The Psychological Contributions of Pragmatism and of Original Institutional Economics and their Implications for Policy Action

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The aim of this work is to illustrate the psychological contributions of Pragmatism and of the Original Institutional Economics (also referred to as OIE or institutionalism), and their relevance for improving the process of social valuing and then the effectiveness of policy action.

As a matter of fact, both institutionalist and pragmatist theories were well acquainted with various strands of psychology, and some of them also provided relevant contributions in this respect. Moreover, these theories present significant complementarities both between themselves and with important concepts of social psychology and psychoanalysis. The work will address the following aspects:

(I) The main characteristics of pragmatist psychology, especially in their social implications. We will chiefly analyse the main works of William James and George Herbert Mead, with particular attention to their social implications. We will also underscore the relevance of John Dewey’s seminal article, “The Reflex Arc Concept in Psychology”, which reached out to many domains of social and psychological sciences.

(II) The psychological contributions of institutionalism. We will pay particular attention to Thorstein Veblen’s theory of instincts and John Rogers Commons’s theory of negotiational psychology.

We highlight the circumstance that these theories present, despite a number of differences, relevant complementarities.

For instance, it seems true that, (i) as underscored by Veblen, persons are driven in their action by their instincts (or propensities), which interact in a complex way with the characteristics of the institutional context; and that (ii), at the same time, as highlighted by Commons, persons acquire in their reciprocal interaction an “institutionalized mind” that orients the expression of their propensities according to their role in economy and society.

(III) The interdisciplinary potential of pragmatist and institutionalist psychologies and some difficulty for their unfolding. We then look at the role that psychoanalysis can play in understanding economic and social phenomena and in promoting social change.

(IV) The implications of the previous analysis for improving the process of policy formulation. We will address in particular the intertwined issues of social valuing and democratic planning.

Such interdisciplinary perspective, by rendering “endogenous” many aspects usually treated as “exogenous variables” in orthodox domain, will open the way to a better understanding of many complex and interrelated phenomena. These include consumers’ and workers’ motivations, micro and macroeconomic imbalances, the structural transformations of the system, the issues of social justice and environmental sustainability.

For instance, in devising policies for promoting workers’ motivations, the focus will be not only on the monetary side but also on the adoption of measures aimed at promoting participation in the management of their institutions.


Posted for comments on 13 Feb 2019, 4:16 pm.
Published in Economic Thought 9.1

Comments (4)

  • Geoffrey M. Hodgson says:


    This is an ambitious and useful review and summary of aspects of pragmatist and institutionalist thought. It takes us through the pragmatist psychology of William James and of George Herbert Mead, and then onto the original institutional economics. Later sections go further, to consider policy issues, including advocacy of ‘democratic planning’. Consequently, the paper covers too many big issues for a conventional academic journal article.

    The strongest sections of the paper are on James and Mead. But even here the writing could be tighter, and the narrative could go into more depth, with comparisons with later authors, for example.

    Any overall discussion of the original institutional economics is problematic, because the OIE contains a number of varied strains. The narrative here over-emphasises commonalities and under-emphasises differences, some of which are noted below, particularly on the question of psychology.

    The final part of the essay attempts to show that pragmatist psychology and the original institutionalism provide support for a policy of ‘democratic planning’. This is unconvincing and the paper would better if this entire argument were removed. The particular argument could be attempted in another paper.

    The particular argument as it stands is unconvincing, for several reasons. It is a core part of pragmatist and Veblenian thinking to stress habit rather than rational calculation. Furthermore, as this paper itself notes, we are often unaware ourselves of the hidden and often context dependent knowledge that resides in our habits. Consequently, the pragmatist-habit perspective severely compounds the ‘knowledge problem’ inherent in any attempt at comprehensive planning. Not only are planning agencies unable to gather knowledge together ‘as if it were in a single head’ (Hayek) but also a ‘single head’ is unaware of all the knowledge held in its own corpus. In short, the pragmatist-habit perspective gives additional arguments that highly limit the possibilities for gathering knowledge together for comprehensive planning, ‘democratic’ or otherwise.

    Furthermore, although Veblen had socialist inclinations, the majority of the original institutionalists (including Commons and Mitchell) were in favour of (a regulated) capitalism.

