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Fri Mar 31 17:18:27 2006
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[log in to unmask] (Colander, David)
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----------------- HES POSTING ----------------- 
I just wrote an article for a symposium in the JEI that might be of 
relevance. I enclose relevant excerpts. Just a warning-it is a bit long, so 
some may want to delete it rather than wading through it.  
 
The article  asks two questions:  
* Is there a differentiable group of institutionalists, and, if so, what 
distinguishes them? 
* Should there be a distinguishable group of institutionalists, and if so, 
what should distinguish them? 
  
Is There a Differentiable Group of institutionalists, and, If There Is, 
What Distinguishes Them? 
 
My answer to the first part of this question is the same as Hamilton's and 
Mayhew's: there is a differentiable group of economists that goes under the 
name institutionalist. However, I do not believe that, today, differences 
between institutionalists and standard economics can be found in their 
concepts of change and, more generally, in differences in content. The 
reason why one cannot differentiate institutional economics from standard 
economics on content is that a narrow "standard economics" in terms of 
content in the sense that Hamilton had in mind has evolved into a field of 
inquiry with a much broader and eclectic focus. Hamilton's initial title 
summed up his view of the different contents: standard economics was 
mechanistic; institutional economics was evolutionary. While that may have 
been the case when Hamilton initially wrote his book, I do not believe it 
to be the case now. Indeed, one of the key themes of my recent writing has 
been that neoclassical economics is dead and that the term is no longer 
helpful as a descriptor of modern economics (Colander 2000). Its death has 
not been noticed because it died a slow, lingering death; it simply faded 
away. One of the reasons for the death of neoclassical economics is 
developments in mathematics and computational technology that have made it 
possible to deal with dynamic issues, including non-linear dynamic complex 
systems that previously were outside the purview of formal mathematics. As 
Hamilton rightly pointed out when he first wrote, the mathematical nature 
of classical economics played a big role in its inability to formally study 
change. Since classical economists wanted to keep their analysis formal, 
the mathematical constraints forced them to avoid complicated issues of 
change. Thus, for example, Alfred Marshall avoided including general 
equilibrium issues in his policy discussions because they were beyond 
formal analysis. (See Colander 2000.) 
 
Mathematics has evolved over time, and today, with the developments in 
non-linear dynamics and computer simulations that give insight into 
iterative and cumulative processes, we are in a better position to study 
change formally. Thus where Joseph Schumpeter (1954) could say that a 
unique equilibrium was necessary for a science to exist, today few 
economists would see it as necessary, and the study of equilibrium 
selection mechanisms is considered an important branch of study within 
standard economics. Work on complexity has shown how organization can 
spring spontaneously out of chaos and has led to the development of a new 
econophysics branch of economics building on insights of statistical 
mechanics. (See Arthur, Durlauf, and Lane 1997.) Similarly, developments in 
evolutionary game theory have provided an alternative mechanism to formally 
study the evolution of systems, and experimental work has allowed 
behavioral economists to explore and test other assumptions rather than 
simply accept the rather sterile rationality that characterized 
neoclassical economics. 
 
The reality is that today standard economics includes significant 
discussion of evolution-for example, evolutionary game theory and 
simulations. Similarly, modern mainstream economics has shown an enormous 
interest in institutions. New institutionalists abound, and major research 
programs on the role of institutions in the economy thrive within 
mainstream economics. To capture this interest, in our history of thought 
text (Landreth and Colander 2002) we distinguish Institutionalists from 
quasi- and neo-institutionalists who spend far less time emphasizing those 
ties and whose work is considered part of modern mainstream economics. It 
is because standard economics has evolved in the twenty-first century that 
one can no longer differentiate Institutionalist economics from standard 
economics on the basis of what issues are considered legitimate for study. 
Both consider change and evolution. 
 
