Different Approaches to Economic Actors: Corporations

 Back in March of 2006 (Vol. 28, No. 1) in the Journal of the History of Economic Thought, Mary S. Morgan gave the presidential address for the History of Economic Thought Association entitled “Economic Man as Model Man”. This is an excellent review of how economists have thought about and modeled the behavioral models that have been used going back to Adam Smith.  In brief, economists have moved over time from “thick” descriptions of human economic behavior in the 18th and 19th century to increasingly narrow descriptions until we reach neoclassical human economic agent in the 20th century.  Thick descriptions may be more realistic but don't provide a clear cut casual tool for understanding the link between behavior and economic outcomes such as prices and quantities.  In the 20th century, we ultimately ended up with the rational choice economic agent who acted under a specific set of assumptions and allowed economists to derive very specific predictions about price and quantity in market settings.   In the late 20th and early 21st century, we have seen the rise of behavioral economics which has altered our view of this model.  

Arguably, these behavioral approaches or assumptions are the engine which drives economic models.Institutional economists (IE) have provided an alternative view of human economic behavior in a variety of settings going back to Thorstein Veblen.  It would take a huge amount of space to go through all of these iterations so I want to explore just one example here.  Institutional economist Marc Tool explored one variation of this question in his book “Pricing, Valuation and Systems”.  He discusses that IE from Veblen to Galbraith and others has modelled in his words the colorful phrase of “discretionary agents of megacorp enterprises”. We can imagine these are the CEO’s and executives of large companies such as Amazon, Microsoft or Facebook today.  They have market power and don’t just act as price takers.  Tool discusses items that characterize these actors as:

• Seeking security of expectations

• Control over determinants that impinge on the enterprise

• Capacity to create options and choose among them

• Exercise discretion and alter outcomes

• Price makers as opposed to price takers

So here we see a much different type of economic agent as opposed to the price taking profit maximizing neoclassical model.  Under this description of these corporate actors, we see economic outcomes leading to consumer exploitation, worker exploitation, environmental injustice and other problems that IE has identified.

Some might argue that these might be more accurate as “thick” descriptions but that the profit maximizing description is still enough. IE thinkers would obviously disagree. I think this at least helped me think about how IE differs from the standard approaches in economics.