    Finally, on page 15 Michael Polanyi is identified as making a significant contribution ‘with important connections to institutional economics’. Yet this Polanyi emphasised the problem of tacit knowledge and used it as an argument against socialism. Like Commons and Mitchell, he was in favour of a regulated capitalism, with Keynesian and other measures to reduce unemployment and inequality.


    P. 6. What does ‘in an evolutionary way’ mean? ‘Evolutionary’ is an extraordinarily vague word.

    P. 15. Contrary to many accounts, there is little (if any) evidence that Veblen stressed ‘the dichotomy between ceremonial and instrumental institutions’. The dichotomy he did in fact stress was between industry and business, i.e. between ‘industrial and pecuniary employments’ or between ‘workmanship’ and ‘propriety’.

    P. 15. What do ‘evolutionary relations’ mean? Again, ‘evolutionary’ is an extraordinarily vague word.

    PP. 15-16. The psychological approaches of Veblen, Commons, Hamilton and Mitchell are seen as having common underpinnings in pragmatism. This is at best misleading. In fact, as a result of the growing popularity of behaviourism and the decline of Jamesian psychology after 1918, Commons shifted his view and Mitchell explicitly abandoned instinct-habit psychology in favour of behaviourism. The institutional economist Clarence Ayres was an early critic of instinct-habit psychology in the 1920s. See Hodgson (2004) for an account of all this.


    Hodgson, Geoffrey M. (2004) The Evolution of Institutional Economics: Agency, Structure and Darwinism in American Institutionalism (London and New York: Routledge).

  • Arturo Hermann says:

    I thank Prof.Geoffrey Hodgson for his interesting remarks, which give me the occasion to clarify some aspects of my work. I would start from his passage, “Any overall discussion of the original institutional economics is problematic, because the OIE contains a number of varied strains. The narrative here over-emphasises commonalities and under-emphasises differences, some of which are noted below, particularly on the question of psychology.” I agree with him, but my emphasis on commonalities has a different focus, which can be expressed in the following points:

    (I) In dealing with the contributions of, in our case, pragmatist and institutionalist thinkers, three main perspectives can be followed:

    (1) The intentions of the authors proposing a new theory

    (2) What they really achieved in the opinion of the scientific community

    (3) What are the aspects of their theories that ─ in most cases in an implicit way, and often without a full awareness of their authors ─ present relevant potential synergies with other theories also belonging to other scientific fields.

    In my work, I mostly address the third perspective. I stress that in their heyday pragmatist and institutionalist theories were different both within and between themselves. But that, at the same time, there were various links and convergences between them, whose roots can be found in a cultural climate ─ as that informing a significant part of the scientific and intellectual life in the US along the first decades of the XX century ─ favourable to progressive social reforms.
    Within institutionalism, while it is certainly true that Thorstein Veblen’s and John Rogers Commons’s theories are rather different, it is also true that their main concepts present significant synergies. In this regard, Veblen’s concepts of workmanship and parental bent are undoubtedly central and lie at basis of a sharp dichotomy between, (i) “business men” looking for profit (and acting out of past-binding and predatory propensities); and (ii) “engineers” pursuing serviceability (and operating under workmanship and parental bent propensities).
    In Veblen’s analysis, the main driver of social change is located in a rather exogenously-conceived notion of technological progress which, by promoting more rational habits of thought and life, would also foster workmanship and parental bent propensities.
    On that account, a complementary focus on the main concepts of Commons’s theory ─ in particular, (a) institutions meant as a collective relation of “conflict”, “dependence” and “order” limiting but also expanding individual action; (b) transactions in their three forms (bargaining, managerial and rationing); (c) ownership (from an older “material form” of mere use-value to one “immaterial” of rights, duties and interpersonal relations); (d) “reasonable value” (as emerging from Government’s policies and Justice Courts’ decisions) defining the rights and duties relationship of market and competition in real contexts ─ would help to cast more light on how Veblen’s propensities can unfold in real situations.
    For instance, while it is true that the profit-motive is important in modern corporations, it is also true that, as investigated by a vast literature, the managers of large corporations pursue a wide array of objectives, which also mirror the demands of the various stakeholders (for instance, shareholders, workers, unions, citizens). The same holds true for other social groups and the relations intervening between them.

