Stevenson 1987

Journal of Economic Issues
ISSN: 0021-3624 (Print) 1946-326X (Online) Journal homepage: http://www.tandfonline.com/loi/mjei20
Institutional Economics and the Theory of

Production
Rodney E. Stevenson
To cite this article: Rodney E. Stevenson (1987) Institutional Economics and

the Theory of Production, Journal of Economic Issues, 21:4, 1471-1493, DOI:
10.1080/00213624.1987.11504712
To link to this article: http://dx.doi.org/10.1080/00213624.1987.11504712
Published online: 05 Jan 2016.
Submit your article to this journal
View related articles
Citing articles: 2 View citing articles
Full Terms & Conditions of access and use can be found at

http://www.tandfonline.com/action/journalInformation?journalCode=mjei20
Download by: [University of California Santa Barbara] Date: 27 June 2016, At: 08:45
Jel· JOURNAL OF ECONOMIC ISSUES
Vol. XXI No.4 December 1987
Downloaded by [University of California Santa Barbara] at 08:45 27 June 2016
Institutional Economics and

The Theory of Production
Rodney E. Stevenson
What is wanted is training in the ways and means of productive industry, not
in the ways and means of salesmanship and profitable investment. By force of
habit, men trained to a businesslike view of what is right and real will be irretriev-
ably biased against any plan of production and distribution that is not drawn in
terms of commercial profit and loss and does not provide a margin offree income
to go to absentee owners. J
As ye sow, so shall ye reap.

-Samuel Butler
Production is a universal activity. Though the concept of production
is culturally encoded, the process of production is common to all soci-
eties. Production is the social provisioning process, the process that
provides a society and its members "real income." Production is the
means by which technology and labor convert material resources into
consumable goods and services. It is both a microeconomic process of
tool using and a macroeconomic system of interaction among public
and private institutions. Production is also a deceptively simple word.
Had Ludwig Wittgenstein's logical positivists had their way, this would
not have been so. But definitions and theories are not easily bounded;
they are mirrors to entire systems of thought and of value.
The author gratefully acknowledges the guidance of Daniel Bromley, Donald Kanel,
Dennis Ray, and Willard Mueller. The author especially appreciates Marc Tool's substan-
tial contributions and Harry Trebing's assistance in directing the author towards this un-
dertaking.
1471
1472 Rodney E. Stevenson
In espousing a theory of production, one seeks to explain the nature

and consequence of a society's means of provisioning. What is pro-
duced? Why is it produced? How is it produced? How does the system
of production affect the distribution and use of that which is produced?
Why are there intertemporal and cross-cultural differences in systems
of production? But if theories are not easily bounded, one does not sim-
ply espouse a "theory of production" but rather a theory of economics
manifest through a concept of production-and a set of values manifest
through a concept of production-and a set of values manifest through

a concept of economics. The goal of this article is to consider the insti-
tutional economic conception of the process and role of production,
especially as contrasted with the conceptions of economic orthodoxy. 2
As will be discussed, the institutionalists are concerned with the control
of the system of production and with the process and consequence of
technological development and adoption.
Institutional Orientations
Thorstein Veblen was the consummate iconoclast schooled in the
ironic and impatient of the foolish. John R. Commons was the philos-
opher practitioner par excellence. Wesley Clair Mitchell counted the
forests and the trees and the leaves. As individuals they could not have
been more different; as economists they and their intellectual descen-
dents shared a desire to understand the economy in context rather than
in isolation. Oriented towards the pragmatism ofJohn Dewey, William
James, and Charles Sanders Peirce, intellectually tied to the Continen-
tal philosophers and German historical economists, the founders of in-
stitutionalism sought a holistic understanding of the economy. They
did not look upon the components of society and the economy as
merely additive or strictly dual. For them, production and consump-
tion are not two blades of a pair of scissors, but two sides of the same
coin, known both by its content and iconography.
The early institutionalists were reform-minded social scientists who
shared a faith in the efficacy of collective social action. Some, such as
Commons, were active participants in the process of social reform.
They were social experimentalists who sought to provide guidance for
structural reform that would ease the social tension and promote eco-
nomic progress. Others, such as Veblen, served the role of social critic.
The economics of the institutionalists is, as Allan Gruchy noted, "the
study of the structure and functioning of the evolving field of human
relations which is concerned with the provision of material goods and
Institutional Economics and the Theory of Production 1473
services for the satisfaction of human wants."3 For the institutionalists,

the economy is not a snapshot of resource-bounded greed but the
dynamically evolving discretionary consequence of collective human
action. The institutionalists are acutely aware of the cultural tension of
technological advancement and of the commercialization and cor-
poratization of society. Their concern with conflict leads them to be
more interested in the structure of economic process than in its hypo-
thetical equilibrium outcomes.

Institutionalist ways of knowing tend to be hermeneutical rather than
axiomatically deductive. Thus the process of heterodox investigation
appears more eclectic and less refined than standard neoclassical pur-
suits. Indeed the richness of pragmatic institutional insight is often
achieved by foregoing the rarefaction of high theory. Unlike their or-
thodox counterparts, institutionalists do not take refuge in a philosoph-
ical interpretation of scientific knowledge as being "value free."
Institutionalists recognize that systems of investigation are also sys-
tems of value and that economic analysis both propagates a set of val-
ues and reflects the value system of the investigator.
The institutional economic construct evolved dialectically.
Consequently, as with musical counterpoint, institutionalism and its
theory of production are better understood when placed in apposition
to that which is countered, which for institutionalism is neoclas-
sicalism.
The Neoclassical Construct

Neoclassical theory is a parsimonious accomplishment of conspicu-
ous assumption. Born of Adam Smith's observations on self-interest
and the productiveness of specialization, neoclassical theory sets forth
an explanation of production and consumption within the constraints
of initial endowments of human and material resources, technology,
preferences, and motivations. Neoclassicalism is arithmomorphic; as
with colloids in solution, resources, technology, preferences, and moti-
vations mix but never merge. Economic agents may engage symbioti-
cally, but the consequence is impotent with regards to resources,
technology, preferences, and motivations. Thus neoclassical economics
is an erector set science; the pieces are given, they can only be rear-
ranged.
A fundamental piece of the erector set is the production function.
The production function is a terse statement of current technology that
specifies the frontier mapping of a confluence of inputs into a set of
outputs. By itself, the production function is an engineering statement

of production possibilities and requirements. Though held not to be
"economic" in nature, the production function is controlling, or at least
limiting, of economic outcomes. When combined with producer moti-
vations, factor input supply conditions, and product demand, the prop-
erties of the production function can be dualistically represented
through the reduced form cost or profit functions. Substantial effort has
been expended on specifying and measuring the parametric structure
of production functions and their duals. 4

