Philosophy of Society

Philosophy of Economics (Economic Theory)

Institutionalism

In the eighteenth century, when England and France dominated the world economy, these nations were also the birthplace of the leading economic theories of the time. The nineteenth century saw intense economic development in Germany, which was then fragmented into hundreds of largely independent principalities. This political disunity of the German territories created a distinctive economic trajectory, unknown to large, unified nations. Additionally, in the nineteenth century, the French philosopher Auguste Comte laid the foundations for a new science—sociology—thus igniting a particular interest in the study of society. These two factors—the advancement of the German economy and the emergence of sociology—provided the basis for the formation of a new strand of economic thought: institutionalism.

The German economist Friedrich List (1789-1846) published his work "The National System of Political Economy" in 1814, asserting that no single, universal economic concept exists. Each nation possesses its unique characteristics, meaning a concept suitable for one country may be utterly inappropriate for another. Thus, the classical economic theories of Smith and Ricardo may be beneficial for vast empires, yet detrimental for the German territories. According to List, economic theory must take national characteristics into account, and thus economics cannot exist without sociology, which provides insights into these peculiarities. Beyond sociology, history plays a significant role in crafting an ideal economic model, in List's view. He is credited with establishing economic sociology and economic history.

In his examination of economic history, List concluded that it can be divided into five stages: 1) savages, 2) herders, 3) farmers, 4) farmers and manufacturers, 5) farmers, manufacturers, and traders. To construct a sound economic model, it is insufficient merely to study sociology and history; these disciplines must be applied to economics. Without state involvement, such an application is impossible. Consequently, List was convinced that a quality economic model is only achievable with the state's participation, which he saw as essential for cultivating national economic traditions among the populace. These ideas evolved into the historical school of institutionalism, which comprised several directions:

• The Old Historical School was represented by Georg Friedrich Wilhelm Roscher (1817-1894), Bruno Hildebrand (1817-1878), Karl Knies (1821-1899), and others. They introduced the principles of historicism into economics—the belief that history possesses meaning and unfolds in a single direction. Economic, social, and cultural changes occur continually, but they are so gradual that they can only be recorded post factum.
• The New Historical School is characterized by several strands:

✵ The founder of the conservative strand was Gustav von Schmoller (1838-1917), who focused on moral issues. Schmoller argued that a common language, national tradition, history, and customs serve as stronger means of uniting economies than capital and the state. For the economy to become a tool for building a happy society, moral development must be prioritized as the foundational principle of economics.

✵ The liberal strand was initiated by Lujo Brentano (1844-1931), who believed that a just economy could be constructed through a system protecting workers' rights, active union involvement, and social reforms. This is feasible because both employers and employees share common interests: all are invested in ensuring workers receive high wages. Increased worker compensation would enhance their purchasing power, improving their social conditions and boosting entrepreneurs' profits.

In the "young" historical school, two philosophers stand out:

• Werner Sombart (1863-1941) interpreted the entirety of history as a spiritual development of humanity, asserting that the conditions for any human manifestation stem from spiritual impulses. Capitalism represents one stage in the evolution of the human spirit. Early capitalism is akin to a time of "heroic youth," wherein economic agents, imbued with youthful vigor, crafted the economy, often making myriad mistakes characteristic of youth. However, as time progresses, the economy matures, becoming more considered and moral, social distinctions dissolve, and new forms of economic organization emerge. Consequently, as the economy matures, it acquires a greater capacity to foster human happiness, establish thoughtful social institutions, and make judicious management decisions.
• Max Weber (1864-1920) entered the annals of science with his work "The Protestant Ethic and the Spirit of Capitalism" (1904), where he articulated the belief that the ethical principles of Protestantism propelled the development of a robust economic system, rendering Protestant nations affluent. Today, it is clear that Weber erred: the religious factor is not determinative for the economy, although the influence of religious doctrines on economic development has become an important issue for researchers.

