For Soc Econ (2008) 37:27–42 DOI 10.1007/s12143-008-9012-y

Institutionalism and the State: Founding Views Reexamined Timothy A. Wunder & Thomas Kemp

Published online: 9 February 2008 # Association for Social Economics 2008

Abstract Economists in the institutional tradition have spent a great deal of time dealing with the notions of governance and the state. Yet that school of thought has yet to develop a complete unified theory of either governance or the state. In the work Commons and Veblen we see very different levels of analysis and commentary on these issues. Both authors are recognized as founding thinkers in the Institutional school yet they differ on how they use their methods and they have differing ideas about the usefulness of the state. Still, considered together they present a fairly complete and useable set of ideas about how governance and the state work. This essay summarizes, clarifies, and somewhat expands on the views held by Commons and Veblen with the view of moving towards a clear and concise institutional theory of the state. Keywords John R. Commons . Thorstein Veblen . Governance . The state . Coercion . Order . Patriotism Individuals looking for alternatives to the neoclassical outlook on the state have to search no further than John R. Commons and Thorstein Veblen. These two founding thinkers of institutional economics had a good deal to say about governance and the state. Yet they differ on their methods and have differing ideas about the usefulness of the state. The significance of this work is twofold. First, we hope to clarify the positions of the foundational theorists within the institutional school of thought. It is our intention to present the material is such a way as to reveal all the salient points, This article was presented as part of a symposium on “The State of the State in Heterodox Economics,” held at the annual meeting of the Association for Institutional Thought in 2007 in Calgary, Alberta. T. A. Wunder (*) University of Texas, Arlington, USA e-mail: [email protected] T. Kemp University of Wisconsin, Eau Claire, USA e-mail: [email protected]

28

T.A. Wunder, T. Kemp

while still retaining a level of complexity that lends itself to further discussion and comparison. Second, taken as a whole with the other works in this symposium we hope to give a clear base of knowledge from which future studies in heterodox economists might proceed. The work is divided into three parts: the first part reviews, clarifies, and expands the work of Commons, the second part applies the same methodology for Veblen, while the third part compares and contrasts the works presented in the first two sections.

Commons Commons’ ideas about the state have been addressed a number of times in the literature—most completely by Chasse (1986) but also in Chasse (1997) and Ramstad (2001). However, demand seems to remain strong given the recent number of publications explaining the ideas and intentions of Original Institutional Economists. As such, in this paper, we will attempt to present a clear, basic statement on Commons’ ideas on the state and to discuss some of the implications of these ideas. Since this topic is far too broad to cover in one article, we specifically focus on the core elements of Commons’ philosophical view of the state. We draw from primarily Commons’ Sociological View of Sovereignty (SVoS), Legal Foundations of Capitalism (LFoC), and Institutional Economics (IE) as it is in these works that the bulk of his thoughts on the nature of the state are contained. As he noted in his autobiography, “Myself” (Commons [1934b] 1964) Commons drew from an extensive literature in the areas of law and political science, accepting that which was consistent with his extensive experience as a policy maker and rejecting that which did not match his observations. Additionally Commons would be the first to admit that the ethics of the individual also play importantly in individual decisionmaking and he himself would be no exception. As Gonce (1996) has pointed out Commons’ early influences included Richard Ely and the social gospel movement with which the later was involved. The core of Commons’ view of the state may be briefly summarized in three words—coercion, order, and right. Thus, this section of the article is broken into these three parts: Coercion, Order and Right. The first section addresses the basic nature of the state and rationing processes in general. The second section qualifies the first by introducing what Commons called order, a product of ongoing struggle or competition for control of coercive forces. In the final section the motivating forces are considered. That is, under what conditions are individuals enticed to build power blocks and to participate in the negotiation for the control of coercive force? Coercion To Commons, the state represents an ongoing negotiation between those in control of private property and those who would be abused by the absolute exercise of private property rights. From SVoS, “The State is the coercive institution of society. It is not an ideal entity, superimposed upon society, but is an accumulated series of compromises

