New institutionalism — fairytales passing as economic science?

“In actual history it is notorious that conquest, enslavement, robbery, murder, briefly force, play the great part. In the tender annals of Political Economy, the idyllic reigns from time immemorial. Right and “labour” were from all time the sole means of enrichment, the present year of course always excepted. As a matter of fact, the methods of primitive accumulation are anything but idyllic.” Karl Marx, Capital Volume 1, Chapter 26.

The late Cambridge economist, Joan Robinson, once made the sociologically astute comment: “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”  I used to share this with all my students and have a discussion about it as I informed them that what they are learning as majors is at most about 10-15% of existing economic theory and modeling traditions. Deception is implicit in the curriculum (it does not matter if one or two teachers mention problems with the standard model). Students are usually shocked to learn that the core curriculum has been largely discredited — only adding insult to the injury that what is being taught is hardly the full story.

Textbooks remain calcified in thought and economics professors, too. Most are unable or unwilling to teach anything too different from the standard textbook nostrums (what is so hypocritical about this is that even many neoclassical teachers don’t believe what they feed students; they simply lazily conform to a conventional approach because it is the convention, albeit a discredited one by its own practitioners). For example, one of the leading schools of thought that challenges many fundamental concepts found in mainstream economics and the textbook core curriculum is called post-Keynesian economics (the Keynesian economics found in textbooks is a sanitized and tamed version of Keynes), but you will never find post-Keynesians or other alternative scientific economics traditions presented to students in a rigorous way (if at all), and it is definitely not required to get a degree in economics. In short, there is only one economics that students are told about and asked to take seriously — neoclassical economics found in all conventional textbooks.

Part of my job as an economics lecturer, however, was to be a consumer advocate — making sure the consumers of knowledge (e.g., students) were not getting a defective product for which they paid a very high price (financially and ideologically). To do that, I had to first teach the standard model rigorously and fairly in order to make sure they understood the essential mechanics (my favorite classes were teaching the model as painstakingly as possible with multi-colored chalk diagrams and slides to drill into students exactly what these models were communicating, something often lost on students simply trying to memorize the model mechanics).

Not the only science, hardly.

Once done, I would select key assumptions to begin to explain why these standard neoclassical models they are learning had considerable internal contradictions and external contradictions with the way the capitalist world actually functions. I would draw on many alternative traditions in economics such as the classicals (Smith, Ricardo, Mill) and classical Marxians (Shaikh), neo-Marxians (Monthly Review school) and post-Keynesians (Ed Nell, et al.), but also ecologically informed critiques. Since students only receive training in neoclassical standard models (micro and macro principles and then intermediate level micro/macro), they actually are led to believe that this is the only economic science, or that this was the accepted state of the art. After all, it’s what dominates the textbook market, with each textbook nearly identical in content.

When I taught my popular History of Economic Thought course (EC 118), I was able to expose the myth of textbook economics as state of the art science. This included mention of  New Institutionalist Economics (NIE), a bit more clever, but still fundamentally flawed neoclassical economics, to which at least three of my former colleagues in UVM’s Dept. of Economics are particularly invested professionally. Still, students needed to know the truth. These are neoclassical economists with a flare for a bit more sophistication — mainly adding institutions as an important focus of analysis — but based on largely a long-ago discredited comparative statics (textbook micro) to explain evolution and even the emergence of capitalism. Lurking in the background, meanwhile, is a neoliberal ideology that springs from Chicago-school style economics that idealizes markets and leaves power and violence in the emergence of capitalism out of the frame. The following extract from a 2004 paper, “Anti-Williamson: a Marxian critique of New Institutional Economics,” by Daniel Ankarloo and Giulio Palermo (published in the Cambridge Journal of Economics), provides a sneak peek at what amounts to an excellent explanation and critique of NIE in the full article:

We began our critique of NIE by analyzing the way in which it poses the problem of understanding the nature of capitalist institutions. Having shown that the market is not the only institution that can be used as a primordial condition to explain the institutions of capitalism, it is clear that [Oliver] Williamson’s enhancement of precisely the market to a natural and universal category is purely ideological. Williamson’s research programme, aimed at presenting the institutions of capitalism as an expression of the highest principles of rationality, is an operation of pure apologetics. Furthermore, it is apparent that his definition of the problem is not scientifically warranted, but is itself an expression of ideology produced by capitalism. His definition stems from a process of superficial idealisation of reality, not from a deep-going examination of the history and logical relations of capitalist institutions.

The as-if method of historical analysis does not even try to explain the present as the result of the processes of the past; instead, it assumes the past in order to make the present appear Pareto superior. Economic historians, in their attempt to explain the course of history, provide a picture of the present made up of contradictions, conflicts, convergences and divergences. Williamson, and NIE, instead assume that the present is a coherent expression of rationality and efficiency and invent a story whose logical end is indeed the existing reality. So, what for historians are contradictions and compromises become for NIE the conditions of consistency. This implies that the stories told by economic historians on the one hand and by NIE on the other go in opposite directions: from the past to the present in the first case, from the present to the past in the second. Economic historians try to explain history, NIE, instead, tells a fairytale whose happy ending is the present.

To read the full critique from a Marxian perspective, go here. The only issue I have with the authors’ approach is that they don’t explicitly lay out the concept of Marxian primitive accumulation and related use of violence, force, pillage, plunder, etc. to create the necessary institutions of capitalism (NIE attributes all evolution to efficiency and rational choice, not power). To their credit, the authors of the critique of NIE do allude to power as it resides in, and is functional to, capitalist hierarchies. But for those not schooled in other schools of thought, it would be easy to fall victim to academic deception by the NEI pseudo-scientific approach, which clearly fails to hold up under serious scrutiny. My hope was always that by providing antidotes in the form of multiple perspectives on economics and capitalism, students would be somewhat inoculated. ~JS