Showing papers in "Journal of Economic Issues in 1996"

Uncertainty and the Institutional Structure of Capitalist Economies Remarks Upon Receiving the Veblen-Commons Award

Abstract: In this working paper Distinguished Scholar Hyman P. Minsky explores the theoretical and practical causes of today's rising economic uncertainty and insecurity. He begins by noting views of uncertainty held by Keynes and adherents of the new classical economics by comparing Keynes' The Treatise on Probability and Sargent's Bounded Rationality in Macroeconomics. According to both views, decisions are made by agents based on varying degrees of ignorance and supposition; the agents have a more or less limited amount of knowledge and base their judgements on their own idea of how the economy works (their "model of the model"). In addition, agents are not homogeneous but have differing abilities and histories. Thus the internal models used to guide decisions are not consistent from agent to agent. Minsky notes that although according to Sargent's concept of bounded rationality all agents at any one time need not be acting according to mutually consistent models, Sargent ignores a point stressed by Keynes about the decision-making process: Economic events at any one time are the result of past mental models (and corresponding actions and expectations), and those past models are different from current models (and correspondingly different actions and expectations); therefore, factors that might determine long-term expectations are in a continuous state of flux. Despite this difference, the gap between the ideas of the two schools of thought have narrowed. Minsky points out that capitalism in the United States is an ever-evolving construct that recently entered a new stage: money manager capitalism. In this form of capitalism, nearly all businesses are organized as corporations; pension and mutual funds are the predominant owners of financial assets; and managers of these funds are judged solely on the total return on fund assets (dividends and interest plus appreciation in share value). One consequence of the money manager structure is predominance of short-run considerations in decision making. Historically, the public has had limited tolerance for uncertainty. During the New Deal era this intolerance led to the creation of institutions and arrangements to reduce uncertainty and create transparency in both financial markets and corporate governance. For example, crop insurance set floors to farmers' incomes, and deficits run by the federal government set floors to aggregate profit flows. However, the focus of money manager capitalism on short-run returns and uncompromised profit margins has increased economic uncertainty at the firm and plant levels through the chronic need to reduce overhead and variable costs. These activities have unraveled the traditional relationships between firms and workers and increased economic insecurity among employees. Minsky asserts that since existing institutions and arrangements cannot contain this uncertainty, new institutions and arrangements must be created to offset the effects felt by the "losers" in the gamble imposed by uncertainty. Such measures are necessary to prevent these individuals from becoming alienated and hence recruits for an alternative to democracy. Accepting the view of Henry Simons that the focus of economic policy is not narrowly the economy but rather to "assure that the economic prerequisites for sustaining the civil and civilized standards of an open liberal society exist," Minsky suggests that full employment programs analogous to certain New Deal programs (the Works Progress Administration, the Civilian Conservation Corps, and the National Youth Administration, for example) should be considered to meet these goals. How would such programs be financed? According to Minsky, the U.S. economy has ample resources, but the question is one of how willing we are to mobilize these resources, that is, to tax and borrow for such projects. For example, welfare in its current form (AFDC and food stamps) exists because it is the cheapest way (short of a policy of doing nothing at all) to take that ratio care of the population in need. Full employment policies are more humane but more expensive and require a larger and more innovative public sector. For government to institute programs to offset the uncertainties of money manager capitalism, it must validate government debt with government revenues. The current high rate of government debt to gross domestic product (GDP) is the result of the irresponsible fiscal policies of the 1980s; a responsible program would assure the decline of the ratio of federal debt to GDP over time from its current 65 percent to about 50 percent. The reduction could be accomplished by transforming the tax structure to a value-added revenue system in which, for example, the individual income tax is replaced by a progressive consumption tax with broad bands and a high per person deduction and value-added taxes are levied on production or distribution and on imports. Imposing such a revenue system would allow the United States to transform its economy from one based on transfer payments to a full employment economy, from one that generates resentment to one that maintains commitment to democracy.

The End of Work: The Decline of the Global Labor Force and the Dawn of the Post-Market Era

Abstract: (1996). The End of Work: The Decline of the Global Labor Force and the Dawn of the Post-Market Era. Journal of Economic Issues: Vol. 30, No. 4, pp. 1219-1221.

