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In Dan Bromley's excellent post on Coase and Commons, he pointed out that 
Commons' explanation of institutions differed from the analysis of Coase, 
which was to become the foundation for the transactions cost-based 
explanation of institutions. Commons, he wrote, explained institutions by 
referring to conflict. My knowledge of Commons is limited. So I will take 
his report to be factual. I would like to make three points to add to the 
discussion. 
 
First, the history of the more mainstream approach to institutions does not 
end with the simple exchange models of Coase. Almost simultaneous with the 
development of the transactions cost approach to institutions, a Public 
Choice approach was emerging. Public Choice theorists sometimes worked 
within the neoclassical paradigm by theorizing about democracy as if it was 
the exchange solution to public goods problems. But Public Choice also saw 
democratic institutions, or more generally government itself, as a solution 
to an initial difference in coercive power. They worked, for example, on 
the question of what institutions individuals might rationally create when 
in a Hobbesian state of anarchy. In their models, conflict and a power 
struggle ended with the emergence of institutions, although these were 
ordinarily considered as exchange solutions to the problem of order, as the 
prospective combatants were assumed able to perceive the benefits of future 
exchange. Since some of the founders of Public Choice were political 
scientists, the focus on differential initial power is not surprising. 
(Gordon Tullock (ed.), Explorations in the Theory of Anarchy, Blacksburg, 
Va.: Center for the Study of Public Choice, 1972.) In grad school at VPI in 
the early 70s, I recall studying Autocracy, War, and Revolution in my 
Public Choice class. It was accepted as a matter of principle that 
institutions emerged from these situations or events. 
 
There is also a rent-seeking theory of institutions, which sees 
institutions emerging within a democratic system in order to extract 
wealth. In a model of a pure market economy, this wealth would go to 
producers and traders. 
 
Also, within the Coasean tradition, there was Harold Demsetz's (AER, 1967) 
theory of the evolution of property rights, in which an increase in the 
price of beaver pelts raised the profitability of establishing private 
property rights in North American hunting areas. As I recall, Demsetz 
reported that new hunting rights were established through wars (including 
wars of conquest) and peace treaties. 
 
One might argue that some or all of these contributions are not mainstream 
economics. But they certainly fit neatly within the framework of the 
maximizing assumptions of neoclassical economics. Accordingly, any 
comparison of the old institutionalism with the new ought, I think, to take 
them into account. 
 
Second, one of the most interesting critiques made by Veblen and other "old 
institutionalists" was based on the the common sense idea that peoples' 
choices can be influenced by others through advertising, propaganda, etc. 
So far as I know, neither neoclassical economics nor mainstream economics 
has dealt effectively with this critique. Unless I am mistaken, the "animal 
spirits" explanation of stock market booms, for example, treats the 
individual as a slave of her instincts but disregards the creativity of 
those who take advantage of the "instincts" of others by misleading them, 
swindling, and betting against them. Deception, swindling, and "parasitic 
positioning" also occurs in politics, rent seeking, and international 
affairs, of course. 
 
Third, the idea that the Supreme court determines values seems less 
satisfactory than the idea that its decisions may be based, on the one 
hand, entirely on efforts to maximize long run wealth (Richard Posner, 
Economic Analysis of Law) and, on the other hand, entirely on efforts to 
redistribute long run wealth. Modern economics has developed the latter 
dichotomy for analytical convenience. We must presume, however, that both 
elements might play a part in any particular decision. 
 
Pat Gunning 
 
 
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