Institutionalism and the state

29

between social classes, each seeking to secure for itself control over the coercive elements which exist implicitly in a society with the institution of private property” (Commons 1967: 45). He continues, “State consciousness is simply class consciousness organized for partnership in the coercive control of society” (Commons 1967: 47). This idea of the state runs all through Commons’ published work from the Distribution of Wealth (Commons 1893) in which the wealthy are purported to have greater representation in the state resulting in property rights that are assigned unequally to IE (Commons 1934) and the Economics of Collective Action (Commons 1950) where the state is considered as a series of “Rationing Transactions” or collective action that distributes economic output. The rationing transaction as a concept contains all the elements coercion, order, and right. It is, however, an intrinsically coercive process as it involves a group of legal superiors and a legal inferior. While Commons did not fully develop his transactional format until late in his career, the idea of “rationing transactions” remains a useful way to think about the state and the ideas on rationing that run through all his work. Commons defined the rationing transaction as “the process of exercising jurisdiction” (Commons 1990: 754). He continues, “The [rationing transaction] is the formulation of rules which shall govern the transactions of subordinate participants in sharing among themselves the burdens and benefits of the production and enjoyment of wealth” (Commons 1990: 754). Changes in the ongoing rationing process occur when individual actions become frustrated. Individuals who face pre-existing power structures that frustrate their ability to act organize a rationing response. An example of such action would be an existing labor force unable to attain higher wages. These individuals organize into a union so as to ration their output and becoming a political force. Another example might be a group of local business people forming a chamber of commerce to petition for their interests to the local government. In either case, the rationing transaction is a method for co-opting state authorized coercion in the interest of a collective of individuals. As described in the above paragraphs, the rationing process is essentially democratic. Commons was not so naïve to assume that this was generally the case— stating that rationing transactions spanned the gap from despotism to collective bargaining (Commons 1990: 756). As a point of policy, Commons sought to reform the rationing process to increase the general level of democratic participation while at the same time retaining the economic efficiency of dictatorship (Commons 1990: 758–760). Commons believed that pure democracy without arbitration “wasted, delayed, and weakened” human effort (Commons 1990: 756). Dictatorship, however, was considered by Commons to be socially undesirable for reasons we will return to in the following sections. Order Commons maintained that the rationing process at its extreme did not constitute a valid state. His reasoning was that when the rationing process was under the complete control of one person then it was tantamount to private property

30

T.A. Wunder, T. Kemp

(Commons 1967: 42). Instead Commons argued that it is “…it is the capriciousness of private property that evokes the state” (Commons 1967: 42). Commons’ rationale for making this distinction was that monarchy generated no sense of what he called “state consciousness”. In contrast, Commons argued that a polycratic state produced a sense of collective action that was not reducible to the individual actions of the participants. Commons placed it this way: “The consciousness which animates them is a class consciousness. This is only a name for their recognition of common interests in the face of a common obstacle, and their capacity to cooperate for overcoming this obstacle” (Commons 1967: 46). He added, “…order… is possible only on condition of a common belief animating separate classes and all classes” (Commons 1967: 53). In other words, the true state is a whole that is greater than the sum of its parts. The state is therefore, by definition, a public concern. The state is an arbitrating force that turns raw coercion into order due to a competitive struggle between individuals and groups of individuals with divergent interests. This does not mean that coercion has disappeared but rather that the coercive power of the state is shared. It is this sharing (and struggle) for coercive power that introduces order. Order is produced out of common consensus through the vehicle of the state. This also does not mean to suggest that the state is the only guarantor of order. In addition to the state, order is also provided by what Commons sometimes referred to as “goodwill” and other times as “working rules”—a discussion of these concepts, however, is beyond the scope of this work (Commons 1969, 17–27). Although Commons never explicitly stated that the stability of order is presumably a function of the relative strengths of the ongoing political classes where the term “class” is understood as presented above. This is important point for several reasons: First, Commons’ notion of the state implies that there is no reason to suppose that the state will always operate in the interests of capital. A nation or community where labor organization dominates will act primarily in the interests of labor. Similarly, in the state structure of an agricultural community we would expect agricultural interests to dominate. Moreover, these possible states will only provide order when there are effective countervailing interests that check the capricious actions of the dominant interest group or class. This, in turn, suggests that the state is most effective when there is relative stability among interest groups. Which begs the question: From where does this stability derive? We will return to this in the next section. Second, Commons’ ideas suggest a straightforward rationale for state forbearance. For interest groups or classes to maintain power they must not act in an especially capricious manner. To do so would attract the ire of large numbers of people who were finding themselves greatly disadvantaged by the state. As Commons argues, “… the king was … restricted by custom… the rights and privileges of property, the possession of coercive sanctions, the grading and subordination of classes, were all minutely bounded and guaranteed by custom” (Commons 1967: 28). Commons’ idea does not quite seem to be that ultimate power resides in the masses, but just about. It suggests that ultimate power lies in the masses’ willingness to act. Which again begs another question: What determines this willingness to act? The answer to both these question lies in Commons’ explanation of collective outcomes resulting from individual human volition or what he termed “reasonable value”.

