Research in the History of Economic Thought and Methodology

CONTENTS LIST OF CONTRIBUTORS

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ACKNOWLEDGMENTS

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WISCONSIN “GOVERNMENT AND BUSINESS” “GOVERNMENT AND BUSINESS” AT THE UNIVERSITY OF WISCONSIN IN THE MID-1950s: INTRODUCTION Warren J. Samuels

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EDWIN EMIL WITTE’S COURSE ON “GOVERNMENT AND BUSINESS,” ECONOMICS 146, FALL 1954 Notes taken and edited by Warren J. Samuels

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EDWIN EMIL WITTE’S COURSE ON “THE ROLE OF GOVERNMENT IN THE ECONOMY,” ECONOMICS 246, 1954–1955 Notes taken and edited by Warren J. Samuels

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ROBERT LAMPMAN’S COURSE ON “GOVERNMENT AND BUSINESS,” ECONOMICS 146, FALL 1955 Notes taken and edited by Warren J. Samuels

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PAPERS FROM A CONFERENCE ON THE HISTORY OF HETERODOX ECONOMICS IN THE 20TH CENTURY PAPERS FROM A CONFERENCE ON THE HISTORY OF HETERODOX ECONOMICS IN THE 20TH CENTURY: INTRODUCTION Warren J. Samuels v

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GROUP ONE: HETERODOX AT THE DEPARTMENT LEVEL HETERODOX ECONOMICS AT THE UNIVERSITY OF MANITOBA Fletcher Baragar

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REPRESSION AT THE UNIVERSITY OF MICHIGAN Edward H. Shaffer

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THE SPARTAN SCHOOL OF INSTITUTIONAL ECONOMICS AT MICHIGAN STATE UNIVERSITY A. Allan Schmid

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THE OKLAHOMA “INSTITUTIONALIST” SCHOOL W. Robert Brazelton

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ECONOMIC HETERODOXY AT THE UNIVERSITY OF TEXAS AT MID-TWENTIETH CENTURY David Hamilton

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HETERODOX ECONOMICS AT THE UNIVERSITY OF UTAH E. K. Hunt and Allen M. Sievers with the assistance of Ginger Alewine

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GROUP TWO: HETERODOX IDEAS AND THEIR EVOLUTION THE TWENTIETH CENTURY TREND OF INSTITUTIONALISM IN MAINSTREAM ECONOMICS JOURNALS Ronnie J. Phillips and Douglas Kinnear

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LAMENT FOR ECONOMICS, OR HOW BARBARA WOOTTON GAVE IT ALL AWAY AND BECAME A SOCIOLOGIST J. E. King

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MARXIST THEORY: FROM CLASS STRUGGLE TO POLITICAL ECONOMY Clark Everling

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THE URBAN LAND ECONOMICS TRADITION: HOW HETERODOX ECONOMIC THEORY SURVIVES IN THE REAL ESTATE APPRAISAL PROFESSION Ranney Ramsey

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LIST OF CONTRIBUTORS Fletcher Baragar

Department of Economics, University of Manitoba

W. Robert Brazelton

Department of Economics, University of Missouri-Kansas City

Clark Everling

Center for Labor Studies, SUNY Empire State College

David Hamilton

Department of Economics, University of New Mexico

E. K. Hunt

Department of Economics, University of Utah

J. E. King

Department of Economics and Finance, La Trobe University

Douglas Kinnear

Department of Economics, Colorado State University

Ronnie J. Phillips

Department of Economics, Colorado State University

Ranney Ramsey

Des Moines, Iowa

A. Allan Schmid

Department of Agricultural Economics

Edward H. Shaffer

Department of Economics, University of Alberta

Allen M. Sievers

Department of Economics, University of Utah

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ACKNOWLEDGMENTS The editors wish to express their gratitude for assistance in the review process and other consultation to the members of the Editorial Board and to the following persons: Daniel Fusfeld

Mel Reder

Geoffrey M. Hodgson

Malcolm Rutherford

Lawrence Klein

A. Allan Schmid

Nicholas Mercuro

Edward Shaffer

Jouni Paavola

Myron Sharpe

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“GOVERNMENT AND BUSINESS” AT THE UNIVERSITY OF WISCONSIN IN THE MID-1950s: INTRODUCTION Warren J. Samuels The following three sets of notes were taken in courses on “Government and Business” and “The Economic Role of Government” given by Edwin E. Witte and Robert Lampman at the University of Wisconsin in the mid-1950s. Edwin Emil Witte (1887–1960) had multiple careers: professor, arbitrator, and public official. He was instrumental in the writing of the Social Security Act of 1935. Earlier, his study, The Government in Labor Disputes (Witte, 1932), along with Felix Frankfurter’s The Labor Injunction (Frankfurter & Greene, 1930), helped produce the Norris-LaGuardia Act limiting the use (often ex parte) of the injunction in labor disputes. He became one of the nation’s foremost labor economists and arbitrators. He began as a senior statistician for the Wisconsin Industrial Commission (1912), became a special investigator for the U.S. Commission on Industrial Relations (1914), and then librarian of the Wisconsin Legislative Reference Library (1917–1922). While a faculty member at the University of Wisconsin (1922–1957, 1959), Witte served as secretary of the Wisconsin Committee on a Retirement System for State Employees (1929–1931), a member of the Wisconsin Interim Commission on Taxation (1933–1934), secretary and executive director of the U.S. Committee on Economic Security and author of the Social Security Act of 1935, and a member of the President’s Commission on Administrative Management (1936–1937), the United States Social Security Advisory Council

Wisconsin “Government and Business” and the History of Heterodox Economic Thought Research in the History of Economic Thought and Methodology, Volume 22-C, 3–6 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(03)22044-7

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(1937–1938), the Federal Advisory Council for Unemployment Security (1941), the National War Labor Board (1943), and the President’s Commission on Labor Relations in Atomic Energy (1948–1953). Witte was a leading member of the Wisconsin School of Institutional Economics. He was President of the American Economic Association and of the Industrial Relations Research Association. He taught courses in labor economics, social security, and government and business (undergraduate)-economic role of government (graduate). The formulation of a theory of the economic role of government was a principal objective, constituting, as it were, his version of the larger topic inclusive of John R. Commons’s – his mentor – theory of the legal foundations of capitalism. (Further personal information and sources will be found in Samuels, 1967. Witte’s own summary is given in his AEA Presidential Address, Witte, 1957. His biography is found in Schlabach, 1969.) The notes recorded below were taken in Witte’s courses during1954–1956. In the undergraduate course, Economics 146, I was later Witte’s teaching assistant, teaching several “quiz” sections a week and helping with the grading of exams. In the other course, I was enrolled as a student. The textbook in Economics 146 was Dimock (1953). Some of the notes were transcribed at the time and edited in January 2001, when the remaining notes were transcribed. As is standard with such materials, the notes do not necessarily indicate conclusively what Witte said, though the intent was to do that. Editorial comments are presented within square brackets []. Most important are topical inclusion and point of view. No attempt has been made to check accuracy of details or for error. As spelled out in Samuels, 1967, Witte’s approach is empirical and relatively non-ideological, the latter especially in contrast with those ideologies of politics and economics which seek selectively to prescribe what government should be doing. Prior to his academic career, Witte had been head of the Legislative Reference Service of the State of Wisconsin, in which capacity he helped draft legislation but also learned much about the infinite details of the economic role of state government. Witte’s approach was to stay close to factual details. While he avoided much theoretical generalization, such generalizations are present but articulated more in his AEA presidential address than in the course. (Reflecting Witte’s influence, including his attention to detail, is a survey article I researched and wrote during the Summer of 1955 while in a temporary position (arranged by Witte) at the Wisconsin Legislative Reference Service (founded and initially administered by Witte in the 1920s) at the State Capitol (Samuels, 1956).) Witte himself was a conservative New Deal liberal. But in his courses he made much of both the empirical or factual importance of government whatever one’s overt ideology and the responsiveness of American democratic government to the

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demands put upon it by the voters – demands which the various ideologies either misrepresented or obfuscated in the efforts – or, rather, use – to manipulate the demands. That meant, on the one hand, that Witte did not necessarily agree with everything government did or was used to do; and, on the other, that given the importance of government, e.g. certain functions, such as regulation, the specific details of what government did – such as determining whose interest counted – remained to be determined. Beyond all that, Witte was almost saccharine in his affection for the representative democracy that is the U.S. system of government. But even that view was part and parcel of his view of U.S. society as an associational civil society, in which individuals were not unimportant but typically acted as members of various organized groups – groups that typically are anathema to the rulers of non-democratic governments. Witte envisioned activist government in the United States as part of the actual American way of life, sentiments and beliefs to the contrary notwithstanding; and had an uncommon view of the history of U.S. political and economic ideology and policy. At any rate, Witte will be looked upon as visionary and utopian, if not also na¨ıve, by both economic conservatives and economic liberals, but for different reasons. Witte himself would defend his accounts of his subject matter as a combination of historical accuracy and Progressive-New Deal values. In the fall of 1955 Robert Lampman taught as a visiting professor at the University of Wisconsin. He was brought in, at least in part, to relieve Witte of teaching duties. Witte, also relieved by Edwin Young in his duties as department chair, was president-elect of the American Economic Association, a time-consuming as well as distinguished position. Although I had been appointed Witte’s teaching assistant, I first served in that position under Lampman in Economics 146, Government and Business. I had audited Witte’s course the year before. Robert Lampman (1920–1997) had received his doctorate under Witte in 1950. At the time of his appointment as visiting professor, he was on the faculty of the University of Washington. In 1958 he was appointed to the faculty of the University of Wisconsin, from which he retired in 1974. Lampman specialized in public sector economics, especially the study of income and wealth distributions and related policies. He served on the staff of the Council of Economic Advisers during 1962–1963. He was a member of the Board of Directors of the National Bureau of Economic Research, 1968–1979 and of the Executive Committee of the American Economic Association, 1976–1979. Lampman was a source and promoter of Lyndon Johnson’s War on Poverty. He was the author of The Low-Income Population and Economic Growth (1959), The Share of Top Wealth-Holders in National Wealth (1962), Ends and Means of Reducing Income Poverty (1971), Social Welfare Spending (1984),

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and Economists at Wisconsin, 1892–1993 (1993), as well as other books and numerous journal articles. Some sixty percent of the notes taken in Lampman’s course were written up as the course progressed. The remaining notes were transcribed and both parts edited during January-February 2001. The notes should not be taken to be a verbatim record of Lampman’s lectures; rather they are an indication of content. Also published below are the following: The syllabus and lists of review and discussion questions used in Economics 146 during the Fall of 1955 (Lampman) and review questions used in Economics 246 (undated; Witte). The syllabus used by Lampman was essentially that developed and used by Witte. Also included are Witte’s handout on the legal and constitutional basis of regulation. Minor corrections have been made.

REFERENCES Dimock, M. E. (1953). Business and government. New York: Henry Holt. Frankfurter, F., & Greene, N. (1930). The labor injunction. New York: Macmillan. Samuels, W. J. (1956). An overview of the relationship of Wisconsin State government to business. Wisconsin Blue Book, Madison: State of Wisconsin, pp. 71–82. Samuels, W. J. (1967). Edwin E. Witte’s concept of the role of government in the economy. Land Economics, 43(May), 131–147. Schlabach, T. F. (1969). Edwin E. Witte: Cautious reformer. Madison, WI: State Historical Society of Wisconsin. Witte, E. E. (1932). The government in labor disputes. New York: McGraw-Hill. Witte, E. E. (1957). Economics and public policy. American Economic Review, 47(March), 1–21.

EDWIN EMIL WITTE’S COURSE ON “GOVERNMENT AND BUSINESS,” ECONOMICS 146, FALL 1954 Notes taken and edited by Warren J. Samuels LECTURE NOTES Economics 146 Government and Business Fall 1954 Edwin E. Witte Lecture The aim of this course is to establish the overall total relationships between government and business – regulation being only a part – and the interrelations of both in modern society, especially the present-day American economy.

INTRODUCTION Definitions Business is any legally permissible economic activity for gain. The first relation between government and business is that government determines by law what are the illegal activities, e.g. fraud, crime, violence. Government is the rule maker. Wisconsin “Government and Business” and the History of Heterodox Economic Thought Research in the History of Economic Thought and Methodology, Volume 22-C, 7–32 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(03)22045-9

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In the United States today, out of an approximate population of 162 million, the labor force, including employers, is about 67 million, including 3.5 million in the military. This 67 million are engaged in economic activity for gain either for themselves or for others. The total excludes housewives, who are not considered as being employed for gain. Of all business, manufacturing is the largest group, 30% deriving their livelihood from manufacturing; however, trade, finance, and agriculture are also included in the term “business.” Government must be distinguished from society and state. Society is the whole mass of humans in the United States and its possessions, and is expressed in every sphere, not only the economic. State is the institution regarded as the most typical, single institution of modern society. It claims supremacy over other institutions. The family, for example, is an important institution; but the state, in the law of domestic relations, regulates the family. Religion, formerly the object of considerable interference by the state, now is subject to little, save in the public interest, for example, the outlawing of human sacrifice as murder. By general implied consent, the state has authorized supremacy, prescribing by law the functioning of the other institutions. The modern state claims full jurisdiction over all persons and other institutions internally within its territorial limits. It also has partial jurisdiction over its nationals when abroad. Government is not all of society. It is merely one institution. Society is the more inclusive concept. Pluralistic. Although Oscar Underwood said that ours is a government of laws and not of men, it is truly both. Government of law signifies the democratic concept that all human relations are to be governed by law, thereby not subject to the whim of the ruler, the ruler being also subject to the law, no less than the subjects: a body of law governing all human relations at any given moment, found in the constitution, statutes, court decisions, and administrative rulings. A result of disputes, “law” will result from a new situation, one not envisioned by the drafters of the applicable law, if any; the new “law” will be an imputed interpretation from a practicable, going concern, standpoint. Lecture Law is changeable, by prescribed processes, operating slowly. Rulers and subjects are responsible and answerable to the law; the men who run the government face impeachment and civil and criminal liability. Government of men: there is no concept in the U.S. similar to the Nazi concept regarding the mystical state controlling everything. The administrators of government, i.e. the exercisers of the powers or authority of government, are considered

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to be, like everyone else, fallible human beings; they are made responsible to the law when they fail to act within the law. Government is thus defined as the authority, the state or as the human beings who exercise that authority. In this course, government includes all levels of American government, national and state; government is broader than the Federal government, and both levels are important in relation to business. The states and their subdivisions have wider authority to regulate business operation, through inherent and residual powers. The trend in American government is toward the recognition that we have one government, not many. This was the original concept: one government on two levels, not one and forty-eight with a no-man’s land. The supposed dichotomy is often exaggerated. The issue of states’ rights reflects the conflict between national and state governments. The party out of power raises the issue, especially if it is in control of some state governments – traditionally the Democratic Party but recently the Republican party, but the shift has again taken place, with the Democrats once again the minority party since 1952. Within the Federal governmental system the two levels each are sovereign in their own sphere. Under the constitution, the laws of the Federal government and the constitution proper and treaties – made by the Federal government – are supreme. The state has authority when the Federal government has not acted and in its own sphere. Even with this division of powers, there is a multiplicity of areas of coordination among Federal, state, and local officials, there being in numerous cases, the county agent being one of them, individuals who are, in the same office, representatives of all three levels of government. Though they may be chosen or elected on the local level, higher authority is given almost automatically to the elected or selected person. Although, because of the international situation of the last fifty years, the national government has received most of the publicity in the press, both levels of government have enormous and vast powers. The relatively more general and comprehensive powers originally delegated to the national government have become the relatively most important powers, hence the decline of the relative stress though not importance of much of the powers of the states; the former powers are war, commerce, and taxation.

The Legal Basis for Government Control of Business The American government has as broad powers as does any other government; the difference lies in the democratic principle of operation.

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States: Most business relations are governed by state law: property, contract, transfer of property (sale, conditional sale, inheritance), etc. Some inherent powers: the emphasis is on their broadness: constitutional-law decisions are concerned with borderline cases. All powers have their limitations; administrators have to act legally also. (1) Right of eminent domain: Not really definitively settled in regard to the Federal government, however the Federal government does exercise it, due to the fact that the states have enacted statutes allowing the Federal government to invoke the right within their boundaries for certain purposes – which purposes are so broad as to cover practically anything the state or Federal government wants to do. Defined, it is the right to acquire property without the consent of the owner. The Federal government, or whatever government is invoking the right, may even occupy the property before the determination of payment, for it is the use of the property that is desired (see Commons, Economics of Collective Action). (2) Police power: Technically it belongs to the states; however, within its sphere as regards its own authority, the Federal government is exercising police power in enforcing its laws. One special case is Federal law extended to transactions completed entirely within a state. Defined, it is the power of government to modify, including extinction, the rights of property and contract without compensation and without the specific consent of the affected persons in the interest of the healthy, safety and welfare of the republic. One example is the prohibition of the manufacture of and traffic in intoxicating liquors. A special case thereof involves the theory of government operating for the benefit of all and as a corollary local option is allowed in those matters, such as the prohibition of intoxicating liquors from sale or manufacture, where the general law is of such a nature that it does not seem to have to be uniform throughout the country or state. The same idea is connected with the concept of home rule. (3) Power to tax and to spend: The power to spend is a direct corollary of the power to tax. Both are for the self-preservation and subsistence of the government, and for domestic and foreign purposes. The power is very broad but it does have some limits. Also, the power to tax does not mean to tax only for revenues; it may also be for prohibitive purposes (state bank notes and narcotics, the latter also being subject to licensing). Every tax has its effects, thus objectives other than the raising of revenue can be incorporated into a tax measure. In many cases it is even hoped that no revenue will be collected due to the preventative nature of the tax. As for the validity

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of a tax, it is not the motives of the legislature but the effects of the tax that is important. Lecture The national government is its own judge in exercising the right of eminent domain, so long as it is for a public purpose. In the past the belief was that eminent domain was delegated by the states, though in a recent case, Oklahoma v. U.S., the national government is said to possess the right of eminent domain for the purpose of carrying out any of the powers delegated to it. Though generally thought of as belonging to the states, the Federal government has the right to enforce its own laws. Within the broadly delegated sphere the national government has full power, power even broader than the states’ inherent powers. This is because of the clause in the constitution that states, “this constitution and all laws made thereunder are the supreme law of the land.” Thus, when the national government acts under its authority where it has jurisdiction, it is supreme, state law and constitutions notwithstanding. (4) War Power: One national power enumerated in the constitution is the war power. It constitutes the largest area and expenditure of government; some 60% of total government expenditure is allocated for national defense. The war power is an exclusive right of the national government, subject to some limitations, though no acts during wartime have been held unconstitutional during the war, although some have been held unconstitutional after the war, such as Lincoln’s suspension of habeas corpus. The war power is the most absolute of all powers: the inherent right of self-preservation, and our government has all the powers thereof; what is deemed necessary by the president, as commander of the armed forces, is not likely to be upset. (The seizure of arms in defiance of a presidential order to halt shipments of arms to belligerents in the war between Paraguay and Bolivia during the 1930s in order to end the fighting was upheld by the Supreme Court.) Constitutional Limitations: The two most far-reaching are: (1) Equal protection of the law: This does not mean that all are to be treated in the same way under all circumstances, but precludes discrimination while allowing for classification: equal treatment of all within the same class. (2) Equal rights of citizens of the United States: An individual citizen can go and practice in a state on the same terms and manner as anyone. However, restrictions of various types are placed on out-of-state citizens within a state not domestic to them, e.g. license to non-residents to hunt within a state, higher fees for out-of-state truckers to use the state’s highways than for domestic truckers, different conditions for foreign corporations, such as higher incorporation fees.