At the micro level, production is organized under the aegis of the
firm. The firm is typically an inframarginally unequal collection of in-
puts organized by managers motivated by a profit maximizing desire.
The firm employs inputs to a point of equal incremental contribution,
compensates according to marginal revenue product, determines out-
put levels, and prices at what the market will bear.5 Firms conduct their
productive activities within a system of markets. While early econo-
mists recognized the performance consequences of alternative market
structures (competitive, monopolistic, oligopolistic), only in certain
limited instances of "market failure" do neoclassicalists advise extra-
market guidance to the production and distribution of goods. In gen-
eral, neoclassical microeconomists hold that unfettered markets are
allocatively superior to socially controlled markets or to non-market
forms of resource organization and distribution.
At the macro level, aggregate production is seen as a key indicator of
the health and well-being of an economy. The rate of real GNP growth
is an ever-present macroeconomic concern of orthodox economists.
GNP levels are viewed as a major determinate of aggregate employ-
ment and prices. Though the Keynesians argued strongly for directive
governmental fiscal policy, the resurgence of classicalism through ra-
tional expectations has harkened back to the orthodox economic coun-
sel on the role of government-the less the better.
The neoclassical construct of production is that of a value-neutral
conduit for transmuting self-interest and resources into economic wel-
fare. This construct is developed within the context ofstasis. 6 The neo-
classical homiletic emphasizes scarcity, insatiability, and the
omnipresence of trade-offs. The neoclassical construct is basically ahis-
torical, acultural, and amoral. At best neoclassicalism orients towards
an isotonic rapacity constrained only by resources and technology.
Institutional Theory and the Process ofProduction

Though the institutionalists have studied the process of production
extensively, delineating an institutionalist theory of production is not

an easy task. Robert Lekachman bemoaned that "institutionalists have
differed so much among themselves, and Veblen took such successful
pains to mislead his readers, that it is difficult to be coherent about the
institutionalists."7 Veblen might well have responded that it is not that
institutionalists are heterologous or that institutionalism is ath-
eoretical, but that the ontology and epistemology of the institutional-
ists, which is quasiorthogonol to the semiology of orthodoxy,
enucleates holistically occluding ductile monocotyledonous redaction.

To recount institutionalism's insights into production, we will consider
the areas of the critique of neoclassicalism, the instrumental/ceremo-
nial dichotomy, the role of technology; motivations and psychology;
power, property rights and information; production and distribution;
production and consumption; production and efficiency; valuation of
production; proposals for reform; and production and values.
The Institutional Critique of Neoclassicalism
The role of neoclassical critique in heterodoxy cannot be overstated.

The institutional critique of neoclassical ism has been ubiquitous and
devastating, though not especially persuasive, to the core of what is
now considered as the mainstream of economics. Institutional articles
that do not, with varying degrees of refinement, take a swipe at the re-
ceived doctrine are rarer than axiomatically logical human beings.
While some may weary of the obligatory neoclassical-bashing, the
dialectic embedded in it plays a crucial role in advancing a useful
knowledge of the economy. Unlike Plato's Socrates, who by question-
ing gave those who claimed episteme sufficient opportunity to display
their lack of it, the dialectic of institutionalism is one of direct refuta-
tion. The advancement of knowledge by dialectical refutation is not un-
common. The Western philosophical tradition is steeped in critical
analysis. The most subtle form of Eastern philosophy, Prasangika-
Madhyamika, uses refutation as the main method for developing in the
mind of the student a valid conceptual understanding of voidness, a
necessary precursor to direct awareness.
Since Veblen, the institutionalists have criticized the limiting con-
structs of neoclassicalism-which are not scarce, as exemplified by
George Stigler's observations on the x-inefficiency proposition: "Unless
one is prepared to take the mighty methodological leap into the un-
known that a non-maximizing theory requires, waste is not a useful eco-
nomic concept. Waste is error within the framework of modern
economic analysis, and will not become a useful concept until we have
a theory of error."8 Institutionalists point out that the neoclassicalists'

lack of a theory of error has not deterred them in its practice.
Common to the institutionalist critiques are concerns with neoclas-
sicalism's presumption of normalcy, adherence to equilibrium analysis,
assumption of optimization behavior, and presumption of an individ-
ualistic hedonistic psychology. Further, the institutionalists object to
the neoclassicalists' failure to consider seriously the endogeneity of
technology, preferences, individual and social values, power, and insti-
tutional structure. For the institutionalists, neoclassicalism is too con-

strained, too abstract, and too devoid of structural reality. The rapid
mathematization of the discipline in the post-war period has done little
to further endear the neoclassical approach to the heterodox.
With regard to production, the institutionalists find various neoclas-
sical tendencies quite objectionable. The institutionalists object to neo-
c1assicalism's failure to investigate adequately the determinants of
technology, to appreciate the unceasing disequilibrating effects of tech-
nological change, and to recognize the relationship between production
and power. Because of this, the institutionalists feel that the neoclas-
sicalists' perception of the nature and function of the firm is flawed and
that policy prescriptions based on that perception are faulty.
The sharp criticism of neoclassicalism by the institutionalists is not
an act of misanthropy. As social scientists, the institutionalists are con-
cerned that one can master neoclassicalism and still not understand the
nature of society and the function of its economy. As social activists,
the institutionalists find the rarefied domain of neoclassicalism a bar-
ren field for reliable policy.
The Instrumental/Ceremonial Dichotomy

