original tableau constructed empirically to demonstrate the scope of the private sector planning process included data on 138 cor porations in thirty-three industries within seven major market areas Munkirs's research suggests that 55-60 percent of all business receipts are generated in the private planning sector. ‘The remainder of the paper addresses the rest of his agenda items: an analytic construct for analysis of economic powcr is presented; some eight industries thought to be competitive are shown to be part of the CPSP: the considerable influence of CPSP leaders on government and education is explored at some length; and the archaic beliefs and boha iors that plague inquiry in this area and serve as blockages to demo- cratic control over private economic power are examined through recourse to Veblen’s instrumental-ceremonial dichotomy. Harry M, Trebing's paper on “Regulation of Industry: An Institu- tionalist Paradigm” is the second in this sei, In the context of contem- porary debate over recent deregulation, and proposed reregulstion inM4 Introduction the transport and communication industries, Trebing examines in con- siderable depth the competing paradigms for which vigorous claims of relevanceand merit are being made. One isthe institutionalist tradition and modek the other is the neoclassical model and its latter-day reaffirmations. The choice of paradigm matters, “Public policy is at a crossroads” with reference not only to flawed performance of deregulated industries but in consideration of new constraints on the financial community and environmental controls. Trebing finds the origins of the institutionalist position in seventeenth-ceniury British common law with Chief Justice Hale's judgment that private property alfected with the public interest may be regulated as society deems appropriate. Trebing thea traces subsequent {nstitutionalist scholarship and policy innovations from te post-Civil ‘War regulation of the railroads to the present. For Trebing, the institu- tional model of ceonomic and social regulation rests on five basic pos tulites: First, “the nced for governmental intervention exists because industrialized societies give rise to concentrations of power, increased Uncertainty, performance failures, uncompensated costs, and adverse distributional effects.” Second, “regulation must endeavor to promote public interest or social values that cannot be derived exclusively from monetary or marketoriented measures.” Third, “when properly ap- plied, regulation secks to promote higher levels of efficiency and greater individual choice.” Fourth, “strategic actors in the regulatory process ‘can have a significant impact on the outcome.” Fifth, “since the evolu- onary process makes any set of goals and methods provisional and intermediary, it follows that the form of regulatory intervention may change over time.” Trebing finds that the neoclassical treatment of regulation does not offer just a single model of economic and social regulation. There are, rather, three foci of interest and inquiry: analyses of market failures, theories of regulatory behavior, and regulation as a facet ofthe interest- group theory of government. Trebing traces the contributions and con plexities of these somewhat diverse neoclassical formulations. In an extensive critique of these three positions, Trebing objects to the fact that neoclassicists have an intense “dislike for affirmative gov= ernmental intervention and an almost theological commitment to com- petition and market-oricnied solutions”: that neoclassical models “tend. to reinforce the siatus quo”: that all of these models “give litle or no explicit recognition 10 socia] values that cannot be reflected in mon- tary values"; that such models “take a highly restrictive view of mar~ ket failure": that the methodology of these models “builds from Introduction: 18 restrictive assumptions cegarding structural and institutionel change, objective functions to be maximized, distribution of income, and the welfare standards to be imposed”, and, finally, that “extensive use is made of the normative aspects of the competitive model for purposes of judging market failure, regulatory behavior, and the effects of interest ‘group governanc Trebing then continues with a probing and extensive analysis of the results of the recent deregulation efforts in transportation, telecom munications, electricity, and natural gas. “This new environment provides an appropriate setting for examining the contribution of the institutionaiist and neociassical models of regulation.” The paper concludes with a consideration of the differing kinds of policy being recommended from these differing perspectives. Not unexpectedly, in- stitutionalist solutions are preferred, with reasons James A. Swaney continues this institutionalist probing of the extent ‘and regulation of economic power in his essay on “Elements of an Insiitutionatist Theory of Environmental Economics. As with Trebing, Swaney finds the contrast between neoclassical and institutional approaches to be sharp and comprehensive: “The neocias- sical approach, couched in a mechanical, reductionist world-view where everything is merely the sum of its parts and all values reduce toa simple pleasure or pain, is premised on exogenous, independeat utility functions, private ownership of everything valuable, an ‘effi cient" but statie property rights structure, and a system of perfectly com- petitive