Institutionalism and the state

31

Right In the above two sections, we established Commons’ thoughts on how interest groups or classes produced order through the curbing of the capricious use of coercive force by the state. We have continually resorted to the term “capricious” (as did Commons) without any clarification as to what constitutes capricious. The question is, what do people consider capricious and entices them to action? Each of the above two questions essentially asks the question: “what determines customs”? Custom determines what is reasonable and unreasonable and what is unreasonable will entice people to action. Commons’ liked to speak in terms of individual volition. That is, individuals have–to some extent–free will. They are capable of assimilating data from their environment in order to make decisions that will guide them in their everyday lives toward some purposeful future of their own making. As such, individuals are equipped with the tools required for participation in the democratic process. Individuals therefore are capable of making educated choices about their best means of representation. It remains for the social policy maker to facilitate individual decision-making skills in the form of education and to open avenues for the citizenry to access the democratic process as well as to ensure a well-educated populous. How, then, does custom (and therefore the organization of state powers) change? Briefly, individuals change customs over time through their allowable (or possible) discretionary interpretations of the letter and intent of the law, as well as, their personal attitudes about preexisting customs and laws. Commons had the following to say: Somebody must choose between customs. Whoever chooses is the lawgiver. The policeman chooses certain customs, rejects others, and, within his limits of power and immunity, he is the prerogative of action. He both finds and makes it—finds it by choosing the desirable customs of his bailiwick and rejecting the undesirable customs; makes it by choosing the direction in which the power of the state shall be brought against those who violate the desired custom, or practice the undesired one (Commons 1974: 300) (italics original). He continues, “The field of discretion is … the ‘freedom’ of the actor to determine the direction of the collective power; of immunity, the absence of responsibility and liability to the collective power for the results of that freedom” (Commons 1974: 354). Thus, custom and hence order will change when enough individuals both inside and outside the current organization of power believe it should do so and they have the available discretion to take action. This does not suggest that all individuals are equally empowered, nor does it suggest that change results from simple majorities— nor does it suggest that change is always progressive. As a result of these several imperfections, Commons sought to reform the rationing process through “judicial decision” (Commons 1990: 759). Such a process was desirable according to Commons because–when organized properly–it combined the coordination of a command process with the socially desirable democratic recourse. Such a system produces more reasonable values. Commons’ use of this term–despite its central place in his economic ideas–is difficult to understand. (As it is beyond the scope of this study, the interested reader would do well to read Ramstad (2001) for a concise statement on reasonable value.) The difficulty comes

32

T.A. Wunder, T. Kemp

from the fact that a complete reading of Commons’ work will yield at the very least four definitions: a socially determined price, a highest or best obtainable value, a socially desirable practice, and a basis for institutional reform. However, all four are actually different aspects of one theory. Commons’ theory of reasonable value was the product of many years in observation of the legislative process. He had worked for the LaFollette administration drafting legislation for the state of Wisconsin during the early years of the twentieth century, and he came to understand how the courts worked and how their actions changed and guided the actions of society. Specifically, Commons understood that economic legislation was much more likely to pass if it was written in such a way that it coincided with preexisting statutes. The experience impressed upon him the importance of the legal structure and precedent in guiding the economic process. Virtually the whole of Commons’ LFoC (1924) is a study of the nature and causes of the changes in the legal atmosphere from the feudal era to Commons’ time that shaped our modern economic environment. LFoC endeavors to explain the current market economy as an instituted process, fulfilling what Commons liked to refer to as the “public purpose.” In LFoC, Commons traced the development of the individual’s “right” to act with discretion so long as it fit the public purpose. What Commons hoped to offer to the economic community was an alternative to the Natural Law theories (in which property is an extension of man’s interaction with nature) to an understanding of private property that was not God-given, but, rather, a liberty granted by society. Commons understood that so far as the United States was concerned, the decisions of the Supreme Court determine at any given time what is the public purpose and what is not. The law is thus not simply the words on the paper but rather it is what the people who have the relevant discretion think it is. In the case of the Supreme Court, this discretion is significant and lasting in the sense that it creates precedent. It is for this reason that Commons always linked ethics, law, psychology, and economics. As the final determinant of value in society, the Supreme Court rulings are necessarily linked to the ethics and psychology of the current justices. Despite this, Commons did not see the Supreme Court as a sort of universal arbiter of the truth. Commons realized that it was public opinion and custom that was the true determinant of what was reasonable and what was not—the Supreme Court is the vehicle that gives public opinion voice. The Supreme Court, like other agents of the state, is bound by custom. As such, reasonableness is truly a socially determined process. Commons’ concept of reasonable is neither inherently conservative, as some have suggested, nor radical. Reasonable, in Commons’ mind, refers to the range of economic outcomes that are socially acceptable. The economist’s role, according to Commons, is to provide society and the courts with an understanding of what is economically possible based upon the best existing technologies and practices. As Kemp (2006) has pointed out this is significantly different from what one finds in “New Institutional Economics” or from much of the economics mainstream. Commons’ conception of the institution suggests that such devices have the partial purpose of expanding the capabilities of human action—the state is no exception to this generalization. In Commons, we see that the state arises in order to both counter and monopolize the coercive forces of society. It becomes the centralizing force by which the economy is formed and regulated. When combined with Commons’ volitional theory of human action, the state naturally becomes an