Veblen, the founder ofa school of thought that would later be asso-
ciated with a non-dualistic outlook, identified numerous personal and
social dichotomies. Veblen saw dichotomous personal traits such as the
"cooperative" or "parental" versus "avaricious acquisitiveness" in-
stincts as having cultural counterparts in "societally serviceable" versus
"self-serving" institutions. He saw society as being divided into the in-
dustrial and the non-industrial. The industrial class comprised those
who engaged in useful or productive activities-such as farmers or fac-
tory workers. The non-industrial class was the leisure class, those who
engaged in non-productive activities seeking to get "something for
nothing"-such as bankers and businesspeople.
Veblen's value system was embedded in his dichotomous percep-
tions. From the "productive" social class emanated economic value,
the real or tangible values of the industrial system-tangible commod-

ities that are useful both to the community and to the individual. From
the leisure class came the pecuniary values, the exchange values deter-
mined by the various forces of the marketplace that are more "psycho-
logical" than "substantial." Thus for Veblen, economic or useful value
was intrinsically vested in the productive process.
Veblen's system of value linked to the pragmatism of Dewey, James,
and Peirce led to Clarence Ayres's famous dichotomy of the instrumen-

tal and the ceremonial. The instrumental was that which would en-
hance the growth of the economic or the useful. The ceremonial
impeded the growth of the useful. Institutions steeped in the cultures
of a prior age and resistant to the structural evolution necessary to ac-
commodate an evolving and advancing technology capable of enhanc-
ing the production of tangible commodities useful both to the
community and the individual were ceremonially obstructionistic.
The Role of Technology

Veblen believed that the contributory causes of economic (real) value
were labor, raw materials, and technology. While labor may have been
the prime creative factor in the handicraft era, Veblen and his followers
believed that technological knowledge is the strategic creative factor in
the new industrial order of twentieth-century capitalism. That which
was instrumental was that which permitted and enhanced the progres-
sion of the useful. And for the emergent industrial nations, that which
enhanced the progression of the useful was the evolving technology-
the advancement of systematic applications of organized reliable
knowledge to practical tasks.
The early institutionalists were clearly enamored with the scientific
advances of the late nineteenth and early twentieth centuries. The sci-
entific advances promised technological improvements that would ad-
vance the industrial arts. Such advances were seen as wholly desirable
because of their potential for liberating humankind from the enslaving
drudgery of traditional means of providing material services necessary
to life and well-being. What disturbed the early institutionalists was
that the promise of emergent technology was being thwarted by social
and market structures that were imbued with the ceremonial, the pecu-
niary, and the invidious. The culturally encoded ceremonial institu-
tions that maintained the existing social order would have to be altered
if the liberating potentials of the new technologies were to be realized.
Institutional reform would be needed if the full promise of new ·tech-
nologies was to be realized; market operations would not suffice be-
cause vested interests wedded to ceremonial and pecuniary values

controlled the markets.
However, even as populism has a dark side, so does technology.
Later heterodox economists came to appreciate that not all technologi-
cal advances are socially advantageous and that all vestiges of the older
culture should not be swept away merely to aid technological advance.
The assertion that real or economic or useful values are embedded in
and consonant with tangible commodities beneficial both to individu-
als and society is precariously close to a materialistic utilitarian system

of values that many latter day heterodox economists find nonpersua-
sive. Economists such as E.F.Schumacher and commentators such as
Amory Lovins suggest that rather than sweeping away cultural con-
straints to all new technology, only "appropriate" technologies that are
not unduly injurious to the cultural norms and societal values-or that
are reinforcing of socially enhancing values-should be adopted. 9 Oth-
ers, such as Thomas De Gregori, continue to champion the cause of un-
abated technological advancement. 1o
Motivations and Psychology
While the behavior of the neoclassicalists' economic person can be

described as self-centered rapacious optimization, the institutionalists'
economic person is more complex. There are at least three major and
related differences in the maintained motivations and behaviors of in-
stitutionalism as compared to neoclassicalism: the wider array of psy-
chological predilections (what Veblen called human instincts), the
extent to which social norms and mores are directive of personal wants
and actions, and the nature of behavior as a satisficing or attenuating
response to human wants, societal stress, and institutional flux.
The neoclassical conception of the individual as a greedy self-serving
glutton has, to many, seemed a bit harsh and myopic. Not even Adam
Smith maintained such a limited behavioral view. Smith, who in his
Wealth a/Nations investigated the applications of the concepts of self-
interest and natural freedom to understanding economic transactions,
argued in The Theory 0/ Moral Sentiments that human sympathy was
the trait that bound people together in society. While the avaricious
acquisitive instinct would suffice as the motivational foundation for a
theory of production for the neoclassicalists, for Veblen and the other
institutionalists it could not. At best, greed was a cynically poor and
myopic explanation for pride of craft and for the curiosity that lies at
the heart of advancements in technology.
Veblen's explanation of the system of production is rooted in his con-

cept of the four basic human instincts: the acquisitive instinct, the par-
ental instinct, the instinct of idle curiosity, and the instinct of
workmanship. Idle curiosity and workmanship are the instincts that are
most enhancing for technological advance. The acquisitive instinct au-
gurs more for activities that are pecuniarily rewarding. Thus, when
Veblen advocated taking control of industry from the financiers and
businesspeople and turning it over to the engineers, he was seeking to

vest guidance of the social institutions of production in the hands of
those who would themselves be guided most strongly by pride of work-
manship and idle curiosity.
John Kenneth Galbraith also found the avaricious explanations of
the structure and operation of the firm to be incomplete. I I He saw the
firm as a set of concentric circles within which the members were mo-
tivated by a different mixture of goals. The concentric circles repre-
sented degrees of corporate control that declined in power as one
moved out from the center. At the center was senior management. Next
came middle management and the skilled technical staff, then less
skilled labor, and finally the shareholders. While the shareholders were
primarily motivated by pecuniary concerns, the middle sectors had a
strong concern with identity (that is taking on the nature of the firm as
their identity-"I am an IBM person"). The closer one moved to the
center of the firm, the greater became the goal of bending the organi-
zation to one's own view-of making the organization an extension of
oneself ("I am IBM").
The diversity of instincts and personal goals is a source of conflict.
The acquisitive instinct, for example, is not fully compatible with the
instinct for workmanship. The extent to which the various instincts or
motivations predominate and the manner in which they manifest is
not seen by the institutionalists as a simple matter of individual choice.
Social pressure and cultural norms play an important role. Thus the
institutionalists understand the importance of social psychology. The
structure of institutions and the nature of the cultural constraints and
expectations embedded within are powerful forces shaping the balance
and expression of human motivations. Institutionalists argue that if
rcal, as opposed to pecuniary, value is to be enhanced in society, then
it is necessary to do more than promote free trade; the structure of in-
stitutions must be periodically reformed to be enhancing of those as-
pects of human nature most congruent with beneficial industry.
In a fixed world, optimization is understandable and perhaps
feasible. In the world seen by the institutionalists, it is neither. When
the world is constantly in a state of change and when value systems are
endogenous, optimizing behavior of the type assumed by the neoclas-
sicists is at best a wishful thought. Change brings the potential for con-
flict, and change is unavoidable. While individuals and societies may
wish for a world free from change, they recognize (at some level) that
change will be thrust on them and that they themselves will be agents
of change. Rather than optimizing, satisficing and attenuation will oc-
cur. Optimization implies getting the most for oneself against fixed con-
straints. Satisficing and attenuation imply a balance of attending to self

and accommodating disruptions. For the firm, satisficing and attenu-
ation are important elements with regard to the ability of the organi-
zation to continue as a going concern.
Power, Property Rights and Information