I suspect that the above argument will be disputed by many 
Institutionalists, who will cite the content of textbooks, not the research 
interests of cutting-edge economists, as support for their position. In 
response to that argument, I agree that these changes in standard economics 
are difficult to see in undergraduate texts, which lag the profession often 
by decades. Most of the criticisms that Hamilton made of "neoclassical 
economics" can still be made of the economics taught in most current 
principles textbooks. But the argument--that because these new developments 
do not show up as part of the principles and intermediate books they are 
not part of the core of modern standard economics--is unconvincing to me. 
In my view what is included in what we teach is an issue of pedagogy, not 
of what is necessarily believed. That view seems to have been the view of 
Marshall, who in his Principles of Economics stated that although economics 
belonged in the domain of biology, the focus of his book was going to be 
much more on mechanical processes and concepts. The reason was that the 
simplicity of those mechanical models made them easier for students to 
understand. Good modern economists make that same argument; they see the 
mechanical and static tools we teach undergraduates as useful teaching 
tools to introduce students to ideas whose more complicated expression 
would push students beyond their analytic limits.2 I agree with that 
argument to some degree; teaching a mechanistic model can be useful as long 
as it is emphasized to students that the domain of economics lies in 
biology, not mechanics, and some focus is given to more complex ideas. 
 
To make clear what I mean by the term neoclassical economics, let me list 
what I see as its distinguishing elements. These include a focus of 
analysis on allocation of resources at a given moment in time; a required 
acceptance of some variation of utilitarianism as playing a central role in 
understanding the economy; a focus on marginal tradeoffs; an acceptance of 
far-sighted rationality; and an insistence on methodological individualism. 
When Hamilton first wrote his book, if one did not accept those elements 
one was considered a heterodox economist. Thus, institutionalists were 
excluded from standard economics based on the content of their arguments, 
such as their belief that an individual's wants were shaped by culture and 
thus could not be considered separate from that culture. At that time it 
was reasonable to distinguish institutionalists from standard economists on 
the basis of their concepts of change, as Hamilton did. 
 
Today, standard economics is no longer defined by content. Adhering to the 
above elements is no longer required for someone to be in the mainstream of 
economics. (See Colander 2000 for a full discussion.) Let me be clear: my 
argument is not that many economists do not continue to use these elements 
nor that some economists do not claim that some of these elements should be 
central to economic analysis; my argument is that standard economics does 
not require adherence to these five attributes. It is much more eclectic. 
For example, the interest in allocation of resources at a given moment in 
time ended long ago, the problems solved. The focus of research quickly 
turned to allocation over time. In the 1990s, for example, growth has been 
a key topic. New growth theory is decidedly mainstream and decidedly 
non-neoclassical. In fact, it is generally contrasted with neoclassical 
growth theory. 
 
Modern economics is very much concerned with evolution. For example, 
Avinash Dixit (1991, 225) argued that we need an "evolutionary perspective" 
and that it must "take history and the institutions of politics seriously." 
More and more economists are considering culture in their analysis. This 
can be in the sense of social capital (see Puttman 2000) or invisible 
institutions discussed by Kenneth Arrow (1974). 
 
We see something similar with utilitarianism and marginalism. Few standard 
economists today accept utilitarianism, and almost all agree that one must 
go beyond marginalist analysis. While many undergraduate texts still 
present economics within a marginal framework, that is not the way it is 
presented in graduate schools, nor is it the way top modern mainstream 
economists think about issues. In fact, by the 1930s, in cutting-edge 
theory, calculus was already being dropped, having been mined for its 
insights, and math was moving to set theory and topology as economists 
tried to expand the domain of economics to include a wider variety of 
topics. In modern graduate microeconomics, game theory has almost 
completely replaced calculus as the central modeling apparatus. Similar 
arguments can be made for the other distinguishing elements of neoclassical 
economics. 
 
Consider the following economists: David Romer, Buz Brock, John Thaler, 
William Baumol, George Akerlof, Joe Stiglitz, David Card, Alan Krueger, 
Paul Krugman, Ken Arrow, Amartya Sen, Thomas Shelling. Each is considered a 
top modern economist, but each operates outside the "neoclassical 
framework" in portions of his work. 
 