markets, The institutional approach, couched in an organic. holistic world-view where few things are merely the sum of their pans ‘and values are hierarchical and often conflicting, is premised on en- dogenuus, interdependent ‘preferences’ of individuals and groups, so cially defined and limited private ownership, a variety of evolving entitlements, and a political economy where political and economic power mia with market forces in a process that serves both private in: terest and social need.” Swaney seeks further development of the organic, holistic world- view of institutionalistsas reflected in his theory of environmental con- trol. He finds the origins of this effort in the turn-of-the-century Progressive conservation movement, in the science of ecology (includ: ing Aldo Leopold's “land ethic"), and in the founders of institutional thought, Veblen, Dewey, and others. Given theextensive consideration Of the conteibutions of the founders elsewhere in these volumes, thelr views are not pursued here. For Swaney, the primary elements of environntental control theory16 Inqroduction encompass basic preconceptions, value premises, and methodological ‘approaches. Among the preconceptions is a rejection of both the “frail earth” and the “quiescent earth” mentalities in favor of an institution alist recognition “that the biosphere . .. is composed of innumerable interacting, interdependent, complex, evolving ecosystems,” knowl edge of which must be extended and the preservation of which must be provided for through social control, Value premises incorporated include the instrumental social value principle, including its concem for the “continuity of human life” and its corollary of “environmental compatibility.” Swaney finds it desirable, moreover, to build on this base and add his concept of “coevolutionary sustainability” to those ‘with which programs and policy are judged. This principle affirms that “development paths or applications of knowledge that pose serious threats 10 continued compatibility of sociosystem and ecosystem should be avoided.” Methodological constructs are incorporated from Erich Zimmerman (“man's own wisdom is his premier resource”), from D. W. Pearce (identifying functions of the natural environment), and Alan Coddingion (simple flow model of interactions among firms, households, and the environment) that identify and demonstrate the ‘complexity and interdependence of socio- and ecosystems ‘Swaney then develops at length environmental control implications of social costs (following K. W. Kapp), of property rights and evolving entitlements (in critique of the Coase Rule) and economic measure~ ‘ments (in critique of cost-benefit analysis and conventional aggregate GNP accounting). He concludes with a reafhrmation of the need for, further development of, and use of a credible environmental ethic. Stephen A. Woodbury contributes a paper on “Power in the Labor Market: Institutionalist Approaches to Labor Problems, For Woodbury, the institutionalist approach to labor problems is dis tinguished by three features: It starts with a “perceived problem” that “may be addressed usefully by public policy.” Much of the work is car- ried out by examining the history, legal foundations and politico- economic aspects of the problem. And, finally there is a general “cognizance of power in the labor market.” “Implicit is the understand ing, unique to an institutionalist viewpoint, that the choice set of avail- able alternatives is historical and evolutionary,” and limited. ‘The power dimension is central for Woodbury: “In the mainstream framework, power is treated as an aberration.” To an institutionalist, “power is an essential part of every market, transaction, ard economic outcome. Power enters at a more basic stage of economic process: in the distribution of wealth, in the determination of tastes, in the evolu= Introduction 11 tion of technology, in the inherent heterogencity of labor. Each is given oo exogenous in the mainstream analysis.” The remainder of the paper is addressed to illustrating the significance of power in labor problems through analyses of collective bargaining and the character of labor markets ‘Although neoclassical economists continu to denigrate labor unions as “monopoly sellers of labor,” and hence as market corruptors, institu tionalists carly on, and currently, see unions as organizations seeking 10 further the interests of workers.” Organized workers parsue collec: tive bargaining (CB) not primarily to restrict the supply of labor, but to provide “one method of handling the problems that inevitably arise in relations between workers and management.” CB is the “only method of handling labor-rranagement relations that involves negoti ating a mutually agreed upon package of wages, hours, and working conditions... That agreement is backed up by a legally binding con- tract, the heart of which is the grievance procedure.” CB “is the only approach that permits the exercise of power by both parties to negoti= ation, because iis the only approach that grants each side a sanction— the strike or the lockout—if agreement cannot be reached.” Unlike uinitateral managerial contol, or worker control, or patemalistic con- trol, where labor and management are presumed not to share goals or purposes, CB presumes that workers and management have “some xgoals in common and others that conflict. The role of collective bar- taining is to seek out the areas of