Where there is conflict, there is a concern about power. Power,
though elusive in concept, conveys an ability of control over people,
events, and institutions. Those with power are able to shift the burden
of change away from themselves-to delegate or deflect the adverse
consequences of risky endeavors onto others. Being a marginal disci-
pline, neoclassicalism does not dwell on the issue of power. In equilib-
rium all parties are equally powerless on the margin; the nature of stasis
is an isotonic balancing of forces. But the institutionalists do not see a
balanced world; they see a world of constant change and flux where
discretionary power is able to direct the evolutionary flow of the econ-
omy and of society. Control of the system of production is a primary
source of discretionary power.
From the beginning, the institutionalists saw the economy as a sys-
tem of power. Veblen believed that the center of gravity of the economy
resided in oligopolistic industries where discretionary production deci-
sions were vested in the hands of a few. Adolf Berle and Gardiner
Means, Willard Mueller, John Blair, Walter Adams and James Brock,
and many other industrial organization economists would confirm
Veblen's observation. 12 Peter Drucker and Galbraith each wrote from
the perception that the power of production in the modem economy
resides in the large corporation. 13 While the neoclassicalists argue that
consumer sovereignty drives the market, the institutionalists recognize
that the sovereigns have corporate titles.
Control is a cultural and institutional phenomena. The institutional-
ists see property rights and information as two major determinates of
control. And the heterodox recognize that the vestment of property
rights and flow of information are institutionally determined.
Property rights, as recognized by Commons, convey social sanction
for discretionary authority. Those who own property have discretion

in deciding what to do with it, at least within the boundaries prescribed
by law and social custom. Property rights are not inalienable, rather
they are prescribed by institution. Nor are property rights always ex-
plicit. A phenomena of twentieth-century capitalism is that the man-
agers of the large corporations are the implicit property right holders
over the assets of the corporation, even though ownership reputedly
resides in the hands of the shareholders.
The control of information is a reinforcing consequence of power. In

virtually every hierarchical system of power, effort is made to control
the flow of information. Asymmetric knowledge provides strategic ad-
vantage. While technological advance can frustrate efforts to success-
fully shield information (consider the effects of the Xerox machine on
the flow of classified information), institutional systems can slow the
rate of dispersion. A substantial pecuniary advantage is gained by con-
trolling information flows, often at a cost of technological advance.
Though Joseph Schumpeter argued that technological advance would
sweep away the old monopolies, Ayres observed that the existing power
structure in the name of cultural (and self) preservation would act cere-
moniously to constrain the flow of technological knowledge.
Production and Distribution

Consonant with a neoclassical theory of production is its theory of
distribution. Simply stated, inputs get paid at the rate of what they con-
tribute on the margin. According to the neoclassicalists, the value of
the marginal contribution is determined jointly by technology (the pro-
duction function) and consumer preferences (product demand). Pre-
suming non-coercion, all agents are at least as well offat the end of the
trading period as before. With coercion some may be worse off, but
neoclassicalists consider the result distributionally superior if the gain-
ers gain more than the losers lose. According to the neoclassicalists,
distributional distortion occurs when there are significant differences
among the marginal product normalized rate of payment for inputs or
between marginal cost and the incremental value of production to con-
sumers. Neoclassicalists are generally unconcerned with the issue of the
distribution of rents.
Institutionalists do not accept that distribution is simply a matter of
allocation in accordance with market prices. The pattern of distribution
is a reflection of the distribution of power. The system of distribution
is institutionally actualized. Distribution within the institutional sys-
tem encompasses both material gains and risks.
Being concerned with distributional equity and with the conflicts that
can arise in the absence of fair shares, institutionalists such as Com-

mons have sought reforms to counteract the distributional inequities
of a market-based sharing of the material benefits of production. The
promotion of unions, fair systems of labor relations, and pension sys-
tems were institutional reforms that altered the nature ofimplicit prop-
erty rights and provided for potentially less acrimonious means of
business-labor conflict resolution. Later institutionalists like Galbraith
looked favorably upon the emergence of big unions as a means of coun-
tervailing the discretionary power of big business. Others, however, ad-

vise caution with regard to the potential of big business co-opting big
unions at the expense of consumers. Note for example the successful
efforts of U.S. automotive manufacturers in obtaining union support
in their lobbying efforts to scale back governmental safety and fuel use
standards.
Being attuned to the constancy of change, institutionalists view as a
major aspect of the distribution question the ability of one group to
immunize itself from the force of change by directing or deflecting risks
towards others. Risks can be placed upon labor through denial of prop-
erty rights for future claims on the firm (labor is a replaceable input
with virtually no claim to rights for future employment). Risks can be
shifted to consumers through limitations on product disclosure and
producer liability. Risks can be forced on third parties through envi-
ronmental discharges. Institutionalists view collective action through
public institutions, such as the public utility and environmental regu-
latory agencies, as a means to attain a fair distribution of risks.
Production and Consumption

