Reflections of an Institutional Economist: Charles Whalen, Part IV

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This is the last post of a four-part series in which the author reflects on four decades of studying and working in the institutionalist tradition of economics. Dr. Charles Whalen is a visiting scholar at the Baldy Center for Law and Social Policy, University at Buffalo, and served as the 2018 president of the Association for Evolutionary Economics, an international organization for economists and other social scientists seeking to advance the institutionalist tradition. Whalen's remarks are summarized in four parts: Beginnings; The Nature of Institutional Economics; John R. Commons’s Continuing Relevance; and Assessing the Economy.


Reflections of an Institutional Economist
Charles Whalen[1]
IV. Assessing the Economy: “Reasonable Value” and Unanswered Questions


By what standard should we judge the economy and public policy?

Conventional economics judges economic outcomes according to the standard of economic efficiency. But institutional economists have long recognized that using efficiency as a yardstick is just a way to dodge the really important issues. As Al Schmid wrote in an essay on Michigan State University’s “Spartan” school of institutionalism, “Efficiency is not a single unique thing, but is derived from collective judgments of whose interests count.”[2] Al offered even more on this in an article describing institutional law and economics: “Efficiency for whom?” is a central question for institutionalists—“since efficiency is always rooted in some distribution of rights.”[3]

Another dodge is the notion of some abstract “public interest.“ Institutionalist pioneer John R. Commons rejected the idea of a public interest “separable from the specific interests of individuals and classes of individuals that can be used as a beacon to guide public policy.” Instead, Commons’s offered the yardstick he called “reasonable value.”[4]

Reasonable value is the preferred yardstick for institutionalists in the Commons tradition. But I believe we need to think much more seriously about reasonable value and how to achieve it. Most of us have only waded into the matter over the years; it’s time to dive in.

Commons’s views on reasonable value evolved over time. At one point, he stressed the role of the courts in determining reasonableness. But his focus eventually shifted to negotiations between various interests with a stake in a given problem. From that vantage point, reasonable value is achieved when representatives of all economic stakeholders reach negotiated settlements or, ideally, engage in joint problem solving.

Achieving reasonable value is a process. But the process requires institutions, including, for example, collective bargaining and regulatory commissions. And the full range of stakeholders and interests must be represented, ideally by self-selected representatives rather than by people appointed by government officials.  In fact, Commons argued even the Federal Reserve should be guided by representatives of a broad set of economic stakeholders, such as workers, farmers, and small business owners, not just bankers.

Moreover, for the outcomes of the reasonable-value process to be genuine compromises, there must be willing cooperation among the parties. That means those at the table must, ideally, have equal bargaining power. Achieving reasonable value also involves identifying “best practices” and finding ways to foster their diffusion throughout the economy.

In addition, the outcomes of the reasonable-value process must constantly be revisited: Reasonable value is always provisional. It needs updating as situations change, as unintended consequences appear, and as new “best practices” emerge.

Commons recognized that this system of compromise was imperfect, but he worried, especially during the Great Depression, that the alternative was authoritarianism—either in the form of socialism or fascism.

To some extent, my call for us to think seriously about reasonable value brings me full circle: back to my decision to pursue a graduate degree in economics under the supervision of Ray Marshall, whose 1987 book, Unheard Voices, highlights the need to give workers a meaningful voice from the shop floor, to the boardroom, and into the highest reaches of national and international policymaking. Under Marshall’s guidance, I began what turned out to be a series of explorations into community-wide labor-management-citizens committees. While such committees were always fragile institutions, what we’ve seen over time is that fewer workers have unions to represent them in such forums — and those unions that do exist often can’t find businesses, public officials, and other stakeholders willing to join them in collaborative problem solving.

But my call for us to think about reasonable value is only incidentally a circling back to themes from decades past. Today, I’m as concerned about the possibility of undemocratic policymaking as Commons was in the 1930s. And global warming doesn’t give us the luxury of letting unreasonable minds shape policy.

Our economic system isn’t a natural system — it’s a social organization, shaped by invention and innovation and by public policy. Since the system can’t be left to run automatically, we need more stakeholder engagement in the making of economic and policy decisions.

The public sector could help: The (community-wide and plant-level) labor-management committees of decades past were encouraged by public policy, including federal grants that helped establish such committees. And public-issues education has long been a part of the work of the country’s Cooperative Extension system. But if James K. Galbraith is correct, we shouldn’t expect much from the public sector anytime soon: According to Galbraith, the dominant feature of contemporary American capitalism is predation—and agents of a “predator class” now control the U.S. government.[5]

How do we move from where we are to the world of reasonable value?

Maybe one part of the answer is to move from winner-take-all elections to proportional representation, which might change the nature of our legislatures, breaking the grip of what Commons called “banker capitalists.” A law professor at my university recently delivered a public lecture highlighting proportional representation. Commons wrote a book advocating proportional representation in 1896. Perhaps it’s time for us to take a serious look at it.

So, after four decades of studying and using institutional economics, there’s still lots more to learn. And Commons remains as good a place as any to start. The aim of his work, to “save capitalism by making it good,” continues. I look forward to sharing the journey with you.

[1] The author is a visiting scholar in the Baldy Center for Law and Social Policy, University at Buffalo. These remarks were originally prepared for a two-day exploration of institutional economics, convened at Michigan State University, May 16-17, 2019.
[2] A. Allan Schmid, “The Spartan School of Institutional Economics at Michigan State University,” Staff Paper 02-03, February 1, 2002, Department of Agricultural Economics, Michigan State University.
[3] A. Allan Schmid, “Institutional Law and Economics,” European Journal of Law and Economics; vol. 1 (1994), pp. 33-51.
[4] For an excellent, concise discussion of reasonable value, see Yngve Ramstad, “From Desideratum to Historical Achievement: John R. Commons’s Reasonable Value and the “Negotiated Economy” of Denmark,” Journal of Economic Issues (June 1991), pp. 431-439.
[5] James K. Galbraith, The Predator State (New York: Free Press, 2008).

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