Commons Economic Common Economics

Commons's Economic Ideas, Common Law Economic

Common Sense Economics: Although Commons arrived at his criticism of orthodox economic theory independently, it parallels that of Veblen and Mitchell. His entire approach to social problems rejected the narrow, static, deductive approach of neoclassical theory. Commons tried to bring all the social sciences and law into the analysis. He viewed society and the economy as evolving and changing and sharply objected to the almost exclusively deductive orthodox approach, with its assump­tions of hedonistic agents and competitive markets. Finally, Commons found that the implicit assumption of harmony in the economy, on which the laissez-faire policy was based, was contrary to his empirical observations.

The starting point for Commons's analysis of American capitalism was the same as that of orthodox price theory, but the analyses themselves were quite different. He asserted that the orthodox theory of price formulation and exchange was unrealistic. It assumed rational individuals acting almost mechani­cally in competitive markets. Commons said that it is not atomistic, hedonistic individuals acting in competitive markets that form the exchange relationships connecting the separate parts of the economy. Orthodox price theory might satisfactorily explain exchange and price in a few very special situations, such as highly organized commodity or security markets, for in these markets there are exchanges but no exchange relationships. In these markets, where there is complete anonymity between buyer and seller, habit, custom, and all the cultural, sociological, and psychological forces that impinge on usual market transactions are absent. Transactions became a key element in Commons's theoretical struc­ture:

In fact, transactions have become the meeting place of economics, physics, psychology, ethics, jurisprudence and politics. A single transaction is a unit of observation which involves explicitly all of them, for it is several human wills, choosing alternatives, overcoming resistance, proportioning natural and human resources, led on by promises or warnings of utility, sympathy, duty or their opposites, enlarged, restrained or exposed by officials of government or of business concerns or labor unions, who interpret and enforce the citizens' rights, duties, and liberties, such that individual behavior is fitted or misfitted to the collective behavior of nations, politics, business, labor, the family and other collective movements, in a world of limited resources and mechanical forces.

Commons found three types of transactions in the economy. "Bargaining transactions transfer ownership of wealth by voluntary agreement between legal equals."25 Legal equality does not imply equal economic power. Bargaining transactions that determine prices in final and factor markets are the subject matter of orthodox price theory, but this theory is really applicable only to the unusual situation of competitive markets in which bargaining power, coercion, persuasion, habit, custom, and law are ignored by assumption. A second type of transaction is the managerial transaction, which involves commands by legal and economic superiors to inferiors. "It is the relation of foreman and worker, sheriff and citizen, manager and managed, master and servant, owner and slave."26 Managerial transactions involve the creation of wealth. The third type of transaction Commons identified is rationing transactions. They involve "the negotiations of reaching an agreement among several participants who have authority to apportion the benefits and burdens to members of a joint enter­prise."27 Commons then moved on to define what he called institution:

These three types of transactions are brought together in a larger unit of economic investigation, which, in British and American practice, is named a Going Concern. It is these going concerns, with the working rules that keep them going, all the way from the family, the corporation, the trade union, the trade association, up to the state itself, that we name Institutions. The passive concept is a "group"; the active is a "going concern."

Institution is defined as collective action in control, liberation, and expansion of individual action. Economic transactions involve conflict—the more I receive, the less you receive. These conflicts are not manifest in most transactions, because over time, precedents are established by custom, habit, law, and so forth, that bring order out of conflict. Commons called these precedents working rules of the going concerns.

With this bare outline of Commons's approach, it is possible to outline his analysis of American capitalism. Neoclassical theory held that the conflicts arising from problems of scarce resources could be solved in impersonal com­petitive markets, which by assumption removed all cultural, sociological, psy­chological, and legal elements from the analysis. It maintained that for the most part, the working out of these conflicts in competitive markets led to results that were superior to any results that might be achieved through governmental intervention.

The basic thrust of Commons's approach was to include the social sciences, history, and law in his analysis and to recognize that government intervention was often necessary to bring about desirable social consequences. Most of our economic activity is not individual activity; we act as members of groups that are guided and molded by the working rules of going concerns. Although the function of these working rules is to bring order out of conflict, at times changes brought about by history lead to new conflicts. These conflicts or 'disputes are then settled, and the old working rules are modified. This is an endless, ongoing process. The proper subject matter of economics, Commons maintained, is the institutions that shape our lives and society by means of collective action. This collective action not only controls individual action but also liberates it by freeing the individual "from coercion, duress, discrimination, or unfair competition, by means of restraints placed on other individuals. And collective action is more than restraint and liberation of individual action—it is an expansion of the will of the individual far beyond what he can do by his own puny acts."

Because an unregulated economy produces undesirable social consequences, capitalism needs to be modified by governmental intervention. Monetary policy to prevent depression, legislation to recognize the right of labor to organize, workers' compensation to assist the unemployed, health and accident insurance to care for the unfortunate, regulation of public utilities to prevent monopoly practices, and other social reforms were advocated by Commons. Thus, although he had almost no impact on orthodox theory, the reforms he advocated and helped to implement have significantly influenced the institutional structure of American capitalism.