For neoclassicalists the purpose of production is to facilitate and ser-
vice consumption. Institutional scholars attentive to the role of power
in the economy tend to suspect that it is the other way around-that
consumption maintains the institutions of production. As the large-
scale corporate organizations evolved, Galbraith argued, so did the per-
ceived need by corporate management for consumption planning.
Power derived from control over the production process would falter
if consumption was not sufficiently strong and stable. Because of the
potential harm that could be inflicted on the corporate order by unsta-
ble or unpredictable demand, consumption became a matter too im-
portant to leave in the hands of the consumers. Say's law may very well
be correct, but not in the manner conceived of by Say.
Consumption is controlled by several means other than simple mar-
ketplace signalling. Consumption is controlled by the creation and re-
inforcement of consumer wants-including the promotion of

conspicuous consumption. Consumption is controlled through planned
obsolescence. Consumption is controlled through encouragement of
economic policies (fiscal and monetary) that stimulate demand. Con-
sumption is controlled through the promotion of public expenditures
oflimited or negative societal benefit (pork barrel projects and military
weapon systems, for example).
Production and Efficiency

In the canons of orthodoxy, efficiency is (at least) next to godliness.
Indeed few, whether within the profession or not, would question the
worthiness of efforts to improve efficiency and to diminish waste. The
important question, however, is the standard by which efficiency is
judged. In orthodoxy, efficiency is gauged against the potential con-
sumptive pleasure afforded by existing technology and resources. Im-
provements in productive efficiency, that is, the ability to produce
more with less, is desirable because the resource base could then sup-
port higher levels of consumption. Productive efficiency augments al-
locative efficiency and thus material delight.
Standards of efficiency are quite different for the institutionalists.
Commons pursued the concept of the "going concern" as a measure of
institutional viability. In this context the standard of productive effi-
ciency is not whether the firm's input-output combination lies on the
production frontier or whether the input mix is cost minimizing for
factor prices reflecting full internalization of production externalities.
Rather, the institutionalist standard of productive efficiency reflects the
adaptability, accessibility, accountability, and distributional fairness of
the firm-in short, the ability of the firm to be an on-going institution
capable of serving the community and fostering beneficial technologi-
cal advancement and adoption.
The differences in the interpretations of efficiency exist for at least
two reasons. First, not all forms of consumption should be viewed as
beneficial. Conspicuous consumption, for example, may be socially un-
desirable both because of the promotion of invidiousness and because
consumption needs of the less well-to-do may not be met as resources
are bid away by the wealthier members of the leisure class through the
one dollar/one vote democracy of the market. Second, the major prob-
lem, as seen by the institutionalists, is not reaching the hypothetical
maximum consumptive potential afforded by current technology and
resources, but, rather, attending to the conflicts of change that may im-
pede the advance of knowledge and technology.
Valuation of Production
The early institutionalists saw real value residing in production and
not in the prices produced by markets. As Ayres stated, "What counts
is the volume of physical production.... Everything else is incidental;
or if it is not, it is ... sand in the bearings." 14 Of course, not all produc-
tion constitutes material provisioning that is socially beneficial or en-
hancing. Indeed, much of what is produced by the modern economy is
of questionable social value.
Various institutional economists have questioned the standard of

production as a standard of economic well-being. In the context of ag-
gregate production, measures such as gross national product may be
perniciously misleading. Measures of GNP fail to take into account the
despoilment of the environment and the production of health and
safety risks for this and future generations. IS GNP measures also fail to
account for the by-product of human misery that may accompany eco-
nomic expansion, as with the annihilation of the various Brazilian In-
dian tribes in the Amazon rain forest.
Even in the absence of environmental externalities and production
by-products of human misery, not all produced goods are necessarily
good. The production of military hardware systems, alcohol and other
addicting drugs, tobacco, and trinkets of conspicuousness, for example,
may provide employment, but the social beneficialness of the resultant
products is highly questionable. Recognizing that non-zero market
prices and positive production levels are fallible indicators of social
beneficiality, various institutionalists have sought to develop more ex-
tensive social welfare indicators to rate the performance of production
systems. 16
Proposals for Reform

Institutionalism started as a reform-minded enterprise and remains
so today. Since society is constantly evolving and the evolutionary path
society follows is a matter of discretionary choice, the need for benefi-
cial reform proposals is on-going. The production reforms proposed by
the institutionalists have all involved a process of public intervention
into what neoclassicalists see as the private domain of the market.
However, substantial differences exist among the institutionalists.
While a full gradation of proposals exists within the spectrum of institu-
tionalist reforms, most can be grouped into the categories of central
planning, regulation, and the competitive restructuring of markets.
Most institutionalists believe that central planning currently exists,
albeit in private hands. Veblen noted that the center of gravity of the
economy was in the oligopoly controlled industries. Galbraith viewed
the giant corporation as the central planning element of the economy.
William Dugger and John Munkirs continue to illuminate centralized
private sector planning. 17 Many institutionalists believe that central-
ized planning of the system of production is a technological necessity.
Their concern is not with the concept of central planning, but with the
fact that the existing planning process is privately and not publicly
dominated. Institutionalists such as Allan Gruchy and J. Ron Stanfield
see the need for a publicly coordinated industrial policy and call for
centralized planning. 18 The intent of the proposals for central planning
is to harness and redirect the planning capacity of private industry. A
wide variety of proposals for industrial redevelopment have come from
heterodox economists such as William Dugger, Barry Bluestone and
Bennett Harrison, Gar Alperovitz and Jeff Faux, and Robert Reich. 19
The proposals argue for varying degrees of proactive public planning
and a joint partnership of government, labor, and business.
Slightly less expansive are the various proposals for regulatory con-
trol. Commons and other institutionalists, such as Martin Glaeser, Da-
vid Schwartz and Harry Trebing have advanced proposals for
regulatory control and reform. 20 Rather than seeking the formation of
a grand design through centralized planning, the proponents of regula-
tion have tended to seek the imposition of government controls to curb
monopolistic abuses, attend to externalities, reduce health and safety
risks, impose constraints on socially unacceptable behaviors such as
sexual or racial discrimination in employment, increase information
accessibility, constrain labor exploitation, and the like. Regulatory sys-
tems proposed by the institutionalists have tended to be organized ei-
ther along industry lines, as with public utility regulation, or along
functional lines, as with environmental and employment regulations.
A third group of institutionalists have tended to advocate reform of
the industrial system through the aggressive application of the antitrust
laws. Economists such as Adams and Brock, Mueller, and Blair have
argued that existing and emerging technologies do not justify the degree
of market control that has evolved in the economy.21 These economists
are quite wary of the economic harm that can be inflicted by monopoly
and oligopoly dominated industries. In addition, they are less than san-
guine about the ability of centralized public planning to avoid total co-
option and control by the private centers of planning. Rather than
subject the economy to the stifling effects of concentrated market
power, whether directly or through the aegis of public planning, this
group of institutionalists believes the best remedies for market power

are constraints on anticompetitive practices (such as price fixing and
market sharing) and monopoly structure reform through divestiture
and dismemberment.
Production and Values

