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Running Head: POST KEYNESIAN/INSTITUTIONAL SYNTHESIS
A Proposed Methodological Synthesis of Post Keynesian and Institutional Economics
Linwood F. Tauheed
University of Missouri Kansas City
Economics / Social Science Consortium
Paper prepared for the 1999 Western Social Sciences Conference
Fort Worth, Texas- April 22, 1999
(Not presented)
(Working paper - comments appreciated)
(NOT FOR CITATION)
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Abstract
Numerous writers from the Post Keynesian and Institutionalist traditions have
commented on the commonality of fundamental principles between the two schools. In spite of
these commonalties each tradition has developed significantly different methods of analysis.
Institutionalist methods have generally yielded "plausible" explanations, but without the
rigor and consistency needed if they are to be used as a basis for economic policy. Post
Keynesian methods have "policy necessary" rigor, but the similarity to neo-classical methods has
exposed Post Keynesian analysis to unwarranted synthesis with incompatible traditions, due to a
lack of explicit acknowledgement, within its modeling methods, of it philosophical foundations.
This paper proposes a synthesis of Post Keynesian and Institutionalist methodology, one
of "plausible rigor", based on a further development of the "Institutional Dynamics" approach
proposed by Michael Radzicki and others, combined with the "instrumental logic" of John
Dewey; which has the potential of overcoming the weaknesses of both schools.
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A Proposed Methodological Synthesis of Post Keynesian and Institutional Economics
Introduction
Keynesian and Veblenian Critique - Economic Policy Issues
The economics of John Maynard Keynes, formally presented in The General Theory of
Employment, Interest, and Money (1936) and other works, and continuing in that tradition with
the Post Keynesians, was not the first criticism of, nor attempt to replace the inadequate neoclassical system of economics. It has been however, the criticism that has made the most impact
in providing alternative courses of action with regards to economic policy. The economics of
Thorstein Veblen, as formalized in The Theory of Business Enterprise (1904) and other works,
and continuing in the Institutionalist tradition, has not, as yet, had as great an effect on policy,
except for a brief period during the Depression1. One explanation for the success of Keynes's
system, but not Veblen's, in the realm of policy, is that
Post Keynesians have created a large body of theory to explain the operation of modern,
market-based, industrial-production economies. With that theory, they have made
specific recommendations for policy. If the ultimate goal of economics is to make such
recommendations, then Institutionalists…still fall short of what has been accomplished
by Post Keynesians (Harvey pg. 70, emphasis added).
Post Keynesian Analytical vs. Institutional Pattern Models
An additional explanation can be given. The nature of the Post Keynesian theoretical
system has generally taken the form of mathematical models capable of analyzing quantitative
data, and pointing to quantitative policy alternatives. That these models are intended to be of a
different framework than neo-classical models is to be taken up later. Nevertheless,
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policymakers, accustomed to quantitative analysis (cost/benefit, linear programming, etc.), which
has the appearance of rigor and precision whatever their worth, no doubt feel comfortable with
some form of numerical solution from neo-classical analysis. Policy makers want and need to
know “how much will it cost?” Their ability to sell a policy to the electorate many times
depends on being able to answer that question with some number, no matter how flawed the
underlying theoretical model.
On the other hand, the Institutionalist method of analysis and synthesis, described as
pattern modeling, storytelling and holism (Wilbur & Harrison) appears to generate no more than
"opinions", albeit learned, and these containing enough "vagueness and suggestiveness"
(Sturgeon, pg. 604) as to be freely capable of alternative interpretations. Add to this the idea,
popular among some Institutionalists, that Institutional Economics has not, cannot and therefore
should not even attempt to develop "formal" models (i.e. theory2), and the only apparent chance
for an Institutionalist impact on policy is to convince policymakers to accept plausible ‘opinion’
over worthless rigor. An alternative project might be to develop methodologies of "plausible
rigor" within the Institutionalist and Post Keynesian traditions.