common interest, and to arrive at some compromise on issues where goals conflict.” After reviewing the legal underpinnings of collective bargaining in the Linited States, and the status of the labor movement currently, Woodbury tras, finaly, to the character of labor markets. Contempo- sary institutionalists tend to hold a"“dual, segmented, or stratified labor market theory.” Stratified markets are distinguished by two oF more segments, by difering processes of wage and benefit determination cross strata, by stable sizes of strata, and by barriers to moving across strata, Implications are that worker opportunities “are nor infinite and expansive,” better jobs are in limited supply, job rationing by race and sex is common, lower strata particularly are short on power. Institu- tional analysis of labor markets acknowiedges these realities of power and choice conditions workers actually face. Publie policy must be ad- essed ta that reality HLH. Liebhefsky’s paper on “Law and Economies trom Different Perspectives” completes Port IV on institutions, power, and ac- countability1s Introduction Licbhafsky sets as his central focus “the question of the extent to \whiich one’s conception of law or economics or of the relationship be- ‘yveen them is a refeection of his explicit or implicit philosophical out- took." In posing the question, and in generating the analysis to follow, Licbhafsky opens up an area of economic power not elsewhere consid~ ered in these volumes. Of course, judges in making decisions do hold and use economic power, Their judgments at times create and revoke economic choices, transfer income, realign economic power relatior ships, and delimit public government discretion over elements of the private sector, among others. Liebhafsky’s paper explores the philosophic grounds on which such judicial use of economic power sometimes occurs. His paper is an implied answer to his own question: dnc’s view of law, economics, or the relationship between does neces- sarily reflect philosophical “outlooks.” Two basic philoscphies of law and economics are considered: One is based on “First Principles” a second is based on “historical, functional, and evolutionary concep- tions.” The “First Principles” conceptions are characterized as being of the a priori type or of an “intellectual introspection” type. “Those who seek the certainty of necessary truths’ use purely deductive reasoning from such a First Principle to establish the validity of that “necessary truth’ ‘by demonstrating its consistency with First Principle.” For Sir William Blackstone, the First Principle was mystical Natural Law buttressed at times by Revealed Divine Law. For Jeremy Betham, both hedonic logic and pecuniary logic are derivative from First Principles. Richard Pos- nef, Liebhafsky's primary inguiry target, draws the maximization pria- ple from Bentham, but not his utilitarianism, At Posner's hands “wealth maximization” assumes the role and statute of a First Princi- ple, and its implementation through Adam Smithian market- deferential judgments is much to be preferred as a “philosophic outlook” for any judge making economic decisions But itis the historical, functional, and evolutionary conceptions of 2 philosophic outlook” for judges 1o which Liebhafsky especially invites our attention. Here is the judgmental focus that is compstible with in- stitutional economics, Liebhafsky draws heavily on opinions (often dis- senting) of Justice Oliver Wendell Holmes, Jr. for insights on the “outlook.” “The life of the law.” says Holmes, “has not been logic, it has been experience... The law embodies the story of a nation’s development. ... Itcannot be dealt with as if it contained only the axi- ‘oms and corollaries of a book of mathematics.” Law is evolutionary. A body of law is more rational and more civilized when every rule it Introduction ry contains is referred articulately and definitely to an end which it sub- ves.” Law is functional, Holmes supported freedom of inquiry, op- ‘posed judicial supremacy, and saw law evolving through the common law tradition. “The Fourteenth Amendment does not enact Mr. Her= ‘pert Spencer's Social Statics.” Legislatures may experiment with social ‘and economie policy. Liebhalsky explores, as well, the contributions of John R, Commons and Westey C. Mitchell to functional and evolu- onary law. The latter serves as an effective and superior alternative to First Principles adjudication. In turning now to the final group of three papers, Part V. addressed generally (0 institutions and global interdependence, the authors dem~ onstrate that the institutionalist approach to inquiry and policy-making hha pertinence and explanatory significance in a global context as well asa domestic one, While claims to generality must always be suspect— ethnocentric conditioners of habits of mind and habits of behavior are indeed powertul—we do in these papers argue for pancultural as well ‘as pantemporal relevance for institutional thought. The following es- says suggest some respects in which the institutionalist approach may well have broad applicability. John Adams's article on “Trade and Payments as Instituted Process: The Institutional Theory of the Extemal Sector” breaks significant new ground in an area not previously the focus of extensive institutionslist inquiry. Adams's “comprehensive theory of intersocial exchange” is in- tended to help elose this scholarly higtus and to prompt further