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(3) Due process of law: The government may modify contract rights but only in accordance with due process of law, a limitation principally applicable in two respects: (a) follow regular orderly procedures; and (b) the regulation must be reasonable. According to the former, the citizen must have his day in court, i.e. court review. This implies that constitutional or statutory or administrative procedures must be reasonable and be followed by government officials: government by rule of law and not the whim of the government of officials. (The first Wisconsin constitution prohibited private banking; a later constitution allowed it under close government supervision.) (Appropriate law was law voted on by roll call.) The latter does not refer to the courts’ ideas as to whether or not legislation is wise. Courts do not have veto power, which is vested in the executive. In declaring an act or law unconstitutional they pass not on the goodness or badness of the law; rather, they act only on the controversy between the disputed law and the citizen bringing suit and only on the case before it. They say a certain act is invalid due to the invalidity of the law in question. They do not review what the legislature has done; that is up to the executive authority. The courts assume that the legislature is composed of reasonable human beings, subject to error. Reasonable means, today, not capricious, that the law must make sense. The test is not one of agreement but whether reasonable mean do what is stated. Looking to the aim of the act, they examine the problem to be met, trying to determine whether it requires government action and whether the act in question represents a reasonably complete attempt to deal with it; above all, whether it is a sensible proposal in relation to the interests of all parties and issues concerned. Conclusion: Most acts of government are valid. The powers of the government to control the economy are broad and as great as that of any other government, while actions carried out in the name of government may be invalid. Government has as its primary functions: (1) The function of rule makers and umpire: the most basic relation between government and business; (2) The function of protector: against enemies detrimental to business activity; (3) The function of providing services: rendering important services to business activity and to society: always present but growing in importance. Basic Economic Institutions Property and contract: free enterprise is a system of contract. It is a system of rights, including special types of rights, e.g. confining monopoly rights to patents, copyrights, and trademarks. Bankruptcy: constitutional modification of contract. Economic organizations for the conduct of business, e.g. corporation, cooperative, employers association, union.

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The relation of government is one of control of the basic economic institutions. All are legal in the sense that rights come from law – constitution, statute etc. – and are the rules of the game. In a totalitarian government, the assumption is that all this stems from the state’s the basic institution. In the U.S., institutions stem not from government. They usually are started before law recognizes them. Business law, the rules of the game, really originates from business and is given statutory authority. [missing page] Property: Thus, the right of property at any given moment is defined by law. Cases in point are both slaves and gold: whereas both were once considered highly valuable forms of property, now it is a crime to hold either of them, the latter with some industrial and art exceptions. As for the rights of property and their narrowing by government, such actions of legislation as the government has undertaken have been the result of the interrelations of the social and business world and government, on a “going-concern” basis. Rather than narrowing property rights, government has really increased and broadened them. Contract: A free enterprise economy is one in which there is a relative freedom of contract. That the obligation of contract may not be impaired by government was definitively established by the Dartmouth College case. The result of this case was state legislation providing in the Corporation Laws for the right of the states to amend the corporation charters made in the future by subsequent legislation. There also are numerous pieces of legislation which subject all contracts made after the date of the legislation becomes effective to the law. Contracts not desirable are classified as criminal, subject to penalty; as unenforceable; and as enforceable only in the way the statutes say they can be enforced and remedy obtained. As for the impairment of contracts already in effect, during periods of depression, as early as 1819, emergency legislation specifically provided for the impairment of contracts procedurally: Foreclosure rights modified, by the extension of the period after default in which redemption could be made from three to five years, later remade three years; by bank holiday or moratorium, enabling banks with demand deposits and time deposits to refuse to pay depositors when the jeopardy of the bank’s whole list of depositors was in question; by deferments of cash surrender value of insurance policies for a time in order to protect those leaving their policies in force for the insurance; and by the transfer of legal tender, making debts payable not in gold but in paper, legal

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tender – upheld by the Supreme Court as no change in purchasing power by the switch of tender. Bankruptcy: modification of contract without consent. Federal law since 1898. Reorganization of the business debt, since act of 1933 (Article 77b), allowing for the reorganization of business debt, bonds allowed to become stocks, reduced interest rates, prolonging the due date of bonds; all with varying degrees of consent of creditors by value, depending on type of business. Future contracts are always governed by law, the law of the moment amending of corporate charters, although existing contracts cannot be amended as to substantive content with the exception of bankruptcy. Patents, trademarks, copyrights: grants of limited monopoly for a period of time (trademarks for all time), with the right to transfer or sell part or the right to use. Lecture Relation of Government to Business Organizations The corporation: Legally a creature of government, subject to governmental legislation; a person, not a citizen, enjoying all the constitutional privileges of persons; earlier, the corporation existed apart from legal institutions. Economic effects: almost 95% of all manufacturing activity is done by the corporation, with the exception of agriculture; retailing, one-half; services, one-third; over 65% of all business is done by corporations. Historically, before the Revolution, in the English common law, the corporation was a creature of government (1720 Bubble Act) and had no existence apart from government: must have a government charter to operate. About the time of the revolution (1800), there were only some 335 corporations in the U.S., and they usually were of a public nature and not a business corporation, developed to effectuate a public purpose, due to the amount of money required: roads and canals. Subscription was both private and public. At this time banking was the only corporate enterprise undertaken for the profit motive. By the Civil War, the number of corporations had gradually multiplied, being very common in the manufacturing field. By 1900 the corporation was the dominant form of organization in industry, and also was important in retailing and in finance. Even before 1901 in most states it was illegal to carry on private banking. Changes in legal position: Joint-stock companies, akin to corporations, had a large role in the development of the American colonies. However, they lacked the feature of limited liability. The early U.S. corporations, although they lacked many of the present peripheral advantages, were formed for the following reasons,

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the latter two being very important today: separate entity from the individuals constituting it, life in perpetuity, and liability limited to the extent of the stock subscription. [missing two pages] Development of corporate law: Until the 1840s, separately charted by legislative action. First general incorporation law, Connecticut, 1837. New Jersey became great center of modern corporations, later, and now Delaware. New Jersey in 1846 granted limited liability to limit of stock subscription; 1860–1870, right to do business outside of state, waiver of requirement of advance notice of intent to incorporate, waiver of limits on size of capital investment; 1889, right to own stock in other corporations; 1890s, limits on life removed, previously extended by still limited; waiver of resident requirement of corporation officers in chartering state; waiver that stockholders’ meeting doesn’t have to be in chartering state. General trend to broaden privileges of corporation to make it a more useful business entity. The major point is the important role of government in defining the changing nature of the basic institutions. Other types of business organization: Cooperatives: slightly growing in importance, especially since 1910s; Wisconsin cooperative law in 1913. Employers Associations: not incorporated, consisting of individuals and corporations; only slightly regulated. Unions: associations of individuals; in recent years coming more and more subject to regulation. Protective Role of Government Definition: Physical protection of personal property, against foreign foe, the disturber of the public, domestic peace, and the criminal; only anarchists condemn government on this point; oldest and largest function of government as to personnel and expenditure. The importance of the protective role to business: without the security of property, business operation would be severely hampered. All the evils protected against are detrimental to business activity. Military preparation, debt, and action: exclusive with national government; largest single item in budget. Domestic peace: disturbances: America relatively free from these. Crime: local and state (early concept); now includes Federal action. This is the era of the national market, national crime, and national or interstate activity: narcotics, liquor, FBI, interstate compacts all approved blanketly by Congress, extradiction of fugitives and witnesses, chase. Much crime, inimical to business, is

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now organized interstate, compelling Federal action; also national action against frauds upon the public, e.g. FTC, SEC. Lecture (Concluding Protective Role) Materials and equipment a good part of total military budget. Purchased from private business. Many industries almost entirely dependent on government orders: aircraft (90%), ship building (100%), munitions. Interrelationship: business pays a good part of the taxes and receives a good part of the expenditures. Governmental Service Activities 1920s: idea of service state, into 1930s: political scientists felt government becoming one. After World War II, welfare state: beside service state activities, handouts, with negative undertones. Nature of government services: (1) Not usually providing goods, rather collectively enjoyed services. (2) Require large funds and have little opportunity for profit: not feasible for private enterprise. (3) Often necessary to health, etc.: cannot leave garbage collection to option of private enterprise. Major services: (1) Post office: largest business in terms of employees in U.S.; of great import to other, private businesses. (2) Highways: transportation in general: public investment in highways three times that of railways; relatively unimportant Federal aid; basis of largest industries in U.S.: automotive. (3) Education: highest amount per capita spend in world by U.S.; mainly public, or non-profit. Education the main expenditure of many states. Federal government in the field relatively slightly: some aid for rehabilitation, agriculture, research, vocational education. Controlled by state law, with local administration and increasing amounts of state supervision. Relation to business: America has high amount spent on education, with high level of economic activity: some causation possible. Largest investment, more than in capital equipment. Education a business producer: extends tastes and standards. Private and public; private exists but money making in only limited fields and is minor part of the total. Private colleges are non-profit and receive more money from Federal government than do state institutions. Service activities: Great extent, second largest amount of government expenditures. The question today is how far and how rapidly should they be extended. They are generally in fields in which there is little competition to private enterprise, due to little private enterprise in those fields. Dependence of business on services: education, tourist advertisement, highways, conservation. Increase of service activities due to increasing density of population (health and sanitation),

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urbanization and industrialization: increase in business and economic activity, increased interdependence. Despite growth, still not a major item in Federal expenditures: 5%, including social security. Most state and local expenditures are for services – two-thirds of the Federal total. Government Aids to Business Loosely, all government activity is an aid to business in that it exists for the benefit of all citizens and business is a part thereof. More accurately for this discussion, government aids are composed of direct grants, subsidies, loans, measures whose purpose is to benefit some particular establishments or industries or the general level of business activity. In benefit, all government activity is included; in aid, direct and purposeful aid to business – legislation and activities. Forms of government aid: tariffs, quotas, embargoes; direct subsidies of property (land), money; special privileges, such as tax exemption; government stock subscription in new industries (states); loans to new enterprises; special services, such as advertising (states); active solicitation of business – foreign trade; research, in agriculture, natural sciences, medicine, statistics. The early period of the history of the U.S. has been called the period of government promotion of business. This was especially true of state and local governments. Most early manufacturing concerns received direct government aids, and, of course, the railroads and other transportation facilities. The U.S. has never had the classical version of laissez-faire, which was opposed to government restriction and promotion of business. Government aid: Criterion of beneficiaries: To business generally: research and statistics. To particular industries and/or particular firms: aviation, shipbuilding, fisheries, recreation, local aids to attract firms. Criterion of purpose: Developmental, in partial or complete absence of private capital; governmental assumption of risks of new, necessary developments, such as atomic energy; high costs, little chance for profit, etc. Military. To rescue private business in financial difficulties, where they could not receive loans through private channels; e.g. RFC, SBA. Pros and cons of government aid: Con: Anti-social, since benefit particular industries or firms, e.g. railroads vs. aviation. Pro: Not contrary to American way of life, historically and in spirit of our institutions which are not grounded in laissez-faire: government by, for, and of the people. Government exists for the benefit of the people: today business endeavor and activity is the important aspect of American life. Justification is the general public welfare: public money expended for public purpose. Not that particular people cannot be benefited more than others: the railroad displaced the stagecoach, airline aid may adversely affect railroads, but public is benefited.

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[missing two pages] Before the Granger movement, railroad charters did contain regulations, but these were little enforced. In the Wisconsin law of 1873 and the case of 1873 Chief Justice Ryan used the phrase “engaged in public service.” This was repealed but returned in national legislation. In Munn v. Illinois, the concept of business peculiarly affected with a public interest was adopted. In the Wolff Packinghouse Case, regulation is limited to those businesses affecting the public interest. Until 1923, in a 5 to 4 decision, no U.S. Supreme Court decision found the wrong business to be regulated – the negative application of the public interest doctrine. Employee-employer relations regulation not founded on basis of public interest business. No dependence on type of business. Same for antitrust laws, securities regulation laws, pure food laws. But as to prices, services, right to engage in business, only where public interest is affected can there be regulation. Doctrine held in 1920s and early 1930s. In Oklahoma Ice case, 1933, no public “interest” held. Nebbia v. New York, 1934, frequently cited, upheld, 5 to 4, regulation of minimum farmer price and maximum consumer price. Public interest argument has no constitutional basis, nothing sacrosanct about prices – subject to regulation on same conditions as other regulation of business. Lecture Constitutional test: due process of law; prices etc. no exception. Actual regulation is over price, services, right to engage. Price regulation in World Wars I and II. Antitrust and labor legislation all business affected. Price regulation, service, and right to engage: (1) Sale of intoxicating beverages: special license, minute regulation. (2) Businesses dealing with food and lodging: license, inspection; rent regulation, during and after World Wars I and II. (3) Licensed occupations: medicine, law, engineer, barber, accountant, real estate, insurance; health, safety and welfare. Indiscriminate; due process of law not violated. Protection against malpractice of licensed recipient; can lose license. Pressure from trade associations motivated by limiting competition and to protect general public. (4) Banks and financial institutions, dating back to 1840s and 1850s. Regulation and inspection of national bank by Federal government. Chartering and inspection of state banks by states. Federal Reserve system: bankers’ bank: compulsory stock subscription by banks, compliance with requirements; national inspection of state banks. FDIC, 1934: compulsory for national banks, optional for state banks. Chartering, inspection, detailed requirements for financial

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associations. Insurance companies: 1850s, first real regulation, by states especially. Aim: solvency: ability to pay obligations. Decision holding that insurance is not interstate commerce subsequently reversed, but insurance is little regulated by Federal government. Rate regulation: mainly as to minimum rates but also maximum (fire insurance). Extension to private health, welfare, and pension funds, unilateral or collectively bargained. (5) Railroads: extensive regulation since 1880s, effective state and Federal regulation. Regulation changes with conditions. Public dependent on exorbitant monopoly profits. World War I, government operation – a new concept – maintaining service, promotion of consolidation to maintain adequate railroad service for national interest. Sentiment for relaxation of railroad regulation in 1930s: not monopolistic, with serious problems. Lecture Agriculture and Labor Agriculture Decreasing group; approximately ten percent of population. Greater influence on public opinion than population proportion. Representation in legislatures and in congress more than in proportion to population. Rural background of most Americans. The most “approved” occupation. Still have rural living, urban working. Lincoln, in speech on labor and agriculture, 1859, in Milwaukee: agriculture the great American occupation, the most numerous class in the population, but “ignored” by government, i.e. government fails to aid the farmer. Homestead Act of 1963: greatest aid given agriculture: bulk of land given to farmers gratis or at nominal cost; 160 acres of land free if worked it for five years. Old assumption: all U.S. land for agriculture. Reversal by Theodore Roosevelt administration: set aside land, not for agriculture. U.S. Department of Agriculture, 1889: third youngest department, third largest (after defense and post office; one quarter million employees, fifty times department of labor). Early activity: research, experiment on production problems; educational – widest of any similar activity conducted by government (land grant and agricultural colleges). Prior to World War I, marketing problems. State cooperative laws, 1913–1919, giving government assistance to organization of agricultural cooperatives. Led to help with management problems, required by law, and accounting problems, required audits. Federal loans: 1916: Federal Land Banks: long term credit for farmers. Early 1920s: Bank of Cooperatives. Later 1920s: Bank of Intermediate Credit. Farm price supports. 1920s, McNary-Haugan Bill, vetoed by Coolidge and Hoover.

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Lecture (Agriculture, Continued) 1929, Farm Price Act, price supports; government purchased large quantities of surplus basic crops – wheat, lard, cotton, rice – at guaranteed prices. 1931, collapsed due to large quantity held by government: no production controls, no market for output. 1933, Agricultural Adjustment Act, all methods included: loans, buying surpluses, agreements on limitation of production; declared unconstitutional in 1935. Later, Soil Conservation Act, with acreage limits, upheld. Present farm price support act in effect for one year. Government can do almost anything to maintain prices: loans, buy surpluses, production-limitation agreements (none in 1954). Loans at 75–90% of parity. If price rises, farmers sell on market; if price falls, let government take it. Agricultural price supports are part of present U.S. policy. Neither political party advocates repeal. Concerns and issues are only as to form: production controls, parity percentage, etc. All types of government aid to agriculture ever developed are still in effect, including homestead. Also promotion of efficient production methods, e.g. land-grant colleges. Cooperatives. Price supports. Agriculture one of main concerns of government today. Involves little regulation. Some recent regulatory laws: grading of crops; state and Federal legal definitions of products. Major activities: aids and loans. But private loans exceed public loans – though governmental loans figure more in agriculture than anywhere else. Labor Labor Department the smallest department in government in appropriations and personnel; one-tenth that of agriculture [sic; see above]. The production workers of industry, the urban workmen, the largest group in the population today; compare Lincoln in 1859. But not majority of total population. In Wisconsin, ratio of 3:1 of city workmen to farmers (not including self-employed workers). Activities: (1) Service: public employment service – the largest labor undertaking. (2) Protective labor legislation: Old in U.S. Primarily by states: child labor, maximum hours, safety, working conditions, etc., operating on individual labor control; nothing regarding union contract. Service and regulatory activity often blend into each other: sanitation and safety, etc. Federal Labor Standards Administration (FLSA): regulating manufacture for interstate commerce. Minimum wage rate, time and one-half over 40 hours, child labor (some restrictions: under 16 in manufacturing, otherwise 14 on vacations with permit, by states). (3) Labor relations legislation: government regulation of collective activities.