The Possibility of Synthesis
We put forward the idea that a "synthesis" between the Post Keynesian and
Institutionalist schools is not only possible, but also desirable. But, if the desired benefits are to
be achieved, the core of the synthesis must be the adoption of "plausibly rigorous" methods - one
such methodology is presented here - which allows each to benefit from its own strengths and the
strengths of the other while overcoming apparent and potential weaknesses. This is a different
perspective than the one proposed by Harvey, whose goal is to make institutionalism more
accessible to Post Keynesians with the intent that Post Keynesians would adopt current
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Institutionalist methodology, which as stated above is vague enough to be ignored with regards
to policy.
The Benefits for Each School
For Institutionalists, a collaboration and development of a more rigorous methodology is
necessary for entry into the policy arena with any significant impact and for other reasons to be
given. For Post Keynesians, the benefit of collaboration between the two schools would be an
awareness of the philosophical foundations of Keynes's system by having these foundations
‘built-into’ the methodology. This would also lower the "risk of becoming straitjacketed by a
blind devotion to its own models, which is a major part of the problem with orthodox
economics." (Harvey, pg. 70).
The Modeling Principles of the Economics of Keynes
Keynes's Three Expectations Models
Keynes made assumptions about the way in which long-term expectations are formed,
and about the effect these expectations have on the economy. Particularly, that long-term
expectations "may shift autonomously in reaction to economic or non-economic factors and will
be a major determinant on the marginal efficiency of capital, liquidity preference and the
propensity to consume." (Kregel, pg. 214). These factors become the determinants of the level
of "effective demand", which can be fixed at any level of employment, even one of high
unemployment. As analyzed by Kregel, Keynes used three expectations based models with
regards to the determinants of the level of "effective demand".
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1. The "Static Equilibrium" model assumed that expectations were given and constant, which
means that the aggregate demand and supply functions do not vary once derived. The
resulting level of effective demand can still result in equilibrium below full employment.
2. The "Stationary Equilibrium" model allowed short-term expectations to vary, but longterm expectations are held constant. Long-term expectations of effective demand are
adjusted by trial and error as short-term expectations are met or disappointed. This is the
model Keynes employed throughout most of the "General Theory", for what Kregel
describes as "pedagogical purposes" (pg. 217), in explaining specific applications of his
general theory.
3. The "Shifting Equilibrium" model allows long-term expectations to be affected by
disappointments in meeting short-term expectations. This is Keynes's fully developed
generalized model. In this model Keynes assumed not only that disappointment of shortterm expectations could occur, but that they are very likely to occur because of
uncertainty.
The Complexity of the Shifting Equilibrium Model
The source of complexity in the fully developed "shifting equilibrium" model is not only
that there is a shifting along the aggregate demand and supply curves as short-term expectations
are adjusted, this occurs in the "stationary equilibrium" model as well. But, additionally the
parameters of the aggregate demand and supply functions themselves are modified as
adjustments in short-term expectations affect long-term expectations. It is, as Davidson has
pointed out, non-stationary and nonergodic (pg. 2). The past never repeats itself and sampling
from the past cannot be accurately extended into the future. The economic actors therefore have
no way to calculate the future course of the economy, which is therefore uncertain by definition.
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The Modeling Principles of the Economics of Veblen
The modeling principles of Veblen were less formal than those of Keynes; even to the
extent that some have ruled formalism out of bounds as an Institutionalist method of analysis
(Wilbur and Harrison, pg. 71). Nevertheless, a number of assumptions and modeling themes are
prominent in Veblen's work including the following;
1. An economy encompasses all of the activities that human beings do in order to provision
for themselves, including those commonly viewed as non-economic.
2. The economy is a social structure, interrelated and inseparably connected to, influencing
and influenced by other social structures.
3. The economy, as do other social structures, constantly changes by way of a cumulative,
evolutionary process.
4. For analytical purposes, the economy as a system may be dichotomized into distinct, but
inseparable technological and ceremonial components.
5. The economy evolves because of the constant interaction and changing relationships
between its technological and ceremonial components and between itself and other social
structures.