The Sociology of Money: Economics, Reason and Contemporary Society

Abstract: (1996). The Sociology of Money: Economics, Reason and Contemporary Society. Journal of Economic Issues: Vol. 30, No. 4, pp. 1209-1212.

The Household as a Focus for Research

Abstract: (1996). The Household as a Focus for Research. Journal of Economic Issues: Vol. 30, No. 1, pp. 143-159.

Urban Sprawl as a Path Dependent Process

Abstract: (1996). Urban Sprawl as a Path Dependent Process. Journal of Economic Issues: Vol. 30, No. 2, pp. 609-615.

Is a Transaction a Transaction

Abstract: (1996). Is a Transaction a Transaction? Journal of Economic Issues: Vol. 30, No. 2, pp. 413-425.

Basic Income, Inequality, and Unemployment: Rethinking the Linkage between Work and Welfare

Abstract: (1996). Basic Income, Inequality, and Unemployment: Rethinking the Linkage between Work and Welfare. Journal of Economic Issues: Vol. 30, No. 2, pp. 399-406.

Institutional Inquiry: The Search for Similarities and Differences

Abstract: A recent article by Hans Lind has served a useful purpose albeit perhaps a different one than he intended. Lind asserts that institutionalist method is best characterized by defining it negatively as "not using certain methods" common in mainstream economics, namely econometrics and mathematical modeling. He goes on to observe that "the institutionalists in my sample do not use any special methods of their own" [Lind 1993,13]. This charge that institutionalism has no methodology (unique or not) is serious. As Lind notes, a school of thought must have a common method of research. The useful purpose served by Lind's paper is to encourage theoreticians and practitioners of institutionalism to reflect upon what their methodology actually is. Lind's assertion is reminiscent of the debate during the latter part of the nineteenth century known as the "Battle of Methods," or methodenstreit, which raged between the historical school and the marginalists. The marginalists, representing mainstream economics, claimed that the historical school had no methodology and were atheoretical. In Joseph Schumpeter's [1954, 814] description, "this not only created a lot of bad feeling but also set running a stream of literature, both of which took decades to subside.... the history of this literature is substantially a history of wasted energies, which could have been put to better use."

Taylorism, John R. Commons, and the Hoxie Report

Abstract: (1996). Taylorism, John R. Commons, and the Hoxie Report. Journal of Economic Issues: Vol. 30, No. 4, pp. 985-1016.

Capabilities, Routines, and East European Economic Reform: Hungary and Poland before and after the 1989 Revolutions

Abstract: (1996). Capabilities, Routines, and East European Economic Reform: Hungary and Poland before and after the 1989 Revolutions. Journal of Economic Issues: Vol. 30, No. 4, pp. 1031-1056.

In Defense of the Minimum Wage

Abstract: (1996). In Defense of the Minimum Wage. Journal of Economic Issues: Vol. 30, No. 2, pp. 391-397.

Gender Differences in the Russian Labor Market

Abstract: (1996). Gender Differences in the Russian Labor Market. Journal of Economic Issues: Vol. 30, No. 1, pp. 161-185.

Coase, Costs, and Coordination

Abstract: tion-in particular, markets, firms, and governments-have always occupied a place at the center of economic analysis, albeit with differential degrees of positive and normative emphasis among them at different times and by different schools, relatively little attention has been devoted to the examination of the underpinnings of these mechanisms. This has several implications. First, economic theory offers little in the way of explanation for how these mechanisms function and why they function as they do. Second, there has been, until recently, little offered by way of explanation for the observed pattern of coordination within the economic system and, in particular, why certain activities are coordinated in different ways (e.g., market versus firm, short-term versus long-term contracts, etc.). Third, and reflective of the foregoing, economic theory offers little basis for the normative analysis of and choice among alternative instruments of coordination. For Ronald Coase, issues such as these are at the heart of economic analysis, one of the central functions of which, in his view, is to understand and to make policy recommendations regarding the appropriate institutional structure of production and exchange-the mechanisms through which production and exchange are to be coordinated. In this essay, I will attempt to outline Coase's contributions in this regard and evaluate their import for economic analysis. While Coase has by no means

A New-Institutionalist Story about the Transformation of Former Socialist Economies: A Recounting and an Assessment

Abstract: (1996). A New-Institutionalist Story about the Transformation of Former Socialist Economies: A Recounting and an Assessment. Journal of Economic Issues: Vol. 30, No. 1, pp. 243-265.