    (II) This complexity constitutes a central element of the shift from the “pure capitalism” of the XIX century (if it ever existed) to the “regulated capitalism”, or “mixed economies”, of the XX century and beyond. These aspects were analysed in particular by Commons and, from a different perspective, by Rudolf Hilferding. This evolution has gone in tandem ─ in order to manage the imbalances of the system ─ with a parallel increase of the complexity of policy action. For this reason, effective policy action requires an adequate level of policy coordination, which often involves a supranational dimension (The United Nations Agenda 2030 for Sustainable Development is a case in point).
    Such coordination includes a horizontal level, between policies (for instance, macroeconomic, industrial, research and innovation, social, environmental); and a vertical level, between institutions (in particular, supranational, national, regional, local).

    This leads me to address Hodgson’s remark, “The final part of the essay attempts to show that pragmatist psychology and the original institutionalism provide support for a policy of ‘democratic planning’. This is unconvincing and the paper would better if this entire argument were removed.”
    I agree with him, but would note that, following the orientations expressed above, the objective of my work is not to find a precise correspondence between, say, pragmatist and institutionalist contributions. Rather, my objective is that of identifying ─ in full respect of the independence and distinctiveness of each theory, and hence of the differences between them ─ the concepts that can be synergically employed in theory and in policy action.
    In this sense, if it is true that, as stressed by Hodgson, “we are often unaware ourselves of the hidden and often context dependent knowledge that resides in our habits”, it seems also true that a better enquiry into these aspects can help overcome the partly unconscious nature of our habit-driven thought and action─and this seems to be one (partly implicit) goal of the pragmatist and institutionalist contributions (and also of most psychological and psychoanalytic theories).
    In this light, the psychological theories examined in the work can, by helping acquire a better awareness of the inner motives and conflicts of our economic and social action, also improve the capacity of policy action to respond to the profound needs of society. With regard to our theme, this aspect is particularly relevant for improving the process of social valuation ─ namely, how our different capabilities, motives and values unfold in collective action ─ since it constitutes a central aspect of democratic planning.

    (III) I agree with your remark, “Furthermore, although Veblen had socialist inclinations, the majority of the original institutionalists (including Commons and Mitchell) were in favour of (a regulated) capitalism.”, and would add some more words about the rationale for democratic planning.
    In this respect, the neoliberal idea that capitalism is a self-sustaining mechanism and that, for this reason, only minimal public action is required is a kind of wishful thinking. What actually comes about is that public action and some forms of economic planning are present, often in a disguised way, also in the more neoliberal Countries. These aspects were underscored by institutionalist contributions which, as shown in the work, identified the main forms of economic planning (corporate, totalitarian, democratic).
    In this perspective, democratic planning would find application in the reality of concerted or regulated capitalism as a powerful way to address the major economic imbalances of our time (and in this way was intended by their chief proponents, in particular, William Dugger and Marc Tool). As for the future, only the history can tell us if and when our economies will become more socialistic (and in what forms).
    For these reasons, I would retain that part in my work, by better illustrating the aspects mentioned above.

    (IV) You observe that, “The psychological approaches of Veblen, Commons, Hamilton and Mitchell are seen as having common underpinnings in pragmatism. This is at best misleading.” On that account, as also noted before, I underscored that these theories were characterised by marked differences that went along with a reciprocal, and often unexpressed, influence.
    It is also true what you say about the shift of some institutionalists towards behaviourism. I highlighted these aspects in the work (and also in a recent article published in this Journal, Vol.7, No 1, 2018), by noting the tendency (rather common in social sciences even today) of institutionalist and pragmatist theorists to shift at times towards a behaviouristic conception of psychology, according to which only observable and measurable phenomena are amenable to truly scientific investigation.
    As for your other points, I agree with them. In particular, by “evolutionary relations” I just refer to the historical aspects of economic and social phenomena.

  • John Dennis Chasse says:

    First, I think the author should more accurately describe pragmatism and original institutionalism.