If we take these assumptions as modeling principles, we can summarize Veblen's
methodology as "holistic, systemic and evolutionary", in agreement with Wilbur and Harrison
(pg. 71). As the principles for development of a theory of the capitalist economic system, it lays
the foundation for Veblen's aim that "[a]ny evolutionary science”, which he intended for his
economic theory to be, "is a close knit body of theory. It is a theory of a process, of an unfolding
sequence." (Veblen 1898).
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The Connections
The Compatibility of Assumptions
That the Post Keynesians have developed a set of rigorous economic models, with
different assumptions than the neo-classicals, would be of little use to the goal of "synthesis", if
these assumptions were incompatible with the Institutionalist approach. However, the
underlying assumptions of the Post Keynesians mirror the fundamental principles of the
Institutionalists. A number of writers have described the level of congruence between the two
schools of thought, the earliest of these writings appears to be Rutledge Vining's article,
"Suggestions of Keynes in the Writings of Veblen" (Vining, 1937). Numerous others have
followed, and J. Fagg Foster, a leading Institutionalist, affirms the connection by writing, "[t]he
institutional economics and the Keynesian economics conjoin in relation to the questions asked,
the philosophical foundations of economic theory, and the identification of the dynamic factors
in the economic process." (1981c pg. 949).
Various writers, (see table 1), have contributed to the literature on the relationships
between the economics of Keynes and the economics of Veblen, and it is not the intention of this
paper to attempt to review their work. However, a few of these connections can be explored as
examples of the compatibility of principles between the two approaches, as well as being
important to the "synthesis" argument to be made.
1.
The existence of institutionally determined (non-economic) variables
2.
The relationship of effective demand and level of employment
3.
The Veblenian/Keynesian insight respectively into the dichotomies between
business/industry and speculation/enterprise.
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Keynesian/Veblenian Connections
Dichotomy between enterprise/industry and
speculation/business
Reference
Harvey (pg. 79), Dillard (pg. 260)
Economy as "open"
Foster (1981c, pg. 955)
Effective demand and level of employment
Vining (pg. 695), Dillard (pg. 268)
Endogeniety of the Business Cycle
Dillard (pg. 262)
Equilibrium state of unemployment
Vining (pg. 700), Dillard (pg. 262)
Historical time
Peterson (pg. 205)
Institutionally determined variables
Foster (1981a, pg. 946)
Interest as monetary/pecuniary
Vining (pg. 695), Dillard (pg. 263)
Investment-capital cycle and circular causation
Harvey (pg. 85)
Marginal efficiency of capital
Vining (pg. 696), Dillard (pg. 262)
Money as an institution
Dillard (pg. 255)
The Multiplier and the theory of circular causation
Vining (pg. 701), Harvey (pg. 85)
Role of "Expectations"
Vining (pg. 696), Dillard (pg. 262)
Role of "Uncertainty"
Peterson (pg. 215-216)
Transactions, precautionary and speculative motives
Vining (pg. 696-698)
Table 1 - Some References to Connections between the Economics of Keynes and Veblen
The Importance of Non-economic Factors
Important concepts, for the purpose of the connection of Post Keynesian theory to
Institutionalist theory, are not only the complexity and uncertainty of the path of the economy,
but that the independent variables are to a large extent independent of the path of the economy
and of each other. They are affected by non-economic factors, which are institutionally
determined, i.e. within the social system at large3. It is on the basis of the misunderstanding of
this point that Foster has been critical of Institutionalists who have "dismissed the Keynesian
theory with slight consideration." (1981c, pg. 954). Institutionalists have opposed all closed
systems as being tautological and therefore unverifiable. But, the Keynesian system is an open
system, precisely because "the independent variables within the system of the analysis are in fact
independently variable." (Foster, 1981c, pg. 955).
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There are some differences between various analysts over which set of independent
variables Keynes employs. Foster takes the independent variables to be "the propensity to
consume, the marginal efficiency of capital and the rate of interest." (1981b, pg. 866). Kregel
take them as "the propensity to consume, the marginal efficiency of capital, and liquidity
preference; along with the wage unit and the quantity of money as determined by the Central
Bank." (pg. 219). The differences of sets should not be taken as overly significant and another
set may be forthcoming from a different analyst since as Kregel points out "[t]he choice of the
problem to be analyzed to a large extent determines what variables are to be classed as
independent, given, and dependent in Keynes's methodology." (pg. 217-218).