If content is not the distinguishing feature of modern institutionalist 
economics, what is? My answer is method. While modern economics is open in 
terms of content, it is not open in terms of method. Modern economics 
requires students entering into economics to focus on technical modeling 
and to go through a graduate program that prepares them to use that method 
in their analysis. As Robert Solow (1997) spelled out and as Jurg Niehans 
(1990) emphasized, the modeling approach to problems is the central element 
of modern economics. Modeling is not presented as an end in itself 
(although all too often it is), but (at least among the economists I hang 
around with) there is a continual discussion of the need to empirically 
test. The argument is that the formal modeling is undertaken to make the 
models empirically testable and applicable to policy, with formal 
statistical techniques.3 Models that are considered acceptable are still 
more likely to be methodologically individualistic than not, but if a 
researcher can make a convincing argument that his or her model provides 
insight and fits the empirical evidence, a wide range of models are 
acceptable. For example, we can see work on agent-based models with 
evolving decision rules and statistical mechanics models in which the only 
meaningful concept of equilibrium is on the aggregate level. 
 
Institutionalists (capital I) may follow a variety of methods, but in the 
publications in the Journal of Economic Issues they concentrate on studies 
using a different methodology from that generally found within standard 
economics. If one were to judge their method from articles published in the 
Journal of Economic Issues, one would conclude that while, in principle, 
institutionalist economics has a very open methodology (as Mayhew stated, 
the tools do not define the discipline), in practice, it is not so clear. 
The methods I see at institutionalist sessions at the American Economic 
Association meetings, and which describe the typical article in the Journal 
of Economic Issues, are primarily verbal, non-mathematical methods: 
literary exegesis, verbal argumentation, and reasoned thought, with 
empirical data presented simply in table form rather than in complicated 
econometrics. I am not disparaging this institutionalist method; I happen 
to like it and find it very illuminating (I also find the economics 
profession's unwillingness to allow that method confining and inappropriate 
and have chided its members about it in a number of articles.) But the 
reality is, in practice, articles in the Journal of Economic Issues follow 
a different method from articles in a standard economics journal. So not 
only do institutionalist economics articles differ in content; they also 
differ by method. Looking at the articles in the Journal of Economic Issues 
over the last ten years, I saw few econometric studies or technical 
articles using, say statistical mechanics, to study aggregate equilibrium. 
Institutionalists may be using those other methods, but they do not publish 
articles using them in the Journal of Economic Issues. 
 
My point is that while, in principle, Institutionalists are committed to an 
open methodology, in practice they tend to follow a verbal, case study, 
historical approach, which places little direct reliance on formal 
econometric studies or mathematical theory. This places them in sharp 
contrast to standard economics, where almost all the arguments about the 
role of institutions are in mathematical form or empirical in some sense. 
If you are looking for the latest work on agent-based models of 
institutions, simulations, evolutionary game theoretical models of 
institutions, or large statistical studies looking for fits of institutions 
to general complexity laws such as Zipf's law, all of which have been used 
by economists to study the role of institutions and of the evolution of the 
economy, you would turn to, say, the Journal of Behavioral Economics, not 
the Journal of Economic Issues. The reality is that when economists with 
institutional leanings are writing papers using these methods they do not 
think of the Journal of Economic Issues as an outlet. 
 
Now there are a number of justifiable reasons for the Journal of Economic 
Issues to focus on historical case studies and verbal argumentation. For 
example, one could make a strong argument that it is necessary to offset 
standard economics' over-focus on mathematical methods with a 
counterbalancing over-focus on nonmathematical methods. But regardless of 
the reason, the reality is that, despite being open to various 
methodologies, Institutional economics is associated with a verbal 
methodology and does not foster active research using other methodologies. 
The verbal methodological focus is self-reinforcing. Individuals trained by 
Institutionalist economists are generally trained by individuals who focus 
on verbal analysis, and they teach their students that same analysis. 
Advancement in Institutionalist-oriented institutions depends on 
publication in journals that focus on verbal analysis, and that analysis 
becomes more deeply built into the methodology. Advancement in 
non-Institutionalist institutions gives little weight to these 
publications. The end result is a subgroup of Institutionalist scholars 
whose primary approach to problems is verbal analysis. 
 