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The Wagner Act of 1935 and the Taft-Hartley Act of 1947 prohibited certain acts of employers to prevent unions from operating; collective bargaining was required. State legislation is mainly restrictive of unions. There is relatively minor labor activity but it has grown, and includes regulation and service. Government and Consumers and Investors Government and consumers: Slight and incidental. Food and Drug Act: definitive and prohibitive; labeling. Fair practices legislation: derivative from antitrust laws; against frauds on consumers. Ours is a production-minded society; never has been any effective consumer organization. Consumers react in response to extreme changes in price levels. Government and investors: Little governmental concern in early U.S. regarding investment. Complex with rise of modern corporation and multiplicity of ownership claims. In second decade of twentieth century, Blue Sky laws: selling Brooklyn bridge to investor, non-existing property, mines – fraudulent. Today, state and Federal securities regulation of issuance, advertising, sale. Early: government semi-endorsement – “non-speculative” – lack of fraudulent ones; ended with Great Depression; endorsed ones proved worst (public utility holding companies). New principle: no labeling as to value; emphasis on full disclosure – still only useful for the informed. Also exchange: dealers, etc. Lecture Competition and Monopoly Terms have been given varying meanings: Classical economists: Competition: the regulator of the economy as to products and prices. Monopoly: opposite: a government privilege given to individuals and firms: exclusive trading privileges, etc. All had right to engage in business: free entry. Prices determined by market, not by producer. Never thought of “antitrust” laws: natural forces would operate upon freely operating individuals. First anti-monopoly movement in U.S.: Jacksonian period, 1829–1860: Great deal of anti-monopoly activity: corporate charter had been special act of legislature, granting exclusive privilege; the corporation, the monopoly, especially in banking. Were not combinations of businesses. Involved special privilege conferred by favorites, Resulted in general corporation laws as solution. Second anti-monopoly movement: Granger Movement, against railroads, called monopolies: operated under corporation charter, exercised delegated power of eminent domain, early ones received land grants – “special privileges,” claimed by opponents – also born by special privilege. Beginning of concept of natural

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monopoly, proposed by defenders of railroads: cannot have free entry, competition cannot exist. Sherman Act: Basic antitrust act, 1890. First combinations set up as trusts. Act came after first combination movement: petroleum refining, by John D. Rockefeller (disorganized in 1911), sugar refining, tobacco. Followed state antitrust legislation. Section 1: agreements in restraint of interstate and foreign trade are unlawful. Section 2: attempts to monopolize are unlawful. Competition: State of affairs in which all are free to enter the market. Prices set by market forces, not sellers. Monopoly: Direct opposite: either producers or sellers determine price by agreement, not by operation of market forces, including restriction of entry not by government but by the combinations themselves. Realization that combinations might operate to force prices up and restrict entry, leads to adoption of law to eradicate monopoly. Early interpretation: prohibited every agreement or combination: Northern Securities Case. Standard Oil Case, 1911: only restraint-of-trade agreements adversely affecting competition; combination okay if no adverse affect on competition. 1920s, “monopolizing attempts” of Section 2: U.S. Steel and International Harvester Cases: monopoly not size nor percentage of market control involved; i.e. Section 1 means Section 2, restraint of trade. 1940s not too different from 1920s cases, though cast doubt on them. Alcoa case: are size and market control factors? Still no suits solely on size and percent control – only incidental to other cases. Concepts of monopoly: Popular: size almost an identification with monopoly regarding extremely large firms: monopolistic element. Likewise, percentage of control. For some, if any competitive product possible, then no monopoly. Legal, 1920s–1040s: neither size nor percentage of control has anything to do with question of monopoly. Mid-1940s on: size and percentage of control, even potential control, determines legality. Not enforced on this basis today; many major companies would be unlawful; many were combinations of competitors. Economists, present day: Classical view until quite recently. Today in doubt as to the phenomena of monopoly and competition – fair, unfair, workable, imperfect, monopolistically competitive – multiplicity of adjectives. Lecture Monopoly: Increasingly courts define it as potential market control, giving attention also to size. Must determine monopoly or not – not half and half. No action brought yet on premise of potential market control or bigness alone. Man in the street: size. Economics and increasingly the courts, but not in practice: potential market control.

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“Restraint of trade” idea well developed over the years; involved with degree of monopoly. Antitrust legislation popular in U.S. “Ambitious” politicians pro; profess desire to strengthen and rigidly enforce. American people never entirely satisfied with the laws; continued profession to strengthen; criticism of party out of power of party in power as lax in enforcement. Laws had pronounced effects on combinations in U.S. Period of 1897–1903 one of most combinations, mainly for securities transactions based on expected control of prices and elimination of cutthroat competition. 1920s also, though less so, period of combinations, principally in public utility field; mainly failed in 1930s (led to Public Utility Holding Company Act of 1933). Post World War II, increase in mergers. 1950 Anti-Merger Act: test is effect on competition. Late 1920s and early 1930s: criticism by business trade associations of antitrust laws; result was NRA, 1933. Situation now: One big firm in few small fields; few in consumer goods; single dominant corporation fewer than at earlier date. Trend toward large unit and few competing large units in some fields. Prices: determined in company offices; have to consider reaction by other firms. (Economic test: market determines prices – one seller has slight effect on market price.) “Efficient unit” judged on basis of national market. Possible future policies: academic, little probability of change: (1) Break up combinations, illegal when formed, having monopolistic position with regard to market control due to size and control percentage of market. Economists: Chicago School – Henry Simons – and Neoclassical School. Lecture Simons: break up combinations into units having limited control; none more than 5% production capital as rough rule. Vernon Mund [author of textbook] agrees with Simon. Dissolution of large corporations would constitute a great change in the American system, possibly leading to depression, upheaval in business, etc. (2) Compete elimination of entire antitrust legislation: Theodore Roosevelt, 1912: substitute regulation; combinations created through natural forces have distinct advantages. (3) “Workable Competition”: Dominant among American economists. Size has generally been advantageous to the public. Difficulty: specific meaning of what is “workable” and objective standards for “competition.”

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Present controversy is over bigness as such; matter also of efficiency. Thurman Arnold, 1930s head of Antitrust Division, held that the three antitrust laws are okay; our nature to combine, combinations have to behave. Basic idea of antitrust is to allow for entrance of new firms into the field. Size of necessary investment is factor against new entrant. America is now a nation of employees, not of independent businessmen. Other countries: Until recently, only Canada had legislation similar to U.S.: enforce competition, prevent combination. Post-World War II strength of American economy led to interest in American combination policies by Europe, which formerly encouraged them: America has not prevented combinations. The nation of big business. Restriction rather than prevention: imperfect competition. Lecture Government as Producer, Competitor, Purchaser Government, which makes the rules of the game, regulates, promotes competition, and provides aids to business, also operates within the economic system thus formed. Purchaser: Government is the largest buyer of the products of private industry in the U.S. Government purchases from private industry are one-eighth to oneseventh of total volume of business; 50% of the national budget, and increasing; 10% of national income. Thirty percent of the budget is for employee payments, and decreasing; state governments: employee payments larger. Government purchases heavily from largest taxpayers. Tend to be concentrated in same industries; some live off government purchases: highway construction, airplane factory, shipbuilding, steel and other metals, electronics firms. Atomic energy financed 100% by government and run by industry: GE gets $1 per year for services. Purchase program has effects on economic activity. Producer: The bulk of what government produces is supply by private industry; relatively little is self-produced but it is still a considerable amount. The central argument is over government competition with private enterprise. Production for own use is the largest field of government production: military supplies, Government Printing Office, stamps, money, envelops. Publicly made products include: (1) service type operations, the largest group – military, highways, health, education, parks; little or no private enterprise; effect is to increase the volume of public business. (2) in other areas, find substantial volume of private enterprise: public utilities, e.g. production and distribution of electric energy; 15–20% publicly owned electric utilities, 80–85% private business; municipalities unable to attract private capital when industry started; not much change despite arguments, though great increase in last decades of public production of

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electric power: TVA, original purpose was regional development, an important producer, not distributor, of electric power, giving preference to publicly and coop owned utilities. Loan field: private enterprise far greater: 1916 farm land banks, etc.; still main source of agricultural cooperative loans and long term farm loans. Where private industry doesn’t consider entry or extension feasible, government facilitates self-help. Lecture Homeowners bank: bailed out prior lenders during depression; government assuming the role of lender. RFC: businesses in difficulty; later, risky businesses. Small Business Loan Corporation, recent, similar to old RFC, new risky business: guarantees 90% of loan, lower interest rates, loans made through private enterprises – banks. Housing: minimal here, extensive abroad. Urban slum clearance; establishing projects, then perhaps selling. More important, FHA, with 90% guarantee. Insurance: limited; primarily in compulsory social insurance. Many state workman’s compensation funds: competitive, bulk of insurance (70%) is private (insurance of employers’ risk). State insurance funds for state property; in Wisconsin, have state fund, optional for cities. Bonding of own employees. Unemployment insurance, 100% government. Federal government: Social Security Old Age and Survivors Insurance, largest in U.S. (100 million people, $19 billion); resulted in boom for commercial annuity insurance. New York and Massachusetts: savings bank life insurance. Wisconsin: small life insurance fund. Life and fire insurance, 99% private. Recapitulation: Government operation is slight in U.S., though multiplicity of little things: restaurants in Capitol, railroad in Panama and Alaska. Provision of services the largest activity of government: education, highways, welfare. 10–15% of total production. Government provision less than one-fifth of total, by liberal definition; mainly where private enterprise is absent. Competition between public and private a function of definition of competition. (1) Competition when sell goods on competitive general market in competition with private enterprise. Few: public utilities and a relatively few other cases. Laws ban sale of prison-made goods without labeling, except for farm products. (2) Competition in sense there is a good deal more private than public enterprises in the field. Yardstick idea of TVA. (3) Where there is any private enterprise in the field. (4) Where government produces goods for its own account. Most large companies do the same. Extreme.

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(5) Where it is conceivable that private enterprise might provide the services. Most extreme. Lecture Government has been engaged in public enterprise from the beginning, with only slight growth, now about one-fifth of total enterprise. Early: U.S. banks, 1790 and 1816, mixed public and private; monopoly of Indian trade, reversing British and French policy; transportation enterprises (especially the states). Slight decrease from Civil War to World War I; slight increase from World War I on. Why public enterprise? Factors: (1) Government has undertaken (and been expected to undertake) the developmental, highly risky enterprises, whose immediate profit possibilities at the time are uncertain. (2) War, leading to many necessary public enterprises, e.g. U.S. government owns all the synthetic rubber plants in the U.S., cannot find a buyer for them. (3) Bankruptcy of private enterprise in fields necessary and important to the public, e.g. municipal mass transportation. (4) Result of government lending operations; where loans are not repaid, either government forgives the loan (generally) or becomes partner in the enterprise (banks in 1933). (5) Shifts from private to public enterprise have been very few, generally going the other way; e.g. acquisition of local public utilities. Minor, but most controversial. Opposition to government operation: focal points: questions of efficiency and of profits. As for efficiency, have examples of both inefficient and efficient government and private operations. Have to be specific. Depends on type and on individuals who run it. As for profit, organization of government not well suited to operation of business on profit basis: Checks and balances means that government enterprise is conducted under many restrictions and in a goldfish bowl. There is little chance of modifying public contracts in response to changing conditions. Public accounting is different from private accounting. Civil service. Lack of profits not sufficient reason in U.S., so long as government is run as it is; need government corporation, similar to England. Tests of public enterprise: (1) Public should undertake what private enterprise cannot do and what public enterprise can do more efficiently than private enterprise – Lincoln. (2) Service basis, not basis of making or securing profits for government previously gotten by private enterprise. E.g., post office. Meeting costs may even be a secondary consideration.

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(3) Competition of a “yardstick” nature: unfair comparison, because of tax exemption, cost differences, lower interest rate paid by government. Can adjust, by taking tax differences into account. Lecture Government Fiscal Operations: Taxes and Debt The effects of government fiscal operations on the economy are exaggerated and lie in the distribution of income and not in the production of wealth. Time lag between taxes and expenditures. No exact return to particular individuals: some get more back, some less. If taxes hit hard on investors, retarding effect on total production. If receivers of government expenditures do not use it, effect on consumption power and demand. Psychological attitude to tax payments: first obligation, compulsory. If property taxes are unpaid, property title is clouded. For individual, expenses of last sickness and death and burial come first; for business, tax obligations come ahead of wages and preferred debts. Attitude varies from country to country and from time to time; greater resistance in U.S. Different in times of war from times of depression. The Keynesian view is that government expenditures and deficits have stimulating effects on the economy. Witte is not as extreme as an ardent Keynesian. There is a multiplied effect of all expenditures. It is an overstatement that government fiscal operations will control fluctuations. Factors include: size of the deficit; public approval, especially private investor who, if he thinks the tax burden will increase, will curtail investment. Different in case of war. The effect is on both the quantity of income and the distribution, the major effect on the latter. Local property taxes: burden on middle class. Farmer pays disproportionate share of taxes on basis of income and property. Shift from state to Federal taxation means shift from property to income taxes, affecting different income groups. Much depends on purpose and nature of government expenditures. One half going to war expenses, a high percentage for materials and supplies, paid to big companies – cheaper and more convenient. Summary: Always both private and public sectors, the former the larger. Government activity largely supplementary; competitive at a few points. Interrelated. Operate on different principles: public, necessity, from first levies on income, pressure through political machinery; private, pricing system. Sane attitude of public as to taxes: Complain bitterly about lost money, but still all have a scheme for government to undertake something new. Taxes and expenditures are two sides of same sheet. Effect is redistribution, however taxes are levied. Taxes are the cost of vast services rendered. Currency and Credit Government functions here are large.

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Currency: Since Middle Ages and earlier all governments have had monopoly over production of currency. U.S. Constitution: government determines “value thereof,” a very important power exercised by government. Counterfeiting. All governments today have managed currencies. Gold standard – currency redeemable in gold at fixed rate – non-existent today. Sweden: value of currency in terms of index number; other nations, in terms of gold and silver. Government tries to maintain stable currency in international trade. Change values in hopes of gaining advantage; also to lighten debt burdens. France devalued thrice since World War I, Great Britain twice. Successful for short periods. Credit: In modern economy, major part played by credit money. Government controls more numerous regarding credit than currency. The more advanced industrially, the more important is credit. Governments try to determine the total volume of credit, a measure of the level of economic activity. A function of centrals is to control the level of business by controlling the volume of credit. Methods of credit control not a complete success. (Three lectures, including exam, missed.) Lecture War and International Relations The scale and cost of modern wars is such that concerted effort is necessary; involves complete upheaval of economy and government: total war. Necessity for directed economies – belligerents and neutrals also. Basic nature of wartime economy: (1) Government-planned economy in real sense, both sides in World Wars I and II: supply factors of war, military supplies and equipment; maintain civilian population. Involves overall direction of economy. In 1944, government purchased 60% of total production for war effort; before and after, 15–20%, lower before. (2) U.S. had more indirect controls in comparison with other nations in World War I. National Defense Act of 1916 still the basic law governing military and economic affairs in war. Enabled taking over the state militias, any plant for defense purposes – which was done in a few cases, plants which did not want to transfer into war production. Some control of manpower: draft, but not ‘extended to full manpower draft to control empl[oyment]. Many indirect controls to secure defense production: profit, patriotism, war involves all. After February 1, 1942, only one plant could, by order, produce autos; cajole into production of airplane parts and engines.

