Quasi Institutionalists

Modern institutionalists remain a relatively tightly knit group intent on sustain­ing an ongoing dialogue among themselves and dispensing the insights of Veblen, Commons, Mitchell, and their followers. There exists another group of writers who accept many of the insights of the institutionalists and who were strongly influenced by them, but who are too individualistic and iconoclastic to fit the institutionalist mold. These include Joseph Schumpeter, Gunnar Myrdal, and John Kenneth Galbraith.

Joseph Schumpeter

Because Schumpeter's provocative views on capitalism were treated in Chapter 15, we need only briefly examine his contributions in the context of their relationship to heterodox economic ideas. Schumpeter came to the United States in the early 1930s and taught at Harvard, hardly a hotbed of heterodoxy. Yet he befriended the young Paul Sweezy; and although Schumpeter was clearly a conservative and not a Marxian, he acknowledged the power of Marx's vision of historical change. One element in Schumpeter's heterodoxy was a lack of interest in the equilibrium focus of neoclassical theory. He concerned himself instead with the dynamic aspects of theory, as manifested in The Theory of Economic Development (1912) and Business Cycles (1939), and especially in the delineation of the entrepreneur, a key figure in all of his analysis. Schumpeter, who like many heterodox economists painted with a broad brush, found the very abstract model of orthodox theorists too limiting. He continuously demonstrated the heterodox proclivity of drifting outside the intellectual boundaries of neo­classical theory, as he poached on the preserves of sociology, history, and political science.

Although he unflinchingly declared his interest in and support of the orthodox paradigm, in his work he ignored the practices he advocated. For example, he avidly supported greater use of mathematics and econometrics in economics, but his own work was almost completely devoid of these orthodox tools. Another example of this curious tendency to say one thing and do another can be seen in his encyclopedic History of Economic Analysis (1954). In the introduction, Schumpeter promises to present a history of economic analysis and to hold to the absolutist's interpretation of the development of economic theory—namely, that modern theory contains an analytical positive core free of value judgments and that past contributions to theory are interpreted through the use of modern standards and are valued because of their role in providing a better understanding of the modern economy. His plan was to show how there has been a steady progression from error to greater and greater truth. However, the book is not a history of economic analysis but a history of economic thought. Nevertheless, Schumpeter is complex, multifaceted, and in his own way mainstream; this is reflected in the fact that he reserved his highest honors for those economists who created modern, abstract general equilibrium theory.

Schumpeter formed no school to carry on his economics, but his dynamic approach to economic institutions and development is reflected in the work of Richard Nelson and Sidney Winter, and also in the work of Nathan Rosenberg and L. E. Birdzell, Jr. His focus on entrepreneurial activity also lives on in the works of I. M. Kirzner, Harvey Leibenstein, and Mark Casson.

Gunnar Myrdal

Our second quasi-institutionalist is Gunnar Myrdal (1898-1987), one of many Swedes who have made important contributions to economics. In this tradition Knut Wicksell is the most eminent, but after Wicksell there are many of nearly equal stature in the development of economic theory. We have chosen Nobel Prize-winning economist Gunnar Myrdal not because he is typical of the Swedish economists but because he represents distinctly heterodox views. Myrdal came to be an international figure whose interests led him to study economic policy issues around the world, though early in his career he was more interested in technical questions of pure theory His classic study of the relationship between ideology and theory, The Political Element in the Development of Economic Theory (1930), displays interests ranging throughout the social sciences and humanities. In the early 1940s he ventured into sociology with a book on the population problem and a major study of blacks in America. In the Southern states, Myrdal's reputation was established with the publication of An American Dilemma: The Negro Problem and Modern Democracy (1944), which figured significantly in the legal battles for greater civil rights for blacks in the post-Wotld War II period. When later in his career he came to focus his attention on planning in developed and underdeveloped countries, he brought to this task a rich experience as professor of economics, member of parliament, cabinet minister, sociologist, and international civil servant.

Myrdal is critical of orthodox economic theory, yet his criticism is not as strident as that of Veblen, Commons, or Hobson. Temperamentally more like Wesley Mitchell, he objects quietly and then busies himself with the tasks at hand. His major criticisms of orthodox economic theory center on the role of value judgments in theory, the scope and methodology of theory, and the implicit laissez-faire bias of theory.

Myrdal maintains that attempts by orthodox theorists to develop a positive science, free of normative judgments, have failed. In his view, it is impossible to completely separate the normative from the positive, to achieve an analysis devoid of oughts. The orthodox attempt, he asserts, merely produced a body of propositions in which normative judgments wete implied but never made explicit. Yet economists are and should be interested in questions of policy, Myrdal points out; thus, their choice of subjects to study and methods to use will necessarily reflect value judgments.

In the original Swedish edition of The Political Element in the Development of Economic Theory, he had concluded, however, that although ideology and positive theory were often intimately associated in the early stages of the Formation of new theories, over time the normative or ideological elements would be purged and a pure, positive, scientific theory would remain. Economists could then use this positive, value-free body of knowledge in conjunction with the normative values implicit in any given set of goals to make policy. An English translation of this book was published some fifteen years later. Its preface reveals that Myrdal had completely reversed his position on this important question:

This implicit belief in the existence of a body of scientific knowledge acquired independently of all valuation is, as I now see it, naive empiricism. Facts do not organize themselves into concepts and theories just by being looked at; indeed, except within the framework of concepts and theories, there are no scientific facts but only chaos. There is an inescapable a priori element in a scientific work. Questions must be asked before answers can be given. The questions are an expression of our interest in the world, they are at bottom valuations. Valuations are thus necessarily involved already at the stage when we observe facts and carry on theoretical analysis, and not only at the stage when we draw political inferences from facts and valuations.