Should There Be a Distinguishable Group of Institutionalists, and, If So, 
What Should Distinguish Them? 
 
Let me now turn to my second set of questions: Should there be a 
distinguishable group of Institutionalists, and, if so, what should 
distinguish them? On these questions I am far more eclectic. In some ways, 
my view is that in terms of content-if by content one means a recognition 
by modern economists that evolution and institutions are fundamentally 
important to studying the economy-Institutionalists have won. Standard 
economics today is much more open to the study of change and institutions 
than it was fifty years ago. True, there are still many laggards, and much 
of economic analysis still reflects the old style neoclassical approach. 
But the cutting-edge work is open to change and indeed understands that it 
needs to change. However, while the future of standard economics involves a 
study of change and a study of institutions, that future also involves 
highly complex analysis that will be centered around mathematics and 
non-verbal analysis, which leaves Institutionalists out of standard 
economics. It is primarily because of method, not content, that 
Institutionalists are seen as outside standard economics today. 
 
Faced with this situation, Institutionalists have a number of options in 
regard to distinguishing themselves:  
 
1. Continuing to emphasize the difference in content with standard 
economics, contrasting institutionalism with that part of standard 
economics that emphasizes neoclassical principles. Being separate but 
equal. (Be separate, but equal.) 
 
2. Incorporating more of the modern economics methods into their approach 
and hence into their journal, exploring the role of institutions and change 
in a more technical manner using more mathematical methods. (Declare 
victory and assimilate.) 
 
3. Downplaying the difference in content by emphasizing their connection 
with the more technical methods of exploring change, while still 
maintaining their primarily verbal methodology. (Differentiate only on 
method.) Each has its own advantages and problems, and the approaches are 
not necessarily exclusive. 
 
Continuing to Emphasize the Difference in Content 
 
The argument I made about the content of standard economics and 
Institutional economics is debatable. It is based upon a definition of 
standard economics that interprets its content as broadly as possible. 
Using a narrower definition of standard economics, and interpreting its 
content narrowly, would allow one to continue to emphasize differences in 
content. Doing so would allow Institutional economics to continue much as 
it has. The advantage of that approach is that it involves the least 
change; the problem with that approach is that it involves the least 
change; it leaves Institutional economics as a group quite separate from 
standard economics. If this is the path followed, the focus of 
Institutional economics will remain at a small group of schools that have 
chosen that path, and its influence in the economics profession will likely 
remain small. It will lead to more and more Institutionalists being 
squeezed from standard graduate programs into history departments or 
otherwise being separated from the core of the profession. 
 
Institutionally, I see this position as eventually leading to the 
extinction of Institutionalists within the economics profession. Rightly or 
wrongly, there is an enormous pressure for standardization of content. 
Deans feel it; department chairs feel it; and that pressure leads toward a 
standardized approach to teaching economics. Pockets of resistance can 
exist, and even temporarily prosper, but eventually through the normal 
hiring and retirement process, most schools will succumb. Institutionalist 
graduate schools will succumb first, as many already have, but then, since 
graduate schools provide the future teachers, undergraduate schools will 
eventually follow. It is possible that Institutionalist economics could 
regroup outside the structure of economics departments, perhaps in history 
of public policy departments. Within economics departments, however, I see 
Institutionalists' future as highly limited if they follow this approach. 
 
I am not arguing that this is necessarily a bad strategy. In evolutionary 
systems things change, and perhaps the essence of the Institutionalist 
approach can be maintained outside of the profession as it is currently 
constituted.6 If this method is followed, I see it as likely that it will 
directly take on mainstream economics' method, which will direct it into a 
more philosophical journal such as the Journal of Economic Methodology. 
Thus, I see special issues looking at the empirical criticisms of economics 
and a section of the journal devoted to criticisms of the empirical work 
that is done. 
 