Institutionalism and the state

33

avenue for the expansion of human action. This, however, does not suggest that economic reform is unnecessary. In fact, it implies quite the opposite. The economist’s role in part is to guide institutions–specifically those of the state– toward increased levels of access for the citizenry, as well as to reduce the naturally coercive nature of managerial and rationing transactions. The following is illustrative of Commons’ desirable state action, “this is one of the parts played by the state… such as minimum wages and security of employment. In this way the coercive element of the renumeratory sanction is taken away, and it becomes more distinctly persuasive” (Commons 1967: 22). Commons’ theory of reasonable value is, in part, the democratic bargaining process by which society hammers out the role of the economy as a function of the public purpose. Reasonable value, however, is not reason, any more than humans are a creature of reason. That which is deemed “reasonable” by the courts is not necessarily that which is best in any sense, economic or otherwise—especially if the state is limited to a few individuals. Thus, reasonable value as determined by the court only contains as much reason as the sovereign power possesses. It may change or even reverse itself over time; and what is “reasonable” to one may not be “reasonable” to another. In practice then, reasonable is a socially determined process. This is why the critical element in Commons’ system is the unwritten understanding that there are ways to make reasonable practices more reasonable. Summary of Commons In Commons’ schema, the coercive power of the state is constrained by an ongoing struggle between varied classes or interest groups. The result of this struggle is an orderly state that does not act in a manner that would be deemed capricious by a significant number of the relevant population. The specific values of “significant” and what is considered “capricious” are determined by custom. Custom, in turn, is the result of the historical decisions made by individuals about what was desirable and what was not desirable within the limits of discretion allowed to them by the then current community through custom and law. The results of state action produce “reasonable values” that may or may not be objectively desirable because they are based upon the current configuration of power. Commons thought that the most desirable (or most reasonable) outcomes would occur when the state operated in such a way as to minimize the coercive forces emanating from it. It stands to reason– given Commons’ framework–that this would occur when there is a relatively even distribution of power between all effected parties. This does not suggest that the optimal state is egalitarian or wholly democratic. Indeed, such a state would not be able to effectively produce order. Instead, it suggests a state where affected individuals have the capacity to organize into power blocks that can change the institutionalized structure of rationing transactions when it is so desired.

Veblen Switching from Commons to Veblen with regard to the state requires a major change of emphasis and direction. Whereas Commons spends a significant amount of time

34

T.A. Wunder, T. Kemp

discussing and analyzing the evolutionary changes in law, Veblen spends almost no effort trying to look at marginal changes in state organization. As William Waller writes “Veblen did not explicitly theorize about the State” (Waller 2006: 14). Rather, most of Veblen’s writing held very negative comments about the state and his analysis was centered on the state as an institution based in patriotic emotions. Where Commons merges the concepts of state and governance, Veblen seems to see governance and the state as two differing ideas to be analyzed separately. This section of the article begins by making some general comments on Veblen’s methodology with regards to analyzing the state. This section will then emphasize Veblen’s criticism of the state, followed by Veblen’s support for free trade, and then will finish by clarifying the difference in his thinking between the state and governance. Veblen’s Methods of Analyzing the State The position of an ‘optimal’ form of the state is never really emphasized in Veblen’s work. Veblen’s observations about the state were grounded in his empirical explorations about countries that he studied. Veblen was an observer of society and out of these observations he created a theory of evolutionary social change that allowed him to predict possible outcomes. Veblen was always very aware that imbecile institutions could continue and even prosper indefinitely. With respect to the state, Veblen believed that it was just such an imbecilic institution. There are great lines of discussion that have occurred in the literature with respect to Veblen’s views on the role of the state and these debates have helped to shape the current essay. Rick Tilman writes, “Although Veblen sometimes proposed small scale changes in existing policies, he was more likely either to endorse large-scale structural changes or else withdraw from policy prescription altogether in the belief that it was futile”(Tilman 1984: 753). Unlike Commons, Veblen really did not offer minor policy prescriptions to influence the evolutionary direction of the state; he was not concerned with offering small changes to the state institution in order to induce marginal improvements. “Veblen’s concern was not with the structural forms and procedural basis of representative government but with a political economy which would maximize the economic welfare of the common man” (Tilman 1972: 314). Where Commons might see the institutional organization of the state evolving through legal practice, Veblen had little concern for the way law evolved. Veblen’s emphasis lay mostly in criticism of the state as an institution and he never really explored the evolutionary possibilities towards improving the institution of the state. Rather, the majority of his work emphasized how the government of states tended to take actions that resulted in social failures. The failures of the state were based on the failures of the citizens of the state. “In Veblen’s analysis of government, political failures were predicted because the individuals casting votes in elections were as irrational in their political behavior as in their consumption decisions” (Leathers 1989: 294). This irrational bent was perpetuated and exploited for the benefit of the vested interests. Veblen, like Commons, emphasized the connections between institutions of government and economy. “Veblen recognized that politics and economics were two aspects of a unified social whole to be understood together. The state is the guarantor of the existing social order and protects existing property rights and the interests of