The Principle of Effective Demand
According to Vining (pg. 695) and Dillard (pg. 268), the principle of "effective demand"
- which Kregel says has "pride of place" as "the distinguishing feature of his [Keynes's]
approach" - can be found in Veblen's writings on the connection of overproduction to conditions
of depression. Veblen writes that "[t]here is an excess of goods, or of the means of producing
them…above what there is an effective demand for". "The difficulty is that not enough of a
product can be disposed of at fair prices to warrant the running of the mills at their full capacity"
(Veblen 1904, chapter 7, Theory of Modern Welfare). Overproduction is the same as
underconsumption, which leads to production slowdown.
Dichotomies between business/industry and speculation/enterprise
If any foundation can be given for Veblen's insights into what came to be "Keynesian"
principles, the most likely candidate would be his analytically dichotomous distinction between
business and industry, with the purpose of business being to make money and the purpose of
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industry being to make goods. This parallels Keynes's insight into and distinction between enterprise, which involves "forecasting the prospective yield of assets over their whole life"
(Keynes, pg. 158), which is Veblen's industry, i.e. resulting from the sale of products, and speculation, which involves "forecasting the psychology of the market" (ibid.), which is
Veblen's business, i.e. monetary gain not directly related to the sale of products. Out of this
insight by both Keynes and Veblen comes the importance of the distinction between money as a
‘means of exchange’ and money as a ‘store of value’, fundamental distinctions in both Post
Keynesian and Institutional economics.
A "Plausibly Rigorous" Methodology
Why Institutionalist Need More Rigor?
Wilbur and Harrison have described "pattern modeling" and storytelling (PM/ST) as the
methodology of institutional economics, due to the holistic, systemic and evolutionary nature of
the subject matter, and the inability of formal methods to "handle the range of variables, the
specificity of institutions, and the nongenerality of behavior." (pg. 72) Yet a case could be made
that Institutional Economics has not developed the evolutionary "close knit body of theory"
argued for by Veblen, (or any theory as argued by some), precisely because the PM/ST
methodology is not capable of generating such a body of theory.
The PM/ST method is a non-evolutionary method in that it is not capable of selfcorrection (in the Deweyan sense), since there are no rules, except those of the
participant/observer. It is idiosyncratic. In addition to the tendency to vagueness and
suggestiveness pointed out by Sturgeon, Radzicki has noted the problems connected with a
methodology based on "mental models" using the participant-observer method. These models
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are "usually incomplete or inconsistent, are loaded with concepts that are not clearly defined, are
full of unstated (and often not consciously thought of) assumptions and goals, and [the rules]
continually change". (1988, pg. 636). As restated, it is idiosyncratic. What is needed is a
framework, with rules - which means a more rigorous approach - in order to reduce the
idiosyncratic nature of the results of the PM/ST method to a level where a "close knit" body of
theory can emerge.
As stated above, the PM/ST method is non-evolutionary since it is not self-correcting.
The extremely personal nature of the case study PM/ST method makes the interpretation of any
results relativistic. "Some like it hot and some like it cold". The following quote from Dewey
highlights the problem with taking personal observation as the "object of knowledge" rather than
as a subject for further discourse.
Just as the validity of a proposition in discourse, or of conceptual material generally,
cannot be determined short of the consequences to which its functional use gives rise, so
the sufficient warrant of a judgment as a claimant to knowledge (in its eulogistic sense)
cannot be determined apart from connection with a widening circle of consequences. An
inquirer in a given special field appeals to the experiences of the community of his fellow
workers for confirmation and correction of his results. Until agreement upon
consequences is reached by those who reinstate the conditions set forth, the conclusions
that are announced by an individual inquirer have the status of an hypothesis, especially
if the findings fail to agree with the general trend of already accepted results. (Dewey,
pg.484)
Personal methods preclude criticism by, and guidance from, the community of inquirers;
errors persist because personal points of view persist. In the view of Charles Sanders Peirce, this
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would not even qualify as a scientific method much less as the method of an evolutionary
science. Particularly because the anticipated results of an Institutionalist inquiry will generally
disagree with accepted theory, the methodology needs to be non-idiosyncratic.