Incorporating More Formalistic Methods into the Institutional Approach 
 
An alternative strategy would be to minimize the differences in approach 
and simply incorporate much of (small i) institutionalist work currently 
being done. This strategy would involve taking a loose definition of 
standard economics and essentially blending into that part of the 
profession that is emphasizing change and institutions. It would involve 
removing the capital I from Institutionalists. Essentially, this is a 
declare-victory-in-content-and-assimilate strategy. 
 
The advantage of doing this would be that it would involve a marriage that 
would be likely to play a central role in defining the future direction of 
economics. The disadvantage is that it would involve developing a whole new 
set of skills for Institutionalists that are inconsistent with its recent 
past (although in the beginning of Institutional economics, economists such 
as Wesley Claire Mitchell were at the cutting edge of statistical work). It 
would depreciate the human capital of many current Institutionalists and 
would mean giving up AFEE's identity. Whether it is worthwhile to do that 
in order to have some influence on the future direction of the profession 
is a question that Institutionalists must decide. 
 
Downplaying the Difference in Content While Still Maintaining a Primarily 
Verbal Methodology 
 
A third strategy would be for Institutionalists to embrace the mathematical 
methods as legitimate but to focus on discussing their relevance and 
relating the methods for policy, especially in the Journal of Economic 
Issues. An example of the type of paper that would be more typical if this 
approach were followed is Staveren 1999. The advantage of this strategy, as 
compared with the previous one, is that it builds on the methodological 
strength of Institutional Economics while at the same time recognizing the 
changes in the profession. If this strategy is followed I see the Journal 
of Economic Issues being more like the Journal of Economic Perspectives, 
which focuses on modern work on institutions and evolution. 
 
The disadvantage of this approach is that Institutionalists are likely to 
continue to be minimized within standard economics even if they follow this 
role and would be unlikely to make significant inroads into departments. I 
think this is sad, but true. In my ideal world, if they followed this 
route, I would see Institutional Economics as one of the subfields of 
graduate schools, with an emphasis on verbal analysis and exposition that 
would prepare students for teaching and policy, areas that are not 
currently covered. It would build upon the technical work, exploring its 
limitations, but it would not create new technical work. 
 
In my view there is an enormous need for some group of economists to play 
this role, but I have no illusions about its possibilities for success. 
Standard economics is committed to its technical analysis and continues to 
downplay any alternative way of considering issues. Undergraduate teaching 
is not seen as a legitimate goal of most top graduate programs, and they 
are unlikely to hire anyone to teach it. Preparation for it would have to 
come from Institutionalist-oriented programs that would add more technical 
elements to their curriculum to provide an appropriate basis for students 
to see what they are studying. Students would be taught more about 
technical programs but would not be required to extend the frontiers of the 
theory-simply to apply the theory to policy and to translate the theory 
into stories that students could understand. 
 
My own view is that in order to follow this approach Institutionalist 
economics would have to be agnostic about policy and perhaps integrate with 
the Austrian economics program, which provides a different ideological view 
but which also shares some of the same views about institutions and change 
as central to the study of economics that Institutionalists hold. 
 
Conclusion 
 
Regardless of what option Institutionalists follow, their continued 
existence in the short run is assured. One reason for that is the Journal 
of Economic Issues. It is a journal that is widely held by libraries and 
one that can further the program of Institutionalists. It got in on the 
ground floor and provides an outlet for institutionally oriented economists 
to publish. In doing so it provides them a way of progressing in the field 
and gives a voice to Institutional economists. It is an organization's 
journal that gives the organization its lifeblood. Thus, the editorial 
decisions that it makes will play a key role in the future. 
 
Nonetheless, because of the evolution of the profession, in the long run 
Institutional economists are an endangered species. They drew their 
lifeblood criticizing neoclassical economics, and with the death of 
neoclassical economics, they must search elsewhere for sustenance. With a 
well-defined neoclassical economics, Institutionalists could go on to set 
up their content in juxtaposition to the standard approach. Without it, 
that is no longer possible, and to ensure their future existence, 
Institutionalists will have to deal with the new situation. 
 
David Colander 
 
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