inquiry in the area, Clearly, argues Adams, standard international trade theory, claiming ‘generality, does not suffice, That theory “demonstrates that the location of production depends upon the quantity and quality of the factors of production available in each autonomous national economy: and that market decisions by independent actors are sufficient to resolve the lo- cation problem without social or state involvement.” But also clearly, orthodox theory canmof explain “non-market systems of trade amiong societies, exchange relations between market-based and non-market based trading spheres, and cases where intersocial trade is conducted, according to exchange relations that differ markedly from those that guide domestic trade.” "Yet," continues Adams, “these are historically the most common patterns requiring elucidation and are, even pres- ceatly, highly salient types of exchange. Adams's institutionalist “theory of intersocis! exchange” addresses the conventional omissions above and also provides “new insights on imperialism and contemporary international inequalities.” It ean help20 Introduction “explain the rapid growth of trade and payments movements,” and ex tend our understanding of the “vexed contemporary trade and pay- ments connections between market and non-market economies.” The “theory of intersocial exchange” rests on basic notions of institutional analysis: “It is a behavioral theory that cente-s on human interactions with @ society and across disparate societies, not upon amorphous and abstract ‘factors’ and ‘commoditics’. It docs not rely upon stylized assumptions about reality, but searches for regularities in observed human behavior... Institutionalists accept the diversity and dynamic nature of all known economies, polities, and societies. They do not attempt to freeze their heterogenous reality into a common ‘mold of resting equilibrium states in which nothing vital happens Institutional theory does not ignore compelling geographical or lo- cational conditions, but emphasizes the malleability and complexity of human relations and the open-ended variety of potential responses to domestic circumstances and external potentials.” ‘Among the several implications of this position is the recognition that “a society's external relations must stem from and be consistent with its culture, polity, economy, technology, and physical environ- mont,” “External economic relations are regulated by and must be com patible with the domestic institutions of all the societies involved, ... The general pattern isthat ... transaetions are routinized or institutionalized so that they follow pathways that are mutally tol- erable to the parties involved.” Accordingly, “instituted process’ means that patterns of behavior are established and sustained between two or more societies in order to facilitate movements of goods, ser- s, people, ideas, technology, and money. These types of transac- tions are thus instituted or normalized.” In the remainder of the paper, Adams extends, refines, illustrates, and draws testible hypotheses from his “theory of intersocial ex- change.” embodying the construct of “instituted process.” He applies the new theory of the external sector to topics of imperialism, international inequality. intraindustry trade, the Japan-Lnited States- Germany triangle, and to the theoretical areas of comparative advan- lage and freedom of exchange. James H. Street opens his essay on “The Institutionalist Theory of Economic Development” with an appropriate summerizing comment: The institutionalist theory of the development of aewly emerging soci- sties is an extension of the general body of institutionalist theory. It draws upon the same basic conceptions of the nature of human behav- jor and the process of social change that have characterized the instituc Invreduction 2 tionalist interpretation ofthe evolutionary history of modern advanced industrial economies. Development is conceived as ¢ complex cultural process, rather than asa stable system of counterbalancing forces reg- ulated by a fluid and selFadjusting market mechanism. The propelling force for economic growth has been and continues to be the utilization of technological knowledge and instruments, The forees inhibiting so- ‘ial progress, on the contrary, are rooted in institutional, or ceremonial, pattems of behavior that are present in all societies, but scem t0 be particularly obstructive in highly wraditional cultures.” For Street, the inquiry agendas for institutional analysis of develop- sment have had to be expanded well beyond the standard, neoclassical boundaries: Investigators must ake account of anthropological, histor- ical, demographic, political, and psychological data in addition to the ‘ore conventional economic data, “The specific form the interplay of institutional and technological behavior takes in each country or cul= tural unit is governed by unique circumstances of geography, cultural history, and available resources. While technology nas universal adap- ability, institutions are culture specifi.” Accordingly, institutional analysis must generate, and incorporate from elsewhere, case study and empirical data disclosing the particular dimensions of development problems, Institutional theory indicates which data to gather and how so arrange it for analysis. Sircet’s theory of development incorporates, as well, a continuing and creative role for democratic governments, a sensitivity