B E R N A R D C H A V A N C E A B I K J U N E 2 0 1 0
John R. Commons (1862-1945)
The founder of the Wisconsin School
A man of action, expert, consultant, legislator and academic
« Institutional economics » : the combination of law, economics and ethics
A theory of institutions centered on organizations
The search for a « reasonable capitalism »
The problem of « social control »
Main books
Proportional Representation, 1896.
Trade Unionism and Labor Problems, 1905.
Races and Immigrants in America, 1907.
J. R. Commons et al., eds., History of Labour in the United States, 4 vol., 1918-35.
Industrial Goodwill, 1919.
Legal Foundations of Capitalism, 1924.
Institutional Economics – Its Place in Political Economy, 1934.
The Economics of Collective Action, 1950.
Reinterpreting economic theories
Wrong postulates: natural abundance, harmony of
interests (Smith), as opposed to scarcity and conflicts
Individual psychology in place of the role of institutions
What matters is the ‘social psychology of
negotiations and transactions, arising out of
conflicts’ (1934)
Institutional economics should subsume equilibrium theories (neoclassical) and process theories (Veblen), focusing on intentional or deliberate change
The institutionalized mind
‘Individuals begin as babies. They learn the custom
of language, of co-operation with other individuals, of working towards common ends, of negotiations to eliminate conflicts of interest, of subordination to the working rules of the many concerns of which they are
members’ (1934)
‘Instead of isolated individuals in a state of nature,
they are always participants in transactions,
members of a concern in which they come and go, citizens of an institution that lived before them and
will live after them’(1934)
« Going concerns »
Active organizations, typical of advanced capitalism
Going concern : the joint expectation of beneficial
transactions, regulated by ‘working rules’
Three types of going concerns: economic, political,
cultural
Common characteristics: duration (they survive the entry
and departure of individuals), sovereignty or
autonomous power, legitimate authority, working rules, sanctions and transactions
Legitimate « authoritative figures » lay down and enforce
the rules of the organization
The State as a template for all going
concerns
The American democratic State of the beginning of the twentieth century becomes in a way the generic model of any going concern
The « common law method » is the general way to
devise working rules in going concerns
Sovereignty, originally an exclusive attribute of the state has been progressively extended by delegation of the latter to all other going concerns.
Diverse organizations « are, indeed, governments, since they are collective action in control of
individual action through the use of sanctions »
Hierarchy of collective action
Commons stresses the similarities between the state and other going concerns, sometimes
characterizing it as a going concern among others
But there is an essential difference between them, namely the ascendancy of state rules on other
organizations’ rules, following a pattern of
subordination and delegation
The physical sanctions used by the state are also
superior to the economic sanctions of the economic organizations, or the moral sanctions of the
cultural organizations
Organizations as institutions
‘It is these going concerns, with the working rules
that keep them agoing, all the way from the family, the corporation, the trade union, the trade
association, up to the state itself, that we name
Institutions.’ (1934)
The institution is ‘collective action in control of individual action’, more precisely ‘collective action
in restraint, liberation, and expansion of individual
action’
A paradoxical liberating constraint, in the relation between individual and collective action
Working rules
Custom: unorganized collective action
A process of « artificial selection » by authorities when
conflicts arise …
… leading to working rules or organized collective action
Every concern ‘must have its working rules, which are its
laws. These spring from authority, custom, habit,
initiative, or what not. They are the common law, the
statute law, and the equity jurisprudence of the concern. The state, the business concern and the cultural concern are alike in their dependence on these working rules, the difference being mainly in the kinds of sanctions,
whether physical, economic, or moral, which they can
bring to bear in enforcing the rules.’ [1924]
Artificial selection
It was the starting point of Darwin, who developed by contrast the concept of « natural selection »
Veblen spoke of natural selection of institutions, but this neglects the role of human will
The way authorities of going concern decide about working rules is rather like artificial selection
Workable mutuality
If working rules are first established in order to mediate conflicts, they do not put an end to them
… as conflicts are a structural dimension of social
reality, based on scarcity
« The working rule is not a foreordained harmony of
interest … but it actually creates, out of conflict of
interests, a workable mutuality and orderly expectation of property and liberty. » (1934)
Conflicts of interests are always to be seen within going concerns
Transactions
The transaction is the ‘unit of transfer of legal
control’, it is a concept that includes simultaneously
conflict, dependence and order
Three types: bargaining transactions, managerial transactions and rationing transactions
Distinguishing what economists wrongly pack in the concept of exchange
Types of transactions
Transactions Bargaining Managerial Rationing
Position of individuals Legally equal Legally superior and inferior
Legally superior and inferior
Negociational psychology
Persuasion or coercion (in relation to the
bargaining power of parties)
Command and obedience
Pleading and argument
General principle Scarcity Efficiency Equity
Identity of Principal Absence of distinction between
principal and agent
Individual or hierarchy Collective authority
Object of transaction Ownership transfer (debts of performance
and payment)
Wealth creation Distribution of wealth (apportioning benefits
and burdens) Execution of future
commitment
Prices and quantities Input and output Budgets ; taxes; price-fixing ; wage-price-fixing
Strategic and routine transactions
Strategic transactions relate to the ‘limiting factor’ of the action, routine transactions to its ‘complementary
factors’
Limiting factor of the action: its control, carried out in the appropriate form and at the appropriate time and
place, activates the complementary factors in order
to obtain the desired results
Once placed under control, the limiting factor becomes
complementary and another factor becomes the limiting factor
Anticipation of evolutionary theory of the firm (Nelson &
Winter)
The common law method
The Anglo-american tradition of law
… is actually at work within going concerns…
It implies ‘making new law by deciding conflicts of interest, thus giving greater precision and organized compulsion to the unorganized working rules of
custom or ethics’ (1934)
‘The decisions, by becoming precedents, become the
working rules, for the time being, of the particular
organized concern.’
Futurity
The individual acts in the light of future reality as he sees
it in the current institutional framework
‘in the futurity-dimensions of present activity, afforded by the expectations of institutions, the human organism converts future happenings into present action. (...) What we say of Time holds of Space. It is only institutionalized brains that compass the world, and they do it through the
going concerns and machines that serve as instruments.’
(1934)
A striking similarity with Keynes’ view of expectations
Reducing structural uncertainty
The future is marked by uncertainty, but the effect of institutions is to reduce this uncertainty:
institutional economics considers a society ‘whose
future is frankly recognized as unpredictable but which can be controlled somewhat by insight and
collective action.’ (1934)
Another parallel with Keynes…
Who wrote to Commons in 1927: ‘there seems to me to be no other economist with whose general way of
thinking I feel myself in such general accord’
Beyond methodological
individualism and holism
The opposition between individualism and holism
Commons gives a critical weight to individual action, and develops a « volitional », « negotiational » and « transactional » psychology - differing from holist approaches
His is simultaneously distinguished from individualist theories by the prominence attributed to « collective action » and by his hierarchical view of working rules of going concerns
Sequence of relations: evolving individual actions -> evolving customs -> common-law
method -> changed working rules of going concerns, by authoritative actors -> collective action -> control of individual action -> evolving individual actions -> ...
