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«Inaugural-Dissertation zur Erlangung des Doktorgrades des Fachbereichs Wirtschaftswissenschaften der Johann-Wolfgang Goethe-Universität Frankfurt am ...»

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2.3.2.1. Evolutionism and holism A leading principle of American Institutionalism is to treat economic processes as evolutionary. Thorstein Veblen was a main protagonist of this approach. He regards actors as part of an evolutionary process and as such not as fixed or given but institutionally and socially shaped.95 Also, he considers changes in the relation between individuals and institutions as essential for social reality. Social change is not purely mechanical, but a product of human action which is formed and guided by the society and the institutions within.

Institutionalism for Veblen is therefore founded upon an evolutionary conception of economics in making a distinction between the pre-Darwinian, Newtonian mechanistic character of economics and a post-Darwinian one based on causation. Veblen uses evolutionary concepts from biology to describe economic phenomena. He also introduced the idea of ―cumulative causation‖, rejecting the assumption of a static equilibrium and focusing on continuous economic change as a causal process. He defines it as follows: ―The economic life history of the individual is a cumulative process of adaptation of means to ends that cumulatively change as the process goes on, both the agent and his environment being at any point the outcome of the past process".96 Veblen aimed to rebuild ―economics by use of evolutionary concepts and metaphors taken from biology‖.97 He defines evolutionary science as an analysis of (non-teleological) processes of cultural growth and the cumulative change of economic institutions. It is thus a theory of an economic life process.98 For him, economics should be a science of constant change, having no final term and without a selfbalancing mechanism.

For Veblen, orthodox economics considers an individual as having ―neither antecedent nor consequent. He is an isolated definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another….When Kiong and Kee, 1998, p. 87.

Amable, 2003, p. 9.

Hodgson, 2002, p. 95f.

Veblen, 1898, p. 391, also p. 387 and similar in Veblen, 1964 [1919], p. 597.

Hodgson, 2004, p. 59.

Lawson, 2005, p. 15f., Veblen, 1898, p. 393f.

the force of the impact is spent, he comes to rest, a self-contained globule of desire as before‖.99 In evolutionism, individuals are treated as being embedded in their institutional surrounding; they therefore take their objectives from the institutions they find in their environment. But although these institutions are relatively stable, they are also subject to continuous changes, because they are displaced by new ones that better fulfill their purpose.100 Institutions are seen as cumulatively self-reinforcing and are therefore regarded as analog to the gene, for both are subject to the forces of mutation and selection. Institutions experience positive feedback because, by virtue of their ability to self-reinforce they create locked-in situations (to use a modern term) which make them sufficiently stable units of selection in the evolutionary process. Institutional change happens not as a result of choice, but because of a development that leads to new patterns and ways of thinking replacing the old ones. It is therefore gradual and adaptive. ―The capabilities and attitudes of an individual were congealed in his or her habits, acquired in activity and social interaction with others. Human behavior is largely a matter of institutional coercion and constraint‖.101 Veblen is thus mainly concerned with the way in which human beings in certain societies and cultural surroundings develop and change over time.102 Hence, institutional economics can have the capacity to explain the phenomenon of institutional change (see also in 2.4.).103 In contrast to the above analysis, many institutionalists also use an instrumentalist approach, claiming that processes are intentional more than unintentional, and that they play an important role for society. This approach was mainly developed by John Dewey, who treated theories as instruments or tools capable of modifying the social environment of human beings.104 These tools are evaluated with respect to the consequences of their implementation; instruments are valued by their effectiveness in solving social problems.

Instrumentalism removes the difference between science and metaphysics insofar as it defines a set of values as the goal to be reached, and as in science assesses theories by their ability to fulfill these goals.105 Dewey‘s instrumentalism can be defined in the following way: It ―is an attempt to constitute a precise logical theory of concepts, of judgments and Veblen, 1898, p. 389.

Lawson, 2005, p. 17.

Hodgson, 2002, p. 96.

Lawson, 2005, p. 16.

Bush, 1987, p. 1075.

John Dewey (1859-1952) was an American philosopher, psychologist, and educational reformer. He was, along with Charles Peirce, one of the founders of American pragmatism. Together with others like the economist Thorstein Veblen Dewey is one of the founders of The New School for Social Research in New York.

Mirowski, 1987, p. 1014-1018.

Bush, 1987, p. 1078-1080.

inferences in their various forms, by considering primarily how thought functions in the experimental determinations of future consequences... it attempts to establish universally recognized distinctions and rules of logic by deriving them from the reconstructive or meditative function ascribed to reason‖.106 J.R. Commons, one of the founders of American Institutionalism, calls this process an ―artificial selection of the plant or animal breeder rather than that of natural selection‖.107 Intended, and thus purposeful, changes of artificial selection help to control evolution according to society‘s ideas of fitness.108 In his view, institutional change also helps to solve conflicts and guarantees the sustainability of the whole system over time.





Veblen was more influenced by Charles Peirce,109 and in contrast to Dewey regards science not as a tool to control the dynamics of social change, but rather as something that provides critical insight into it. For him, an idea has to be analyzed for its meaning, not tested for its validity. He suggests that institutional change is an unintentional process.110 Another major element of American institutional economics is to focus on pattern of relations between part and whole, therefore striving for a holistic approach to models and theories. Holism as a concept originates from the book Holism and Evolution by Jan Christiaan Smuts of 1926, who derived it from the Greek word holos meaning ‗whole‘.111 He applied it to categorize a new type of evolutionary or dynamic theory in the natural sciences, for example Darwin‘s theory of evolution of 1859. This kind of theory replaced the mechanistic scientific theories à la Newton, which are static and deterministic.

