Institutional Law and Economics: The Legal-Economic Nexus

This week we're in Madison, Wisconsin digging through the John R. Commons Archives. Found this gem along the way, undoubtedly authored by one of JRC's many students. Enjoy! 

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 inv...

This week, we are shamelessly promoting the upcoming Institutional Economics: Perspectives and Methods in Pursuit of a Better World ( Pub: October 28th, 2021).   It is edited by our colleague Charles Whalen, who previously reflected on his career as an institutionalist on this blog here , here , and here . The book covers several major institutionalist perspectives and methods in one place. Other authors include Mary Wrenn, and Bill Waller, who are both interviewed in our Legal-Economic Nexus podcast.  How Charles managed to pull this many-authored volume together throughout a global pandemic (with few setbacks) remains a mystery to me.  Eric and I (with Charles) contributed a chapter in the latter section titled: "Institutional impact analysis: the situation, structure, and performance framework." This chapter covers the evolution of Schmid's model, using old files and drafts we found here at MSU and at the University of Wisconsin to piece together the SSP model. Through...

Eric and I recently had the pleasure of chatting with Dr. Pierre Schlag.   Schlag is Distinguished Professor at the University of Colorado and Byron R. White Professor at the Law School.  We had been referencing some of his work on Hohfeldian Legal Analysis for some of our model on legal-institutional interdependence, and he was kind enough to offer to Zoom with us as we worked through our many questions.  We had our conversation about Hohfeld, but Schlag also highlighted one of his past works on the importance of incorporating law into the study of economics.  This 2013 paper, titled " Coase Minus the Coase Theorem-- Some Problems with Chicago Transaction Cost Analysis " is incredibly relevant to all those interested in the intersection of law and economics-- not just those familiar with Coase's larger body of work or those especially familiar with the Coase Theorem.  Schlag provides a comprehensive overview of Coase's broader critique of neoclassical eco...

Robert Lee Hale was an important lawyer and economist who worked at Columbia University from the 1920's through the 1960's. He is an important figure for thinking about institutional law and economics and we will explore more of him in this blog over time. One of Hale's most important articles is:   Hale, Robert L. "Coercion and distribution in a supposedly non-coercive state."  Political Science Quarterly  38.3 (1923): 470-494. https://www.jstor.org/stable/pdf/2142367.pdf Warren Samuels wrote a very long and well thought out article on Hale in the Miami Law Review entitled “The Economy as a system of power and its legal base” by Warren Samuels which can be found here:   https://repository.law.miami.edu/cgi/viewcontent.cgi?article=2750&context=umlr   This may be more useful for economic scholars rather than legal scholars, but economics is based on the idea of voluntary exchange and economists have gone out of their way to avoid questions of power, coercion ...

In writing about A. Allan Schmid and his ideas, I've run into a few common themes. One of them is the key idea of human interdependence (as written about in this blog post ), but another is the economists' handling and discussion of transaction costs (also other econ buzz words like free market, externality, etc., but those are topics for other posts). Throughout my reading and writing, I've compiled several notable authors' definitions of transaction costs. A few key differences stand out. The definition, in economics literature, of a transaction is often separate from the definition of transaction cost. This seems important to note, since it is clear to me that economists can mean very different things when they refer to a transaction (not that we always agree on what is considered a cost either). In the 1937 paper, The Nature of the Firm, by Ronald Coase, he does not use the term "transaction cost" but refers to "the cost of using the price mechanism...

As we continue to learn about the evolution of ILE, a review of some of the older work by Prof. Al Schmid is a helpful guide.  In 1964, Schmid edited and wrote a book called "Agricultural Market Analysis" with his longtime colleague James Shaffer (my IE class was with both of them in 1993 at MSU). Schmid and Sahffer wrote chapter two this text and included some key definitions that are helpful in understanding the evolution of ILE.  these are all quotes from that text: "P osition is the name or social symbol identifying a particular set of role images identifying an individual in relation to the other. Each position carries right and obligations" "I nstitution is defined as an enduring organized set of related positions directing energies of individuals towards a common end". (This is quite different from the definition Al would later use). "Social system is the aggregation of institutions defining the relationships of any group of individu...

Academic Detective Work: Writing About the Origins of a Model Recently the anniversary of the start of our MSU/Great Lakes Institutional Econ project came and went, with little fanfare other than a brief review of the past year's accomplishments during my annual review. It has always been a little weird to me to see days or months of work summarized in a few bullet points or publications. This got me thinking about all the hours researchers and academics in general can put in to even the most straight-forward seeming pieces. We call it "research", but some of the time our searching takes us well beyond the usual academic channels and requires some TV-montage-worthy sleuthing. In sub-fields like economic history or institutional economics, this is more obvious. In these fields, the ability to do some academic detective work outside of scholarly journals is a large determinant of success in the job. When writing about the origins of a model or of some line of thought, th...

What are institutions?  We gather here many different definitions... Douglass North (2005)..."institutions are the constraints that human beings impose on human interaction. Those constraints, together with standard constraints of economics, define the opportunity set in the economy".  One important point is that institutions are contrasted with belief systems which are defined as, "internal representations" and institutions are "the external manifestation of that representation".  Thus, North is trying to make clear that in his viewpoint institutions are external to the observer and can be analyzed. David Reisman (2002) (from Kasper and Streit, 1998)...."institutions are the rules of human interaction that constrain possibly opportunistic and erratic individual behavior, thereby making human behavior more predictable and thus facilitating the division of labour and wealth creation". John R. Commons (1934)....."institutions are collect...

In his 1987 book entitled, "The Reconstruction of Economics", Professor Allan Gruchy had some pointed criticisms especially of the post Veblen economists between the war years.  As these are an important foundation piece to the ILE school, it is useful to consider Gruchy's complaints and criticisms. We can no do better than start with Gruchys, perhaps harsh criticism, that "the late 1920's and the 1930's were not a fruitful period in the development of institutional economic thought" (pg.26). This pretty clear sets the stage for his views on Commons and the Wisconsin school so closely related to the ILE.  He further writes that they (referring to the Wisconsin institutionalisats amongst others), "a survey of their writings does not reveal much advance beyond Veblen" (pg. 26).   and then again, Gruchy writes that "Commons never developed what one of his graduate students described as a theoretical roof" and further that "Commons h...

It is now 2019, a century and a handful of months since economist and lawyer Walton Hamilton (1881-1958) published his “plea for a particular kind of [economic] theory” in the pages of the American Economic Review .  Hamilton felt that the state of the field of economics had lost its course, failing to address real problems or “truly recognize the complexity of the relations which bind human welfare to industry.” In response to these concerns, he published “The Institutional Approach to Economic Theory”. Hamilton was writing at a time when neoclassical economic ideas were taking shape.  He describes value theory as having overcome the older system of institutional theory for dominance over the classical doctrine, and his writing is critical of the use of words like “utility” and “productivity” that are very familiar in the economic sciences today, but were still in the process of being defined.  In “The Institutional Approach to Economic Theory”, he almost unintentio...