Institutional Economic Theory Economics 451 University of Missouri-Kansas City

1. Institutional Economic Theory Economics 451 University of Missouri-Kansas City

2. Generalizations Regarding Ceremonial Behavior Although there is enormous diversity of ceremonial patterns of different societies in different parts of the world, and also great differences in ceremonial patterns of the same society over time, as, e.g., the differences between ancient and modern Italian society, nevertheless, it is possible to identify some major features of ceremonies. 1. Power, authority, class inequality, rank, status, superior/ subordinate are based on the ceremonial aspect and all purport to rest on differences in competence and hence are quasi-technological; Veblen described this as "ceremonial adequacy."

3. Norms justify and sanctify the above. Some are deemed of major importance to the welfare of society - a prosperity code - and observance of these is binding on all members. The norms determine friends/enemies, right/wrong, good/evil, and such. They also purport to rest on tested, quasi-technological, standards. •  3. Preliterate societies had legends, mythical stories to authenticate the above. These tend to evolve into ideologies/theologies under the supervision of professional or semi-professional • functionaries, e.g., religious theologies; secular ideologies, as, doctrines of capitalism and fascism.

4. Emotional conditioning paves the way to emotional arousal when appropriate symbols are invoked. Emotional confirmation tends to reinforce ideological commitment. Thus, although Marxism and capitalism are primarily secular doctrines, emotional commitment raises them to the level of religious commitment on occasion. Modern commitments to nationalism and economic ideologies make them more significant than religious commitments, and also make them the most dangerous sources of conflict. • Legitimacy is conferred by ritual and ceremony. • 6. Ceremonies are past-binding and involve combined continuities and discon­tinuities with antecedent ceremonies. • .

5. The method of knowing, or arriving at the validity of ceremonial values: tradition, authority, self-evident truths, faith. • 8. The inequalities and authority defined by ceremonies are usually supported by the socialization process. Every society possesses a set of social traditions, beliefs, and habits that are deemed necessary, revered, and faithfully taught to each oncoming generation. "Norms" are standards for such judgments as right and wrong, truth and falsehood, beautiful, ugly. The norms and mores teach belief in the correctness of the inequalities of authority. When nations began to adopt public education systems, they were rapidly turned into instruments for teaching patriotic allegiance to the state, the prevailing economic institutions and, in countries that support religious schools, religious organizations.

6. 9. The ceremonies form a network of means of which they support and reinforce each other. Family indoctrination teaches respect and reverence for church and nation, and church and state support family. ceremonies support great inequalities between humans and, its beneficiaries or vested interests have the strongest of reasons to support and perpetuate the status quo. • One of the most powerful reasons ceremonies are past-binding and resistant to change is that the entire population has been taught to believe in the truthfulness and worthiness of it’s ceremonies. It is seen as a prosperity code whereby society prospers if it holds fast to the traditional way of life, but calamity and decline befall the society that departs from tradition. In addition, vested interests have a supreme incentive to perpetuate arrangements of which they are the chief beneficiaries. They usually exercise a major influence over communication systems, including educational ones. • Our medieval ancestors found no intellectual difficulty in holding to the conviction that a minority of people - monarchs, nobles, and clergy - should control the majority in all of the affairs of life. It was "obvious" to them that some kinds of people should dominate others.

7. 9 continued • Beginning in the 18th century, intellectual inquiry questioned traditional authority as it had never been questioned before, and this questioning has continued more or less actively ever since. But the process has not ushered in an egalitarian society by any means, and has not, by some standards, ushered in a really functional political democracy. Notwithstanding our tradition of questioning authority, there is practically universal acceptance of the belief that it is "obvious" that those who possess money should dominate the economy.

8. 10. Although ceremonies tend to resist change, they do change. Most change (major) is due to the fact that technological innovations change the environment over time to such a great extent that the traditional ceremonies ceases to function effectively. To cite two revolutionary times: the technological revolution that ushered in domestic plants and animals brought with it such extensive changes in the environment, that most ceremonies underwent major changes, although in some cases they were modifications of antecedent ceremonies. The technology that ushered in the industrial society also changed the environment so greatly that traditional ceremonies became dysfunctional by way of conflicting with the requirements of industrial activity, and were modified significantly although, again, the new ceremonies were modifications of antecedent ceremonies

9. The ways of knowing in the ceremonial realm are different from the ways of knowing in the realm of science and technology. The surest path to truth, according to medieval European thought, was by faith in the authority of the holy book, and by revelation, divine inspiration. Confidence in tradition as a path to truth seemed confirmed by the fact that tradition had been a sure and reliable guide to humans from time immemorial; its longevity was evidence of its truth. In every stable society some ideas are so widely accepted without question that they are seen as self-evident truths, truths that could be accepted a priori as the foundation upon which to build systems of thought. These would be concepts, held to be beyond challenge because they are held by faith, rest on authority (divine or otherwise), and achieve the status of self-evident. They are also seen as absolute, final, eternal, truths.