The Social Gospel, Ely, and Commons’s Initial Stage of Thought

Abstract: As John R. Commons rose out of the 1890s to success in the twentieth century as an institutional economist, his thought evolved through several stages. Much is known about the last stages that include his ideas in his Legal Foundations of Capitalism and Institutional Economics. His beginnings, however, lie in darkness, partially illuminated by his autobiography, Myself [1934], and the research of Dorfman [1949; 1965a; 1965b], Harter [1962], and Mayhew [1987]. These works reveal inter alia that he then had strong religious convictions. Questions arise. When was the initial stage? Did his religious beliefs affect his economic thought? Did his ideas then make up a coherent whole? Is the initial stage significant: does it make more understandable the later stages of his thought? This essay argues several theses. First, the initial stage ran from 1882 until 1894, a period when Commons entered the social gospel movement and became Richard T. Ely's disciple and protege. Second, Commons's social gospel principles were fundamental: they imparted coherence to his work, creating his social welfare criteria, leading him into Christian socialism and Christian sociology, affecting his political economy and causing it to attend to the role of institutions and the social relations they enforce, and, via all of the foregoing, determining his policy proposals and his plan to enact them. Third, this initial stage is significant, for it can explain his subsequent work from 1894 to 1899, and it can roughly account for parts of the post-1899 stages.

Development, Gender, and the Environment: Theoretical or Contextual Link? Toward an Institutional Analysis of Gender

Abstract: The current discourse on development, gender, and the environment has emerged from a convergence of feminist and environmentalist critiques of economic development. 1 This discourse is dominated by two paradigms: Women in Development (WID) and ecofeminism.2 Although the two paradigms have been influential in advancing women's issues in economics, this influence has been limited by the lack of understanding of the institutional nature of gender among the proponents of the paradigms. This lack of recognition is due to the essentialist characterization of women that underlies both paradigms. In WID, women are treated as rational beings who readily respond to economic incentives within any cultural setting; in ecofeminism, women possess a supra-material bond with nature that endows them

A Brief History of Work

Abstract: Even a brief history should begin at the beginning. God said to Adam, "In the sweat of thy face shalt thou eat bread, till thou return to the ground" [Genesis 2:3]. As a later Adam, Adam Smith, would put it, work was toil and trouble. Even in the beginning, work as toil and trouble was contrasted with leisure, ease, or rest, and thus "God blessed the seventh day and sanctified it: because that in it he had rested from all his work" [Genesis 3:19]. Adam Smith also emphasized another important conception of work as "the real price of everything," since it is through work that natural objects are transformed into things that people need or want. Thus, "What everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people" [Smith 1937, 30-1]. This elision of use value and exchange value (as we would now say) has been central to the subsequent demise of the labor theory of value, the notion of work as the standard by which all goods are measured. It is interesting that if we go back two millennia to Aristotle, we find these ideas sharply distinguished. Aristotle distinguished economic acquisition, characteristic of the household, from chrematistic acquisition, directed at the marketplace. These correspond closely to modem conceptions of use value and exchange value. Whereas Aristotle held that "the amount of household property which suffices for a good life is not unlimited," he also saw that the second form of acquisition "leads to the opinion that there is no limit to

Mexico: Financial Fragility or Structural Crisis?

Abstract: (1996). Mexico: Financial Fragility or Structural Crisis? Journal of Economic Issues: Vol. 30, No. 2, pp. 451-461.