Institutionalism and the state

35

the leisure class. A democratic, representative government fits very well into this function by protecting the interests of the capitalist owners of business” (O’Hara and Sherman 2004: 979). Veblen almost always saw the state as an institution that maintained the vested interests. There is a debate amongst the interested scholars as to whether Veblen changed his emphasis towards the end of his career towards a more active social policy advocating revolutionary social change (Knoedler and Mayhew 1999; Tilman 1972, 1984). His explorations in Engineers and the Price System (Veblen 1965 [1921]) suggest that a rising wave activism seemed to be taking place within the engineering field and Veblen even suggested an alternative method of governance based around engineering leadership. Yet Engineers does not appear to be a call to action; rather, it seems to be an observation of a trend Veblen saw as arising and as such does not seem far out of line with the rest of his works. It should also be noted that even in Engineers Veblen seems to hesitate in arguing that such an engineer-led system was inevitable and that the engineering leadership was beyond being co-opted by business interests. Whereas Commons’ analysis of the state offers a look into how government changes, Veblen’s work mostly emphasizes the need to allow time to mold the thinking of the populace in order to change the institutional underpinnings of the state. “Veblen believed that Western ideas, like Western technology, were essentially in conflict with the reactionary dynastic state and, so, would eventually undermine the latter” (Loader and Tilman 1995: 342). Such conflicts that would undermine dynastic states and the patriotism that perpetuated them would also undermine capitalist states as well. The Patriotic Sentiment Veblen’s perspective on the state emphasized the role that patriotic sentiments played in the perpetuation of state governance. In reading Veblen, it becomes apparent that he had an extremely negative view on the state, but that pessimism seems to arise out of his view of the state being an institution based upon patriotic sentiments. In particular Veblen disliked how the vested interests obfuscated their activities by using calls to patriotism to shut down dissent and maintain their power. It is not apparent that Veblen held an inherently negative opinion towards governance. Veblen’s continuing discussions, and criticism, on the importance of patriotism in the perpetuation of the state is present throughout his works. Veblen’s writings also offer the reader suggestions for better organizing and governing the social order. These two themes suggest the implicit idea that Veblen viewed the state as an outdated institution, but that he also saw a major role for detailed social governance. It is clear Veblen’s distaste is not centered on government per se, but, rather, on dislike for the types of government that he observed to be based upon patriotic state organization. Veblen’s writings on the government seem to be rooted in the idea that the state is a tool of the vested interests and therefore the power of the state will be used to advance those interests’ goals. To Veblen, the people in power seem to be able to institute rules within a state government to secure their position within the system. Key to securing power within the United States system is the institution of absentee ownership. The interests of America’s absentee owners are often at odds with the

36

T.A. Wunder, T. Kemp

interests of the majority of the populace. The nation’s Captains of finance are continually, “Engaged in a routine of acquisition, in which they habitually reach their ends by shrewd restriction of output; and yet they continue to be entrusted with the community’s industrial welfare, which calls for maximum production.” (Veblen 1965[1921]: 40–41). As an institutionalist, Veblen would be the first to recognize that his views upon the state were molded by the examples that he had available to observe. Such examples gave Veblen little hope as to any beneficial uses for the states that were in existence. A comparison of existing states, for example, is found in An Inquiry Into the Nature of Peace and the Terms of Its Perpetuation (Nature). Veblen looked closely at the governments of the warring parties of World War I and showed that the allied state governments were less aggressive in terms of warlike behavior. Yet, even though the allied governments seemed to have less aggressive tendencies, he concluded these governments still did not serve to benefit the majority of the populace. The allied governments were run at the behest of business interests and such a method of organization allowed sabotage for pecuniary gains. The result was loss of production in the system by 25% or more (Veblen 1919: 172). Since it was clear that states were failing society, Veblen turned to explaining why the state continued as the primary system of governance. Veblen made great efforts in showing that the state governments were able to perpetuate their popular legitimacy by calling upon the patriotic feelings of the populations. The use of the patriotic feeling within the population as a way to perpetuate the control of the vested interests is an observation Veblen makes throughout his writings (Veblen 1932 [1904]: 288, 1919: 60, 1923: 38). Veblen argued that patriotic sentiments helped to perpetuate the perceived legitimacy of the group in power and the end result was lowered production. “The Conclusion would therefore provisionally run to the effect that under modern conditions the patriotic animus is wholly a disserviceable trait” (Veblen 1919: 46). Veblen on Free Trade It seems clear that Veblen believed the machine process and the industrial organization that arose from it had made state government an imbecile institution. The actions of the state were nothing more than a form of disguised sabotage that furthered only the interests of the absentee owners. To Veblen, free trade with the eventual decline of states as institutions would be the best outcome. As Veblen writes, But the neutralisation of international trade, or the abrogation of all discrimination in trade, is the beginning of wisdom as touches the perpetuation of peace. The first effect of such a neutral policy would be wider and more intricately interlocking trade relations, coupled with a further specialization and mutual dependence of industry between several countries concerned; which would mean, in terms of international comity, a lessened readiness for warlike operations all around (Veblen 1919: 207). Yet though Veblen calls for free trade his ideas about the beneficence of a global capitalist hegemony run in clearly different lines than do modern free traders. To Veblen, the rise of a free-trade system would result in the declining power of the

