Task+4

It has been widely recognized in the literature __about__ history of economic thought that the differences between neoclassical and institutional economics occur __in__ many levels. Furthermore, the foundation of the institutionalist movement to a great extent was based in Thorstein Veblen’s critical writings, which stressed many differences between the approach that he was proposing and the early neoclassical thought. In this regard, it must be remembered that __was Veblen__, in his critiques of the marginalist approach, who suggested the title ‘neoclassical’ for this trend in economics. Thus, in the following paragraphs the differences between neoclassical and institutional thought in economics will be presented __in__ two different levels, concerning their philosophical foundations or methodological preconceptions and their theoretical approaches. The philosophical basis of these approaches to economics emerged separated by a century and by the Atlantic Ocean. For the marginalist or neoclassical thought the philosophical pillars __was assented__ by Jeremy Bentham __in the turning from the 18th to the 19th__ century. His thought has been entitled ‘utilitarianism’, and it provided the main idea that allowed __the__ marginalist thought to propose an alternative value theory to the, __at that time, dominant labor theory of value__. Inspired by the Benthamian idea that man is an agent who seeks constantly and predominantly to achieve pleasure and avoid pain – or more generally, avoid displeasure – and based on the conception that this same man is a kind of pleasure-displeasure calculator, early neoclassical economists proposed the utility theory of value. This theory, in contrast with the labor theory of value, says that __the exchange value__ has its roots in a subjective evaluation, made by the individual economic agent, of the utility that each specific commodity has for him. Roughly, the neoclassical theory, even in its modern variants, is based on the idea that economic laws must be derived deductively from this basic axiom about the behavior of the individual economic agent. All in all, some philosophers of economics name this approach ‘methodological individualism’. __On the other hand,__ institutional economics was founded on an extremely different philosophical basis. __Besides__ the fact that institutional economics has a more complex matrix of philosophical origins, it can be said that its chief influence was the pragmatic American trend in Philosophy. Charles Sanders Peirce deserves the most credit for pragmatism, nevertheless William James’ and John Dewey’s writings have been influential in institutional economics up to these days. The upsurge of pragmatism occurred __in__ the end of the nineteenth century, and it has been considered __as__ the most valuable American contribution to philosophy. Yet, regarding institutional economics, the main pragmatist influence is the idea that economics does not need a theory of value __to start from__. Moreover, it will be an error to proceed just deductively from a very general starting axiom. In short, pragmatism introduced to economics the idea that the specificity of the economic facts matters. Therefore, context matters, the unique character of the involved economic agents matters, the cultural environment matters, and, most __important__, history matters. As a result, institutional economics does not have a very general and well established closed-knit body of theory. Since Veblen many institutionalists __proposed__ many theories, but none came up as the singular general theory of economic institutionalism. Despite that __and in some degree surprisingly__, institutionalists have been capable __to analyze__ real world economic problems and to an extent even influence the development of neoclassical theory with their critiques of it. With respect to theory, the contrast between neoclassical economics and institutionalism reflects their very different philosophical basis. Neoclassical economics, as a deductive inclined science, is akin to a more mathematical approach. Actually, since its beginning the people involved in __the__ neoclassical economics emergence were all inclined to the use of mathematical tools in modeling economic phenomena. Stanley Jevons, one of __the__ neoclassical economics founding fathers, for instance, was a railroad engineer. Alfred Marshall, who was responsible for the popularization of neoclassical economics, for the first time used a lot of __mathematical a graphical language in a textbook of economics__. Published in 1890, Principles of Political Economy by Marshal rapidly became to be the most read economics textbook in Europe, and even in some American universities. Another important development of neoclassical theory that deepens the use of mathematics in neoclassical economics was the __launching__ of the famous Paul Samuelson’s book The Principles of Economic Analysis. In reality, most historians of economic thought take Samuelson’s book as a turning point. From the approach suggested __in it on,__ neoclassical economics became almost exclusively mathematical. Furthermore, some of these historians concede to The Principles of Economic Analysis the role of making neoclassical economics the mainstream trend in economic science. Nowadays, the most respectable journals in economics, American Economic Review, Econometrica, Journal of Political Economy and The Quarterly Journal of Economics do not have a single article without very complex mathematical modeling or advanced statistics techniques. In emphatic opposition, institutional economics have been based on a verbal approach, yet not exclusively. One of the consequences of pragmatist influence is that institutional economics studies the economic facts __in__ a more case-by-case basis. A very real description of the context and the history that led to a specific economic phenomenon is usual in an institutionalist research. History seems to take in institutionalism the role that mathematics performs in neoclassical economics. Thorstein Veblen’s influential Theory of Leisure Class and John Commons’ well regarded Legal Foundations of Capitalism are treatises pervaded with history, mostly American. It does not mean that institutionalists do only history, and that they do not have theory, a common accusation from neoclassical theorists. The case is that institutionalist theory runs in a more general level that the axiomatic neoclassical theory conceives economic knowledge. What __institutionalists__ theorists have in common is some methodological guidelines, which are almost entirely in opposition to the neoclassical ones. First, the economic order must be apprehended as in constant change, a precept that leads to the importance of history and of accurate descriptions of the social context. __Not any__ natural laws of economics can be established. Next, institutionalists reject the idea that the economic system has a resting state. Hence, there is no convergence of the economy to an equilibrium situation achieved //per se//. Institutional economics, accordingly, refuses to accept __thesis__ like //laissez faire// or the existence of an ‘invisible hand’. Social control, not of the socialist kind, is what institutionalists suggest __to__ economic policy. The differences between these two schools of economics could be treated in a book length text. In fact, there are at least __a dozen of books__ comparing the two approaches. But the objective of this small essay is just to highlight some of them, __the main ones in the author’s opinion__. In summary, the opposition between these currents in economic thought has run from the end of the 19th century through the 21st. In this history, they __influenced__ each other, changed a lot, and continue to offer to the economic student a rich source of ideas, and a example of the plurality that is the hallmark of economic science.