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! 

 Lately, we have been reading John R. Commons' Institutional Economics (Part I).  In it, Commons lays the foundations for a lot of what he sees as the basis of economic transactions, heavily rooted in human psychology, action, and interaction (or, as we like to say-- human interdependence). It is a dense book as explained briefly in Rodrigo's blog contribution last week . One notable component of the Commonsonian approach to economics is the fundamental importance of collective action, or the role collective action plays in shaping the legal rules and informal institutions of the world around us. It's interesting to think about how collective action in relation to housing rights has or may continue to impact existing property law. In Dr. Lisa Alexander's 2015 contribution to the Nebraska Law Review titled, Occupying the Constitutional Right toHousing , she walks through the various Occupy and other housing-strike movements of the recent past, detailing how each is a for...

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...

A key part of the work Eric Scorsone and I have been doing has centered around this idea of creating a general awareness in students and peers of the institutional, legal underpinnings of economic organization and action.  We borrow heavily from the work done by Al Schmid for the foundation of our institutional thought -- Al was incredibly well read and missed little-- but have noticed a need for more concrete vocabulary and structure for how to teach and talk about institutional structure and changes in it.  Consider this excerpt from Warren Samuels' "Some Fundamentals of the Economic Role of Government"(1989),  "People tend to define socioeconomic reality in terms of legal rights. Government selectively protects, as rights, certain interests and not others-and it is rights that form, structure, and operate through the market and the economy in toto. What people define as reality is thereby formed and reformed. In helping to define and create socioeconomic reali...

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...

The concept of externality was first introduced to economics, in a formal sense, by Alfred Cecil Pigou in the book "Economics of Welfare" written in 1920 (Medema, 2017).  As Medema points out in his 2017 article, Henry Sidgwick and John Stuart Mill and even Thomas Malthus had identified the idea of externalities earlier but not the word.  From the time of Pigous's 1920 book until about the late 1950's, economists did not really use the idea of externalities.  Medema persuasively argues that it was only used tangentially by economists in developing the new welfare economics, including heavy weights such as all Paul Samuelson, Frank Knight and Abba Lerner. It was mostly used as a potential problem or foil for achieving equilibrium in competitive markets but not an important focus. It was Tibor Scitovistky (1954) who made the first important contribution to the idea that externalities were direct interdependence rather than interdependence due to the existence of mar...

Upon further reflection of Komesar’s critique of Schmid and others approach to IE and the notion of institutions, here are some further rebuttal remarks.  Schmid perceived that institutions lie within the mind of each individual in a society or group and not simply as a written down dead letter law or rule which appears to be Komeasr’s main point of contention.  John R. Commons wrote of the “institutionalized mind”. I will only focus on the main thinkers in the Great Lakes IE tradition and no others such as North or Williamson. Schmid believed and wrote that institutions are ordered or structured sets of relationships amongst individuals.  Borrowing from John R. Commons and Wesley Hohfeld, an institution told the hodler in their mind of what they can, cannot, must, must not may and may not do.  These “institutions” are carried around in people's minds how they act and react to others around them. The stability of institutions varies and can certainly change ove...

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...