Sturgeon has argued that "[m]ethodology and valuation should be joined" (pg. 599),
making the case that methods are not just tools (i.e. methods of manipulation, but also methods
of valuation), that all tools are not alike, and that tools have to be matched to the problem to be
solved. In addition, he argues that "the use of induction as a slogan" of institutional method "has
retarded the development of institutional theory" (pg. 604). We add that the misuse of inductive
methods, of which the PM/ST is a type, has also retarded its development. This paper takes the
position that there is a place for the PM/ST method in institutional analysis, but what has
retarded the development of a "close knit" body of institutional theory is the almost sole reliance
on this method, as documented by Wilbur and Harrison, in institutional analysis.
There is no need to abandon the PM/ST methodology, as might be the case if one were
arguing for a value-free or objective way of assessing facts. There is no value-free way of
assessing the facts, as the facts come to our attention from the situation and as Dewey argues, "a
problem must be felt before it can be stated" (Dewey, pg. 76). What this paper argues is that the
PM/ST method can be viewed as only a part of an overall instrumental and evolutionary method
of theory development, guided by the process of Deweyan instrumental logic.
Why Post Keynesians Need More “Philosophy”
The crucial connection, of what could be called the "ontological perspective", between
the economics of Keynes and the economics of Veblen, is the recognition that there are
important independent variables, which are "institutionally determined" and are therefore not
solely dependent on the functioning of the economy. Foster has noted that "[e]xcept for the rate
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of interest" Keynes "[did] not pursue the explanation of each of them beyond pointing out that
they are institutionally determined." (1981b, pg. 865-866). Peterson (1977, pg. 213) has pointed
out that it was the "capture" of these institutionally determined variables - taking them as
endogenously defined - by the neoclassical synthesis Hicks-Hansen model, which "pushes the
analysis back toward the neoclassical notion that the endogenous processes of the system
automatically leads to full employment." Once these variables were brought back into the neoclassical system of atemporal, instantaneous (simultaneous) equations not only did the system
become once more tautological and therefore unverifiable, but also "fortuitous equilibrium" was
assured.
In order to develop further Keynes's 'Shifting Equilibrium" model, and move it away
from its "capture" by "fortuitous equilibrium", it becomes necessary to begin to understand the
source of variation of the variables that have their determination outside of the economy proper.
And in addition, to determine the effect that changes in these variables, and the resulting change
in expectations, have on the form of the relationship of the economic variables to each other, i.e.
the functional forms and their parameters (Davidson's non-stationarity). The Institutionalist
approach has attempted to determine the source of the variation and the effect of these noneconomic variables, (but as argued, with a methodology that does not live up to its philosophical
foundation).
A number of Institutionalist have argued that the economics of Keynes, was in fact an
application of the instrumental logic of Dewey and the institutional approach. Foster, in
numerous writings has stated that "[t]he most notable application of the institutional approach to
a fundamental economic problem is the analysis of the level of real income presented by John
Maynard Keynes in 1936." (1981b, pg. 865). Gladys Parker Foster (1991) finds considerable
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evidence that Keynes and Dewey had the same view of; the role of probability and therefore
uncertainty, the use of scientific method in ethics, and a desire to "dispense with the formal rules
of logic and symbols in favor of inquiry that is helpful in arriving at decisions in everyday life"
(pg. 567). Echoing J. Fagg Foster she concludes that, "Keynes's General Theory of Employment,
Interest and Money could serve as a case study of Dewey's concept of scientific methodology"
(pg. 561)
And, as shown, Keynes and Veblen had the same ontological insight into the
dichotomous nature of the modern industrial economy. It should therefore be no great surprise
that they should have developed their theories along the same lines and with the same idea as to
the "institutional adjustments" needed to handle the faults within its (economic) structure. With
regards to the further development of Keynesian theory, Foster (JF) writes "Keynesian theory
must be developed toward generality and foundation to the point that it can be continuous with
the theory of institutional adjustment." (1981c, pg. 956) Remembering Kregel's insight that
Keynes used the "Stationary Equilibrium" model in The General Theory, as a way of handling
specific cases for pedagogical purposes, Fosters words point to the need for further development
of the general "Shifting Equilibrium" model.