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In World War I, war work or fight. World War II, indirect controls: higher wages in war plants than elsewhere; transportation aids. Direct controls: man in defense plant needed “pass” to leave work for non-war work; needed good reasons. War plants hired through public employment office. Government always had power to go further if necessary. (3) Control over investment. A war economy necessitates control over resource allocation, including investment allocation. Investment controls were restrictive and channeling. Government’s own investment in war plant expansion. Almost entire expansion of private business had a government source. (4) Rationing and priority controls: mainly indirect in World War I but extensive over production and consumption in World War II. Main control on consumption was on production limits, governing quantity directly and through what could be produced via priorities over raw materials. Price controls needed: government keeps majority of products, has to be paid for after war, i.e. keep war costs down. Prevents normal situation in which consumption controls production, especially with restricted production: result, inflation. Production expansion without goods available for great purchasing power. Long time effect of war on economy: War is not over until complete demobilization. Impossible to return to pre-war ways. Government undertakes investment function during war. Inflation problem requires post-war remedy: high incomes, scarce goods, pent-up purchasing power. Siphon, through taxes and loans. Prevalent idea in U.S.: once war is over, so should be controls. Lecture International Relations Historical: In early years, great interest in foreign affairs. European affairs had American repercussions, e.g. French and Indian War a phase of England-France War – the world war of the time. Later, c.1798, interested in France-England War, declared war on France; 1812, involvement on losing side. After Napoleonic wars to World War I a great period of world peace. Americans more interested in favorable balance of trade. After World War I, America no longer safe by reason of oceans. After World War I, the U.S. rejected membership in the League of Nations; also early U.S. interest in foreign investment was not maintained, and went back to London. The U.S. had loaned its Allies $10 billion in World War I, counted by us not as participation but as a loan to be repaid, not so by our foreign allies; only a part of American war participation. In the 1920s, high tariffs, hence little possibility of repayment. Most foreign investments lost in either the depression or World War II. Wilkie, “One World,” recognized U.S. economic interrelations with Europe. (Stimson had wanted intervention in Manchuria after Japanese attack in 1932;

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followed by Italy in Ethiopia, Spanish Civil War, etc.) Effects: (1) Foreign trade: especially for producers of agricultural products; U.S. less dependent percentagewise than any other major country, but world’s largest exporter. (William Pitt: combined arts of war and profits of commerce) (2) Supplies needed by industry; seen in World War II, when rubber and tin supplies cut off; rapid exhaustion of domestic supplies of essential minerals since 1940: U.S. today more dependent than in 1940. Lack fully or partially: uranium (Belgian Congo, Canada), copper, lead, graphite, tungsten, nickel (Canada), tin, iron, petroleum, rubber. Coal, sulphur, salt, sodium – have important supplies but not forever. (3) Domestic economic success depends on peace. 1900 imperialism: “trade follows the flag.” War profits controlled by taxes, war cost. (4) Bi-Polar setup: East West: World War II aroused the masses, sentiments against wealthy nations (jealousy, fear): U.S. has 7% of world’s population, 50% of production; per capita income is fifty times that of Southeast Asia. Attempted industrialization by “backward” nations during last twenty years. (5) Necessity for allies: loss of war or even war per se: loss of property rights and of civil liberties; change of economic, political and social structure. British economists: “One war too many,” regarding changes during and after both World Wars. Some may survive but the economy will not. Conclusions: Profits can no longer be the guiding motive in international relations, e.g. with regard to “loans” to foreign nations. Economic costs are secondary to winning the war. At stake is more than realizable profits from foreign trade: peace central for continuation of economic life. Herbert Hoover’s inaugural address, 1929: “American progress is tied up with the progress of all humanity.” Economic problems are wider than realm of economic theory. Lecture Changing But Enduring American Government Economic relations are not unchangeable; especially relations between government and business, as both are human institutions and therefore subject to change. Change in economy has been greater than change in government, since 1789; still, government has considerably changed. Through constitutional amendment (most important are 1–10 and 13–15) but reinterpretation has been a source of major change. Also changes in administration, functions. Summary of major changes: (1) Great growth in government at all levels, absolutely and relatively, but greatest at national level, in number of employees, size of expenditures, prestige (especially at national level). (2) Growth in importance of powers assigned to national government: defense, foreign affairs, regulation of interstate commerce.

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(3) Great increase in state and local governments, particularly on local level, although not mentioned in the constitution. Local government is the largest government employer of civilian employees; the largest group, teachers. (4) State government determines ordinary relations of civil and criminal law – important segment of life. (5) Growth of government power involved little shift of power from states; very few state functions were taken over. (6) Federal aid has stimulated state action. (7) During last 25 years, trend toward cooperative government, with lessening of conflict between levels. The “states’ rights” argument has been less used of late; it is still only a political term. (8) The slow development of the concept of “one government” functioning on three levels, not two hostile governments each strictly within its own powers. Enduring features: (1) Very existence: 165 years old, one of oldest in survival of continuous tradition of successive governments in orderly process (United Kingdom, Switzerland, too). (2) Survival of basic concepts and growth: democratic – and has grown; in 1789 an experiment in enfranchisement, limited by sex, race, religion, property. (3) Although total war involves restrictions, there have been no important impairments of individual liberties; democratic institutions and rights have been maintained, e.g. press, speech, etc. (4) Has withstood severe tests, most recently, two world wars, the great depression, the cold war; and has gained in power and prestige from decisive economic and political position in world wars. [missing page] Schmoller: Capitalism as system of quest for profits. Periods: (1) Low capitalism: Welfare in hereafter gave way to profit and economic advancement; hitherto interest as usury, banking only by Jews and foreigners, profit as wicked and sinful. (2) High capitalism: Profit motive dominant, measure of worth is money; U.S. an aristocracy of millionaires. (3) Declining capitalism: Already declining in England and U.S. Lecture Problems and trends: changes in the relation between government and business (the economy):

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(1) Public and private enterprise: Changes not significant. Both public and private from the beginning. In terms of assets, public more extensive than today: public lands, land the basic unit. Trend at present: slight toward more government ownership – because of greater significance of government operations applying to all people. (2) Government regulation and control: continual, slight increase. (3) Government aid to business: No fundamental changes; did so from very outset. Promotion: beneficiaries have varied: first, turnpikes and canals; later, railroads; now, airlines. Extensive aids to business. (4) Growth in service and defense functions of government. Service: greatest growth of civilian activities: highways, education. Defense: increasingly important: 65% of national budget for 1955–1956 sent to Congress on January 17, 1955. (5) Closer interrelationship between government and business. Always has been close, and has grown with more population, urban living, age of on-world international economy – whereas in 1789 only a small percentage of output was marketed even domestically. In age of atomic and solar power, government’s role is greater. Accomplishments of American Economy: An economy of free enterprise, but not uncontrolled anarchism – a slogan. American free enterprise – defined as the economy as developed in the U.S. Implies government control. Per capita productivity: 15–18 fold over 165 years. Seven percent of world population having 40–50% of world production. Ascribe to partnership of government and business, not only to management, etc. Professor Carl Russell Fish [historian of Civil War and American diplomacy]: Prior to Civil War, best men devoted to government activity; after Civil War, period of expansion, talent into business, with aristocracy not of men in government but of men in business. Conclusion: Foundations of America laid before Civil War became basis of American economic development. American progress: Not only have the successful been beneficiaries of progress but so have all others; especially since 1920 a tendency for greater equality. Henry Ford “the last of the billionaires.” Problems: Doubt about American institutions and our country itself. Even as mightiest country and richest. Earlier, Americans confident of greatest government and country on Earth. Fear of subversives (“no nation has ever been free of traitors”). Fear of depressions. Part of cause: After winning a war, “all problems solved”; disappointment. Alarming progress of communism. Fear of war stronger here than anywhere else even though we are strongest nation.

EDWIN EMIL WITTE’S COURSE, ON “THE ROLE OF GOVERNMENT IN THE ECONOMY,” ECONOMICS 246, 1954–1955 Notes taken and edited by Warren J. Samuels I. QUESTIONS FOR REVIEW Questions for Review

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(1) Compare governmental regulation of agricultural prices with governmental regulation of prices of electrical utilities. In what respects do goals, methods, and problems of regulation differ in the two cases? (2) Compare and contrast the role of government in regulating and influencing (a) the labor market and (b) the market for manufactured products. (3) Trace the changing attitude of government toward “bigness” in “business and “monopoly” as expressed in common law, leading statutes, and court interpretations of these statutes since 1890. (4) “A leading cause of the changing role of government in the U.S. is war and fear of war.” Critically evaluate this statement and indicate specifically what importance war has had in changing relationships between government and business, (5) (a) What is meant by “laissez-faire” as a government policy, using Adam Smith’s views as representative. (b) Evaluate the following statement, – “Laissez-faire never was practiced in this country.” Wisconsin “Government and Business” and the History of Heterodox Economic Thought Research in the History of Economic Thought and Methodology, Volume 22-C, 33–91 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(03)22046-0

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(6) (a) Suggest four major changes in our economy since 1776. (b) How has the role of government been altered in respect to each of these changes. Be as specific as you can in your answer. (7) Define and distinguish the following terms and concepts: (a) government and state (b) business and economy (c) pressure group and party (d) government as rule-maker (e) public utility and public corporation (f) independent commission and executive department (g) powers of presidency in economic affairs (h) several meanings of term “government as competitor” (i) police powers of federal and state governments (j) economic planning and planned economy (k) monopoly and unfair competitor (l) government spending, government purchase, and government production. (8) Summarize the Constitutional provisions which enable government to play each of the following roles, indicating which branch or level of government is specified. Also indicate, where approximate [sic], the limits placed on government in playing each role. (a) protective role (b) stabilizing the economy at high employment (c) role of producer and competitor (d) regulator. (9) “In our history government’s chief function with regard to the business community has been to control and restrict the free play of business power.” Evaluate. (10) Consider the following list of statutes, cases, agencies and programs. Group them according to a recognizable classification system of your own. Discuss them by groups, indicating what role of government is involved and the historical significance of each item. (a) Homestead Act (b) Transportation Act of 1920 (c) Sixteenth amendment (d) Employment Act of 1946 (e) Nebbia v. People (f) Northern Securities case (g) ICC (h) SEC

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(i) Wagner Act (j) Atomic Energy Act of 1946 (k) Munn v. Illinois (1) Marbury v. Madison (m) Minnesota Mortgage Moratorium cases (n) Hope Natural Gas Co. Case (o) Clayton Act (p) Alcoa case (q) Parity prices (in relation to farm price support) (r) Smyth v. Ames (s) National Industrial Recovery Act, (t) TVA (u) Erie Canal (v) First Bank of the U.S. (w) Social Security Act of 1935 (x) Council of Economic Advisors (y) Office of War Mobilization. (11) Write down what you consider to be five different leading questions on theses arising in this course. Select any one of the five and write a 30 minute critical essay on it. (12) (a) Document the concentration of control of business in the contemporary U.S. (b) Why is this concentration a matter of political and economic concern? (c) Outline the development of government policy on this issue since 1890 and characterize contemporary policy. (13) What is meant by each of the following? How is each practice looked upon by the courts? (a) price leadership (b) market sharing (c) basing point pricing (d) trade association price information sharing (e) discriminatory pricing (f) patent monopoly (g) tie-in sales (h) conglomerate merger (i) interlocking directorates. (14) What would you identify as the three leading trends in American government finance over the last 50 years? Describe and appraise the significance of each of the trends you name. (15) (a) “The more government takes, the less each one has.”

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(b) “The more government spends, the more income we all have.” Evaluate both (a) and (b). What is the likely effect on employment and gross national product in money terms, i.e. expansionary or contractionary, of each of the following. Explain your answer. (a) government deficits (b) government repayment of bank-held debt (c) successful encouragement of more investment spending. (d) increase OASI reserve fund (e) increase size of balanced budget (f) decrease government purchase of goods and services by amount of increased government transfer payments (g) increase export surplus. Discuss the following aspects of (governmental) economic planning: (a) What differing types of economic planning do we now have in the U.S.? (b) How does the economic planning we have in the United States differ from the economic planning in Russia? Discuss (direct) government aids to business from the following points of view: (a) Are government aids to business consistent: (1) with the theory of laissez faire; and (2) the American way of life. (b) The extent of direct government aids to business (other than agriculture) in the preseft day United States. Discuss the Government’s Relation to the Basic Economic Institution (property, contract, etc.) from the following points of view: (a) Give not less than three illustrations of important basic changes in the economic institutions of the United States which have occurred in the course of American history. (b) Illustrate by at least two examples that property rights are not absolute but subject to control and regulation by law. (c) To what extent can the government alter rights of contract in the United States. Discuss briefly the following: (a) What has been enduring in the American economy? (b) What has been enduring in the American government and what have been the major changes which have occurred in the American government since the adoption of the Constitution (c) What is meant by the service functions (activities) and how important are they in the present day United States?

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II. SUPPLEMENTARY MATERIALS DISTRIBUTED BY E. E. WITTE ON THE LEGAL AND CONSTITUTIONAL BASES OF GOVERNMENT IN RELATION TO BUSINESS TOPIC II THE LEGAL AND CONSTITUTIONAL BASIS OF REGULATION Important concepts and issues to be reviewed and discussed, particularly as they relate to government control and regulation of business: Federalism and the federal principle. Implied powers. Separation of powers and delegation of power. Judicial review of legislation. The interstate commerce clause as a basis for federal regulation. The taxing power as a basis for regulation. The states and the police power. The requirements of due process and equal protection as limitations on legislative power. The concept of “business affected with a public interest.” The nature of administrative regulation: administrative legislation, administrative adjudication, administrative orders of individual application, the license requirement. Administrative regulation: advantages, disadvantages, safeguards. Judicial review of administrative action: extent of such review and the application of the due process requirement. Significance of the Federal Administrative Procedures Act. Administrative organization for regulatory purposes: the departmental bureau v. the independent regulatory commission; important federal regulatory agencies; state agencies. Public policy viewed as the end product of legislative, judicial and administrative operations; policy formation no longer to be regarded as the exclusive responsibility of any one branch of government, but rather as a continuum in the development of which all three branches participate. Assignments: Text, ch. 2. The Federal Administrative Procedure Act (to be distributed). Fainsod and Gordon, Government and the American Economy, ch. 3. Blachly and Oatman, Administrative Legislation and Adjudication.

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Carrow, The Background of Administrative Law. J. Landis, The Administrative Process. J. Pennock, Administration and the Rule of Law. W. Gellhorn, Federal Administrative Proceedings. E. Redford, Administration of National Economic Control, ch. 2, 3, 5, 6, 10 & 11. Selected Cases for Suggested Reading, Page References, Dykstra, Cases on Government and Business, 2nd edition: Implied powers: McCulloch v. Maryland (1819), p. 22. Separation of powers and delegation of power: Excerpts, pp. 16–22. Schechter Poultry Corporation v. U.S. (1935), p. 37. Judicial review of legislation Marbury v. Madison (1803), p. 6 Interpretation of the interstate commerce clause: Gibbons v. Ogden (1824), p. 28. Swift and Co. v. U.S. (1905), p. 440. Hammer v. Dagenhart (1918), p. 45. Stafford v. Wallace (1922), p. 161. Schecter Poultry Corporation v. U.S. (1935), p. 37. N.L.R.B. v. Jones & Laughlin Steel Corp. (1937). Mulford v. Smith (1939), p. 102. Wichard v. Filburn (1942), p. 104. U.S. v. Darby Lumber Co. (1941), p. 111. U.S. v. S. E. Underwriters Ass’n (1944), p. 484. Regulatory aspects of the taxing power: McCray v. U.S. (1904), p. 384 fn. Bailey v. Drexel Furniture Co. (1922), p. 381. Carter v. Carter Coal Co. (1936), p. 50) Sonzinsky v. U.S. (1937), p. 379. Sunshine Anthracite Coal Co. v. Adkins (1940), p. 157. Steward Machine Co. v. Davis (·), p. 409.

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Police powers; due process of law; equal protection of the laws: House v. Mayes (1911), p. 34. West Coast Hotel Co. v. Parrish (1937), p. 362. Business “affected with a public inter∗ est” Munn v. Illinois (1877), p. 325. Tyson & Bros. v. Banton (1927), p. 329. New State Ice Co. v. Liebmann (1932), p. 320. Nebbia v. New York (1934), p. 332. Independent status of regulatory commissions: Rathburn v. U.S. (1935), p. 551. The following questions are based on the materials listed under Topic II and are offered as an aid in the study of this assignment. (1) State, the more important reasons (a) for the shift from state to federal regulation of business. (b) for the shift from legislative and judicial to administrative regulation of business. (2) How have these shifts, which are in the nature of constitutional changes, been accomplished without many formal amendments to the Constitution? (3) What principles on delegation of power were emphasized by the Supreme Court in the Schechter case? (1) Explain the Constitutional basis of the doctrine of implied power. (2) What special advantages are claimed for the independent commission as a regulatory device? What are some of the objections to or criticisms of the independent commission? (3) Enumerate those parts of the Constitution (by reference to subject matter) which have a vital bearing on the relations of government and business. (4) Show how the language of the Constitution tends to provoke judicial as well as political controversy over the extent of the state and federal regulatory powers. (5) What is the nature of the conflict between due process of law and police power? (6) Show how the interstate commerce clause has been applied in (a) extending federal control over business and industry; (b) in denying such control.

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(7) Explain the application by the courts of the phrase “business affected with a public interest.” (8) What requirements does due process impose upon administrative procedure? (9) Explain the use of the phrase “public welfare” in the constitution. (10) What controversies have arisen in the general field of judicial-administrative relations in the development of the system of administrative regulation? (11) Explain the difference between the constitutional basis of federal police power and the constitutional basis of state police power. (12) Assuming a system of government control of business, what are the arguments for a system of federal control rather than one of state control? For a system of state control rather than one of federal control? (13) Define administrative legislation; discuss its advantages and disadvantages, and indicate safeguards which may prevent abuses in connection with its operations. (14) Define administrative adjudication; discuss its advantages and disadvantages, and indicate safeguards which may prevent abuses in connection with its operation. (15) Show how the Federal Administrative Procedure Act of 1946 aims to deal with some of the problems that have arisen in the development of the system of administrative regulation. (16) Enumerate federal regulatory agencies, indicating in each instance area or fields of regulation. II. LECTURE NOTES First Semester Lecture The objective of this course is a theory of the role of government in the economy, emphasizing the interrelationships between government and the economy. This compares with the usual approach, the regulation of business by government, in which government appears as an outside agent. We will also trace both the American conception of what that role should be and what it has in fact been in the past. Special attention this year will be given to the present period, including what people think the role should be. Major Changes in the Economy and in the Role of Government Major changes in the economy have been great; major changes in the role of government have not been as great.

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Immigration: Immigration in the colonial period was almost exclusively English plus geographically scattered others. Little immigration until after the War of 1812, still mainly English speaking. After 1840, a heavy influx of German (1850–1880), Irish, later Scandinavian immigrants in large numbers, especially after, but also during, the Civil War, 1860–1865. The heaviest immigration was from 1890 through 1910 up to World War I: Polish, Italian, Slavic, Russian and Romanian Jews, generally East European. Most immigrants were young people. Since World War I immigration has been light, due in part to restrictive policies after 1920, especially after 1927. Only slight immigration during the 1930s but more emigration, resulting in net emigration. Since World War II, considerable immigration but nothing like the period prior to World War I; relatively geographical distributed: refugees, nationals, displaced persons, etc., including the families of servicemen who married abroad. Each successive census showed a pronounced increase in population age. The population doubled and quadrupled in relatively short periods of time. The population of Europe had a much higher average age. Industrialization: The first effect was an increase in population – because of the increase in production, more food was available; the second effect was an increase in standards of living after a generation or so, with the birth rate falling off. Such has been the Western experience during the early period. Earlier, at the time of Malthus, the rate of population growth in England was so high that it led him to say that the rate of population growth was greater than the rate of growth of food. In the modern period many underdeveloped areas have experienced death rates going down and the birth rate about constant, with population thus increasing. Resources: Coal not used until past the Civil War. Oil not discovered until just before the Civil War. Iron use was negligible; knowledge of deposits, slight. Civilization is built on the use of minerals. Transportation: The key to the development of the country, certainly to the trans-Mississippi area. 1850–1890, the railroad era. Growth of government financial assistance since 1789 or so – in proportion of total, in distribution, and changes over time. Changes in Economic Ideas What people think is important with regard to the action they take. For example, all American economists have been free traders. But they could not sell the idea to the American public. They preached from their ivory tower, not thinking of why people act as they do. [Witte often stated the point that what is important is what people think, not what they should think because it is true or others think it is true.]