Social and personal values form the basis for the moral norms of so-
ciety and the cultural context of individuals. These values playa major
role in individual and societal well-being. Satisfaction is not merely a
characteristic of the product or service consumed by the individual.
Satisfaction and well-being are characteristics of the mind that per-
ceives the act of consumption. And the ability of the perceiving mind
to find satisfaction in a given situation is strongly influenced by the
prevalent value system.
In the neoclassical conception, values (through preferences) influence
production, but production does not affect values. Institutionalists rec-
ognize the endogeneity of values and production. While home, school,
and church are potent institutions for value formation, the institution
of the workplace may be the most potent of all. In our society the work-
place plays a central role in the determination of individual personality
and capacity and, thus, in the characterization of our culture. Much of
a person's childhood is structured in preparation for employment.
Most ofa person's adult life is spent in the process of production. Peo-
ple tend to identify themselves with their work. Individual and societal
measures of personal success are often defined by workplace perfor-
mance and advancement. Value formation is inherent in productive
participation.
In short, production systems produce more than tangible products
and services. The system of production promotes and reinforces a sys-
tem of personal and societal values. Indeed, while the character and
flow of real income are far from trivial issues, the most important prod-
uct of production may well be not goods but values. And a production
system motivated by greed and aggression will produce a bitter harvest
regardless of what technological advances it fosters. E. F. Schumacher
expressed the concern:
If human vices such as greed and envy are sytematically cultivated, the
inevitable result is nothing less than a collapse of intelligence. A man
driven by greed or envy loses the power of seeing things as they really are,
of seeing things in their roundness and wholeness, and his very successes
become failures. If whole societies become infected by these vices, thC?y
may indeed achieve astonishing things but they become increasingly in-
capable of solving the most elementary problems of everyday existence. 22
Theories of production, like any conjectural statement of knowledge

or proposal for reform, are normative statements, and normative state-
ments are statements of value. Any statement of value will, to some
degree, turn the mind towards and reinforce its referent value system.
Thus, while the level of output, the manner of combining inputs, and
the distribution of production are all important questions, the root
(though subtle) issue addressed by a theory of production is the bene-
ficiality of the referent value system. If greed and aggression are indi-
vidually and societally destructive, then the promulgation of a theory
of production that subtly enshrines greed and aggression in the name
of efficiency is at best an unwise allocation of human capital.
Precis
Theories are suppositions; they are concise conjectures about that

which is to be known. Theories are guides for investigation, markers
suggesting potentially fruitful pathways to understanding. Being en-
lightened, the Buddhas have no theories-they have no need for them.
Economists, on the other hand, have several theories and probably
need more. During the twentieth century it became fashionable to con-
struct theories as deductive manipulations of a set of maintained axi-
oms. Theories so constructed were intended to be cast in a manner
susceptible to verification-or at least falsification-by recourse to ex-
perience (data). Such is the mode of neoclassical economic theory.
If axiomatic deduction (especially of the type susceptible to math-
ematical formulation) is what is meant as theory, then institutional
economics does not have a theory of production, or at least it does not
have one that is readily apparent. However, to limit "theory" to the
domain of axiomatic deduction is reductionistic and far too limiting.
If theory is defined instead as including adductive conjectures by which
hypotheses may be generated, thereby orienting investigators towards
understanding, then institutional economics has a clear and fruitful the-
ory of production. Key components of the institutional theory of pro-
duction are:
• production is a discretionary human enterprise involving the
application of current technology to practical tasks-in particular,
the provision of real income;
• the process of production is defined by and implemented through

the institutional structure of society;
• the system of production is a system of power that manifests itself
only partly through the transactional channels of the market;
• power manifest within the system of production reflects differen-
tially and socially sanctioned property rights and asymmetric access
to information;
• control of the system of production is the predominate determinant

of the distribution of material benefits and risks within the econ-
omy;
• the system of production is unstable and ever-changing because of
the progression of technology and the evolution of personal and so-
cietal values;
• the structure of the system of production influences the formation
and evolution of personal and societal values.
Rocky Ground. Thorns. and Good Soil

Theories are not knowledge, they are only guides toward it. Absent
a legitimate claim of infallible guidance toward wholly reliable knowl-
edge, theoretical stasis implies intellectual stagnation. The early pur-
veyors of institutionalism did not propose that their theories be left
untouched. Intellectual progress requires continued probing. But where
should the seeds of investigation be sown? From whence comes reliable
knowledge?
Neoclassical investigators have chosen to plant in the fields of math-
ematical abstraction. Their harvest has yielded models of analysis that
are simultaneously sophisticated and crude. The appearance of sophis-
tication comes from the gloss of mathematics. Lagrangian formulations
have been replaced by stochastic optimal control. Reaction models are
being reformulated in the mode of game theoretics. Forays have been
made from calculus to set theory to topology. The appearance of crude-
ness, as Paul Feyerabend uses the word, reflects a separation of theory
from the tradition and context of society. As Feyerabend notes of the
process of rationalistic abstraction:
The discovery that abstract concepts which are too poor to ref/ect the pecu-
liarities of any particular tradition and thus seem to be tradition indepen-
dent are linked by abstract relations then suggested a further and more
"objective" way of dealing with the multitude: replace all these forms of
life by a single abstract tradition, accept the "objective" laws of this tradi-
tion and try to prove them by using the abstract relations they contain .
. . . [This) has been accepted by the rationalists and has become a basis
of their faith .... [these relations) are poor in content but rich in deductive
connections. It is interesting to see how readily these [relations) are used
as means of enforcing consent. 23 (emphasis in original)
Succeeding generations of neoclassicalists are demonstrating their ever-