A return to those foundational insights, by way of Deweyan instrumental logic as a
methodology true to those insights, would aid the Post Keynesians in breaking free of capture by
those who would declare "We are all Keynesians now."
The Method of Institutional Dynamics4
Michael Radzicki, in a number of Journal of Economic Issues articles explains and
demonstrates the uses for the systems dynamics (Institutional Dynamics) approach to computer
modeling, and posits this approach as a way of developing Institutionalist based economic
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models which can replace or augment the PM/ST methodology. Institutionalists have generally
avoided most methods that could be thought of as quantitative. However, it should be
remembered that there was a time in Institutionalist history when the then leading Institutionalist,
Wesley Mitchell, developed and used quantitative methods. The abandonment of those methods
by Institutionalists can arguably be placed on "the lack of technical resources" (Radzicki, pg.
637), particularly when one considers that the tremendous quantity of data was collected by
Mitchell before the age of computers. Radzicki argues that "[t]he complex, dynamic, highly
interactive and circumstantial processes of economics cannot be accurately modeled by
analytical mathematics" (quoted in Radzicki, 1988, pg. 637), but that the method of computer
simulation provides the ability to develop non-linear, open-system, numeric models of economic
theory. It can also address Wilbur and Harrison's concerns that a method be able to "handle the
range of variables, the specificity of institutions and the nongenerality of behavior." The range
of variables capable of simulation, both quantitative and qualitative, is virtually unlimited,
specific models of individual institutions and their posited interactions can be incorporated, and
alternative models of behavior, can be modeled.
While there are other useful simulation methods; (other than the system dynamics
approach) - because of the correspondence of structures in the systems dynamics method, to
theoretical constructs in Post Keynesian and Institutionalist economics; (ex. positive and
negative feedback, and the simulation of historical time) - methodology matches ontology. But
simulation, regardless of the method of simulation chosen, should be looked upon as a heuristic,
designed to aid in the solution of a problem, rather that as providing an answer itself. The idea
of an answer within error limits, of some calculable degree of probability, is ruled out by the
understanding that even for simple non-linear systems, no realizable amount of precision in
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estimation of initial parameters, will allow prediction of long-term results (Radzicki 1991, pg.
79).
The Method of Instrumental Logic
Dewey has argued that the standard logical methods while perhaps adequate for the
notion of science and its problems in Aristotle's time are insufficient for modern society, its
notion of science and its problems. This becomes exceedingly so if old forms of inquiry are used
in an attempt to understand and guide the development of a modern industrial economy. He
argues for the adoption of a modern, evolutionary logic as a method of inquiry. Central to this
logic is the method and process of deliberation. While space permits only a cursory treatment,
the process of deliberation within the framework of Deweyan instrumental logic encompasses
the following steps in an iterative, cumulative, evolutionary, and interactive manner. Within the
exposition of the method of instrumental logic, the place of Institutional Dynamics and the
PM/ST method, as components of what could be described as an instrumental toolkit can be
shown.
First, we start with the recognition of a "felt" problematic situation. The process of
inquiry begins when a problematic situation, for which a solution is not readily available, is
"felt". Dewey makes it clear that by "felt" he is not referring to a sensation or emotion, but to a
situation that represents a qualitative, personal and unique whole, the parts of which are not yet
separable from each other.
