The Evolution of Institutional Economics: Agency, Structure and Darwinism in American Institutionalism

Published by EH.NET (January 2005)

Geoffrey M. Hodgson, The Evolution of Institutional Economics: Agency, Structure and Darwinism in American Institutionalism. London and New York: Routledge, 2004. vix + 534 pp. $135 (hardcover), ISBN: 0-415-32252-9; $43.95 (paperback), ISBN: 0-415-32253-7.

Reviewed for EH.NET by Sherry Davis Kasper, Department of Economics, Maryville College.

At the beginning of this book, Hodgson gratefully acknowledges the time to read, think and research his new position at the University of Hertfordshire has provided him. The remarkable array of ideas he imparts in this book bears witness to that gift. They range from the development of Charles Darwin’s concept of natural selection in the nineteenth century to late twentieth-century developments in psychology, philosophy, complexity theory and economics. Along the way, the reader learns about ways of thinking about the relationship between agency and structure; the evolution of social theory, psychology, and philosophy; the life, times, and intellectual accomplishments and failures of Thorstein Veblen; the development of American institutionalism in the twentieth century; and the ripe conditions for a revival of Veblenian institutionalism at the present time. In addition, Hodgson provides readers with detailed footnotes and an extensive bibliography, both of which can serve as a launching point for their education in these ideas.

Hodgson views this book as a companion to his earlier volume How Economics Forgot History (2001). The theoretical focus of the first book was “the limits of general theory in the social sciences” and the consequent necessity for scholars to study how “socio-economic systems [move] through time and space” (p. xiv). To explore these ideas, he examined the effect of the German historical school on the development of American institutional economics. This new book changes its theoretical focus and moves forward in time. “The theoretical focus here is on the interaction between the individual and society,” that is the relationship between agency and structure. The time period covered runs from the development of Darwin’s ideas to the decline of institutional economics after World War II.

Hodgson divides the book into five sections. Part I serves as an introduction to the book and to the core concepts on which Hodgson hopes to found the revival of Veblenian institutionalism. Chapter 1 introduces the nature and scope of the argument. Chapter 2 provides a discussion on how social theorists have analyzed the relationship between agency and structure. Chapter 3 ends this section with an examination of the evolutionary perspective of analysis, including descriptions of Darwinism, Lamarckism, and Weismannism.

Part II, titled “Darwinism and the Victorian Social Sciences,” examines the “origin and meaning of Darwinian ideas and the early impact they had on the social sciences” (p. 10). Chapter 4 elucidates and contrasts the principles of Darwinism with those of social Darwinism as developed by Herbert Spencer and William Graham Sumner during the late 1800s. Chapter 5 describes “early attempts to apply Darwin’s ideas to social evolution” (p. 10). In this section, Hodgson focuses on the work of philosopher George Henry Lewes, natural scientist Conwy Lloyd Morgan, and philosopher David Lloyd Ritchie to establish that Veblen could build on earlier attempts to apply the Darwinian principle of natural selection to both the levels of the individual (agency) and the institutional evolution (structure).

Part III, titled “Veblenian Institutionalism,” “discusses Veblen’s institutionalism and measures his achievement” (p. 10). In chapter 6, Hodgson begins his account by providing biographical detail about Veblen, including potential influences on his thinking. He spends a section of the chapter expanding further on the ideas and possible influence of Morgan. Though Hodgson cannot confirm that Veblen and Morgan met, he does establish that both were at the University of Chicago at the same time. He speculates that Morgan’s ideas about emergence paid an important role in Veblen’s contribution that “individual and social structures were in a process of coevolution, rather than one being the determinant of the other” (p. 133).

In chapters 7 and 8, Hodgson describes Veblen’s development of a Darwinian institutional economics. Initially he spends time documenting his position that Veblen made his primary theoretical contributions to economics from 1896 to 1909. He continues with an extensive discussion of how Veblen drew on the evolutionary theory of Darwin, the instinct-habit psychology of William James and William McDougall, and pragmatist philosophy of James and Charles Sanders Peirce to develop institutional economics. Hodgson concludes by arguing that Veblen rejected both methodological individualism and methodological collectivism in favor of a theory that views “institutions as both units of evolutionary selection and repositories of knowledge” (p. 10).

