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The purpose of this volume is to demonstrate how contemporary institutional economic analysis can be applied to the resolution of economic problems. All of the essays in this book challenge the conventional wisdom in the problem areas addressed. They advocate policy positions that often run contrary to views widely held by academic economists and policy makers alike. The general literature of institutional economics is unorthodox, beginning with its methodological foundations and continuing through the kind of policy analysis found in these pages. The orthodox tradition in economics is commonly characterized as "neoclassical economics." Neoclassical economics fosters the myth that only "the market" can efficiently allocate a society's economic resources and equitably distribute its income. It provides the intellectual defense for in which "free markets" are championed over democratic capitalist ideology policy formation, which it contends is neither efficient nor equitable. For both professional economists and policy makers of a conservative political persuasion, neoclassical economics writes the script for a morality play in which the market is the "good guy" and the government is the "bad guy." As such, it undermines the belief that free societies can enhance economic welfare through the use of democratic processes in the formulation of economic policies.



1. Foundational Concepts for Institutionalist Policy Making

Institutional economics is a policy-oriented science. For over a century, it has contributed to the resolution of economic problems at the federal, state, and local levels. Institutional economists have continuously sought to identify and resolve the economic and political problems that impair the efficiency and equity with which the economy engages in the production of goods and services and the distribution of income. The topics of the chapters of this book illustrate the broad range of interests institutionalists exhibit in policy issues and the approaches they take in dealing with them.
Paul D. Bush, Marc R. Tool

2. An Institutionalist View of Fiscal Policy

Fiscal policy is arguably the most explicit embodiment of the institutionalist conviction that there is a constructive role for governmental intervention in the quest for stable satisfactory growth rates in the modern market oriented economy. As such it is, therefore, at the same time an equally explicit rejection of the conventional mainstream belief that the best course is almost invariably to leave the economy to the not invariably tender mercies of the market.
Philip A. Klein

3. Monetary Policy: An Institutionalist Approach

While this chapter will not present a detailed history of monetary policy, it is useful to first take a quick look at the evolution of thinking about the nature of monetary policy. We will first examine the famous Currency School-Banking School debates of the early 19th century, then turn to the insightful analysis of Walter Bagehot. We next turn to the creation of the Federal Reserve System (Fed) and early 20th century thinking about the role of the central bank. The discovery of the “deposit multiplier” in the 1920s as well as the developing understanding of open market operations had a very large influence on the post-WWII theory of central bank control of the money supply. While postwar “Keynesian” economists were skeptical of the potency of monetary policy, the Monetarist approach gradually gained adherents and came completely to dominate thinking about monetary policy by the last quarter of the 20th century. However, Monetarism experienced a quite remarkable turnaround of fortunes at the end of the century. As we begin the 21st century, orthodox thinking about monetary policy is in nearly complete disarray. However, there are themes that run through the 20th century and even the 19th century that offer some guidance in reformulating and creating a truly institutionalist approach to monetary policy.
L. Randall Wray

4. Progressive Tax Policies

Institutional economists have not had a great deal to say about tax policy, at least directly. Nonetheless, they have had a great deal to say about the orthodox view of market efficiency and market failure, about the alleged trade-off between efficiency and equity, and about the agnosticism of neoclassical economists on issues of income distribution. In this chapter, we show how these ideas form the basis for an institutionalist approach to tax policy. We then apply this approach to three of the most important issues of taxation in current policy debates: the assault on progressivity in taxation and the taxation of wealth, the use of tax law and tax incentives to influence individual and corporate decisions, and the relation between local government taxation and the increasing polarization of metropolitan areas along lines of race and class.
Peter S. Fisher

5. Promoting Economic Equity: The Basic Income Approach

It is no accident or coincidence that just about every human society has had some mechanism to promote economic equity. From the Old Testament’s redistribution of wealth through the Jubilee to the modern welfare state, a common feature of human society has been the redistribution of wealth and incomes to account for those who have not been adequately provided for by the given “rules of the game” that determine income allocation. This constant feature of social living shows that there is a need to account for factors besides existing property rights in determining the ability of individual community members to subsist and thrive. The reason that such redistribution schemes are a fundamental feature of human societies is that wealth and incomes are collectively created, but often the rules that determine the initial distribution of incomes, usually based on power and property rights, do not typically provide for the whole community. Many people in the community are not currently economically productive but still need to be provided for to ensure the economic sustainability of the community (children and the elderly). Furthermore, many factors besides what is necessary to promote future production influence what the initial distribution of income will be (such as a lucky hunter), thus it may be harmful to the health of the community to allow such inequalities to persist.
Charles M. A. Clark