    Pragmatism originated in Charles S. Peirce’s proposal for a method of inquiry that would bring all who followed it to the same conclusion. It is based on science but not the same as positivism. Dewey debated the positivists, and he seemed to be losing until it was shown that Dewey’s philosophy could explain Heisenberg’s uncertainty principle while the positivists could not. Commons (1934 [1990], 654) briefly discusses the relation between Peirce, James, Dewey, and Veblen, arguing that in spite of Peirce’s complaint, James and Dewey were following his principles because social sciences cannot avoid purpose (or what today are called value judgments). He continued that he would follow Peirce’s methodology and the social psychology of James and Dewey.

    Walton Hamilton (1919) introduced the term institutionalism during a discussion of the relation between psychology and economics. He proposed 5 characteristics.
    1. Economic theory should unify the different applied economic disciplines
    2. Economic theory should be relevant to the modern problem of control
    3. The proper subject matter of economics is institutions
    4. Economic theory is concerned with matters of process
    5. Economic theory should be based on an acceptable theory of behavior.

    Original institutionalists were part of the mainstream, not outside of it, fading gradually after World War II. The “instrumental-ceremonial” distinction dates from Clarence Ayres in 1944 (Rutherford 2011, 335-336). It was not well accepted then even by other institutionalists. Neither Veblen nor Commons, of course, ever heard of it.

    Next, the author should look more closely at what Commons meant by negotiational psychology. The quotations given cobbled together psychological assumptions that Commons developed from Dewey and James with Commons’s actual negotiational psychology which was based on evidence about how people behave in negotiations. Commons used court cases and his own experience as a negotiator to develop that theory. In the back of his mind he was always thinking of the worker in a wage negotiation.

    “He earns his living, not by working on his own property, but by working on the property of another, and by accepting all the conditions he finds there. And if he has no property of his own sufficient to fall back upon, he is under an imperious necessity of immediately agreeing with somebody who has…” The wage bargain” involves not only wages, but also hours of labor, speed and fatigue, safety and health, accident and disease, even life itself,” (Commons 1916, 2).

    Finally, I think He could improve the organization by building it around the first paragraph on page 15.

    Commons, John, R. 1916. Principles of Labor legislation. New York: Harper Brothers.
    ______. 1934 [1990]. Institutional Economics: Its Place in Political Economy, Malcom Rutherford, ed. New Brunswick: Transactions Press.
    Hamilton, Walton.1919. “The Institutional Approach to Economic Theory.” American Economic Review Supplementary papers and Proceedings. (March): 309-318.
    Rutherford, Malcolm.2011. The Institutionalist Movement in American Economics 1918-1947. New York: Cambridge U. Press.

  • Arturo Hermann says:

    I agree with most of your points. As for the first, I am well aware of the two strands of pragmatism and of J.R.Commons’s passage on that matter, but for a kind of oversight I did not include these aspects in the text. As for Hamilton’s reference to the need of an acceptable theory of behaviour in economic theory, I will mention it.

    Regarding your remark, “Original institutionalists were part of the mainstream, not outside of it”, I agree in the sense that, as stressed, for instance, by Yonay (1998), for a number of reasons neoclassical economics and OIE were in the early 20th century much closer than today. However, even in that period, the overall conception and methodology informing these theories remained different.

    I agree with your remark “The ‘instrumental-ceremonial’ distinction dates from Clarence Ayres in 1944” but this builds upon Veblen’s distinction between pecuniary and serviceability objectives.

    As for your appraisal of Commons’s negotiational psychology as being solely related to his experience as a negotiator, I do not completely agree.
    In fact, while it is certainly true that Commons’s negotiational psychology constitutes a kind of “positional psychology” ─ related to how people act in a certain social/professional situation ─ it is also true that his vision is inscribed in a more encompassing and interdisciplinary oriented social ontology. This perspective rests (in particular, Commons, 1934, vol.I, chapter II) on the pragmatism of John Dewey and William James, on philosophers like David Hume and John Locke, and on Gestalt psychology.


    Commons, J.R. [1990 (1934)], Institutional Economics: Its Place in Political Economy, New Brunswick (New Jersey, U.S.A.), Transaction Publishers, originally published by the Macmillan in 1934.

    Yonay, Y. (1998), The Struggle over the Soul of Economics: Institutionalist and Neoclassical Economists in America between the Wars, Princeton, Princeton University Press.