By the late nineteenth century, classical institutionalism took shape, centering on attempts to explore economic laws based on definitions of human nature. Classical institutionalism is represented by several thinkers:

• Thorstein Veblen (1857-1929) founded the socially-psychological strand of institutionalism, positing that social and economic institutions are the result of past processes that have become habitual. With advancements in science and technology, these technical innovations became catalysts for profound changes in the economy; however, the psychological traits of the populace, now ingrained as habits, fundamentally define the essence of economic processes. While most historical-psychological habits are beneficial, some are detrimental. The most egregious remnant of the past is the idle class, a concept introduced by Veblen. The idle class represents vestiges of predators and ne’er-do-wells who once parasitized the body of the people. This habit of parasitism has been transferred to contemporary wealthy idlers, who, having acquired wealth, cease to work and instead feed off economic institutions. Yet, someone must own the capital and organize economic life. If the idle class poorly fulfills this role, a replacement is inevitable, as the evolution of the economy will reach a point when competent individuals, possessing quality training and representing the industrial elite, will displace the idle class and assume control of the economy.
• John Rogers Commons (1862-1945) proposed the idea that a distinctive feature of the economy in his time was the formation of trade unions, which capitalists must consider. Trade unions became institutions that curb the negative manifestations of capitalism.

After World War II, institutionalism developed in several directions collectively known as new institutionalism:

• The institutional-sociological strand emphasized changes in economic power. The French economist François Perrou (1903-1987) criticized his predecessors for accounting too extensively for extraneous factors in economic analysis while neglecting the economy itself. Perrou focused on analyzing economic power, studying the institutions that govern economic processes. He asserted that until the nineteenth century, the bearers of economic power were individuals accountable for their decisions (governments, capitalists). In the twentieth century, decisions are made by managers who bear no responsibility for their choices. This shift has led to the democratization of capital and a redistribution of profits. Adolphe Auguste Berle (1895-1971) and Gardiner Means (1896-1976) noted that corporations are now managed by professional managers rather than the capital owners. Whereas, in previous centuries, capital owners managed their enterprises and shaped economic policy, they have now become mere investors who do not oversee their capital but simply receive dividends.
• The foundations of industrial-technocratic institutionalism were laid by the Austrian-American economist Peter Ferdinand Drucker (1909-2005). In his 1949 work "The New Society: Anatomy of an Industrial Order," he described the second industrial revolution. While the first industrial revolution was characterized by the use of machines in production, the second revolution shifted the primary value of the economy from machines to intellect, training, and professionalism. Consequently, economic power transitioned from capitalists to managers.
• The ideas of evolutionary institutionalism were articulated by the American economist Walt Whitman Rostow (1916-2003). He argued that the economic history of humanity has passed through five stages: traditional society (where Eastern despotisms and Europe until the late seventeenth century relied on manual techniques and exhibited low productivity), transitional society (in late seventeenth- and early eighteenth-century Europe, faith in economic progress emerged alongside advances in science and technology), the stage of take-off (characterized by significant investments in industry, the establishment of factories, railroads, etc.), the stage of maturity (marked by oscillating economic progress and the emergence of new industries), and the stage of high mass consumption (where active automobile manufacturing and service industries dominate). Humanity is set to transition to a new type of society characterized by the diminishing role of ownership, a transfer of economic power to scientists and managers, the eradication of monopolies, the bridging of wealth gaps, and the optimal utilization of scientific and technological achievements. The eminent philosopher and sociologist Daniel Bell (1918-2011) posited that humanity progresses through three stages of economic and social development: pre-industrial, where advanced industry was lacking; industrial, where industrial enterprises flourished; and post-industrial, where more individuals work in service sectors ("white-collar workers") than in production ("blue-collar workers").

The next phase in the evolution of institutionalism is neo-institutionalism. Notable neo-institutionalists include Nobel laureates Ronald Coase (1910-2009), Oliver E. Williamson (b. 1932), Elinor Ostrom (1933-2012), and James M. Buchanan (1919-2013). Proponents of this strand have shifted their focus away from analyzing large economic systems to concentrating on the individual. By merging institutionalism with neoclassicism, they hold that humans tend toward opportunistic behavior and bounded rationality. According to neo-institutionalists, social institutions emerge spontaneously and are beneficial, as they constrain humanity's negative tendencies while fostering positive conduct.