Institutionalism and the state

37

vested interests within any given system. Veblen argued, “A protective tariff is a typical conspiracy in restraint of trade.” (Veblen 1965[1921]: 20) He also wrote: “Of a similar character… are all manner of excise and revenue-stamp regulations” (ibid: 20). Veblen does not mention that extending free trade might extend the power of US vested interests into control over areas of the international system as can be seen in the extension of US corporate control around the world. It seems that Veblen believed that the use of free trade might help diminish the ability of the vested interests to use sabotage to advance their pecuniary goals. Even with this optimistic free trade attitude, Veblen was very much aware of the imperialistic uses of state power to advance the goals of absentee owners in overseas ventures. Veblen recognized that the power of the state was often used to protect the vested interests’ property overseas. “To safeguard these commercial interests, as well as property-holdings of the nation’s citizens in foreign parts, that nation maintains naval, military, consular and diplomatic establishments at the common expense” (Veblen 1919: 26). To Veblen, the concept of free trade was not an issue imbued with national sovereignty and the ability of one group of elite to trade freely in another group’s backyard, rather free trade was a step towards the elimination of the false boundaries and false group identities. Ultimately, free trade is the logical outcome of the machine process whereas the state is an imbecile institution. The state is solely an instrument to advance the interests of one group at the cost of the rest of the people in a country. Veblen’s position on the state is best summed up in the following passage: The great standing illustration of sabotage administered by the government is the protective tariff, of course. It protects certain special interests by obstructing competition from beyond the frontier. This is the main use of a national boundary. The effect of the tariff is to keep the supply of goods down and thereby the price up, and so to bring satisfactory dividends to those special interests which deal in the protected articles of trade, at the cost of the underlying community (Veblen 1965 [1921]: 20). To Veblen, the state was an outdated institution that was a carryover from previous eras of social evolution. The perpetuation of the state was carried on by the appeal to patriotism that allowed for the vested interests to then create a power structure that would enable the organization of a system detrimental to the majority of a state’s population. In any honest evaluation of Veblen’s view on the state, there is little room to suggest optimism for a positive role. Whereas Veblen does see some states as less detrimental than others, his most basic vision suggests that the ultimate improvement would be the elimination of the state based on patriotic sentiments and its replacement with some other form of governance. This improved vision of governance is not the elimination of government, but rather the elimination of an irrational leftover institution, the state. Patriotism is the blind following of group identification without reference to actual social benefits. Such a sense of patriotism comes out of the same bent as the invidious distinction behavior Veblen lambastes so often. “The patriotic spirit is a spirit of emulation shot through with a sense of solidarity. It belongs under the general caption of sportsmanship rather than of workmanship” (Veblen 1919: 33). From this sense of patriotism the state arose, thereby creating alliances between people without mutual

38

T.A. Wunder, T. Kemp

material benefit and creating separation between people who would be made better off by cooperating. Such a sense of group loyalty was probably beneficial to the survival of individuals at the foundation of society when groups were small (Veblen 1919: 50). Yet as society’s size expanded, the interests of individuals within the group became divergent. An institution that was once a beneficial survival institution became an imbecilic institution that perpetuated a detrimental form of governance. Governance based around patriotism no longer serves to advance the material survival of the people. Since patriotism and the state that arises out of it both diminish the material well being of the majority, Veblen argued that both had become imbecile institutions. Yet the state is not the only form of governance. Veblen’s View on Governance There does not appear to be in Veblen’s writings a position that denounces the rule of law or of governance in general. In fact, Veblen argues that the natural tendency of the German population is toward an anarchistic bent (Veblen 1939: 68) and that this bent does not work well with the machine process. To reorganize the process to be as efficient as possible would require the cooperation of thousands and would take on the form of central planning (Veblen 1965 [1921]: 139). Such reorganization does not seem to be plea by Veblen for less governance. In fact, Veblen’s work provides examples suggesting that the problem is not government, but, rather, the form of government embodied in the western state arising from the feudal order. “Yet history records an instance at variance with this axiomatic rule, a rule which is held to be an unavoidable deliverance of common sense. And it is by no means an altogether unique incidence” (Veblen 1919: 11). Such a form of government as seen in the western states is based around the centralization of authority and the monopoly on the use of force which arose out of the Prince’s quest for power. The governmental form in modern capitalist states is the same with the exception that business class interests replace the interests of the Prince. The instance Veblen offers as counter to this Western state is the Icelandic republic of tenth to 13th centuries. Veblen writes: In the history of its installation there is no hint the men who set up this Icelandic Commonwealth had any sense of the need, or even the feasibility, of such a coercive government as would be involved in the concerted preparation for the common defense. Subjection to personal rule, or to official rule in any degree of attenuation, was not comprised in their traditional experience of citizenship … The new commonwealth was necessarily erected on the premises afforded by the scheme of use and wont; and this received scheme had come down out of pre-feudal conditions (Veblen 1919: 12–13). The modern state as an institution of centralized power with the coercive capacities used to benefit the ruling class was a species of government and not the only form. Veblen seemed to have within his work suggestions that the state as a form of government was a historical outcome of specific evolutionary forces. A view into Veblen’s position of governance that would best serve society under the machine order can be pieced together by looking in several locations. In

