Institutions, Policy and the Labour Market: The Contribution of the Old Institutional Economics

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This paper seeks to examine the relationship and the interaction between institutions, policy and the labour market in the light of the ideas of the first generation of institutional economists, who, in contrast to neoclassicals, conceived of economy as a nexus of institutions, underlying, therefore, the significant role of institutional and non-market factors in the functioning of an economic system. They also argued that markets are generally imperfectly competitive, and criticized those who define (economic) welfare only in terms of efficiency and satisfaction of consumer interests; institutionalists instead focus on issues related to justice, human self-development and labourers’ welfare. In addition, early institutionalists had paid considerable attention to the examination of the institutional framework of the labour market. In particular, the first generation of institutional economists highlighted the importance of institutions and other non-market parameters in determining the level of wages and employment (e.g. the role of the bargaining power of workers and employers). Furthermore, they made substantial contributions towards the field of labour policy and they were pioneers in the formulation of economic and social policy. Specifically, various modern institutions and labour market policies, such as unemployment benefits, industrial training and active employment policies, were implemented in the US, during the first decades of the 20th century, after the recommendation of the institutional labour economists. Therefore, their ideas, besides being interesting from a historical point of view, may also be useful in today’s analysis of workers’ problems and the functioning of modern labour markets.

Posted for comments on 5 Sep 2018, 8:47 am.

Comments (5)

  • Arturo Hermann says:

    I think your work is interesting and deserves publication. However, there are some aspects that, in my view, demand a more fully treatment. These are, in short, the following:

    (I) In the paper you rightly stress John R.Commons’s perspective but your account do not fully deliver the relevance of his contributions to labour economics. These can be found in blending around the concepts of transactions (bargaining, managerial and rationing) and of reasonable value the historical, cultural, economic and psychological analysis of labour markets.
    Relevant contributions in this respect can be found in, among others, History of Labour in the United States, Races and Immigrants in America, Labor and Administration, Institutional Economics.
    In such books are addressed intertwined and relevant issues (also for our time), like the role of unions and labour legislation, the role of firm’s organisation, the segmentation of labour force, the dynamics of migratory flows.
    True, you mention some of his contributions, but in a rather cursory way.
    For instance, more attention should be paid on the role played by Commons in drafting the 1932 “Wisconsin Unemployment and Compensation Law” and how he linked such experience to his notions of institutions, transactions and reasonable value (all this is addressed in the volume II of his Institutional Economics).

    (II) The same type of remarks applies also to Veblen’s “workmanship and parental bent” instincts. In this case, Veblen’s central contribution (The Instinct of Workmanship and the State of the Industrial Arts) should be taken into account. And something more should be said on the implications of these concepts for workers’ motivations and for the central Veblenian dichotomy between the objectives of pecuniary gain and serviceability. This theoretical approach would invite the analysis of how to steer ─ in our capitalistic institutions moslty driven by acquisitive propensities ─ a workmanship and parental bent oriented economy.

    As a general remark for the above points, it would add to the clarity of the text to distinguish better the various institutionalist contributions ─ for instance John R.Commons’s and Don D.Leschoier’s ─ on labour economics

    (III) In addressing A.Pigou’s theory of unemployment, you should also consider the related and important J.M.Keynes’s criticisms (in The General Theory of Employment, Interest and Money, appendix to chapter 19). This seems appropriate not only for completeness of analysis but also because there are various and complex links between original institutional economics and Keynes’s theory.

    • Ioannis Katselidis says:

      Ι would like to thank Dr. Arturo Hermann for his useful remarks. I think that all the three specific comments can be taken into consideration and addressed in a later version of my paper. Specifically, I will try to more fully deliver the relevance of Commons’ contributions to labour economics using also new material from the additional works you mentioned. Furthermore, Veblen made a significant contribution to the institutional conceptualization of labour; his “instinct of workmanship” was in full contrast to the neoclassical conception of labour according to which labour supply has a negative utility for the worker. Thus, following your suggestion, this aspect could be more fully treated. Finally, with respect to the third comment, there are indeed various and complex links between early institutional economics and Keynes’s approach, which, however, are out of the scope of the present paper. Nevertheless, I could write something regarding Pigou’s unemployment theory and the related Keynes’s criticisms found in the General Theory of Employment, Interest and Money.

  • Anne Mayhew says:

    This paper reaches an important and valid conclusion by way of an overly ambitious survey of some of the contributions of Original Institutional Economists (OIEconomists) to the study of labor markets and working conditions in the USA.

    Katseledis is certainly correct in concluding that the ideas of the early OIE are useful in today’s analysis of modern labor markets and work place terms and conditions. This can be seen in the work of those labor economists who still work with the OIE ideas. Here I have in mind the work of B. Kaufman, Dell Champlin, and of Ellen Mutari and Debora Figart in their recent book JUST ONE MORE HAND. It can also been seen in the work of such “think tanks” as the Economic Policy Institute which has ties to the OIE past. There is a suggestion in this paper that the author’s conclusion is somehow surprise, and it may be to those trained only in the neoclassical tradition, but to those who know the history of OIE thought it is not surprising at all.

    And, this is a problem because the overly ambitious reach of the paper does not serve well to introduce the neoclassically trained economist to the OIE tradition. This is a hard thing to accomplish in a short paper but in this case Katselidis fails because the paper attempts too much and lacks sufficient focus

    The problem starts with a loose explanation of what it meant to be an “early instittuionalist.” Katselidis writes that they “. . . conceived of economy as a nexus of institutions, arguing that markets typically operate under imperfect competition. Accordingly, beside price mechanism, institutional and non-market factors such as proprietary rights, professional and trade associations, traditions, customs, etc. play an important role in the functioning of an economy” This delineation is inadequate because it makes the contrast between imperfection competition with the neoclassical ideal of perfect competition central understanding of the OIE when, in fact, the idea of market competition plays a limited role in explaining the institutionalist approach.