to the vule nerability of poor countries to multinationals, energy crises, and inad- cquacies in international financial mechanisms, and concern with the cnvicoamental impact of development efforts. One of the many contributions of the essay is Street's fresh canvass and assessment of contributions of institutionalist founders—Veblen, John R. Commons, and Clarence E. Ayres—but also of Simon Kuznets tw his economic development analysis. Of particular interest, for exar~ ple, are four contentions from Ayres's new Preface for the republication fhis Theory af Econamic Progress: (1) “the process of economic devel- ‘opment is indivisible”; 2) “ihe technological revolution spreads i in verse proportion to. institutional resistance”; (3) “the mie of development is dependent on the educational level of the community and (4) “the values engendered in the technological process are univer: sal values. Suieet concludes bis paper with a perceptive comparison, noting con- sgencies and divergencies, of institutional development theory with that oF the Latin American structuralists, and especially. the depen-2 Introduction dency school, Street contends, and these scholars concur, that only an open-ended, evolutionary and holistic approach 1o develepment anal- Jes can hope to disclose the complexities of development problems and to generaic constructive policies to resolve them. ‘William P, Glade’s paper, "Multinationals and the Third World.” concludes Part Vand this volume on Institutional Teoryand Poli ‘After noting the comparative inattention paid by neoclassicists to di sect foreign investment prior to the 1950s and the institutions through which it was accomplished, and a quite extensive survey of the litera- {ure from the political “let” and elsewhere critical of theadvent of mul- tinational corporations (MNCs), Glade analyzes with meticulous care, and fiom an institutionalist perspective, how modera MNCscame into prominence and what their sole is in Third World economic develop- ment “Multinational corporations have become financially and otherwise suecessful enterprises, he argues, because: (1) They have developed the bility 10 minimize or absorb transfer costs arising frort transport of 2oods and persons, information acquisition and dissemination, tech. nology transfers, and the like, 2) They have developed the ability to arrange money fund transfers not only from their home fms, but also from accursulation of on-site retained earnings and intrafirm transiers. G3) Of greater importance is the fact that MNCs have substantially in- creased real investment in less-developed countries (LDCs). The quan- Lity and quality of capital stock has been increased. Direct investment dnd technology transfers are central. Given the rudimentary state of financial markeis in LDCs, MNCs have been somewhat more cor: ‘cemed with real production than with nonproductive pecuniary en- deavors. (4) Behind capital lies technology: behind technology lies information. MNCs have been effective in gathering, processing, and disseminating information of all kinds—financial, technical, market- ing, legal, and political. A major coniribution of MNCs to LDCs is & reduction in the information deficit (5) Organizationally, MNCs have custody over the stock of information. It is a source of power for MNCs, obviously. Control of information generally means control of ther facets of MNC operations. Glade’s analysis of MNCs leads him to conclude that “the marriage of technology information and organization that has come about ia the multinational entesprises” has produced an efficient, productive, and fgrovth- inducing instiution in the less-developed countries. But Glade is not unmindful of a number of reservations and hazards of which institutionalists would also wish to take account: Capacity for Introduction absorption oF transfor costs of large firms may prevent smaller firms from entering the field. Large firm accumulation of funds begs the ques Tom of the character of the use of funds. Who decides where direct in- Vestments should be made and on what grounds? Efficient technology fransfers may Ieave unaddressed the approriateness of the wansfer and is cay ienmental impact. Conflicts may arise between information- eh multinationals and information-poor host countries. Efficient or ganizational management of transfer costs, accumulation, technology Transfees, and information flows and access, may not be a sufficient success indicator, (On balance, however, Glade appears to suggest that the real income gains for LDCs of multinationals’ presence and operation exceed the hhavards and costs 10 the LDCS. Indeed, the MINC as an institutional form is wow being adopted by some newly developing countries in Latin America, Eastern Europe and China, Acknowledgements In this place, as well as in the Introduction to Volume 1, it is my distinct pleasure gratefully to acknowledge all those who have contn= buted to the second volume of solicited papers on Evolutionary E nomucs. To all those who suggested names and topies, to the Ad Hoe Advisory Committee members who helped steer the project to its com pletion, to the contributing authors for their excellent papers, to those who found time to serve as referees or readers, and finally, again 10 Anne Lou'se Jackson for her mast capable and conscientious editorial work, my most heartfelt shanks, Marc R. Toot, Editor Jowenal of Economie Issues Sacramento, California August 14, 1987