I have therefore arrived at the belief in the necessity of working always, from the beginning to the end, with explicit value premises. The value premises cannot be established arbitrarily; they must be relevant and significant for the society in which we live

A second criticism leveled by Myrdal against orthodox theory concerns its scope and method. In common with many other heterodox economists, he maintains that economics is too narrowly defined by orthodox theory. Myrdal wants to bring into his analysis material from all the social sciences, particularly psychology and sociology. He also criticizes the focus of economics on short-run issues, whether they involve the allocation of resources or fluctuations in economic activity. Myrdal is more interested in the longer-run questions con­cerning economic growth and development and believes that much of the analytical framework and concepts of orthodox theory are inappropriate fot this task. Myrdal finds the orthodox fixation on equilibrium particularly inappropri­ate in trying to explain the economic, social, and political changes taking place throughout the world. He abandons the static equilibrium analysis of conven­tional theory and develops instead a notion of cumulative causation. His idea of cumulative causation is, in essence, a general, dynamic equilibrium framework in which the term general implies that other than putely economic factors enter the analysis. This idea will be demonstrated later with an example from Myrdal's analysis of the economics of underdevelopment.

Finally, Myrdal is critical of what he regards as the bias of orthodox theory, which assumes that there is harmony in the system and that laissez faite is therefore the best policy fot all nations to follow, regardless of their stage of economic development. Myrdal views the long-run development of the Western industrialized nations as passing from a period of mercantilist governmental controls to a period of liberalism and laissez faire, to a period of welfare politics in which governments intervene on a more or less pragmatic basis to ease pressing social problems, to a final period of planned economy, which has not yet been reached by some industrial countries, particularly the United States. The end of laissez faire is marked by increasing government involvement and intervention on a piecemeal basis; with no overall coordination. Present experience, according to Myrdal, reveals the necessity of planning the macroeconomic goals of the economy and letting the market and, for the most part, private enterprise allocate resources within this plan. Without the overall planning to take us beyond the welfare state, he says, we will have an economy characterized by inflation, unemployment, and balance of payments difficulties. Myrdal's model of plan­ning is not that of Soviet economics, nor is it as complete as indicative planning.

It supposes national planning of the macroeconomic variables with a minimum of bureaucracy and maximum decentralization of economic decision making. Looking into the future, Myrdal sees the need to extend planning to the international level so that the fruits of the Industrial Revolution can be extended to everyone as we achieve a global welfare society.

Myrdal took an interest in underdeveloped countries and the world economy as well as in the special problems of affluent economies. Many of his books have been read in the United States by people other than economists; these books include An International Economy (1956), Rich Lands and Poor (1957), Beyond the Welfare State (1960), Challenge to Affluence (1962), Asian Drama (1968), and The Challenge of World Poverty (1970). In his study of the underdeveloped nations, Myrdal found that orthodox economic theory was not very helpful. There are two major areas in which it fails. On the one hand, orthodox international trade theory gives incorrect answers when applied to the foreign trade problems of developing nations. On the other hand, orthodox theory seems incapable of formulating internal policies that will lead to economic growth and development.

Let us examine one element of Myrdal's criticism of orthodox theory to obtain an idea of his approach. Myrdal maintains that there is a widening gap in real income between the rich and poor nations. Orthodox economic theory has no satisfactory explanation for this widening gap, nor does it offer any suitable policies to reverse these trends. The definitions economists use are too narrow, and the models for economic development are in the basic tradition of static-equilibrium models; they fail to grasp the complex interrelationships among economic, sociological, political, and psychological factors that mold economic development. Myrdal argues that in order for anyone to understand economic development, "history and politics, theories and ideologies, economic structures and levels, social stratification, agriculture and industry, population develop­ments, health and education, and so on, must be studied not in isolation but in their mutual relationship."

The orthodox theorist believes that increased capital formation will lead to economic growth and therefore concludes that an unequal distribution of income is desirable, because it will result in less aggregate consumption and more saving and investment. Yet this is too narrow a view of the concept of investment. Myrdal contends that labor efficiency is very low in underdeveloped countries partly because of all the evils associated with poverty. Increased consumption for the laboring classes, he contends, will therefore lead to better health, greater productivity, and better attitudes toward work. Thus, what an orthodox econo­mist would call consumption expenditure is in this case an investment in human capital. The failure to define expenditures in terms of their impact on produc­tivity "is one reason for doubting the usefulness for South Asia of Western-type economic models which stress the relationships among output, employment, savings, and investment."

Some thirty years of studying economic and social problems convinced Myrdal of the necessity for an end to laissez faire and for a thoroughgoing program of planning on both the national and the international levels. Coordi­nated national planning consistent with freedom has been implemented in Western European countries, he observes, although some difficulties with plan­ning remain to be solved. But the United States, Myrdal believes, has failed to recognize the necessity of planning its economy, in spite of the obvious social and economic costs of not planning. And the underdeveloped countries cannot afford the luxury of evolving planning systems in the manner of the Western European countries—the stages of laissez faire, piecemeal intervention, and then national planning. The poor countries must begin, Myrdal reasons, with com­prehensive national planning, if they hope to stimulate their static, past-bound, stagnant economies, to solve their population problems, and to significantly increase their per capita incomes so as to promote the long-cherished Western ideal of social justice.