Institutionalism and the state

39

Engineers and the Price System, Veblen suggests a government led by three executives in charge of production, transportation, and distribution (Veblen 1965 [1921]: 143). In the Nature of the Peace, he suggests the elimination of systems of national defense and replacing them with a system of mutual state defense on a global level. He also suggests the elimination of the ability of states to place tariffs and other policies that perpetuate the interests of the kept classes (Veblen 1919: 280– 281). Finally, he concludes his discussions in Nature by pointing out that as peace is perpetuated in such a system, the machine process that it enables will continue to grow. The machine process will eventually call into question the pecuniary control of the system. To end this discussion, it seems useful to point out Veblen’s pessimism about the state being replaced with a better form of government. The nature of the machine process indoctrinates individuals into a matter-of-fact frame of reference and calls into question the control of the vested interests. Veblen argued that the vested interests were unlikely to allow the collapse of their power and would take actions to block it. In Nature, Veblen ends by suggesting that the vested interests would rather maintain a system of war footing then allow their control to fade away and the only way to stop this would be to diminish property rights at the foundation of the new peace (Veblen 1919: 366–367). It seems unlikely that Veblen would have been surprised by the importance of the military/industrial complex in America today; Sidney Plotkin offers an excellent discussion on this issue (Plotkin 2007: 170–201). A fundamental idea running through Veblen’s work is the contradiction arising from the machine process versus the imbecilic institution of patriotic sentiments. He sums up this contradiction with its associated forces at the end of Theory of Business Enterprise by suggesting that the control of business interests can only be transitory. If peace is maintained, then the machine process will call into question absentee ownership and the pecuniary forces will lose out. If the patriotic attitude continues with its tendency to warlike conflict, then the dynastic systems of the past will rise up and once again the pecuniary leaders will lose out. “Which of these two antagonistic factors may prove the stronger in the long run is something of a blind guess; but the calculable future seems to belong to one or the other. It seems possible to say this much, that the full dominion of business enterprise is necessarily a transitory dominion. It stands to lose in the end whether the one or the other of the two divergent cultural tendencies wins, because it is incompatible with the ascendancy of either” (Veblen 1932: 400). Summary of Veblen Veblen’s views on the state arose out of the empirical realities he observed around him. There is a large difference between his criticism of the state and his ideas on governance; whereas Veblen criticized the patriotic sentiment, and the state that arose from it, he emphasized the machine process and the governance that it required. Veblen pointed out the difference between the concept of governance and the species of government based around the patriotic sentiment that resulted in the state. Implicit within his work is a distinction between the state and the need arising in the machine process for increased organization and governance. The key to understanding this distinction lies in reviewing his discussions on patriotism.

40

T.A. Wunder, T. Kemp

Patriotism is the irrational bent that serves to perpetuate the state in a similar way that conspicuous consumption serves to perpetuate the consumerist economy. In both situations, Veblen seemed to want a better way and his discussions about a differing form of governance, though fragmentary, are enlightening.

Comparison and Conclusion Veblen and Commons share a vision of government and the state that is based on the recognition that power plays a central role in economics. This common vision serves as a unifying theme in their distinctive descriptions of both the state and of governance. Scholars who believe that there are inconsistencies between Veblen and Commons on these issues should recognize that it is this unifying issue of power that is the central focus of effort in both authors’ works. Differences in emphasis and intellectual effort cannot be interpreted as differences in fundamental method and that method emphasizes the clarification of how power is central to economic questions. Both Veblen and Commons analyze their visions of government and the role of the state in many books and essays. Their descriptions of the state, and of government, flow from a simple belief that has become a fundamental underpinning in Institutional Economics. This belief argues that power structures play a major role in economic activity and therefore they play a major role in the economy. Since power plays such a major role in economics, the primary institutions of power, government and the state have become a central part of the institutional research agenda. This article has gone back to Veblen and Commons to review and analyze some of their key positions on the state and government. The differences in their emphasis and the commonalities of their ideas can now be seen more clearly. It seems to be that neither Veblen nor Commons ever really sets out to emphasize the state as the subject of a coherent theory within their writings. Veblen’s views on the state are interspersed throughout his works and are entwined with his observations on business control and international issues. The student of Veblen can bring together differing ideas to come up with an outline of his opinion, but for a concise account one must either piece it together from differing areas or turn to secondary sources. With Commons, we see a similar situation: the pieces of a concise view are there, but it is only through searching that an overall system can be brought together. Both authors use evolutionary discussions about the institution of the state, but they each emphasize differing parts of the evolutionary process. Commons emphasized that the state was an institution in a process of constant change. The differing interest groups work at cross-purposes, and it is this struggle that produces a sense of consensus for the populace. Veblen uses his evolutionary analysis to offer a history of the state’s origins and development and suggests that the current incarnation of government, embodied in the patriotic state, is a result of specific historical evolution. Whereas Veblen saw the patriotic state as the result of past evolution, Commons emphasized how the process was still continuing. Veblen would have agreed that the process continues (and, as mentioned above, often considered existing trends and their implications for the “calculable future”), but he never spent much time analyzing the specifics of the process nor did he offer policies

