Commons and Smith on Growing Markets

This guest blog post is posted on behalf of the Center's visiting scholar,  Rodrigo Constantino Jeronimo. Rodrigo is a Ph.D. candidate in Economics at Sao Paulo State University (Unesp/Brazil) and is visiting the Center to work with Eric Scorsone and I on the work of John R. Commons.

Commons and Smith on Growing Markets

The book “Institutional Economics: its place in political economy” (1934) is one of John R. Commons` densest works in his attempts to provide a clear and organized exposition of the theoretical basis for what he conceived as his institutional economic theory. Undoubtedly, Commons` IE and “The Legal Foundations of Capitalism” (1924) are fundamental references for those aiming at investigating the constitutive elements of a “Commonsian approach” to economics and its phenomena. However, we are talking about a book that had as one of its main objectives reconstructing the history of economic though and placing collective action as the central feature of the economic investigation; thus, it demands careful reading and interpretation of all of its chapters. 

By saying that Commons tried to present a clear and organized exposition of his way of thinking, I do not mean that Institutional Economics is an easy piece of writing aimed at those unfamiliar with the field of institutional economics or the history of economic though; on the contrary, even those acquainted with these debates may struggle with Commons` interdisciplinary and fast way of thinking about different terms and concepts. If you take notes of your readings, you would certainly end up with more than one definition for the same concept (i.e. property, working rules, institutions), which does not result in contradictions, but may confuse those unaware of the different role they play as ways of evidencing the place of institutional economics in political economy. 

In this effort of reconstructing the history of economic though, or at least its interpretation, Commons revisits a variety of authors that goes from philosophy to economics, and it is in Smith that he spends a great part of his attention. The chapter dedicated to Adam Smith is one of the longest in the book, and its importance can be seen when compared to the length of those sections dedicated to the main elements of Commons` though (Futurity and Reasonable Value). In this chapter, that honestly could have a book of its own, Commons introduced important debates on the notion of use/exchange value and criticized Smith`s assumption of harmony of interests and the idea of an economic environment sterile of institutions conducting the interactions between economic agents. What we take from Commons` exposition is that, if there is order in our transactions, this order is institutionalized, it is an order, not natural harmony, constructed by the collective action in its deliberate and artificial selection of working rules that seems to be most adequate fit to deal with the conflict for scarcity.

There is, however, another work of Commons that deals directly with the Smithian notions of free market, harmony of interests, and the resultant wealth of nations. By presenting a detailed description of the evolution the American shoe makers` activities in response to the changing economic environment and expansion of markets, Commons (1909) provided an alternative reading to Smiths` frictionless social effects of the augment in the extent of the market. As described in the chapter 3 of his inquiry into the nature and causes of the wealth of nations, Smith argues that the size of the market limits division of labor, and that cities closest to coasts, therefore with access to different markets, as well as improvements in transportations would mean increasing wealth creating capacity though division of labor. There is no conflict, but the inherent promise of abundance trough commerce and specialization of the workforce generating wealth.

 

In his turn, when debating the growing extent of markets, Commons saw in the case of the shoemakers a conflict between capital and labor that would be named “competitive menace”, a pressure from competition to reduce wages and work conditions in order to reduce prices in a competitive market. Bargaining transactions would have no place in this economic environment, and managerial transactions would walk towards autocratic attitudes of employers unilaterally defining working rules aiming at efficiency, while dealing with labor as a commodity and with little if any incentive to improve labor conditions. Thus, as Glen Atkinson argued after debating “American Shoemakers”, the classical economists “failed to foresee the downside caused by the menace of the marginal producer” (Atkinson 2004, 48), the one whom low quality practices towards labor would set a poor standard of working rules governing the employment relations and pressure high fashion employers to give in to these practices.

In his American Shoemakers (1909), Commons “reconstructed, after the manner of the paleontologist, the sequence of industrial stages. But the material is wider than the mere economic data; it is, in fact, the whole stream of American history, notably the ideological factors." (Perlman 1951, 59). It is, in fact, an analysis of the markets and of the menaces of competition when the free market is considered, not apart from the institutions that organize and direct every economic transaction, but as a changing environment formed by social constructed rules in which different interests and economic forces try to impose, persuade, and coerce the rival party (in relation to scarce property) to behave as one pleases and to achieve its goals, event if it means deteriorating working conditions for the weakest party.

With this brief discussion, we argue that the American Shoemaker is also one of Commons` greatest works in his efforts to presenting a theory that, even though not breaking with the tradition of the classical economists, has in the transactions and its working rules the tools for investigating free markets in labor relations, specially to understand what “free” really means when we are talking about a world of conflict for scarcity and of asymmetric economic powers.

References

Commons, John R. 1909. “American Shoemakers, 1648-1895”. The Quarterly Journal of Economics, 24 (1): pp. 39-84

Commons, John R. 1924. Legal Foundations of Capitalism. New Brunswick: Transaction Publishers.

Commons, John R. 1934. Institutional Economics: its place in political economy. Madison: University of Wisconsin Press.

Smith, Adam. 2007. An Inquiry into the Nature and Causes of the Wealth of Nations. Amsterdam: Metalibri.

Perlman, Selig. 1951. “The Basic Philosophy of the American Labor Movement”. The Annals of the American Academy of Political and Social Science, 274: 57-63.