10. 12. ceremonies are especially resistant to change when there is a populous society with long-standing and entrenched traditions. There are situations, however, in which ceremonies are comparatively weak or fragile and, where they offer comparatively little resistance to change. A frontier is a place where ceremonies are likely to be weak, permissive, and offer less resistance to change. All populations, as in some of the Pacific Islands, often see their ceremonies shattered when outsiders with more formidable technology impose control. The question of whether ceremonies may make a positive contribution to change, facilitate change, is controversial and will not be considered here.

11. ceremonies are not simply non-technological, they are pseudo-technological, in the sense that they purport to be functional. They purport to 'make-possible' some essential activities and outcomes upon which the well-being of the society depends. Thus, the semi-divine pharaohs subsequently provide abundant crops: correct religious observances are followed by planting, cultivating and harvesting and abundant crops. The fact that desired consequences follow correct religious practices are seen as proof of the efficacy of the ceremonial practices and hence the correctness of valuing these ceremonies. • 14. The path to truth in the realm of technology is probably as old as the ceremonial path to truth, and took the form of discoveries and inventions, accidental or otherwise, of a tool-making-using character.

12. 15.Since every set of ceremonies provides for or defines inequalities, ranks, statuses, it is quite understandable that those who are better off in the social hierarchy should seek to perpetuate it for themselves and their children. Those in the middle and upper social/economic classes in our society teach their children the importance of acquiring knowledge and skills that will enable them to enjoy the same benefits. They are strong advocates of the prevailing system of authority and preach its merits and belong to interest groups that promote the system.

13. 16. The norms and mores are not commands in the sense that statutes and laws coming from legislatures and judicial bodies are. They exercise the influence they do because they are part of a cultural stream going far back into the history of a society; they have tradition on their side, and they seem to people to be part of immemorial belief. They owe their strength to the fact that they have become a deeply entrenched feature of social life and organization, and that is one reason why they are so tenacious, so enduring, and so difficult to change. Some of our norms and mores have their roots in antiquity as the predominance in our society of the Judeo-Christian tradition, our system of private property, our intense competitiveness, and our belief in the use of military methods to resolve conflicts. Modern "political" democracy is quite young, seen in terms of the history of civilizations, yet soon after the American revolution and subsequent adoption of a Constitution, legend-building began.

14. 17. All ceremonies are in practice different mixtures or combinations of traits. We may say that this activity is predominantly ceremonial, and that predominantly technological, but we are unable, in view of present knowledge, to assign a verifiable quantitative score to them. • 18. Some ceremonies are more functional, permissive, or less dysfunctional than others. Thus, large numbers of children were once seen as functional both from the point of view of individual families and society. Now, while having many children may be seen as functional from the point of view of the family, they are coming to be seen as dysfunctional from the point of view of society. Poverty has been growing in some parts of the world in the 20th century, as in most of Africa, and in parts of Asia. Population is growing in that part of the world faster than economic growth, and poverty become more widespread. Furthermore, population imposes great strain on the environment, especially where the environment is fragile.

15. Technology • 1. Technology is a learned aspect of human behavior. It forms correlated patterns based upon and deriving from a functional process. This functional process is an instrumental or tool-using process. This means that the technological aspect of behavior comes from tool-using activities. But technology is not merely tools. A common mistake is to think of technology as tools, machines and the like. But technology is not external to man ‑‑ it is internal, a part of human behavior. It is not like a coat that can be put on or taken off depending on the temperature. No single person and no society has ever existed that was devoid of this aspect or type of behavior.

16. Technology is part of the network of social and personal relationships and it permeates all relationships. Tool existence implies the skills necessary for tool using. A fundamental principle of Institutional economics is that tools and skills are inseparable. The technological process is cumulative and progressive. It is a process of tool and skill accumulation through elaboration and combination of existing tools. All inventions are combinations of previous inventions or combinations of previously existing tools. Literally thousands of previously existing inventions make up even the simplest tools in our economy.

17. 3. This is because inventions or tools include processes or ways of making things as well as things themselves. The modern use of carpentry tools involves the arts of steel making and fabricating, wood shaping, and these in turn involve the knowledge included in chemistry, physics, biology and more. The point is that tool using is complex and interrelated activity. And, these activities and processes grow and accumulate by combination. The more tools and inventions and skills there are, the greater the number of combinations are possible and the faster is the accumulation process. Even if a tool is broken, it can be replaced in much less time than it took to create it in the first place for the simple reason that all the knowledge and skill necessary to make it exists. It is a simple job of recreation.

18. 4. Consider how long it took to make the first hammer out of stone and wood, and how long it took to make the first steel headed hammers. Now we manufacture hammers at the rate of millions per year. If a hammer is broken it is a "simple and quick" matter to replace it. But not too many years ago a broken hammer meant long delays in production for the unfortunate workman whose hammer got broken. Why is this? What has changed? Have people become naturally or inherently better at making hammers? Are babies now born knowing how to make hammers?