learning new languages does not guarantee that one will have some-
thing more significant to say; in fact one might end up saying less.
If an adequate institutional theory of production is to continue to
evolve, several fields will have to be worked. Four areas are suggested
here. These areas are intended to be suggestive, not exhaustive. First,
the development of at least a rudimentary knowledge of the technol-
ogies of production is essential. It is wishful thinking to believe that
one can provide useful economic advice to the steel industry or the
automobile industry or the computer industry or the public utilities
without at least some reasonable grounding in the system of production
ofthe various industries. Knowledge of the relevant technologies is im-
portant for at least two reasons: (a) awareness of the nature oftechno-
logical change is instructive in making some sense out of the resultant
fire fights and sieges that occur among the participants in the industries
as systems of power are threatened; (b) understanding of the technology
is linguistically beneficial. If one is going to talk to, or at, those in the
front lines of the systems of production, it helps to know something of
the language.
Second, immersion in the corporate culture is beneficial. Production
systems are systems of culture. And the systems of culture are not ho-
mogeneous across industries. The cultural setting of steel mills, medical
equipment manufacturers, and fast food chains are not the same. The
cultural environment involves both the technological setting and the
structure of the organization, which in many of the large-scale corpora-
tions is exceedingly complex. As with cultural anthropologists, field
work is important. Of course, time in the field will not insure wisdom,
but few artists have ever painted passable pictures of trees without
spending at least some time in a forest. Anthropological and sociologi-
cal methods and insights would be useful here, as would greater famil-
iarity with advances in organization theory and management and
decision sciences.
Third, as Wesley Mitchell advised, further inquiry into the "dim in-
ner realm of consciousness" would be useful. Satisfaction is intrinsi-
cally a psychological phenomenon. While models based on faulty

psychological assumptions may be able to provide explanations and
predictions that are statistically robust, they will not prove to be ade-
quate guides for distinguishing the beneficial from the non-beneficial.
The quest for such guides is an inherent part of institutional economics.
Finally, continued attention to the study of values is important. The
question of values as investigated, for example, in ethics, justice, and
moral philosophy, is old and venerable. Economics endeavored to side-
step the quagmire of the metaphysically laden domain of values, but

only succeeded in becoming a proponent of a particular set of values-
materialistic utilitarianism-without undertaking the burden of dem-
onstrating the beneficial superiority of the referent value system. Given
the nineteenth-century context of the evolving debate over value sys-
tems, the rise oflogical positivism and its modernist permutations are
dialectically understandable and (most likely) intellectually healthy.
However, continued attachment to a false or misleading philosophical
construct that has served its dialectical purpose is unhealthy. If eco-
nomics is to continue to evolve and be beneficially instrumental, inves-
tigating the value of alternative systems of values is essential.
The early institutionalists were creative and eclectic outsiders who
drew on a vast domain of intellectual endeavors to provide insight into
the structure, function, and evolving nature of the economy. The need
for eclecticism has not disminished.
Conclusion
For all of its insights, institutionalism does not now hold the high
ground in economics. The corpus of institutional thought is currently
tended by economists who are academic outsiders-both those outside
the elite academic institutions and those outside of the traditional eco-
nomics departments. Institutional economists are not finding their way
on to the President's Council of Economic Advisors, nor are they being
sought out by Businessweek, Newsweek or Fortune to comment on the
current state of the economy. At the annual tribal meetings of the eco-
nomics profession, the tents of the institutionally faithful and curious
are few in number. None of these comments are intended in any way
to disparage either the intellectual vitality of modem-day institution-
alists or the value of their message. Rather it is to note that in today's
marketplace for economics, institutionalism is not a hot commodity.
Why is this so? There are at least four requirements for a school of
thought to remain prominent: a useful set of insights, a means by which
the prelates can convey those insights to the uninitiated, a tool kit for
novices, and an admiring public wil1ing to provide material support.
Institutionalism has valuable insights. However, the insights of insti-
tutional theory tend to be opaque to the non-hermeneutically oriented;
its tool kit does not enable the degree of conspicuous scholasticism at-
tainable by neoclassicalism; and existing power structures prefer jus-
tifications for the status quo. Except in times of deepening crises, the
ceremonial will outsel1 the instrumental. Sir Thomas Gresham would

have understood.
Notes
1. Thorstein Veblen, The Engineers And The Price System, The Portable Veb-
len, ed. Max Lerner (New York: The Viking Press, 1948), p. 449.
2. In this article, the term "institutionalist" is used broadly to refer to the
forms of economic inquiry that have been titled institutional, collective,
volitional, investigational, social, experimental, evolutionary, cultural, ho-
listic or heterodox economics. Various scholars have objected to specifying
an overly broad domain for institutionalism. (See Baldwin Ranson, "AFEE
or AFIT: Which Represents Institutionalism?" Journal ofEconomic Issues
15 (June 1981): 521-29). However, it is the author's opinion that the insti-
tutionalist tradition can be maintained and advanced by those who are not
lineage descendants of Veblen, Commons, Mitchell, Ayres, or Foster.
While a reading of the works of the early institutionalists is instructive,
and even prudent, it is not essential to the formation and promulgation of
ideas enhancing to the body of institutionalism. To hold otherwise is to
risk an intellectual migration from the instrumental to the ceremonial.
3. Allan G. Gruchy, Modern Economic Thought: The American Contribution
(New York: Prentice-Hall, 1948), p. 550.
4. See, for example, Dale W. Jorgenson, "Econometric Methods for Modeling
Producer Behavior," Handbook ofEconometrics, Vol. 3 (New York: North
Holland Publishing, 1986).
5. Traditionally, neoclassicalists have not been overly interested in the inter-
nal structure of the firm. More recently, economists have sought to better
explain the inner workings and structure of the firm by focusing on man-
agerial utility functions, information asymmetries, and the costs of trans-
actions. See Robin Marris, The Economic Theory of Managerial
Capitalism (London: Macmillan, 1974); Oliver Williamson, Markets and
Hierarchy: Analysis and Antitrust Implications (New York: Free Press,
1975).
6. Even the dynamic analytical tools ofneoclassicalism, such as optimal con-
trol theory, have a markedly "static" quality about them.
7. Robert Lekachman, A History of Economic Ideas (New York: McGraw-
Hill, 1976), p. 314.
8. George Stigler, "The Xistence of X-Efficiency." American Economic