Racial Discrimination in Residential Lending Markets: Why Empirical Researchers Always See It and Economic Theorists Never Do

Abstract: A fundamental disagreement exists between empirical researchers who have evaluated home mortgage market data and mainstream microeconomists who have theorized about discrimination in credit markets. Empirical researchers see evidence of racial discrimination in virtually every study they conduct. They argue that whether one looks at the disparity between black and white applicant rejection rates, the shares of loans going to black and white neighborhoods, the number of banks in these neighborhoods, results from regression analysis, or a variety of other measures, the result is the same: residential mortgage markets are characterized by large racial disparities that are neither explained by income nor other economic and social variables. In short, these researchers conclude that these disparities constitute evidence of racial discrimination. Conversely, economic theorists never see evidence of racial discrimination in the

International Financial Instability and the Financial Derivatives Market

Abstract: The financial derivatives market evolved rapidly in the 1980s in response to the deregulation of financial markets and financial innovation. Encompassing futures, options, currency swaps, and interest rate swaps, this market has grown to a value of more than $8 trillion in outstanding contracts. While these financial innovations have assisted business enterprises in hedging risk, they have also created conditions for heightened financial fragility on an international scale. The rapid growth of the derivatives market has been accompanied by a lag in instituting regulatory controls that would limit the destabilizing impact of these new financial innovations. Since many derivatives involve cross-border trading, the derivatives market has led to increased international financial fragility and the attendant need for greater supranational governance of derivatives. To explore these themes, I will use a monetary theory of production provided by institutionalist economic theory.

Innovation, Economics and Evolution: Theoretical Perspectives on Changing Technology in Economic Systems

Abstract: (1996). Innovation, Economics and Evolution: Theoretical Perspectives on Changing Technology in Economic Systems. Journal of Economic Issues: Vol. 30, No. 4, pp. 1198-1199.

Holism and Collectivism in the Work of J. R. Commons

Abstract: Recent years have witnessed a considerable resurgence of interest in institutional economics, much of which has been generated by contributions going under the heading of "new institutional economics."1 Although it is difficult to impose any precise programmatic unity upon these contributions [Coates 1986; Maki 1987], it is certainly possible to discern various important commonalities. Most significantly, as other commentators have already pointed out [e.g., Hodgson 1989; Rutherford 1989, 1994], new institutionalist writers share an adherence to some form of individualism. That being the case, however, it warrants emphasis that the precise form of the individualism at work in new institutionalist contributions is rarely spelled out. Rather, the usual strategy is to distinguish and criticize positions understood to be alternatives to individualism such as holism and collectivism. Of particular interest here is the fact that when examples of such supposedly untenable alternatives to individualism are cited, the work of J. R. Commons is frequently referred to. Commons's work is referred to because it is held to exemplify certain errors that are to be transcended. Thus, although new institutionalists often incorporate or express sympathy toward some of Commons's specific ideas (an obvious example being Williamson's [1975; 1985] use of the "transaction" as the basic unit of analysis), their main objective is to define their own general methods and concerns as being in direct opposition to those of Commons. The purpose of this paper is basically twofold. First, I want to argue that the new institutionalist contributions misrepresent Commons's actual writings. That is, they tend to set up a "straw-person" interpretation of Commons.2 Second, I wish to offer some explanation of the identified misrepresentations. More specifically, in the

Stock Markets, Rentier Interest, and the Current Mexican Crisis

Abstract: (1996). Stock Markets, Rentier Interest, and the Current Mexican Crisis. Journal of Economic Issues: Vol. 30, No. 2, pp. 443-449.

Sovereignty in Transaction Cost Economics: John R. Commons and Oliver E. Williamson

Abstract: This paper compares and contrasts the concept of sovereignty as developed by the founder of transaction cost economics, John R. Commons, and as later rediscovered and redeveloped by Oliver E. Williamson [Dugger 1979, 1980, 1983, 1987, 1990, 1993]. For both Commons and Williamson, sovereignty is the authority to settle disputes between transactors, thereby creating order. Sovereignty is extremely important to the work of both [Commons 1961, 1964, 1968, 1970; Williamson 1975, 1981, 1984, 1985, 1990]. In the theory-forming stages of their lives, each tried to get new kinds of transactions accepted within state sovereignty. Commons worked on behalf of the collective bargaining transactions of labor unions and on behalf of the rationing transactions of various industrial boards. Williamson worked on behalf of the merger and acquisition transactions of various corporate conglomerates and on behalf of the hierarchical prerogatives of corporate management. Both were advocates pushing against a disapproving judicial system.

The Origins of the a Priori Method in Classical Political Economy: A Reinterpretation

Abstract: (1996). The Origins of the a Priori Method in Classical Political Economy: A Reinterpretation. Journal of Economic Issues: Vol. 30, No. 4, pp. 1105-1125.