In chapters 9 through 11, Hodgson critically evaluates some of Veblen’s ideas to explain why Veblenian institutionalism never took hold. First, he describes the “defects in [Veblen’s] account of the ‘instinct of workmanship’ and its alleged conflict with pecuniary motives” (p. 10). In Chapter 10 Hodgson delineates the two research programs present in The Theory of Business Enterprise (1904). The first focuses on the “role of expectations and financial speculation in business cycles” (p. 10). Hodgson laments that if Veblen had focused more on developing this idea then he could have “upstaged” Keynes by several decades (p. 10). Unfortunately, in Hodgson’s view, Veblen dissipated his energy developing the second research program — “the alleged influence of the machine process on habits of thought” (p. 11). Hodgson concludes by arguing that the development of institutional economics was irreparably harmed by Veblen’s decision to abandon the study of philosophy by 1909. This desertion meant that Veblen missed connecting with the developers of emergentist philosophy during the 1920s. Their ideas about evolution on the social level could have rescued Veblenian institutionalism from the contamination of those who used principles of biological evolution to justify racist, sexist and imperialistic practices, such as the Nazis.

In chapter 12, Hodgson concludes this part with a description of the launch of American institutionalism. In it, Hodgson asserts that its Veblenian foundations were harmed by two factors. First, the development of behavioral psychology and positivism challenged the instinct-habit psychology and pragmatist philosophy on which Veblen founded his institutionalism. Second, a movement emerged to separate social science from biology, due to racist, sexist and imperialistic policies that groups such as the Nazis were justifying on evolutionary grounds.

Part IV, titled “Institutionalism into the Wilderness,” provides an overview of the birth and decline of American institutionalism during the interwar period. Initially, Hodgson presents case studies describing how individuals that he classifies as institutional economists dealt with the relationship between agency and structure in their work. These include John R. Commons, Wesley Mitchell, Frank Knight and Clarence Ayers. Chapter 18 returns to a general discussion of institutional economics after World War II. Hodgson highlights external and internal reasons for its decline. External factors include an inability to provide a theoretical explanation for the Great Depression, a failure to provide a remedy for the Great Depression, the focus of economics during World War II, and the change in the nature and scope of economics to “a greater technocratic bias” after the war (p. 388). Internal factors include the absence of a “systematic treatise on institutional theory”; Ayers’ reinterpretation of institutions as inhibitors rather than promoters of evolution; the abandonment of price theory by leading institutionalists; the lack of consensus on fundamental methodological and psychological issues; and the focus on ideology and moral pronouncements to the detriment of theoretical developments (p. 391).

Part V, titled “Beginning the Reconstruction of Institutional Economics,” serves as Hodgson’s manifesto about ways to generate “the revival of a Veblenian-style institutionalism” (p. 11). Chapter 19 outlines recent developments in psychology, philosophy, complexity theory and economics that support the reintroduction of Veblen’s ideas. Chapter 20 illustrates how institutional economists can use Veblenian institutionalism to solve current problems. This chapter concludes with a summary of lessons learned from reconstructing the history of institutional economics and outlines the promise of Veblenian institutionalism for the future.

In terms of assessing this book, as a scholar of the development of economics during the interwar period, I was not fully persuaded by Hodgson’s description of the decline of institutionalism, because it was not always clear to me why he selected for analysis the four economists that he did. He states that he chose Commons, because he wanted to evaluate his “attempt to provide institutional economics with a systematic methodological foundation,” an effort Hodgson judges as a failure (p. 287). Hodgson seems to have selected Mitchell, because his success during the interwar period at the National Bureau of Economic Research (NBER) and in developing macroeconomics made him “the second most important figure in the history of institutional economics” (p. 309). He appears to have chosen Ayers because his theory of the dichotomy between technology and ceremony “was to sustain and become central for the dwindling numbers of American institutionalists for more that fifty years” (p. 355). He states that his purpose for examining the ideas of Knight is “to situate [him] in the broad tradition of American institutional economics, and to consider his views on the relationship between neoclassical and institutional economics, on the problem of agency and structure, on psychology and its relation to economics” (p. 323).