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(1) Weakening faith in competition as the all-sufficient regulator of the economy. After the Civil War, during the period of greatest expansion, competition was thought of as the great regulator. Now, less faith is placed in competition, evidenced by the use of such adjectives as “weak,” “fair,” etc. (2) Trend toward group action and thinking. People get their ideas from their associations, along the lines of their economic, and other, interests. Management and labor each holds view of the real story quite different from what the real story is. Pattern thinking has become increasingly important in the U.S. – part of the fact that the group has become so important. [A fundamental point of Witte’s was that the American economy was associational, not individualistic, in character – illustrated by the use of the corporation, associations/organizations of all kinds, and government itself.] (3) Increased demands on government and lack of confidence in government. All groups, when in trouble, turn to government for aid. At the same time they condemn government as being a “fly in the ointment.” (4) Changing concept of the purposes of economic activity. The concept of capitalism was expressed by Werner Sombart just before World War I. Defining capitalism as the quest for profit, Sombart saw three stages in the evolution of industry. These three stages were preceded by a period in which the quest was not for profits, which was slight and compartmentalized on religious lines, but rather for salvation, holding that profit was sin, money was barren, etc. Low capitalism was a period in which the profit motive was competing with the older, handed-down motives. High capitalism, the domination of the profit motive. Declining capitalism, the weakening of the profit motive; extension of interests, partly because of the decrease in esteem placed on the successful businessman that had been so important in the preceding stage. Sombart saw the U.S. as being in the period of high capitalism from after the Civil War until about 1890; at the time of his writing, just before World War I, Sombart saw the U.S. as being in the period of declining capitalism. (The chapter headings of James T. Adams’s Epic of America tell the story.) Lecture Ideas and Policies, Especially Since 1789 Laissez-faire: Only anarchists have pure claim to seriousness. Modern business is inconceivable without government. Adam Smith, in his Wealth of Nations, primarily assigned defense to government. Criticized certain practices of his day, whereby monopoly, i.e. exclusive grants and privileges, letters of patent and

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aid, was granted by government, not formed by business associations. Argued that competition and the ensuring prosperity and benefit would not exist with government taking sides. Witte quotes Smith, that every system which endeavors to provide extraordinary encouragements or extraordinary restraints to draw toward a particular industry a greater share of capital than would otherwise be employed in it, is subversive of the great purposes which it means to promote, retarding rather than accelerating progress, diminishing rather than increasing the value of the annual product. Smith was against government aid and restriction, not government regulation: the monopoly privileges given to business, the aids and prohibitions against entering certain professions or industries. If government does not give preference or restraint, then private competition will create greater wealth. The duties of government according to Smith are those that comprise most of government today: protection, defense; establishing the administration of justice; and providing those public works and institutions which are useful but not capable of bringing in a profit to individuals. Smith, a professor of moral philosophy, who also had a minor government clerk job, was, however, practical, and went beyond these three functions and makes exceptions to these three roles: (1) Money: banks and all corporations to be charted by government; felt unregulated banking results in abuses just like fires, though restrictions on both are prohibitions on liberty; and takes England’s side in its controversies with the colonies. (2) Import duties: Against them except for defense industry (shipping), retaliatory duties, and gradual introduction of free trade (equity and public sentiment rule against full restoration of free trade in Great Britain). (3) Bounties: Against them except for defense, based on self-sufficiency argument. A tax on others to support it. [missing page] The expenses of government include those for military purposes and for the administration of justice. They also cover public works, for the aid of commerce generally, and for benefits to particular industries (trading posts, foreign ambassadors, foreign joint-stock trade companies, and for elementary education, as well as for supporting the dignity of the chief magistrate. Smith recognized government in broad roles but also in extensions for certain policies. Little discussion of the economic role of government in Ricardo or Bentham. Acceptance of view that failure of natural law leads to government as rule maker, umpire, and protector of society. The English free-trade movement came from politicians, not economists.

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John Start Mill: Last of classical economists. Gave much attention to economic role of government. Reformer, Member of Parliament, supporter of early legislation regulating child labor. Summarizer of classical economic theory. Part V of Principles of Political Economy dealt with economic role of government. Laissez-faire should be general rule, departure only if required by certain great good. Business should be conducted only by private and voluntary agencies, except in limited fields. Against government interference but recognized three basic role of government: protector, ruler maker, and umpire. The classical economists assumed the common law stated by Blackstone. When government goes beyond the basic functions a cost is involved: reduction in total production. But department may be justified by a great good – a greater social purpose – even with the lesser production, e.g. prohibition of child labor. J. S. Mill felt that cautious general expediency was a better rule than any restrictive definition. Herbert Spencer had the most extreme view of laissez-faire. Had great influence in the U.S. in the second half of the nineteenth century – the period in which “laissez-faire” originated. He published Social Statics in 1851. In the 1870s he was the most widely read social scientist in the U.S. Holmes wrote that the Constitution does not include Spencer’s Social Statics. Every man, Spencer argued, has the equal freedom to do he will as long as he does not infringe on that of others. Recognized government protective function through domestic law and foreign protection, including the administration of justice that renders society possible. But if government does more than that, it becomes an aggressor. The less government, the better. Against bureaucracy and restraints. Education should not be provided by government; no charity either. Public collection of garbage is wrong. Favors free practice of banking. A transition took place in the 1870s. American laissez-faire includes things that original laissez-faire did not include: protection, government aid. This was not the result of Spencer. It included what the businessmen wanted. They had not read Spencer. Therefore, when laissez-faire has influence it is almost a negation of the classical concept. This is the popular idea. Pre-Constitution Views and Policies There were five sources: (1) Brought over by the colonists from England: Mercantilism: every American industry began with government aid or grant. During the colonial period in New England, one needed government permission to own land or even to live on land.

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Schmoller considers mercantilism to be when the central government – rather than the local government and other local organizations, such as the guilds – became the regulator of the economy; desire of government to acquire gold and thereby gain strength. Growth of the state from feudal beginnings. (2) Application of mercantilistic ideas to conditions in the colonies: The restraint side was never developed, because of existing conditions, especially the distance between government and the frontier. Nothing was on a large scale. New England: had commercial interest, dominant Puritan church: concept of work as salvation, predestination, with select group in control, democracy within the group. No guilds existed in the U.S.; there was no market for their products, no market economy, only a home economy. (3) British policies toward the colonies: Although there are many statements to t the effect that the revolution was against government regulation of business, it was foremost a revolt against British taxation without representation. There was little complaint against local government regulation, of which there was much; it was only against a distant and seemingly oppressive government. This is the origin of the persistent American idea of government being a pressing, distant thing. (4) Eighteenth-century natural rights and social contract political theories: Were political rather than economic doctrines and had no relation to laissez-faire. Natural rights theory came from Hobbes’s Leviathan (17th century), Locke’s Treatise on Government, Rousseau’s Social Contract (1762), and Montesquieu’s Spirit of the Laws (checks and balances). One application of natural rights doctrine is laissez-faire, the economic policy thereof; but this was not emphasized. The political theory of the social contract visualizes a historical explanation of the rise of government, seeing the necessity of government, to maintain order and voluntary agreement, with consent of the governed. This was not correct anywhere except in the U.S., which came about afterward and even then only a close approximation. The basis of the original colonies was a contract, but between the colonists and the crown. Later they were to object to changes in the charter without their consent (by parliament rather than by the crown). The Massachusetts Bay Colony adopted a social control on board ship. Before civil government there existed a state of nature in which all had the same natural rights, forming the basis of rights after the rise of government, established for reasons; only surrendered right was right to defend one’s natural rights. Corollaries: (a) Government must have the consent of the governed and has no right to continue without that consent. (b) Popular sovereignty, majority rule.

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(c) Right to revolution: each generation has the right to review the contract handed down by the previous generation. Paine, Adams, Jefferson; Paine: “government, like dress, is a badge of lost innocence.” (d) Government as a necessary evil and the best government is that which governs least. (e) Government must be restricted unless it should invade the natural rights of individuals: checks and balances, bill of rights. Social contract and natural rights theories were widely applied in the colonies c. 1770, opposing Parliamentary taxes – levied for services rendered – on the ground that the charters of the respective colonies did not provide for them. The Declaration of Independence opposed not the king who granted the charters but the parliament who was supposedly violating the contracts. The colonists used the corollaries of the right of revolution in case of violation of contract and right to revision upon violation by one party. The Preamble to the Constitution expresses the social contract philosophy, also the ninth amendment: the people have inherited rights not all of which are enumerated; and the tenth amendment, the residual power to the states or the people. Blackstone’s theory of the English common law: a body of inherent rights and principles of natural justice, laid down by the Creator. The business of government is to declare (discover) and enforce them in order to attain individual happiness. Preserve individual rights with little restricting by government. (5) Conditions between the revolution and 1789 (the Confederate period) leading the framers to seek stronger central government: Commercial interests unsatisfied. No depression because no market economy, but blame placed on decentralized government by commercial interests – reflected in the Constitution. Elements: (a) Paper money, Shay’s Rebellion, and fear of easy money policies; and (b) different trade regulations by the sundry states. Lecture Although natural rights theory is strongly evident in the Declaration of Independence, by the time of the constitutional convention of 1789 it had lost most of its force, especially with regard to property and equality, since all had fought together. Some emphasis on natural-rights theory is found in the Constitution; but the Constitution itself was a revolutionary step, inasmuch as the Convention was empowered only to amend the Articles of Confederation and then only by unanimous consent. Instead it prepared a draft effective when nine of the thirteen

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states ratified it; even then some of the first nine ratified only on the condition of the inclusion of a bill of rights. The Constitution went into effect regardless of the provisos, but Congress did immediately provide for the bill of rights. Natural rights and social contract theories are evident in the Constitution: the Preamble (We the people), the first ten amendments, e.g. the ninth, wherein the people have natural rights and are giving some to government but retain all others. There was no intention to embody laissez-faire into the Constitution. It was formed to create a stronger central government. Although some wanted a unitary type of government, they settled for a Federal type. The Constitution was promoted by those groups for their own interests; the objectors felt otherwise. [At one point in the notes, I wrote in the margin my idea that the principles of natural rights and social contract were given pragmatic application, the theories nonetheless used as justification.] Government’s relation to business was expressed in the Constitution. The Congress has the powers to (a) regulate commerce: Today it is thought that the purpose was not regulation but protection from the complex regulations of the various states, i.e. to establish uniform regulation; also protection from the interference of the states. (b) Coin money and weights and measures. (c) Uniform law of bankruptcy. (d) Patents, trademarks, and copyrights. The states were forbidden to issue paper money (bills of credit), pass ex post facto laws, impair contracts, and levy tonnage and import and export duties. Congress was prohibited from taking life, liberty or property without due process of law; the converse is, of course, that Congress may do so with due process of law (fifth amendment). The Federalist Papers of Hamilton, Madison, and Jay, presented the arguments on the basis of which the Constitution was ratified. Property was an important part: the need was for a strong central government to protect property against “the passions of men who need restraint.” This change from natural-rights theory was caused by Shay’s Rebellion and the insecurity it caused. The issue of factions (class groups) engendered fear of the masses, for aggregate interest of the community. Federalist 44: the Constitution is principally an instrument for the protection of property. Also: checks and balances, Federal government system, national government with broad powers – protecting rising commercial interests from jealous states. Economic view of founding fathers apart from Constitution: George Washington: Eighth annual address to Congress, 1796: promote four great interests of the nation: navigation, commerce, agriculture, and manufacture, especially those necessary for national strength. Government ownership and

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operation but no interference with private business. Advocated Federal monopoly of Indian trade, national university, aid to agriculture. John Adams: Navy to protect commerce. P[elatiah] Webster (philosopher): 1791: laissez-faire view. Early Acts of the New Government Tariff of 1790: Based on Hamilton’s Report on Manufactures: import duties to help develop domestic manufactures; succeeding tariffs all high, reduction until 1828 and Tariff of Abominations. Assumption of state war debt: Had been much speculation, though at time of assumption value was almost nothing. Speculation carried on by many men who had been at constitutional convention, such as Wilson, Morris, Hamilton. Federal judicial system: under optional power of Constitution, Congress could establish those inferior courts it deemed proper. Granting of Indian trade monopoly, 1793, maintained until 1819; unenforceable. Establishment of First United States Bank: 20% subscription by government; mixed public-private enterprise; same for Second Bank, 1816. Establishment of Patent Office under Secretary of State, be exercise of optional power; separate patent office, 1836. Uniform Bankruptcy Act, 1798, repealed in Jefferson’s administration; again in 1898. State policies and practices: Most extensive economic action and legislation. Shown in studies by Handlin, Massachusetts; Hartz, Pennsylvania; Primm, Missouri; also Illinois and Georgia. A clear picture: The revolution and the Constitution made no break in the economic policies of these states. They were deeply involved in the promotion of private business and with government participation in and regulation of private business. The studies end with the Civil War. For example, many prices were fixed by legislation (in 1820s, Abe Lincoln’s tavern in Salem, Illinois, the menus tell of many prices fixed by the legislature, for lodging and food.). These policies hardly distinguishable from early mercantilist ideas; practices on all levels but state and local levels have more direct relation; aid and promotion, and also regulation. Land issue: Big factor in establishment of national government. Confederation got, by cession, all lands west of Alleghanies, i.e. all land of U.S. except original thirteen and four other states. Public ownership of most important natural resource: land. Public property then a larger percentage of total property than now, in part because it embraced those lands.

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American Economic Theories and Policies of the First Half of the 19th Century Economic concepts of political leaders of Jeffersonian era: Laissez-faire not an American concept; only few had any contact with and knowledge of the classical version. Albert Gallatin, Secretary of the Treasury under Jefferson, influenced by English classical economists (Smith and Ricardo). 17th and 18th century liberalism in politics and philosophy, with ground prepared by acceptance of political counterparts of natural law and social contract theories, seen in Declaration of Independence, Constitution, Bill of Rights. When laissezfaire ideas were brought to the U.S., they fell on fertile soil. At once it had great popularity, was advocated by some early now-obscure writers, and was accepted, though without the qualifications and reservations of the classical economists, but it was never practically applied. Thomas Jefferson: Very influential in both U.S. and Europe. Completely changed his views: Early, c. 1785, held an agrarian view, influenced by French Physiocrats: independent farm is superior to every other group, strength of nation lay in agriculture, wanted to keep manufacture etc. out to protect American society from sores of industry, i.e. keep industry in Europe. However, in 1805, when he was President, his writings evidence a change in his thinking: Must place manufacture alongside agriculture; either we manufacture our own or go without, being at prey of foreign governments. Diversification. On his tomb, which he designed himself, the inscription states that he was the author of the Declaration of Independence (his faith in government action grounded in law), author of the Virginia Statute of Religious Toleration (belief in human rights), and founder of the University of Virginia (faith in public education); no mention of his being the founder of a political party or of his being President. A strict constructionist in constitutional interpretation. “The tree of liberty must be refreshed from time to time by the blood of tyrants and patriots.” Until his death he held to the concepts expressed in the Declaration, including the natural rights of man. Some of his statements were all out for laissez-faire but with some modifications based on a sense of practicality. Distrust of urban people; held independent farmer best for democratic society. Albert Gallatin: Important banker, later pamphleteer. Supported Jefferson against Bank of the United States. Earlier had defended men involved in Whiskey Rebellion. Liberal but not doctrinaire type of laissez-faire, but always national in thinking. Ardent free trader. Advocate of hard money. In later years, anti-slavery.

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Proposed national system of education financed by sale of public lands, and scheme for internal improvements. James Madison: Desired laissez-faire but with exceptions for national self-sufficiency. James Monroe: Encourage domestic manufactures; improve conditions of the parties to the social contract. More radical writers: John Taylor (Virginia): Very strong stress on agriculture, even in 1820s. Considered agriculture the guardian of liberty and source of wealth. Against protective tariffs and any policy building up manufacture. Very pessimistic in contrast to general optimism of most men in government at that time. Also N. Macon (North Carolina), J. Randolph (Virginia). Systems of proposed internal improvements were vetoed by the presidents of the era on the ground not of laissez-faire but that government did not have the power under the Constitution to do so. Jacksonian Period: Arthur Schlesinger, Age of Jackson: Jeffersonians gave up true faith of agricultural democracy for practical reasons; revived by Jackson. New England radical the true Jacksonian, return to Jeffersonian principles abandoned by Jefferson for expediency. Rising worker group rather than frontier coonskin hats. Witte questions that view: The New England radicals had no control of government; return does not represent laissez-faire. Fought banks and corporations. Anti-monopoly movement meant opposition to government privilege. New England radicals against any kind of corporate charter; joined with Andrew Jackson against Bank of the United States. General incorporation acts broke monopoly; backwash of anti-monopoly, anti-corporation movement; changed nature of corporation laws. Closest, in relative degree, to American version of laissez-faire in 1829–1860. Lecture Jacksonian period the closest approximation to laissez-faire, but not classical version: (a) Tariffs, 1828–1863: downward trend. (b) Less subsidization of private business, anti-corporation movement, slight return to agrarian philosophy. (c) Introduction of restrictions in state constitutions on government participation: curbs on legislature and executive, universal suffrage (except slaves and women; formerly, religious and property qualifications), popular government (spoils system, no qualifications). (d) Public school emergence and innovation. Not economic but political forces, except for anti-bank and tariff issues. Jacksonian leaders: Jackson, Van Buren, Polk, Taney (upheld states’ rights, reversing trend of centralization of government). City of New York case, 1839,

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upheld state quarantine regulation re interstate commerce. Kentucky Bank v. Briscoe, 1839, allowed issuance of banknotes by state-owned banks. Charles River Bridge case, strict construction of corporation charter, no confirmation of monopoly, more than one charter in same field. P. James, Life of Jackson, superior to Schlesinger’s book. Jackson’s farewell address, 1837: Anti-corporation and monopoly (one in the same) – special privilege; effect: general incorporation laws, giving all the privileges. Agricultural mechanization: labor classes unable to defend against by concerted action. Dislike of press. Saw remedy in withdrawal of government privileges, free trade, strict construction of Constitution. Van Buren: similar to Jackson. Polk: Anti-England – very characteristic of American thought. New England intellectuals: Transcendentalists. Little importance politically with great masses of people. Thoreau: that government is best which governs least or not al all; philosophical anarchist. Channing (Unitarian leader): government should repress crime and maintain public order. Conservative opposition: Whigs: won two presidential elections, Harrison and Taylor; minority group during this period. Webster, Clay, John Quincy Adams, Calhoun, Greeley. Clay: for protective tariffs, internal improvements; defender of Bank of the United States – its attorney while in Senate. Not criticized by opposition for retainers; well known, not secret. Webster: New England manufacturing interests; shifted from free trade when manufacturers shifted. While in Senate, on retainer/payroll of New England manufacturers, Abbott and Amos Lawrence textiles. Calhoun (South Carolina): independent, not a Whig. More philosophical, political theorist; esteemed in recent period. Afraid of Northern majority. Government could only act when all major interests concurred. Weak but desirable government. Free play for individual. Doctrine of “concurrent majority” – defined in terms of economic classes. Emphasis on individualism but restraints against property-less poor – concurrent majority. In long run their views prevailed, as to banking, tariffs. First American school of economists: Protectionists. Not academic writers: pamphleteers on particular subjects. Retired businessmen propagandizing their economic ideas. Daniel Raymond: Author of first book in U.S. entitled Political Economy, 1820. Critical of English economists. Antithesis between social and individual interests. Favored large population – natural view of U.S. in 1820. Against Ricardian rent concept: land is in excess and had to be worked. Minor influence on John Rae.