19. 5.Like all tool using and making activities hammer production is learned and each new generation is born into an already existing stream of activities, knowledge and skills. One reason that technology is thought of as tools is that tools and tool-usings are "part" of this way of behaving. However, "tools" is a broad category. Tools includes both the physical and mental devices, both concrete and abstract. Tools include hammers, nails, screwdrivers, the multiplication tables, music scores, computers, pencils, language, calendars, stirrups, economic theories, books, names, logical systems, and microscopes. The entire heritage of activities which stems from doing and thinking. Tool‑using is a physically productive and creative process that underlies all the achievements of mankind. Even the most ceremonial activities include tool usage. As obtrusive as technology is most of us take the technological landscape for granted.

20. Theory of Production • Includes • Historical Development and Perspective • Resource Theory • Theory of Production organization • Implications • Historical perspective • Nomadic-semi nomadic • Neolithic civilization • wheat and water – basic elements • First Agricultural Revolution • Horse Collar & Stirrup • Second Agricultural Revolution • Iron Plow & Mechanical Reaper • Third Agricultural Revolution • Surplus – economic surplus – where does it come from and how do we use it. • War as organized theft • Consumption • Waste

27. Production theory and the Veblenian Dichotomy Creative forces— Instrumental Knowledge Workmanship Permissive forces-- Ceremonial Prosperity Codes resistances inhibitory forces

28. Theory of Resources • Early ideas and concepts of resources • The doctrine of the harmony of interests – Smith and laissez-faire • Law of diminishing returns in conjunction with • The population thesis of Malthus • The idea of cost—individual costs sum up to total cost – as measured by land, labor, capital • Institutional Theory of Resources • two levels of discourse about man • man – the animal level has only natural wants and capacities and commands only “natural” resources. Man as part of nature • The natural resources available to man are rare (scarce) indeed • nature as non-MAN - unaffected by MAN • MAN – human or social level -- every thing is artificial • The sum of the changes wrought by MAN is culture • Creation of resources - the resources process

29. WANTS Including cultural wants Resistances Neutral Resistances man NATURE CULTURE Resources Stuff ABILITIES arts & sciences Resistances Resources as a Dynamic Process Instrumental MAN Resources Ceremonial

30. Functional Theory of Resources • Resources a function of knowledge • Neither Scarce nor abundant • They emerge – not ARE, but becoming • dynamic not static

31. “Factors of Production” Institutional Approach Standard Approach Nature Land Machines Capital Energy Labor Standard theory has its basis in ideology: This particular one is that production is linked to income. Factors of production – not a theory of production, but a distributive formula and rationale.

32. Path Analysis Veblen British Rail System in 1914 The mud hole metaphor – more on this later David Clio and the Economics of QWERTY – 1985 Keyboard configuration Technological Lock-in Why – the nature of a path Ergodic Non-ergodic Small events early in a technology

33. Path – continued Arthur Non-linear probability – 1991 Example of rings in an urn Draw a sample and replace with color bias What happens – no stable equilibrium No necessity to pick better technology VHS – Beta Increasing returns problem Possible solution – Positive feedback Standard approach is – negative feedback system

34. Path Dependence – A Story and a Metaphor • The Reivers

35. From Faulkner’s The Reivers There was something dreamlike about it. Not night-marish: just dreamlike--the peaceful, quiet remote, sylvan, almost primeval setting of ooze and slime and jungle growth . . . [In it] the expensive useless mechanical toy rated in power and strength by the dozens of horses, yet held helpless and impotent in the almost infantile clutch of a few inches of the temporary confederation of two mild and pacific elements—earth and water— . . .; the three of us, . . . now unrecognizable mud-colored creatures engaged in a life-and-death struggle with it, . . . And all the while, the man sat in his tilted chair on the gallery watching us while Ned and I stained for every inch . . . and Boon . . . strove like a demon, titanic, . . . lifting and heaving it forward; . . . he dropped, flung away his pole. . . “How much do you have to pay him to get dug out?” Ned asked. “Two dollars,” Boon said.” “Two dollars?” Ned said. “ This sho beats cotton. He can farm right here setting in the shade without even moving. What I wants Boss to get me is a well-traveled mudhole.” “Morning, boys,” he said. “Looks like you’re about ready for me now.: “Looks like it, “ Boon said. . . . “We might a got through . . . if you folks didn’t raise such heavy mud up here.” “Don’t hold that against us,” the man said. “Mud’s one of our best crops up thisaway.” “At two dollars a mudhole, it ought to be your best,” Ned said. “That was last year,” the man said. “It’s double now.” “It’s six dollars,” he said. “I charge a dollar a passenger. There was two of you last year. That was two dollars. The price is doubled now. There’s three of you. That’s six dollars Boon said, “Suppose I don’t pay you six dollars. Suppose I don’t pay you nothing.” “You can do that too,” the man said. “ . . . . Maybe you’d rather walk back to Jefferson than pay two dollars.” (Faulkner, pp. 80-91)

36. Roads, Cars & Mud holes • Evolution of Roads, Cars • And the Economy becomes dependent on single source variable route individual transportation system • GM plan • Economies are both path dependent and path created • Depends on structure, function and flexibility • Flexibility is inversely related to strength of tradition • Myth, legend and invidious differential advantage • Strength of status quo • Flexibility is directly related to strength of learning and growth of community shared knowledge • Technology • Education • Objective and Experiential knowledge (the interaction of knowing & doing)