Review, 66 (March 1976): 213-16, at p. 215.
9. E.F.Schumacher, Small Is Beautiful (New York: Harper & Row, 1973);
Amory Lovins, Soft Energy Paths (New York: Harper & Row, 1977).
10. See Thomas DeGregori, A Theory o/Technology: Continuity and Change
in Human Development (Ames, Iowa: The Iowa State University Press,
1985). For a critique of DeGregori, see Han Yu Lee and F. Gregory Hay-
den, "DeGregori's A Theory o/Technology: A Review Article," Journal 0/
Economic Issues 20 (September 1986): 799-804.
11. See John Kenneth Galbraith, The New Industrial State, 2d ed., revised.
(Boston: Houghton Mifflin, 1971).
12. See, for example, Adolf Berle and Gardiner Means, The Modern Corpora-
tion and Private Property (New York: Macmillan, 1932); Willard Mueller,
A Primer On Monopoly and Competition (New York: Random House,
1970); John Blair, Economic Concentration (New York: Harcourt Brace
Jovanovich, 1972); WaIter Adams and James Brock, The Bigness Complex
(New York: Pantheon, 1986).
13. See Peter Drucker, The New Society: The Anatomy 0/ Industrial Order
(New York: Harper Torchbooks, 1962), and Galbraith, The New Industrial
State.
14. Clarence Ayres, "Veblen's Theory ofInstincts Reconsidered," in Thorstein
Veblen: A Critical Reappraisal, ed. Douglas Dowd (Ithaca: Cornell Univer-
sity Press, 1958), p. 37.
15. See Christian Leipert, "Social Costs of Economic Growth," Journal 0/Eco-
nomic Issues 20 (March 1986): 109-31.
16. See, for example, F. Gregory Hayden, "Social Fabric Matrix: From
Perspective to Analytical Tool," Journal ofEconomic Issues 16 (September
1982): 637-62; F. Gregory Hayden, "Organizing Policy Research Through
the Social Fabric Matrix," Journal of Economic Issues 16 (December
1982): 10 13-26; and F. Gregory Hayden, "Integration of Social Indicators
into Holistic Geobased Models," Journal of Economic Issues 17 (June
1983): 325-34.
17. See their papers in this volume.
18. See Allan Gruchy, "Corporate Concentration and the Restructuring of the
American Economy," Journal o/Economic Issues 19 (June 1985): 429-39;
and J. Ron Stanfield, "Social Reform and Economic Policy," Journal 0/
Economic Issues 18 (March 1984): 19-44.
19. William Dugger, An Alternative to Economic Retrenchment (Princeton:
Petrocelli Books, 1984); Barry Bluestone and Bennett Harrison, The De-
industrialization 0/ America (New York: Basic Books, 1982); Gar AI-
perovitz and Jeff Faux, Rebuilding America (New York: Pantheon Books,
1984); and Robert Reich, The Next American Frontier (New York: Pen-
guin, 1983).
20. Martin Glaeser, Public Utilities in American Capitalism (New York: Mac-
millan, 1957); Harry Trebing, "Public Utility Regulation," Journal 0/
Economic Issues 18 (March 1984): 223-50; David S. Schwartz, "Idealism
and Realism: An Institutionalist View of Corporate Power in the Regulated
Utilities," Journal 0/ Economic Issues 19 (June 1985): 311-31.
21. See Adams and Brock, The Bigness Complex; Mueller, A Primer on Com-
petition; and Blair, Economic Concentration.
22. E.F. Schumacher, Small Is Beautiful: Economics as if People Mattered
(New York: Harper & Row, 1973), p. 31.
23. Paul K. Feyerabend, Problems of Empiricism-Philosophical Papers, Vol.
2 (Cambridge: Cambridge University Press, 1981) pp. 6,7.

Stevenson 1987

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Stevenson 1987

Uploaded by

Copyright:

Available Formats

Journal of Economic Issues

ISSN: 0021-3624 (Print) 1946-326X (Online) Journal homepage: http://www.tandfonline.com/loi/mjei20

Institutional Economics and the Theory of

To cite this article: Rodney E. Stevenson (1987) Institutional Economics and

To link to this article: http://dx.doi.org/10.1080/00213624.1987.11504712

Published online: 05 Jan 2016.

Submit your article to this journal

View related articles

Citing articles: 2 View citing articles

Full Terms & Conditions of access and use can be found at

Institutional Economics and

As ye sow, so shall ye reap.

In espousing a theory of production, one seeks to explain the nature

through a concept of production-and a set of values manifest through

services for the satisfaction of human wants."3 For the institutionalists,

thetical equilibrium outcomes.

The Neoclassical Construct

outputs. By itself, the production function is an engineering statement

of production functions and their duals. 4

Institutional Theory and the Process ofProduction

extensively, delineating an institutionalist theory of production is not

enucleates holistically occluding ductile monocotyledonous redaction.

The Institutional Critique of Neoclassicalism

The role of neoclassical critique in heterodoxy cannot be overstated.

a theory of error."8 Institutionalists point out that the neoclassicalists'

tutional structure. For the institutionalists, neoclassicalism is too con-

The Instrumental/Ceremonial Dichotomy

the real or tangible values of the industrial system-tangible commod-

and Peirce led to Clarence Ayres's famous dichotomy of the instrumen-

The Role of Technology

cause vested interests wedded to ceremonial and pecuniary values

als and society is precariously close to a materialistic utilitarian system

Motivations and Psychology

While the behavior of the neoclassicalists' economic person can be

Veblen's explanation of the system of production is rooted in his con-

businesspeople and turning it over to the engineers, he was seeking to

straints. Satisficing and attenuation imply a balance of attending to self

Power, Property Rights and Information

for discretionary authority. Those who own property have discretion

The control of information is a reinforcing consequence of power. In

Production and Distribution

can arise in the absence of fair shares, institutionalists such as Com-

tervailing the discretionary power of big business. Others, however, ad-

Production and Consumption

inforcement of consumer wants-including the promotion of

Production and Efficiency

Various institutional economists have questioned the standard of

Proposals for Reform

group of institutionalists believes the best remedies for market power

Production and Values

Theories of production, like any conjectural statement of knowledge

Theories are suppositions; they are concise conjectures about that

• the process of production is defined by and implemented through

• control of the system of production is the predominate determinant

Rocky Ground. Thorns. and Good Soil

Succeeding generations of neoclassicalists are demonstrating their ever-

cally a psychological phenomenon. While models based on faulty

step the quagmire of the metaphysically laden domain of values, but

ceremonial will outsel1 the instrumental. Sir Thomas Gresham would

8. George Stigler, "The Xistence of X-Efficiency." American Economic

You might also like