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John Rae: Statement of New Principles of Political Economy, 1834. Against free trade. Critical of classical economists. Antithesis between social and individual interests, whereas classical economists assumed social welfare was sum of individual welfare. Criticism of laissez-faire based on classical summation theory. Mathew Carey (father): Head of chief publishing firm of his day. Protectionist, through Philadelphia Society for Promotion of National Industry. Essays on Political Economy: for protective tariffs, internal improvements. Economic harmonist. Henry Carey (son): First American writer to attract attention in Europe. 1837–1840: three volumes, Principles of Political Economy. 1857–1860: Principles of Social Science. Same ideas as to economic harmony. Differed from Ricardo and Malthus on rent and population. Protectionist. Nationalist. Free trade held to benefit England because it exploits others: “selfish and repulsive” – dichotomy of world’s producers and consumers. Friedrich List: German economist of note. Greatly influenced by America; came to U.S. in 1819, stayed until 1832. Not widely read in U.S. Later, influenced Richard T. Ely. Tracts published by Henry Carey. Outlines on American Political Economy – views on American protective tariff. National System of Political Economy, 1841: critic of English system of economics; theory applies only to England. Own views: Stages of development of country. Free trade desirable at some but not all stages: free trade made many dependent on England. No universal economic laws. Laissez-faire ideas in U.S. at this time: Critics thereof had attraction abroad. Founding fathers had philosophical and practical views with little knowledge of and regard for economics. [Illegible line, possibly saying Smith’s 1787 edition the first economics book published in the U.S.] More widespread knowledge of economics only after 1812. J. B. Say and others’ books presented laissez-faire theory in simple form. Jane Marcett and Harriet Martineau (Illustrations of Political Economy). Popularizations of English classical doctrines omitting rent and population doctrines. Teaching of economics in U.S.: No subject known as economics until after the Civil War. Teaching in departments of philosophy, along lines of classical English theory. Some free traders; others followed Carey. Interest increased by controversy over Bank of the United States. Books written by college professors and preachers, often with religious bent. Reverend John McVicar, Columbia; Henry Vethake, Pennsylvania (Principles of Political Economy, 1838); Walker, Oberlin; Francis Bowen, Harvard; George Tucker, Virginia; A. L. Perry, Williams College. Texts were popularizations of English classical view. Widely used were Reverend John Wayland, Elements of Political Economy, 1837; A. L. Perry, Elements of Political Economy, after Civil War; Francis Bowen, Principles of Political Economy, protectionist but still classical.

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Frontier views on role of government in the economy: Frederick Jackson Turner: frontier the major factor in American history in the 19th century. Passing of the Frontier. Thesis: Frontier bred ideas and men peculiarly American, not English in origin. Lincoln the epitome. Equality of fact if not in theory; no significance given to property and social standing, due to frontier conditions. No sharp cleavages between labor and capital. Self-reliance and individualism but not keeping government out of economic affairs: Provide what individual could not himself provide. Against restrictions, pro aid, e.g. schools, free land to settlers. Belief in progress – characteristic American concept to this day. Striking progress observable. Land of opportunity. Payton, history of American frontier. Lincoln on labor: the new immigrant young man needing to be employed by some one else; in short time, his own capitalist-farmer, merchant; labor primary, capital secondary. Picture of no sharp cleavage in frontier between labor and capital. Close to egalitarian set-up. Lecture Thought and Action Post-Civil War: 1860–1914–1917 Two sub-periods: Civil War-1900: Conservatism in politics. 1900–1917: Progressive era. Civil War-1900: Period of greatest expansion in U.S. economy. Railroad era – important factor: 1850–1870–1900. Rapid expansion of population into frontier. Between 1879 and 1900, population of U.S. doubled: heaviest immigration, average age decreased, land in agriculture doubled, increase in percentage of population in cities. Capitalistic agriculture: export bias of market economy, rather than self-sufficiency, implementation of technology, large farms in prairie land west of Mississippi River – unoccupied until railroads. Expansion of manufacturing and railroad building. 1860: 30,000 miles of railroads; 1900, 193,000 miles. Capital invested in manufacturing: 1860, $1 billion; 1900, $10 billion. Value of manufactured products: 1860, less than $2 billion; 1900, more than $13 billion. Engaged in industry: 1860, 1 million; 1900, 5.3 million. Dependence on post-Civil War metal-working industries.

Bituminous coal Crude oil Crude steel Iron and steel

1860 6 mil. tons 0.5 mil. bbl. 10,000 long tons 0.5 mil. tons

1900 193 mil. tons 57 mil. Bbl. 10.5 mil. long tons 10 mil. tons

1932

32 mil. tons

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Improvement in transportation widened markets. Vernon Mund, Open Markets: development of marketing institutions in U.S. and anti-trust program. Changes in basic marketing institutions: Local city market, real market. Some fairs. General store on frontier. Middleman between local farmer and consumer; farm goods exchanged for manufactured goods, purchased. Private retail shops only after Revolution. C. 1850, wholesale markets: from grain to iron and steel. 1870s, bonded warehouse and storage yard. (Munn v. Illinois, held warehouses to be engaged in commerce.) Negotiable receipts/warrants issued by warehouseman for goods deposited. (Similar to government loans on stored-sealed crops.) Direct sales for consumers: development of last years of 19th century. Development of national markets on extensive scale; agriculture becomes market economy. Considerable technological change; 1879, electric light; c.1900, automobile. Steam power now in extensive use; great motive power. Electric power coming in c. 1900. Sources of power:

1850: 1900: 1930:

Animal 75% 52% 4%

Man 15% 10% 12%

Machine 6% 38% 84%

Tremendous increase in national income: $2.3 billion in 1850; $19.3 billion in 1900. Per capita income, 1850, $787; 1900, $1388. Trend of priced downward during 1878–1896; wages more stable than prices – doubling of real wages. Transformation of population: Inflow of immigrants, largely uneducated peasants with little capital; slight improvement of education of native population, more than frontier population, which decreased. Greatest after World War I. Growth of specialized skills and white collar. High schools: 1860, 100; 1900, 6,000. Growth of state universities. End of theological dominance of universities. Growth of business corporation: by 1890 the dominant manufacturing organization in U.S. Development of trust: combinations effected through trust arrangements, i.e. trustee administers property for benefit of parties having legal title or legal interest in property; hitherto used for minors, heirs, incompetents. First combinations, independent producers used the trust to administer properties as single unit. Standard Oil Trust, 1879, John D. Rockefeller, first notorious trust. Dozen organized, 1877–1896, including sugar, cottonseed oil, distilling. Replaced after 1889 by holding companies: New Jersey let corporations hold stock of other corporations – basis of holding and subsidiary companies. 1896, holding company movement. 1897–1903, greatest period of combinations; aided by investment bankers, leading one, J. P. Morgan Co. 1903, Northern Securities case, end it. Combinations formed not on operating basis but stock market operations, on

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assumption that combinations would yield profits giving value to additional stock issues in fantastic quantities. Many failed, due to court decisions knocking props out from under securities. Northern Securities case – investors would not buy their stocks. Later combination movement, in 1920s, in utility field, not manufacturing. Period of building up of great fortunes. Companies got much capital from government re natural resources. The wealthy were promoters in cities, not frontier men. Period of optimism and great hope. Supposed period of great profits considered over – C. D. Wright – later changed view. Industrial Revolution in U.S. Social Darwinism and American Thought, 1860–1915, Richard Hofstatter: Includes Sumner. Premise: slow evolutionary change in society. Spencer. State interference is vicious and feudal; same re palliation of social evils. Natural selection becomes social-selection justification for laissez-faire. John Fisk: sociology comes out of economics: Sumner, Giddings. Critical of economic approach as narrow; sociology a synthesis. Later, preaches of Christian responsibility for social welfare; “In His Steps.” Philosophical pragmatism: Peirce, James, Dewey: experimental approach. Dominant school after 1900. 1880: questioning of laissez-faire and Social Darwinism, influenced by Germans – studied philosophy, social economics, history, law. Sumner, not influenced by Germans. Henry Carter Adams, Richard T. Ely, Burgess, Farnum, James, Patten, Seligman, Taussig. Ely: laissez-faire unsound; founder of AEA, first secretary, Walker as president; first platform: (1) state as agency, positive and necessary, for human welfare; (2) political economy considered young; want statistical and empirical study, not speculation; (3) conflict between labor and capital needs solution; (4) no partisan attitude on tariff issue. Later: purely academic, no platform. Sociology a distinct discipline after World War I. American economists largely in agreement favoring free trade. Otherwise, some favor essentially laissez-faire: Sumner: interfere as little as possible; other favor active government regulating and controlling business to correct abuses. John Bates Clark: eventually pro laissez-faire, though early, 1888, argued government needs to curb monopoly, changed later, affirming self-interest as basis of economy; psychological approach to economics. Fred M. Taylor. Irving Fisher: made fortune out of his own invented business equipment. Taussig, Harvard: strongest [unintelligible] of free trade. Henry Carter Adams. Lecture Latter 19th century economists, continued. Early AEA group favored active role of government.

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Henry Carter Adams, ICC secretary, in “Relation of the State to Industrial Action” (1887): necessary for constructive thought for maintenance of harmonious relation between government activity and private enterprise. Laissez-faire and free competition are not the same thing. “Unrestrained competition is the worst competition.” Early 20th century: Rise of American school of institutionalism: Veblen, Commons, Mitchell. Emphasized that economy is not self-functioning, that profit quest does not result in maximum production, that economy is not perfectly competitive, concerned with moving trend. Thorstein Veblen: descriptive of functioning of institutions and influences of the day. Emphasized that institutions are man-made. Government is controlled by the economically privileged and economic elite and employed to attend to their interests. Wesley C. Mitchell: Student of Veblen’s; lacked his cynicism but learned from Veblen that economic ideas must be developed by statistical and historical investigations. Wrote Business Cycles, great American contribution, developed cyclical concept. First director of NBER – private, impartial, represents emphasis on statistics in economic thought. (Brookings Institution: annex to Republican party.) John R. Commons (no Ph.D.): Not a good teach but had great influence through his students. After Syracuse, worked for Mark Hanna group and labor conciliationindustrial peace. Institutional economic approach: Problems approach. No actual problems can be solved by economic theory alone; need all the social-science disciplines in inseparable sets – the approach of all economists no matter of what “school” in regard to concrete problems. Contrast the institutional horizons of contented economists. In 1910s, working on practical problems; in 1920s, aggregative, theoretical approach: Legal Foundations of Capitalism, Institutional Economics. Government as active, with “collective bargaining” throughout. American society dominated by associated action, especially the corporation, not an atomistic economy. Fundamental solidarity of all classes requires and makes possible compromises, the role of collective bargaining. Government ought to promote collective action but leave groups to come to own compromises. Plurality of non-dominant classes necessitates compromise. By World War I laissez-faire a philosophy of the past for economists. All conceded important role of government. Already before World War I, economists, e.g. Ely, favored regulation rather than government operation. Commons had faith in participants’ free hand to arrive at compromises – 40 years before Galbraith’s concept of countervailing power. Institutions had been aspects of doctoral work of economists who studied in Europe.

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After 1900, economists active as advisors in government – Progressive era; though Ely, e.g. was never in government service. Few political economists in government before New Deal. Very recently, in technical operations of business as advisors. Economic Thinking of Practical People, Civil War to World War I Dominant conservatism: Before 1900, Republican Party dominant; idyll of conservatism: Supreme Court decisions, statements, policies, platforms. Legal periodicals contain practical economic thinking. In re depression of 1873–1878 (Resnick, JPE, December 1950), The Nation, leading conservative intellectual magazine: editorials, 1875, depression due to less shrewd and self-reliant. Atlantic Monthly: dangerous tendencies in American life. Governor Tilden of New York, deplored rise of class of tax consumers. 1878, Congressional committee to investigate depression. John Hay, The Breadwinners, 1916, anti-strikers. Haymarket riot, 11,886, 8-hour day strikes had great effect. 1880s trust legislation condemned by intellectuals; defended on basis of keeping prices down. Blaine 1888 campaign: trusts are a matter of private business. “Rich essential to well-being of poor.” Economic position, not group, determines views on easy money, etc.: debtors or creditors. Justice David Brewer, most influential member of Supreme Court, 1870–1890s, conservative leader. 1893, “unvarying law that the wealth of the nation will be in the hands of the few.” Greenbackism: Easy money, non-redeemable money. Henry George: Progress and Poverty; role of government (platform, 1886, New York mayoralty contest): government’s purpose is maintenance of sacred right of property, and to do what organizations can do better than by individuals – similar to Lincoln. Knights of Labor: Appealed to farmers and businessmen also. Generally favored arbitration rather than strikes. Endorsed political candidates. Equal treatment of capital and labor. Mechanics’ lien laws. Child labor; contract prison labor. Rapid growth, rapid disint[egration]. American Federation of Labor: Organized labor challenge to existing order. Gomper’s theory: American labor philosophy: emphasis on improvement of position, not to get out of their position. Labor’s economic, not political power stressed. Turned to government for protection and right to organize. Populists: Late 1880s. Most vigorous third-party movement. Farmers, labor, small employers. Too heterogeneous. Union labor, partly; multiplicity of union labor parties, later joined People’s or Populist Party. Especially Western and

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Southern debtor farmers. Second party in West to Democrats; also in parts of South; Kansas, Nebraska, Dakotas. Many demands became law: popular election of senators, referendum. Non-bank currency, based on general resources. Public ownership of railroads and telephones. Free coinage of silver, at 16:1. Recovery of “excess” railroad land grants; really was little cheating. Federal income tax. Power of government, of people, should be expanded, is not socialism. 1896, amalgamation with Democrats (William Jennings Bryan). Radical Labor Movements: 1870–1880s. German immigrants. Socialist Labor Party. Haymarket anarchists: produced strong anti-labor feeling, hurt Knights of Labor, though no affinity with them. Leftist labor group in AFL; subdued; socialist. Independent political party in 1898, Socialist Party of America; political and economic action, opposed to Gompers, who wanted economic action only, defeating him in 1894. Wanted gradual conversion of economic system. At peak, one-third of convention strength. Controlled many state federations of labor, e.g. Wisconsin, 1887-World War II. Daniel DeLeon, Socialist Labor Party; rival to AFL, controversy with Gompers. Industrial Workers of the World: Direct connection with DeLeon movement. Government seen as committee to look after the interests of employers. Revolutionary aims; no faith in political action. Syndicalism: industrial sabotage, quickie strikes. World War I: state Anti-Syndicalist laws, prosecution for treason. Lecture Ideas and Policies, Civil War to World War I (Continued) Progressive Era: Muckrakers: journalists exposing evils of big business, also corruption in government. Lincoln Steffens, Ida Tarbell, Baker, Upton Sinclair (writings led to meat inspection act of 1905). Progressive state governments. Heavy participation of economists in government. Activism of institutionalists. Progressive movement strongest in states (Lafollette in Wisconsin; Johnson in California). Major emphasis, especially of Lafollette, was on political reforms, not economic issues: primary elections, direct election, initiative and referendum, civil service reform, etc. Included some economic reforms: railroad rate regulation, fair and improved tax administration, public utility regulation, pure food laws, protective labor legislation including workmen’s compensation, conservation, cooperatives, income tax. Anti-monopoly; against Wall Street control of Middle West and West.