Second, we have recognition of the constituent parts of the situation. As previously
stated, "a problem must be felt before it can be stated" (Dewey, pg. 76). Since the quality of the
situation is a unique, personal experience, this is where the PM/ST method finds its legitimate
use within an instrumental methodology. In agreement with Radzicki it is proposed that "[i]n the
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systems dynamics method, the participant-observer's search for themes becomes a structured
search for positive and negative causal feedback loops." (Radzicki, 1988, pg. 638)
Third, we proceed to the development of alternate hypothetical solutions. The alternate
hypothetical solutions become alternate models of the problematic situation.
Fourth we have the "dramatic rehearsal" of the anticipated consequences of applying a
hypothetical solution. At this stage, the method of Institutional Dynamics would be used to
"rehearse" and document the consequences of the alternate hypothetical solutions.
Fifth we have the choice of a tentative solution from among the hypothetical solutions.
While not discussed in this paper, Foster's theory of institutional adjustment (see 1981d) can
provide an instrumental framework for the analysis of the expected consequences
Sixth we have the application of the chosen solution and monitoring of the consequences.
While obviously so, the expected divergence of the simulated consequences from the
consequences of real world application must be monitored simply because divergence is
expected.
Seventh and iteratively, we return to the first step if the problem is not deemed “solved”.
The process is iterative, evolutionary and interactive. Even the failure of the selected solution, if
properly analyzed, will provide additional warranted assertions relative to the problem.
Conclusion
The incorporation of the PM/ST and Institutional Dynamics methods, (and the theory of
institutional adjustment), within the framework of Dewey's instrumental logic in the manner
described, allows each tool to be utilized in the process of modeling and inquiry where it can best
address the requirements of ‘enough vagueness for creativity’ and ‘enough rigor for precision’;
concerns expressed by Wilbur and Harrison, and Sturgeon and Radzicki.
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In addition, it has a better chance of allowing for the cross-fertilization of ideas between
the Post Keynesian and Institutionalists schools than does Harvey's idea of having Post
Keynesians adopt Institutionalist methodology after becoming familiar with its "unintelligible
phraseology and exotic methods" (pg. 70), since current Institutionalist methodology is so illdefined.
As to policy, a methodology of “plausible rigor” capable of providing some answer to the
‘how much will it cost?’ question and guided by instrumentalist logic in implementation has a
greater chance not only of raising the profile of Institutionalist / Post Keynesian economics, but
also of doing what neo-classical economics cannot; actually attending to the public and its
problems. We end this essay with the words of Wallace C. Peterson,
I like to view Keynesianism and institutional economics as two trains which started out
on parallel tracks toward a common destination…The Keynesian train spurted ahead, but
was almost imperceptibly shunted onto another track, one which took it further and
further away from its original destination. This was the neoclassical synthesis. What is
needed is to get the trains back on parallel tracks. (pg. 202).
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SYNTHESIS
21
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SYNTHESIS
22
1
One could note that this influence coincided with the emergence of Keynes’ system as
the “only game in town” capable of making sense of the times.
2 The discussion over the appropriateness "of theory" has to resolve what qualifies "as
theory". If by economic theory one means a model, derived either from an analysis of empirical
data or a priori assumptions, which has as its purpose the prediction of the future course of
events, then Institutionalists must reject the possibility of economic theory. However, if
economic theory is taken to mean an explanation of the process whereby the economy proceeds,
then Institutional Economics indeed has a body of theory, although not "close knit". As pointed
out by Sturgeon (pg. 604), the failure of Institutionalists to formally define their theoretical
concepts has led to a body of incompatible theories under the label of institutional thought. This
definition of theory, i.e. explanation of process, has an immediate and enduring appeal for the
economics of Veblen, since the "Theory of Evolution By Way of Natural Selection", a
fundamental paradigm of institutional thought, is a theory of process with no pretense of
prediction. Certainly Ayres' "Theory of Economic Progress" fits this definition as well.
3
The technological determinants are more apparent in Veblen's system than in Keynes's.
(Dillard, pg. 268)
4
Since the initial writing of his paper an application of Institutional Dynamics applied to
Keynes’ Chapter 22 “Notes on the Trade Cycle” has appeared in the JEI (Harvey, 2002)