Holism implies that the physical world be seen as an evolving dynamic whole. This whole is supposed to be greater than the sum of its parts, and the relations among the parts condition their functioning. A holistic model ―emphasizes the interconnectedness or unity of the system‖ and the ―primacy of subject matter over method‖, in the sense that whatever method is being used, it should be an adequate description of what is analyzed.112 For holists, reality cannot be explained using universal law-like statements, and so institutionalists favored the introduction of the holist philosophical orientation to economics.

Thayer, 1981, p. 169.

Rutherford, 1998, p. 250.

Commons, 1934, p. 45 and 120.

Mayhew, 1987, p. 977. Charles Sanders Peirce (1839-1914) was an American logician, mathematician and philosopher. Today he is largely appreciated for his contributions to logic, mathematics, philosophy, semiotics and American pragmatism, for which he was largely unrecognized in his lifetime. Mirowski, 1987, p.

1007-1014. His definition of pragmatism reads as follows: "Consider what effects, that might conceivably have practical bearings, we conceive the object of our conception to have. Then, our conception of these effects is the whole of our conception of the object". Peirce; Hartshorne and Weiss, 1934, p. 1.

Dugger, 1990, p. 428.

Smuts, 1926, Wilber, 1978, p. 73.

Wilber, 1978, p.75 and 80f.

For institutionalists reality is a process of evolutionary change driven by the interaction between the parts of a system and its whole, meaning that one certain aspect cannot be isolated from its social surrounding. Social reality is seen as an organic unity, where the parts cannot be explained without referring to the larger whole to which it belongs.

To illustrate this Wilber and Harrison quote an example from Robert Heilbroner regarding the functioning of markets in an unnamed developing country.113 He demonstrates that two superficially similar parts of different systems –markets – can in fact vary quite markedly. To improve living conditions in a developing economy and to make its markets more efficient experts in economic development replaced the traditional peasant market, where prices are set by bargaining, with a fixed-price supermarket. This new type of market was not accepted by the population, because this supermarket could not satisfy consumer needs that included haggling as significant part of the social interaction provided by the institutional environment. This illustrates that supposedly similar elements, in this case markets, exhibit very different functions in different systems. However, this example does not only apply to developing countries. Phenomena of this kind have to be reproduced in a more complex model that places strong emphasis on habits.

Holism tries to capture these differences in its models. It stresses the importance of comparative institutional analysis including a broad variety of factors in its models. It confirms that prediction cannot be seen as the only form of verification for economic theories as is the case in mainstream economics, but rather looks for an adequate causal explanation. Thus, institutionalists carefully locate human behavior in a pattern that explains the processes of change in a whole system. For them, society is more than ―just a group of independent actors‖; rather they act within ―sets of social conventions and norms‖ defining objectives and roles.114 This cannot be explained solely from an individualistic point of view. For holists, economics is seen as an evolving system, characterized by a general interdependence of ―cumulative causation‖.115 Holism is therefore about understanding and explaining, not predicting.

To construct holistic explanations, institutionalists use the participant-observer method.

The subject matter is a particular social system of any scale, but which has to be a unique unified whole. The system can be a family, a society, a formal organization or even a whole historical epoch. First of all, the theorist has to socialize herself with the system so that she might become a participant and hence to be as close as possible to it. In this posiWilber, 1978, p. 79f., quoting a lecture given by Robert Heilbroner in 1972.

Rutherford, 1998, p.250.

Veblen, 1898, p. 378.

tion the researcher can obtain a wide variety of information about interrelations of themes that matter to the system. These themes addressed can be an accepted practice, for example a ceremony, a cultural norm such as the importance of consumption, or a particular mode of production, like Capitalism.

As an observer, the researcher looks for themes that illuminate the whole system and demonstrate its unity. Universal statements are consequently unsuited for describing such a specific system. Instead the theorist has to construct hypotheses from the information she has obtained as participant. This is a somewhat arbitrary process, since it depends strongly on the themes the researcher encountered while undergoing socialization. The hypotheses are tested with as much data as possible, gained from previous case studies or other survey data. The evidence is cross-checked to evaluate the plausibility of the initial interpretations.

The hypothesis is valid as long the evidence does not call its validity into question. During that process the interpretation becomes increasingly accurate, and a complex picture of the subject matter is built up.

The shortcoming of this process is that it can only produce varying degrees of plausibility; instead of being rigorous and delivering a precise prediction as a model in mainstream economics. The final stage of the process is actually building the model, taking the form of pattern models. "The institutionalist paradigm focuses upon...a holistic and evolutionary view of the structure-behavior-performance of the economy…in a system of general interdependence or cumulative causation". This definition could also serve as a summary of holism.116 2.3.2.2. Pattern models Pattern models seek to explain human behavior within its institutional and cultural context. This type of model is sometimes also called ―concatenated‖, in contrast to hierarchical, formal models.117 Abraham Kaplan defines a concatenated theory as one ―whose component laws enter into a network of relations so as to constitute an identifiable configuration or pattern‖.118 A pattern model consists of components forming a particular pattern, which in this context means it shapes a social reality described in its natural setting. A specific pattern can also be conceived as a culture whose components tend towards some central point, namely an institution. Emphasis is placed on interrelationships within a system.

Wilber, 1978, p. 73.

Kaplan, 1964.

Kaplan, 1964, p. 298.



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