Institutionalism and the state

41

that might influence the process. It should be made clear that the differing emphasis in these works does not imply a differing or incompatible vision. Veblen would not have disagreed with Commons; rather, he was not interested in exploring the topics that were the main focus of Common’s attention (though there were indeed overlaps, as indicated above and mentioned below). Veblen’s negative opinion on the state is widely seen in his works, but, as this essay points out, it is not governance that Veblen condemned. Rather he condemned government as instituted in the patriotic state. If governance becomes the institution under analysis, then we see clearly a much closer connection between Commons’ views on the state and Veblen’s. Commons saw the state as an ongoing struggle for control of power between rival interest groups. Commons saw this competitive struggle as a tempering force that reduces the most coercive elements of the state. Veblen’s emphasis on the institution of patriotism, and its negative effects on governance, would not be outside Commons analysis about the evolution of laws. Patriotism is an institution instilled and perpetuated in part by codified state law. As the analysis of Commons shows, evolutionary changes may not always lead to a better system and can instead promote the continuation of institutions that are detrimental to a better social order. Veblen argued that governance based on patriotism was such an imbecilic institution and Commons’ analysis never denies the possible perpetuation of such a flaw. It seems clear that these two visions are very complimentary in nature. In the end, Veblen and Commons devote considerable attention to analyzing the importance of the state in modern society. Veblen emphasized the state as an imbecilic form of government based around the obfuscating institution of patriotism. Commons looked much deeper into the evolutionary mechanisms that changed the system over time. Both authors offer something useful to the student looking for alternative views of the state, and their visions combine to offer a complimentary vision of an economic past and present shaped by power. Acknowledgments The authors would like to thank the other members of the symposium and the referees, whose help has made the article a better work. Any errors or omissions that remain are solely the fault of the authors. We want to give special thanks to Charles Whalen who put extensive effort into organizing and keeping this process going.

References Chasse, J. D. (1986). John R. Commons and the democratic state. Journal of Economic Issues, 20(3), 759–784. Chasse, J. D. (1997). John R. Commons and the special interest issue: not really out of date. Journal of Economic Issues, 31(4), 933–949. Commons, J. R. (1893). The distribution of wealth. Boston: The Macmillan. Commons, J. R. ([1899–1900] 1967). A sociological view of sovereignty. New York: August M. Kelley. Commons, J. R. ([1919] 1969). Industrial goodwill. New York: Arno & The New York Times. Commons, J. R. ([1924] 1974). Legal foundations of capitalism. New York: August M. Kelley. Commons, J. R. ([1934] 1990). Institutional economics. New Brunswick: Transaction. Commons, J. R. ([1934b] 1964). Myself. Madison: University of Wisconsin Press. Commons, J. R. (1950). The economics of collective action. Madison: University of Wisconsin Press. Gonce, R. A. (1996). The social gospel, Ely, and Commons’s original stage of thought. Journal of Economic Issues, 30(3), 641–665.

42

T.A. Wunder, T. Kemp

Leathers, C. G. (1989). Thorstein Veblen’s theories of governmental failure: the critic of capitalism and democracy neglected some useful insights, hindsight shows. American Journal of Economics and Sociology, 48(3), 293–306. Loader, C., & Tilman, R. (1995). Thorstein Veblen’s analysis of German intellectualism: institutionalism as a forecasting method. American Journal of Economics and Sociology, 54(3), 339–355. Kemp, T. (2006). Of transactions and transaction costs: uncertainty, policy and the process of law in the thought of Commons and Williamson. Journal of Economic Issues, 40(1), 45–58. Knoedler, J., & Mayhew, A. (1999). Thorstein Veblen and the engineers: a reinterpretation. History of Political Economy, 31(2), 255–272. O’Hara, P., & Sherman, H. (2004). Veblen and Sweezy on monopoly capital, crisis, conflict, and the state. Journal of Economic Issues, 38(4), 969–987. Plotkin, S. (2007). Thorstein Veblen and the sabotage of democracy. In J.T. Knoedler, R.E. Prasch, & D.P. Champlin (Eds.) Thorstein Veblen and the revival of free market capitalism (pp. 170–201). Northhampton, MA: Edward Elgar. Ramstad, Y. (2001). John R. Commons’ reasonable value and the problem of just price. Journal of Economic Issues, 35(2), 253–277. Tilman, R. (1972). Veblen’s ideal political economy and its critics. American Journal of Economics and Sociology, 31(3), 307–317. Tilman, R. (1984). Dewey’s liberalism versus Veblen’s radicalism: a reappraisal of the unity of progressive social thought. Journal of Economic Issues, 18(3), 745–769. Veblen, T. (1919). The nature of peace and the terms of its perpetuation. New York: B.W. Huebsch. Veblen, T. (1923). Absentee ownership and business enterprise in recent times. New York: B.W. Huebsch. Veblen, T. (1932). The theory of business enterprise. New York: Charles Scribner’s Sons. Veblen, T. (1939). Imperial Germany and the industrial revolution. New York: The Viking. Veblen, T. (1965). The engineers and the price system. New York: Augustus M. Kelly Bookseller. Waller, W. (2006). The pragmatic state: Institutionalist perspectives on the state. In S. Pressman (Ed.) Alternative theories of the state (pp. 13–33). New York: Pelgrave Macmillan.

Timothy Wunder is visiting assistant professor of economics at The University of Texas at Arlington. He teaches the economics of race and gender as well as comparative economics systems. His research interests are in history of economic thought and issues of economic inequalities.

Thomas Kemp is assistant professor of economics at University of Wisconsin-Eau Claire. He teaches macroeconomic theory, institutional economics and public policy. His research interests are in the areas of public policy and law and economics.