    As Katselidis moves on in Part 2 he does a better job of focusing on the essential characteristics of OIE. Even there, however, it is worth emphasizing that the non-OI Economists of the early 20th century were also focused on “practical economic issues” but those were primarily issues of pricing and of money and not of the conditions of work and employment. Katselidis is on much firmer ground in noting that the OIE adopted an “empiricist approach to theorizing.” and, in Part 3 he repeats the point by quoting from Bruce Kaufman about the importance for the OI labor economists of the “go and see” approach.

    But here Katselidis runs into the problem of dealing with both Commons and Veblen as two of the three most important early OI Economists. It is absolutely true that both were important but Veblen’s contributions to labor economics, which Katselidis introduces in the same Part 3 where he talks of “an empiricist approach” as fundamental. It can be argued, and I would argue, that Veblen’s rejection of the pleasure-pain approach to labor theorizing was based on observation, but I would not attempt to the sustain the argument that it was based on the kind of “go and see” approach that Commons used.

    Without intending to Katselidis has created a dilemma for himself by attempting to explain the quite complex approach hared by Veblen and Commons in a very few works. And very importantly, it is not clear to me why Katselidis wants to do this. There are already masterful accounts of what the OIE approach was in the field of labor economics (Kaufman, for example) and of what set the OIE approach apart more generally (Rutherford). I would further recommend John Dennis Chasse’s book A WORKER’s ECONOMIST, for illustration of the importance of the “go and see approach” and for a detailed description of how Common’ approach to labor issues developed over time. In other words, the purpose of Katselidis paper is just not clear to me. There are other excellent accounts, some long but some relatively short, that do what h e says he is setting out to do. If he were able to add some new understandings or some cross-national or cross-disciplinary perspectives this would be valuable. I just do not find these in the present paper.

    But this is too harsh. I do think that Katselidis reaches a valuable conclusion and a conclusion that deserves to be repeated. I simply don’t think that htis paper as it stands brings great strength to that conclusion. Instead, it will probably be confusing for those who do not already know of the OIE tradition. I do, however, see this paper as a strong beginning. For example, were Katselidis to start with a relatively detailed account of a modern labor market problem and then show how the OIEconomists would have tacked it and then use that to summarize their approach, that could be most useful. I applaud Katselidis recognition of the importance of the approach and encourage him to continue working on this project.

    • Ioannis Katselidis says:

      First of all, many thanks to Professor Mayhew for her decision to read and comment my paper. I also wish to thank her for the literature recommendations that seem very interesting and should be certainly included in a revised version of the article. Professor Mayhew is right to say that it is necessary to give a better explanation of what it meant to be an early institutionalist and that the market competition idea is not central in explaining the institutionalist approach. She is also correct to illustrate that both institutional and non-institutional economists stressed emphasis on “practical economic problems”, though their focus was rather on different issues. Moreover, as far as Commons and Veblen’s approaches are concerned, both made significant contributions towards institutional economic analysis, but certainly they adopt different paths and methods. The present paper actually refers only once to Veblen, and specifically to his contribution towards the institutional conceptualization of labour (e.g. the instinct of workmanship), which was in sharp contrast to the neoclassical viewpoint (e.g. the negative utility of labour). As Mayhew correctly points out, Veblen’s approach cannot be characterized as empiricist and certainly was not relied on the kind of “go and see” approach that Commons used. However, following Mayhew’s remark, the paper may need to provide a clearer description with respect to the explicit differences between Veblen and Commons. Finally, her suggestion “starting with a relatively detailed account of a modern labor market problem and then show how the OI Economists would have tacked it and then use that to summarize their approach” is very interesting, but with all due respect to Professor Mayhew, I felt that this is a different project and is out of the scope of the present paper which has a more historical and theoretical perspective, trying to provide a somewhat broad overview of the early institutional theses on labor market issues. In any case, I wish to thank again Professor Mayhew for her constructive comments.

  • Sebastian Thieme says:

    I enjoyed reading the manuscript and I think it’s a good idea to illustrate the thinking of old-institutionalism on the ground of real labour policy and real labour market. Eventually, I follow the author’s conclusion that old-institutionalists’ ideas may “be useful in today’s analysis of workers’ problems and the functioning of modern labour markets”.

    However, there are some things in the beginning of the text leaving me with some minor questions.

    1. The author wrote that until the end of World War II old-institutionalism “had lost much of its previous influence on economic thought” (p. 3). I’m aware that the article does not address the question about the reason of this vanishing of the old-institutionalism. However, I’m wondering whether (and if so, in which way) this disappearance of old-institutionalism has something to do with the question addressed by the article (interaction between institutions, policy and labour market). Is the disappearance of old-institutionalism related to the focus on real world labour as mentioned within the text? From the fact that “institutional economists were the founders of the personnel management and industrial relations” (p.14) the question arises whether old-institutionalists did migrate to other disciplines (business administration, industrial sociology etc.). Perhaps the author could spend some words about that.

    2. The author stated that the definition of institution “cannot be absolute and unique” (p. 3). However, then the author left the readers with only the reference to the definition of Commons while some readers may expect one or more examples illustrating the directly aforementioned fact that the definition of institution “cannot be absolute and unique”. Alternatively to mentioning more examples of definitions, the author can give his own working definition of “institution” being open or “indefinite” enough to cover a variety of definitions and considering characteristics mentioned later (“Nevertheless, institutions should not be regarded as given, since they are human constructs and are subject to perpetual change”, p.5)