Yet, these choices seem arbitrary. Commons, Mitchell and Ayers do stand out as leading institutional economists. At the same time, during the interwar period, other individuals were identified as providing successful models of institutional economics, such as Walton Hamilton and his study of the coal industry and John Maurice Clark and his study of costs. In addition, no consensus exists on the fact that Knight was an institutionalist. In fact my reading of Knight’s work suggests that ultimately he epitomizes the questioning skeptic who aimed to keep his fellow social scientists aware of and accountable for the limitations and possibilities of their methods of analysis. Thus after reading Part IV, I was left wondering if Hodgson’s historical narrative and subsequent interpretation would have been different if he had selected a different set of interwar economists.

On a different level, the amazing breadth of this book emerges as both a virtue and a vice. Its virtue is that it enlightens the reader immensely. For example, I decided to accept this review, because I wanted to learn more about Darwinism and its influence on the development of the social sciences in America. Reading this book enabled me to accomplish that goal. Hodgson provides a detailed description of Darwinism and the ideas that Darwin drew on to develop his ideas about evolution. This introduction to the foundations of Darwin’s thought took the reader to discussions of philosophy, social theory, psychology and philosophy. Hodgson also clearly explained the differences between Darwinism proper and its corruption to the social Darwinism of Spencer and Sumner. I then learned how Veblen drew on the ideas of Darwin to develop his multiple-level evolutionary economics. Finally, I gained a fuller understanding of why the majority of social scientists abandoned evolutionary ideas. Due to the book’s expansive range, other readers can come to this book with a different interest and come away enlightened.

Yet, there is also a vice inherent in this amazing breadth. First, its complexity sometimes makes following Hodgson’s argument a challenge. For example, Hodgson examines pieces of emergentist philosophy in various ways throughout in the book. Some of the times, the text is an historical narrative. For example, in chapter 5, he describes the ideas that were precursors to this philosophy. In chapter 11, when discussing how Veblen got institutional economics off track, Hodgson continues with the historical narrative, providing a detailed description of the “flowering” and “importance” of emergentist philosophy in the 1920s (pp. 237, 242). But suddenly at the end of chapter 11, he moves from historical narrative to theoretical explication to present his view of what Veblenian institutionalism would consist of on “emergentist foundations” (p. 246). Since Part V of the book is designed to present the reconstruction of Veblenian institutionalism, an abbreviated rebuilding at this point in the book diverts the reader from the historical narrative and makes following the argument more complicated. On some level, Hodgson seems aware of this problem. Throughout the book, he adds statements letting the reader know that he will return to a particular train of thought in a later chapter, or that the reader can return to an earlier section of the book to refresh her understanding. Thus, I think Hodgson could have made a more persuasive argument if he had organized it more logically.

Second, the breadth of the book also detracts from his proposal to rebuild institutionalism. I sense that Hodgson believes that he must provide much detail in order to convince readers of the necessity and possibility for reconstruction of institionalism at this place and time. But the reader has to sift through so much to get to his manifesto, that I fear Hodgson will lose many along the way. And that loss would be disturbing, because twenty-first-century economics is in need of some reconstruction so that it can understand and remediate the problems of real people. And Hodgson has provided some ideas that might help move institutional economics in a more fruitful direction.

(Geoffrey Hodgson is Research Professor in Business Studies at the University of Hertfordshire, UK. He was formerly a Reader in Economics at the University of Cambridge, UK.)

Sherry Davis Kasper, Professor of Economics at Maryville College (Maryville, Tennessee) is an historian of economics who studies the evolution of American economic thought in the twentieth century. She recently published The Revival of Laissez-Faire in American Macroeconomic Theory: A Case Study of the Pioneers (2003).