6. Welfare Reform

In the Preface of this volume, the editors state that the common purpose of the volume’s various chapters is to “demonstrate how contemporary institutional economic analysis can be applied to the resolution of economic problems.” Institutional economics is characterized as “unorthodox,” challenging the myth that “only ‘the market’ can efficiently allocate a society’s economic resources and equitably distribute its income.” The unorthodox methodological foundations of institutional economic analysis lead to policy analysis that challenges the “conventional wisdom” in the problem areas it addresses.
Janice Peterson

7. Universal Health Care in the United States: Analysis and Proposals

Over the past decade or more, health conditions have worsened for Americans of every age: infants, adolescents, adults and the elderly. Reduced services, less public funding or increased costs have triggered all manner of negative consequences running from higher infant mortality rates, to the recurrence of nineteenth-century diseases, to more modern kinds of health epidemics. On most comparative indexes, the United States ranks last in health care but first in health costs among the world’s industrialised countries (Petras and Morley 1995, 75).
Michael Keaney

8. Social Security: Truth or Convenient Fictions?

There is no question that Social Security is under attack by well-organized and well-funded opponents. As my colleague, Max Skidmore, has documented, the enemies have been there from the beginning, but they had had little success until recently (Skidmore 1999). Originally, the program was attacked on the basis that it was dirty pinko socialism. The framers of the Social Security Act had taken such claims into account when they formulated the program to look something like a pension plan, with “contributions” and “benefits”. Americans came to believe that they deserved benefits because they had “paid into” the program. Hence, rather than being seen as welfare and socialistic, the program came to be seen as little different from a private retirement plan. For several decades, this effectively quashed criticism.
L. Randall Wray

9. Competing Perspectives on Economic Power and Accountability

The economic beliefs that have become increasingly dominant in economic policy formation for the past quarter century are derived primarily from neoclassical economic orthodoxy. This orthodox viewpoint has its basis in an economic ideology that encompasses a specific vision of human nature, a particular economic methodology, and an explicit outlook about the design and workings of the economy. Based upon these neoclassical presuppositions, this ideological perspective demands the application of specific policies. General acceptance of this set of ideas has tended to wax and wane to some extent over the years, but in recent years it has enjoyed widespread approval. Advocacy of this viewpoint has spread from economic scholars to opinion makers, to politicians and to the public at large. The policies required by this set of ideas have been applied in the United States, and worldwide, for the past generation. This chapter will examine the foundations of this pattern of thought and some of its applications. It will contrast with this viewpoint the philosophy, and related policies, of the institutionalist school, a major alternative to neoclassicism. It then will examine how the application of accepted neoclassical beliefs has contributed to the concentration and centralization of economic power in giant multinational corporations and the concomitant decline of democratic processes in the determination of economic policy.
Edythe S. Miller

10. Market Failure in Public Utility Industries: An Institutionalist Critique of Deregulation

There is a general consensus that public utility services are an integral part of the infrastructure of modern society. Typically, these services are provided by capital intensive networks that link centralized supply with a wide range of diverse customer classes—ranging from residential to large industrial customers in both urban and rural settings. These networks constitute the platforms that support all sectors of the economy and contribute to the productivity gains and income growth of those using the networks. In addition, when successful these network platforms facilitate the expansion of markets, thereby further increasing productivity, wealth, and the attainment of social goals.
Harry M. Trebing

11. The Abuse of Economic and Financial Power in the New Economy: Historical Patterns in the Creation of Modern Remedies

Since well before the time of Hobbes, it has been accepted that one of the major functions of government is to protect the general society from abuses by predators, whether they be common criminals or the more well dressed users and abusers of monopoly power. The typical response of the predators to the imposition of government controls on their activities is to claim that the government is infringing on their fundamental free enterprise right to prey on their neighbors. With the great changes in the American economy arising in the period from the end of the Civil War to the present, the issue has become more pressing. The increase in the size of industrial, commercial, banking, and utility markets has led to the organization of combinations for the very purpose of extracting monopoly rents from competitors, property owners and consumers. The management of these enterprises justify their behavior on the grounds of natural law, Social Darwinism, laissez faire, and Neoclassical and Chicago School economics.
Michael F. Sheehan

12. Toward Developmental Curriculum Reform: Teach What? To Whom? Why?

In 1989, President Bush convened his Cabinet with all the nation’s Governors at a high-profile national education summit. Their agenda was a challenge to American power and prosperity: “the failure of US schools to teach the basic skills needed to keep Americans productive and competitive” (Time Magazine,October 9, 1989:60). These leaders reached substantial agreement on how to reform public school curricula—the knowledge, skills, and attitudes taught—to correct that failure. Their agreement took the form of national goals that answer our title questions. Their answer to “Teach What?” was to prescribe five academic subjects: English, mathematics, science, history and geography. Their answer to “To Whom?” was all American children through high school. Their answer to “Why?” was to raise the skills of citizens and workers to compete in the global economy.
Baldwin Ranson