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Favored increase in government participation in economic life, but not public enterprise, except for public utilities; primarily regulation. Enable small and middle class group to get ahead and out of Wall Street domination; anti-monopoly. Nationally, Theodore Roosevelt and “Square Deal,” culminating in Progressive Party, 1912. Never very radical. Initiated many reforms: railroad regulation, meat inspection, pure food, anti-trust enforcement, conservation. Firm believer in regulation when abuses appear but against government operation when private parties can do it. For measures to promote equality of opportunity. Election of 1912 the only one in which trust issue was a big issue. Combinations inevitable and must be regulated. Rule of reason re restraint of trade – there are good and bad restraints of trade. Section 1 of Sherman Act: combination per se is bad and per se is in restraint of trade; Northern Securities case. Later, not agreement per se, but ones in restraint of trade. Democrats won in 1912, added Clayton Act, stating what was a restraint of trade, and established FTC. Whereas businessmen believed competition meant going after customers, others believed in diseconomies of large units, a unit being a combination of products, i.e. power – voluntary groups have disappeared. Brandeis, Curse of Big Business: not efficient, same re government. American Association for Labor Legislation, c. 1907–1942. Progressive academic economists: John B. Andrews, Commons, Ely, Farnum, Witte. Irving Fisher and Gompers not for it. Workmen’s compensation, industrial safety, minimum wage. Conservative View: William Howard Taft: Thought there was too much government activity, but favored more than laissez-faire hands off: let’s go slow but do it. Woodrow Wilson, 1912, “the New Freedom”: similar to Square Deal but with larger role of government: “the people of the United States do not wish to curtail the activities of government but rather to enlarge them.” Very many reform measures passed that extended government but with no fundamental changes; made economy more operative. Since World War I, increased attention to foreign problems. Economists of the Period: Institutionalist, liberal ones supported Roosevelt and Wilson re governmental activism, especially, e.g. Wisconsin and Lafollette; Commons only one of many. Religious faith in regulation: legislation to correct everything; checking abuses – reform – is only way to preserve the system. Commons: study problems in order to improve upon them. Progressive era belief in infinite possibilities for improvement. Weakened in modern period. World War I: First total war, though not too much so for United States. “Total”: war between populations, not only armies; importance of industrial

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productivity/economic strength; direct destruction not confined to front; total objectives: completely destroy the enemy, its government. U.S.: Government had a large role in economic regulation and control: prices – especially railroads, telephone and telegraph, rationing for supply (more than in World War II); controls went off quickly after war ended. Harding: more business in government, less government in business; Return to Normalcy. Lecture World War I to World War II World War I: First modern total war. Extensive involvement of government in business, though more so in Europe: railroads, telegraph, rationing, price controls. By 1918, exclusive purchase of many agricultural products. Done on assumption of war basis, to restore ante bellum status quo afterward. “Work or fight” order not too strictly enforced. Attempted allocation of labor. Rationed raw materials and transportation. Twenty-five wartime public corporations, did much operation of own plants. First billion-dollar budget in 1916; 1919, $19 billion; 1920s, cut down to $4 billion. Debt: 1916, less than $1 billion; 1920, $26 billion. No serious attempt at current payment of debt. 1920s to early 1930s: Republican control of government; conservatism, though New Deal, to Witte, began with Hoover. Economic conditions: Thought of as period of great prosperity; now realized as very spotty and unsound in agriculture, railroads, and coal mining, all of which were depressed throughout the 1920s. Manufacturing, public utilities, and finance were prosperous from 1922 on. Immediate period just after World War I: Large American exports, on U.S. loans mainly. Auto industry and many durables had prosperous period. Also building boom: highways, tenements. Late 1920: Severe depression; quite severe at start. By 1922, pretty well over for manufacturing. Little recovery in agriculture from fall in prices; less European demand for foodstuffs. Criticism that government reduced excess production during the war; therefore bad times for farmers due to agricultural surpluses. Argument used for 1920–1930s’ claims for farm price supports. In 1920s, over one-third of all banks (over 5,000), especially rural, failed due to lack of farm prosperity. Great increase in farm indebtedness in 1920s. Railroads: Turn in their economic condition, due to auto, bus, truck, and highway completion.

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Coal: Due to expended production during World War I and to competitive fuels, e.g. electricity, depressed. In U.S., only in a few periods was coal a prosperous industry, due to vast deposits, only 1% so far tapped. Also, over-supply by clothing industry, caused by cheap resources and financing plus optimism as to opportunity and expansion. Later 1920s: Wild stock market speculation, 1928–1929. 1920s, overall pretty stable prices. Though manufacturing prosperous, little or no increase in employment in manufacturing, due to development of manufacturing techniques. Great increase in services and retailing. Slow but steady increase in relief costs. High unemployment: 2–3 million out of c. 30 million. Increase in well-being of urban workers. Commons and others: stopping New Your Fed’s policies maintaining steady price level. 1920s, period of great public utility mergers; stock promotions to unload surplus stock. Associated Gas and Electric Co.-Richmond Hobson: thirty-six holding companies on top of one operating company. Real estate: boom. Lecture Opposition to dominant conservative groups in the 1920s: Strong, centered in Supreme Court minority and their strong dissenting opinions – many decisions 5:4. Especially against view that only businesses “affected with a public interest” could be regulated as to price, service, and right to engage therein. Holmes (one of greatest Supreme Court justices; great stylist) and Brandeis. Law magazine articles supported dissenters, especially with regard to decisions holding child labor legislation unconstitutional. Attack partly historical. Taft: public interest theory: three classes of business subject to price regulation but not of public interest group: (1) using public facilities: gas companies; (2) monopolistic: Wolff Packing Co. case; (3) regulated by public from time immemorial: Munn v. U.S. Actually, the last class included all businesses: “from time immemorial” meant from time of Revolutionary War and then all were regulated. Minimum-wage laws: Justice Sutherland, leader of conservatives: immoral to require employer to pay wage greater than product of worker. Criticized by church as to what was morality. Monsignor Ryan, Living Wage: moral obligation of all employers. Dissent: Taft: Government can regulate hours of labor and wages are to hours as multiplier is to multiplicand, and if can regulate one, can regulate the other.

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Farmers: not prosperous, although stock market was; dissatisfied, slipped away from Republican party. McNary-Haugen Bill vetoed by Coolidge and by Hoover. Hicks: Populist Revolt. Farm Bureau: tied up with county agents, strong in corn belt; one function, to promote cooperatives; very conservative, comprised of larger farmers. Farm Union: weaker, cutover farmers. Grange: strong in East (New York), had social features. Organized labor: Weak. But weakness made public more tolerant than previously. Many unions almost or did [indecipherable] to prices – miners, building trades. Period of injunctions, yellow-dog contracts. Unions got into politics more – when economic power was useless. Hitchman Coal and Coke Co. case: yellow-dog contract obligating worker not to join union could not be broken or interfered with by union. “Open shop” and “American system” given favorable connotation; used against union men. Same re “yellow-dog” contract. Manner of use won war against it. 1920s, gained in public opinion through American support of underdog. Also union cooperation with farmers: Minnesota: Farm Labor Party, 1922–1938, held government of state; also North Dakota, twin cities controlled state; Wisconsin, supported Lafollette progressives. 1920s summing up: Period of growth strength for opposition groups, though did not control presidency and Democrats made horrible political errors in 1924 and 1928. Consumer view lost Western farmers. Public opinion pro labor. Railroad unions most successful in politics (always heavily politically active); close living proximity. An accepted group by rest of population. In 1920s, most effective of all labor groups in re legislation. Most number of injunctions issued in shop craft railroad strike. Plumb Plan for railroads after World War I: continued government control; railroad unions for it. Esch-Cummings Law, 1920, returned railroads to the companies. Depression Period The stock market crashed on October 20, 1929; in one day, after a fifteen-month increase in share prices, a 50% drop in stock prices. Hoover quoted as saying that it was just a stock market affair. Analysts found that in the summer of 1929 some manufacturing plants (especially textiles) were closing – a downward trend in actual production and employment. Depression started as early as 1928 in Central Europe. Started slowly, a gradually declining economy; in 1920 and 1937, much sharper drops; but continued into 1931. A subject of attacks on Hoover, who always said that we have reached bottom and that prosperity was always around the corner. Still, Hoover was active. In October 1929, assembled top industrialists; argued that we keep our heads through period of readjustment; that we maintain purchasing power, and not cut

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wages (purchasing power idea had been developed by business in the 1920s, notably Henry Ford) – though later, had to cut wages. Letter to governors: increase public works expenditures. Established first U.S. government planning agency, National Planning Bureau, 1930; joint Federal-state, long run planning of public works. Saw construction-capital falling off. Prosperity seen to depend on stock of off-on public works; problem of cost, solved by laying aside funds to pay for increased spending in depression, i.e. counter-cyclical (Pennsylvania). In 1930, recommended increased Federal appropriation for public works; did it. By 1931, Federal and state programs went to pieces: added to deficit of construction. Early summer of 1931, decline and collapse of central European economy. Indices: 1929 1932 1933 1934 1935 1936 1937 1938 Durable goods: 1929 1932 Price level: 1929 1932

Total production (100 = 1935–1939) 110 58 69 74 87 103 113 88

133 41

95 64

National income: 1929 1930 1932

$83B 40B 42B

Unemployment: 1929 1932–1933 1936–1937 1940

2 million 13–15 million 4–5 million 8 million

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Banking system collapse aggravated U.S. conditions, also Central Europe but not Great Britain and Western Europe. U.S. started in 1920s; 16,000 banks closed. By 1931, large city banks shaky; by 1932, considerable withdrawals. February 1933, all closed. Depression produced: (1) Political revolution: in 1932 election. 1930, deadlock in House of Representatives; Democratic majority of 2–3 seats. Senate Republicans had no effective control due to loss of programs. (2) Shaking of proverbial faith in American economic system. Inevitable under the circumstances. (3) Shaking of belief that economic laws alone would right the economy; instead, government fact felt needed. Neoclassical view: depression forces out marginal producers; with too high prices, consumers revolt and inventories pile, affecting production and investment. Marginal producers go bankrupt, though bankruptcy not emphasized. More risk opportunities at lower costs in depression; great prospects of profits. Liquidation does not mean disappearance, but writing down of capital structure so as to cut down costs; reorganization. Weak firms become strongest through reorganization. By 1933, view that economy would right itself became pass´e. Business clamored for government help – the typical American position. (4) In 1930s, attitude of Americans toward people needing aid changed radically. Earlier, if need relief, inferior – view holds until many fear loss of jobs. Wisconsin had a stable economy, due to much consumption activity and agriculture. Wisconsin: relief in later 1920s a local responsibility, cost just $1 million; in 1930, $8 million. 1931, state aid, $20 million; 1932, $35 M; 1933, $40 M; 1935–1936, $100 M – Federal government; 1937, shrinkage; 1938, $100 M. Way out of the depression: Lafollette hearings, 1932, Commission on Manufactures”: nothing came out of them. Major subject of 1932 election. Were many ideas: (1) Deflation: Self-righting economy, but needs more bankruptcy before things right themselves, i.e. lower prices. Classical economists’ ideas still recognized need for relief of suffering. Balanced budget. Reduce cost of government: In 1932, Roosevelt promised greater economies when in office, tried to reduce government costs by December – unpopular. Congress restored costs over veto. Was attempt to cut old line costs: salaries and veterans’ allowances, in order to cut taxes and encourage business.

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Lecture (2) Reflation: Lafollette hearing. Difficulty of business was that prices were too low to permit profits; vicious circle – bankruptcy. Limit price cutting, manipulate currency and credit to restore prices to 1929 level. (3) Inflation: Debtors’ remedy, popular in U.S. Easy money, especially in panics. Less support in Great Britain than earlier. (4) Bolster major financial institutions: Close to Hoover’s ideas. America has credit as economic basis. (5) Restoring confidence: Another Hoover idea; inevitable for party in power. (6) Increased consumer purchasing power: Widely held by workers, businessmen. Mass purchasing power necessary for mass production. Hoover: keep wages up (earlier Industrial Conference), also public works – compensatory, not pump priming. (7) Pump priming: As early as 1932, $10B plan for Federal government advanced. Multiplier effect recognized before term was used. (8) Stabilized prices: Businessman’s view, popular in 1920s. Let them control prices by agreement, to prevent violent fluctuations. (9) Decreased prices, but not wages: Brookings Institution. Inadequate proportion of national income going to masses – underconsumption theory. Remedy: let prices fall but keep wages up, to increase real income. National Association of Manufactures, Chamber of Commerce of the United States: NAM: “Platforms of American Industry,” started December 1934. Relief to needy, using private and local funds, with local administration; reduce Federal aid, except Civilian Conservation Corps. Study unemployment and old age: against Federal action – really a delaying action. One-year law: renewal of NIRA codes of fair competition, enforced by industry, minority bound to follow. In NAM, state association people run the show, and in them the smaller firms’ point of view, which is more conservative than the big firms’. USCC: Condemned New Deal. Supported insurance of bank deposits, reasonable regulation of security exchanges, government aid for export trade, self-government in industry, government leadership in railroad consolidations. Labor: Reduce hours of labor so all will have job, and don’t reduce wages, even increase hourly rates for 30-hour week. Maintain and increase wages; distribute work. Industry and “self-government in industry”: NIRA: businessman’s final program. 1932, business leaders and Business Advisory Committee to Secretary of Commerce, regarding anti-trust legislation: to popular thinking, an amendment to them. Early 1920s, doctrine of size percentage of control has no importance for restraint of trade or monopoly (U.S. Steel and International Harvester cases),

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and price leadership is not evidence of monopoly, i.e. great combination, in re anti-trust, turned on how it treated competitors; a live and let live philosophy. Trade association cases: Trade associations date to Civil War, but growth in 1920s. From natural desire to know competitors: Adam Smith: from conviviality to price discussion and control. Will talk on what interests them: profits, techniques. Wind up with agreement on prices, etc. “Doctrine of open competition.” Government won most cases before the Supreme Court in 1920s. Decisions seemed to say: nothing illegal for businessmen to meet, quite natural; nor in reporting past conduct regarding prices and production; but illegal to combine and agree on future prices and production; discussion of future policies has effect on others’ policies and practices. Therefore, no matter what size, so long as live and let live, but trade associations made up of supposedly Independent firms have a cloud of illegality; okay for the combination to do it. FTC started under Commerce Department when Hoover was Secretary. Industry leaders wary of needless duplication of products; need agreements over classification of nuts and bolts. Positive approach to fair practice: codes of fair competition. Developed in 1920, aided by FTC and Justice Department, but not given advance sanction; if behave rightly, no prosecution. Similar to NRA codes. Early self-government bill introduced after election of FDR: trade association bill re codes of fair competition, passed and enforced by Federal government, drawn by “General” Johnson. Labor’s 30-hour week bill, “Black Bill,” passed House in May 1933; FDR called it impractical. NIRA: government to either accept or reject proposed code, coerce ones determined by industry to be bad. Enforcement with government agency. NIRA had Section 7A, the right of workers to combine for self-organization, right to bargain collectively, free from employer interference. Codes had to fix maximum hours and minimum rates. Borah Amendment: nothing in law or code to nullify anti-trust laws: conflicts with purpose of act. Great public approval. Administrator: General Johnson. First codes: some had price fixing; still, no new plants without approval. Unfair practice to charge price below cost of production. Borah: Codes violated act itself, in fixing prices and in product-cost rule. NIRA passed July 1933. In March 1934, FDR instructed FTC to examine codes to see if any clauses limit production or fix prices. In July 1934, instructed NIRA to take out violating clauses of old codes. Johnson quit. Continued to June 1934; in May 1934, Schechter case, Supreme Court ruled NRA unconstitutional. Schechter case: “sick chicken case”; Witte, a bad case. Shipment of dressed poultry from New Jersey to New York. Code said had to be healthy. Violation: had dead chickens in coops. Decision, 5:4: through out law in strong language:

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not a regulation of interstate commerce (manufacturing): production in NJ and sale in NY are intrastate. Decision unpopular: price fixing charge. Device to encourage monopoly. Most codes were not bad; early ones looked to some price fixing. Purpose: stabilization. Overall, proposals and practice: no real pattern; many measures not consistent with each other. FDR inaugural eve, first fireside chat: Try different devices until hit on one that will work; trial and error, experimentation. Closed banks will not reopen until received Federal permission, state banks included. Many are solvent, still cannot face runs. Demonetizing gold: too much hoarding of currency; no more redemption of gold. (Borah: RFC loans to be made public. (Vice President Davis received big loan for his Chicago bank.) Defeated legislative purpose: if a loan leads to a run; people feel bank going under.) RFC amended; took out Borah amendment; government could sit on board. Government to replaced impaired stock – not loan, but subscription. Wisconsin: Even if give back stock, still liability for it for six months. Guarantee of bank deposits. Monetary measures the first taken, and the most successful. In prior panics, all railroads went bankrupt; in 1930s, only a few. Lecture Depression measures adopted: (1) Attempts to economize: Economy Act of 1933. Reversed in 1934, over veto. (2) Restoring confidence: Reconstruction must go along with recovery; including bold experimentation, but with preservation of existing economic system. (3) Attempts to prevent universal bankruptcy: Loan operations; began in Hoover Administration; RFC, 1932–1953. RFC: Early, banks, railroads, firms in financial difficulty; $5–6B in first years. Later, extended to small firms. Bankruptcy Act of 1933 (Hoover): provided for continuing operation of company during reorganization (Section 7b). Hitherto, same for railroads, banks and insurance companies; also, new company took over, winding up old company: cumbersome, now same company. Homeowners’ Loan Corporation: loans on delinquent mortgages; saved homes; bailed out prior lender, especially banks and insurance companies; government had to take over many houses. In 1933–1936, one million loans, $3.5 billion. Wound up in early 1950s. Farm Credit Administration: loans on delinquent farm loans either already in foreclosure or in imminent prospect thereof. Turned out to be good loans; took over only a few farms. During early 1930s, only government made loans on farms.