13. Policies to Provide Non-Invidious Employment

Labor markets are rife with hierarchical distinctions between different categories of work and different groups of workers. Relative wages signify the relative “worth” or “value” of particular forms of work (and types of workers). Class distinctions are often grounded in employment status. Racial-ethnic and gender discrimination in labor markets maintain inequality. Full-time employees are presumed to be more stable and career-oriented than part-time workers. Paid work itself is treated as a marker of one’s social contribution, implicitly and explicitly devaluing unpaid work in homes and communities.
Deborah M. Figart

14. Policy Implications of the New Information Economy

An ever more popular theme in the scientific literature, government policy documents and the popular press, is that technologically advanced economies are in the process of moving beyond industrial capitalism to information-based economies. This transformation is expected to bring profound changes in the form and structure of economic, social, cultural and political systems. European Union (EU) integration and the North American Free Trade Agreement (NAFTA) are just two illustrations of this ongoing restructuring of economies and societies (Melody 1985a).
William H. Melody

15. An Institutionalist Perspective on Environmental Goal Setting

At the most basic level, environmental policy can be thought of as addressing two fundamental questions: 1) how to establish environmental goals and 2) how to achieve those goals. Environmental goal setting addresses questions of what ambient physical, chemical and biological conditions should exist in our nation’s air and water resources. Once the desired ambient conditions have been identified, the policy means to achieve those conditions—such as emission technology and performance standards, emission taxes and subsidies, transferable emission allowances, educational programs, or moral “suasion”—must then be established.1
Kurt Stephenson

16. Policy Concerns Regarding Ecologically Sound Disposal of Industrial Waste Materials

Early in the Twentieth Century, Thorstein B. Veblen argued that private business enterprise “has taken over the [natural] resources by a process of legalized seizure, and has used them up as rapidly as may be….” (Veblen 1919, 98). One of the most important natural resources seized and used up has been the living systems destroyed by industrial waste disposal. Improper waste disposal, in addition to resulting in disease problems for humans and other species, results in a loss of living systems upon which people and industry depend. Some of the services nature provides include purification of water and air; regulation of atmospheric chemistry; storage, detoxification, and recycling of human waste; natural pest and disease control; regulation of the chemical composition of oceans; maintenance of soil fertility; and nutrient storage and recycling. The attempt to replace these critical ecosystem services as they have been overwhelmed and destroyed by waste disposal has led to excessive resource costs and a burden in trying to maintain a standard of living.
F. Gregory Hayden

17. Globalization: An Institutionalist Perspective

Globalization has taken on at least two different meanings in the current literature. It is defined here as a process of institutional change in the modes of intercourse among nations and regions of the world, prompted by technologies that increase the volume of exchange of knowledge, culture, and commerce. This positive position reflects that of Thomas Friedman (1999), who sees globalization as the integration of capital, technology, and information across national boundaries. On the other hand, there are many who look at globalization as the takeover and augmentation of world commerce by increasingly powerful and rich multinational corporations (MNCs), driven by narrow and self-serving corporate goals and values without regard to human welfare. To them, globalization appears to be out of control and the MNCs without accountability.
Gladys Parker Foster

18. Global Industrial Policies

The characteristics of the “new” economy are to be seen not so much in the hypermanias of the high-tech stock markets that have turned out, with their recent depressions, to be rather conventional. They have to be seen as knowledge-based, clustered, and networked economies. They manifest considerable intensification of direct interdependencies among economic agents, where the outcome of A directly depends also on the behavior of B, and vice versa. This has always been true of modern economies, as institutionalists and socio-economists have routinely contended. But it has become so intense, obvious, and ubiquitous that it can by no means be ignored any longer in either standard theory or policy formation.
Wolfram Elsner

19. Recent Tendencies in Development Economics: Bringing Institutions Back in?

This chapter critically analyzes some major recent analytical tendencies in development economics. In particular, the focus will be on key points of contention within the field of study as expressed through the writings of a number of prominent contributors. Most particularly, this chapter will concentrate on the role of institutions and institutional innovation in the context of development. After numerous complex twists and turns, development economics—as currently practiced by many, but not all—has returned to its “big picture” roots as expressed in the research of the “pioneers of development.” The pioneers—among them Paul Rosenstein-Rodan, Gunner Myrdal, Ragnar Nurkse, Albert Hisrchman, and W. A. Lewis—gained prominence in the early postwar years with their broad, generalized, and often Keynesian approach to development issues (Cypher and Dietz 1997, Ch 5).
James M. Cypher


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