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Readjustment of municipal debts, 1935. Export-Import Bank. FHA: guaranteed-loan concept; used extensively since then (90% of principal, with lower than commercial interest rates, low down payment). Three farm credit acts: long term, intermediate term, and short term; second largest lenders to farmers (insurance companies, largest). Rural Electrification Administration. FDIC: early 1933, guaranteeing bank deposits; part of legislation reopening banks; some Western states legislation in this failed, costly. Recently, veterans’ loans. (4) Attempts to raise prices: Early, popular. Federal Farm Board Act, 1929, re low farm prices. Coupled with Smoot-Hawley Tariff, highest ever. FFBA: buy surplus commodities; government could sell, but no definite provision; huge surpluses bought; not yet any limiting of production. (McNary-Haugen Act: government purchase of surpluses and sale abroad for whatever price can get for them – dumping.) Another act, 1931. AAA, 1933: blanket authority to deal with farm depression as government sees fit: buy products, fix minimum sale prices, limit production, make loans on farm products, without statement of order and how to be done. Production limitation: done by agreements, after pig episode. Market agreements, by contract. Method still used. March–August 1933: special session: most New Deal legislation. AAA held unconstitutional in Butler case (before Schechter case): grounds: agricultural not interstate commerce, processing tax, vagueness of Act. Soil Erosion Act, sustained in 1937, replaced first AAA; production limiting. Later production limiting did not work; farmers took poorer land out of cultivation, giving it a rest, so better the next year. Surplus Commodity Corporation, 1933. Henry Wallace, USDA, geneticist, largest seed company; developed hybrid corn, more to acre; did not help production limiting much. Blue Stamp Plan, late 1930s; very similar to Brannen Plan and similar to Benson Plan in effect now. NIRA: important in raising prices, including minimum wage in every code – measure to increase mass purchasing power (Henry Ford: mass production needs mass consumption), encourage unions. Encouragement of private investment: 1932–1933, negative investment; through increased purchasing power to farmers and urban workmen. During depression, percent of income going to labor rose, and real wages rose, but only for those who had jobs. (5) Relieving distress and unemployment: Hoover: public works should offset decreases in private spending. July 1931, loans to states in distress by RFC, $300 M; part later cancelled. 1933: over half of relief costs borne by Federal government. No one satisfied, neither those on relief nor the taxpayers. Relief: WPA, NYA,

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CCC, SSA. From relief to Social Security (book, Grace Abbott, early 1940s). At relatively small cost, population kept in health, morale up, etc. Thinks WPA did a good job, and did not affect will to work when jobs did come. Relief cost c.$15B. Public investment in individuals during the first eighteen years of life is much greater than investment in capital. Pump priming: Public Works Act, 1933: WPA, later, relief program. Harold Ickes, administrator. Concluding Remarks: Louis Hacker, Shaping of the American Tradition, New Deal as third American Revolution. A positive interpretation; some regard it as close to communism; not FDR’s own belief. Roosevelt: Duty of Federal government is to cope with depression, not to destroy but to bolster existing economy. U.S. then quite near revolution. Keynes: Roosevelt is not economically literate. Roosevelt: I cannot understand that man. After Keynes’s visit to U.S. in 1935 or 1936. New Deal had no consistent economic theory. Muddled through it; improvement easy by hindsight. No revolutionary changes in role of government produced by New Deal. (See Hutton, Atlantic Monthly, 1938). Student Reports (Preliminary) (1) Men around FDR: Tugwell, Berle, Moley. Berle: Main Street and Wall Street, Berle and Means on corporation; Berle, articles in law journals. (2) Recent economic views on the development of monopoly: Premise: increase in industrial concentration over last 60–70 years; increasing size of business unit. Aspects: (1) Why competition declined and monopoly or oligopoly arose? (2) Does monopoly or oligopoly, as it exists, work beneficially? (3) What is role of government in economy of imperfect competition? Ease of entrance an important test. Views of economists on foregoing three questions: Joseph Schumpeter: Capitalism, Socialism and Democracy: monopoly necessary for economic progress. John Kenneth Galbraith: American Capitalism: countervailing power. Edward Mason. David Lilienthal, Big Business. Louis Brandeis, Curse of Big Business. Growth of popular “ideology of monopoly.” Vernon Mund: Open Markets, Government and Business.

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Stocking and Watkins. Peter Drucker. Allan Nevins: Saturday Review of Literature, New York Times, books on Ford, Rockefeller. Early growth not due to efficiency but to unscrupulousless. Efficiency not the question, but rather it is the type of society we want. Nation of employees. “The corporation.” Monopoly of power, economic, social, political. Laissez-faire is the luxury of a rich country. Julius Pratt, on American imperialism of 1880s. Captain Mahon, geopolitician. (3) Development of economic ideas on role of government in underdeveloped countries: Emphasis on industrialization and per capita level of income. Opportunity for profits. Not as advanced as we think we are. (4) Workmen’ s Compensation carriers: Oldest “security” legislation. Solely state operated. Different from abroad: insurance, not a tax or from general revenues. 30% state fund; 70% private insuranace carriers. State funds, 18; exclusive, 7; competitive, 11. Private: 200 casualty insurance companies. Some states allow self-insurance; large firms. Companies: mutual and stock. Origin: aspect of tort liability: fault or negligence. Theory: occupational cost, included in produce price. Ensures employer liability. Private insurance pools cover certain dangerous occupations; pro rata by amount of insurance contracts. National Council on Compensation Insurance determines most rates. From payrolls, accidents; rates per some 700 job classifications. Good accident rates reduce firm’s rates, and vice versa; 20% qualify, representing 80% of premiums. Each of the 11 states operates own rating bureau. Classification of types of work and of firms is highly complex. 60% of premiums goes for losses; 40% for expenses – high. Death cases, 1% of total accidents, 10% of cost; loss of major member, 10 and 40%. During war time, new employees; rate of accidents goes up more than in proportion to number newly employed. Includes occupational diseases; but rehabilitation rarely paid or covered. Interstate comparisons hard to make. Wisconsin: Cost, $26 M. 160 large firms self-insured, one-fifth of state payroll; 52% of remainder are mutual insurance company (nation as a whole, 33%). 40 private stock companies. California rates injuries as temporary or permanent; tried in Wisconsin; has to be simple to work, but hard to rate permanent lifetime injury.

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New Zealand: part of income tax. England and France: from revenues, employer and employee contributions. Germany: one private firm, regulated as public utility. State fund: saves costs of acquisition. Automatic hearing system for workers to appeal and protest. No settlement is final unless satisfactory under the law. Self-insurance: Lower cost. Usually larger companies, with best safety programs and devices; self-handling, no cost of acquisition. Decreasing overall. Strong in Pennsylvania. Able to pay, though with some bad experience in paying minor claims. Exclusive fund: saves one-third of cost. Competitive state fund: saves one-third of cost; growing in NY. Mutual company: restricted membership. Overall problems: (a) Level of benefit determination (b) Actuarial calculation of risks and classification (c) Actuarial determination of rates (d) Administration and control Recommendations: more automatic and administrative, less involvement with litigation. (5) History of economic role of government in Wisconsin, 1836–1860: Part of Territory of Michigan, 1818–1835. Population: 1836, 11,683; 1860, 775,000. Great growth in 1850s; German immigrants settled in East Wisconsin. Act of 1887, last Northwest Territory state. Hartz, Handlin, and Primm studies of other states, conclusion: not laissez-faire, great role of government participation. Wisconsin Constitution: forbade internal improvements and lending of credit of state to private industries. Banking: 1836–1841: individual charters – made annual reports to legislature; investigations and annulment of charter if insolvent and fails to meet charter conditions. 1841–1853: statute prohibiting banks; no new banks chartered; banking only by established early banks, but these being closed down one by one; no constitutional provision for issuing money. 1853: general banking law, 99 incorporated between 1853 and 1860; comptroller, appointed by governor – beginning of state banking system; had to have state and Federal bonds as security. Groups wanted, for own interests: Land speculators: transportation. Farmers: roads. Lead miners: canals. State inveigled in many internal improvement plans

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by companies, against the constitution – especially aids to private business. Push for statehood by business opportunists: more chance to control legislation. 1840s, canal-building craze; 1850s, railroad-building craze. Local governments involved in financing. Witte: “Government exists to help people in their economic endeavors.” Hawkers and peddlers tax, against products of other states; later, licenses. Promotion of state commerce: Exemption of railroads from taxation, or liberal treatment; same for telegraph. 1850s, elected commissioner of insurance. Usury rates: (approximate dates). 1839: 12% maximum. 1840: any agreed rate is legal, no ceiling; if no rate mentioned, 7% first year, then no limit. 1856: any rate okay. 1858: repeal of all legislation on interest rates. 1859: 12%; if no mention, 7% first year. In 1850s, great growth of economy and population. Land values increased 50–200%, so could borrow at 20 and 30% per year. Small loan aid to farmer: 1849, land purchase with 10% down, 7% per year, ten years to pay. 1850, no down payment, 30 years at 7%. Led to speculation. Funds from sale of land went to farm loans, rather than internal improvements. Protective labor legislation passed. Constitution of 1846 rejected by people; that of 1848 approved. Second Semester Lecture Carry last semester through the present day. Discuss governmental role in current problems. Greatest role of government: shaping the economic institutions: Ely, Property and Contract; Commons, Legal Foundations of Capitalism. Present-day government aids to business. Economic effects of government fiscal operations. Present status and economic effects of U.S. social security. Extent of economic planning in American economy and ideas on it. Present concepts of competition between government and business. DixonYates: government cannot produce own power.

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Concluding the 1930s: Lasting facets of the New Deal: Hacker (Columbia University), The Shaping of the American Mind. Good collection of documents. New Deal as third American Revolution. Hoover, 1932 campaign: Challenge to liberty, condemning regimentation, approves of objectives. Recently: “socialistic.” Roosevelt, 1932 campaign: Emphasized saving the economy and nation by changes correcting abuses and inadequate functioning, all with purpose of preserving the system and its institutions – “reform must accompany resurrection.” (Harvard Business Review, July 1944, Leadership: past and present; 1934, Looking Forward, Roosevelt’s speeches.) Witte: New Deal period really 1933–1935; afterward, Roosevelt lacked Congressional control; no New Deal legislation, with few exceptions, passed after 1935. No single economic policy: opportunistic. Inaugural speech: nothing to fear but fear itself; have to try something, cannot sit back. No single administration; many trying to get the ear of the President. Power struggles within the administration, conflicting policy recommendations. Early New Deal period, 1933–1935: Emphasis on getting economic system functioning again. Necessary to effectuate minor reforms. No change of system. To 1937: Steady recovery. Fiscal 1937, larger production than in 1929, but still many unemployed. 1937: Severe depression, worse than earlier one; terrific impact: back to 1932 prices and 1934 unemployment. All gains seemed lost. Rapid growth of government service activities: social security, employment services, developmental projects (Grand Coulee, TVA originally – irrigation, navigation, flood control). Broader acceptance of principle of responsibility of the state for security of the people and general welfare. Government encouragement of unionism: earlier proclaimed to be neutral, but actually aided fight against them in courts. Freedom from judicial interference in government actions: “switch in time saved nine.” No law since 1937 held unconstitutional, except for a few state laws. Earlier: look to earlier courts for decisions on related items. Now: look at constitutional clause regarding constitutionality, not at precedents. Trend toward growth of national government and its prestige. Growing anti-governmental feeling particularly by businessmen. Long remembrance of Great Depression by many Americans. Since then, longest depression-free period in American history; still, most do not think, as

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in the 1920s, depression licked. Dismal period: unemployment, relief legislation, moratorium on debts. By 1934, more than half of population of South Dakota under relief; Utah, over one-third during 1934–1936. Lecture Hutton, Atlantic Monthly, 1938: Intense bitterness over New Deal legislation and Roosevelt; compressed in U.S. in a few years the results of a generation of British history. Witte: No real difference between before and after. Striking is similarity rather than difference of opinion. Pro and con. Conclude: Events of 1930s affected American thinking but no revolutionary changes, except for more dependence of people on government. War Period: 1940–1945 No real preparation until June 1940, fall of France; thereafter, feverish. Laws enacted of same caliber as early 1933 – blank check type, e.g. draft act. Aspects: Total war. More so than World War I. Slight devastation (Oregon seaside bombarded by Japanese submarine, some balloons). Chief supplier of munitions, military supplies and equipment, rather than of food. With 13 million men in army, one-quarter of labor force. Still great production of civilian goods; both guns and butter; general living standard increased during the war. Restrictions, priorities. Heavy movement form rural to urban. Productivity did not increase much during the war but increased tremendously afterward. Greater food production with less people: mechanization and fertilizer; an agricultural revolution in late 1930s and war years. Contracts renegotiated when costs reduced. Government a monopsonistic buyer but must pay price reimbursing cost plus reasonable profits. No uniform price; guaranteed safe return. Government controls more extensive than in World War I; generally indirect but with broad power to implement. 1944, 50–60% of total production went through government hands; 15% at present. Controls, same as in World War I, but on larger scale. Price control not the main control. Allocation of materials the major control; priorities system; including railroad facilities rather than operation. Much of silver used at Oak Ridge in wires; scarcity of copper during the war. Necessary use of sub-marginal plants previously abandoned; no uniform price – production at cost plus. Almost all plant expansion carried on at government expense–$25 billion. Private sources unwilling to build: uncertainty. After the war, operator had preferential right to buy plant at low cost. Amounts to subsidy, i.e. sale of war buildings.

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Lecture Considerable increase in role of government during World War II. Fiscal 1944–1945: peak war year: $100 billion government expenditures, one-half national income, used by government. National debt: 1900, $40 B; 1945, $262 B. Controls: (1) raw material for industry: stockpiling program, many purchases abroad; (2) production: allotments of raw material, transportation; (3) prices – determines cost of the war, for future bearers of debt. Early imitation of World War I machinery: World War I National Defense Council – not overly successful in coordinating production, etc. World War II NC – cabinet level and advisory, council comprised of industry men. Co-chairmen: Knudson (later to War Production Board) of GM and Sidney Hillman. 1941, superagency for planning, “War Mobilization and (later) Reconversion,” with Burns as chief, office in White House; ran civilian end of war, “assistant president.” Inaugurated semi-annual report, with recommendations, to president and Congress; led to beginning of full employment program and Act. Relied on motives of free enterprise economy backed up by legislation giving the president a free hand. A planned economy, relying on private enterprise motives: high wages, profits, employment. Considerable use of indirect controls; reserve power only occasionally used. No-strike pledge, immediately after 7 December 1941; promise by labor and management to avoid strikes. By late 1943 (after invasion of North Africa and Italy; then, after D-Day, 6 June 1944), talk of post-war and reconversion; similar to World War I. Conclusions regarding the future by thinkers: (1) Great war production capacity should be translated to peacetime production; (a) exaggerated notion of production efficiency and mass of consumer durable production, (b) especially re 12 million men out of military service. (2) Acceptance of requirement of government direction in business conversion and transition: (a) took about one year to convert to war production; (b) also about 8–12 months coming from army into labor force; (c) exact figure of unemployables low. Controls went off in a hurry; a mistake, but everyone wanted them removed. Desire to eliminate controls as soon as possible, increasing frictions and dissatisfactions everywhere, e.g. anthracite coal strike. Acceptance of controls in a democratic society depends on emergence of danger; U.S. ready to accept them in early war period – in Great Britain, throughout the war.

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Post-War Period (1) Controls removed rapidly. (2) Terrific price increase: inflation. After World War I: rate of.5% per month; World War II, 4–5% per month. (3) Unemployment lower than expected, 3–4 million. Explanation: (a) started before the end of the war, c. D-Day; retooling and dies, reduced government controls around time of fall of Germany; (b) educational bonus to soldiers, who went to school, slowing entry into labor market; (c) pent-up demand greater than anticipated, inflationary; (d) previous plans all but forgotten. 1945, Murray Bill: proposed act would have guaranteed full employment. Full Employment Act of 1946 a feeble attempt to provide peacetime planning. Council of Economic Advisors, Edwin Nourse, Chairman. Recommendations for high level of activity – similar to Burns’s wartime work – disregarded by Congress: defective machinery, don’t need it, have full employment. Under Eisenhower, real power given to chairman – Burns now the head (had succeeded Mitchell as head of NBER). J. M. Clark, Social Control of Business, recognizes role of government in shaping basic economic institutions. Many brief references to government’s relation to basic economic institutions. Recognizes restrictions on freedom of contract, in interest of social minimum. Government does not protect already-made rights; it creates and alters them. Good treatment. Vernon Mund also emphasizes, but no extensive or connected discussion. Better: Koontz, Government Control of Business, 1941, chapter “Property, Contract and Government”: property a bundle of rights, business arguments unfounded at law. Both social in nature; social privileges, not rights, exist subject to public powers. Good treatment. Conceptual Aspects of the Economic Role of Government Walter Lippmann, The Good Society; excellent. Witte’s own view is similar to that of Clark and Lippmann: Economic institutions are not created by government is the first place; they arise out of the experience of the business community, grow up as business practices them, and grow before government tries to define them, e.g. forerunners to corporations before they were chartered. Changes come as modification of old law and come about as result of changes of business practices. Largely reflect new development, but at any one point of time, they are defined by government – statutes plus court decisions. Government defines, and enforces accordingly; also alters these institutions. Most control is by states, not by Federal government, and differs from state to state. Recent: development of model acts,

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tends toward greater uniformity, but each state still somewhat different. Patents, bankruptcy, and copyright are Federal. Property as an institution: Basic changes in “what is property” have taken place during the last 150 years. Absolution-dominion concept: over physical thing (reflected in Ely, also Blackstone, 1767). Blackstone: influential until this generation in American common law; is taught in law schools. America: property: 1790: land most important form, the source of earning a living; slaves, 2nd largest source, 1/3 of property; movable – tangible personal property. Idea of absolute dominion, with government as protector; though limited in regard to slaves: cannot take their life. Natural right to own property; Blackstone: to tiller belongs the harvest and the land. Today: rise of intangibles or incorporeal property; bundle of rights and duties; defined, added to and subtracted from by law. Government, therefore, is right in the picture. Applies to real, intangible and tangible, etc. property, e.g. zoning laws. Intangibles: good will, securities (corporate and government), patents and trademarks. What is brought to expectation is goodwill, that customers will continue to buy them. Bundle of rights and duties: accepted at present, domain of relations among men. Changes as to what is property: Second most valuable property right is now peonage, a crime with harsh punishment. Also, gold, March 5, 1933, no longer money; much litigation regarding property rights. Prohibition; local option. Changes as to what can be done with property: Early: right of property includes use of property. Later: limit of return on public utility, “destroying property.” Government has limited and restricted property rights. It has also created additional property: goodwill, trade name protection, trademarks, etc. 1789, eight corporations, five were public. Right to do business is property; origin c.1880. Interference brings enjoyment – important regarding labor legislation. Liberty and property have become identical in the U.S. Constant expansion of property. Likelihood of changes: New types of property. “Right to work”: not absolute, but qualified; different from right-to-work laws: (a) security under union contract, failure to get promotions; (b) pensions, what was a gift is not a liability. Especially with a nation of employees. Modern concept of all law: for every right there is a corresponding duty; it is not a one-sided affair. Slichter: restriction of property rights amounts to contraction of liberty for one man and extension to another man; e.g. prohibiting farmer to sell dirty milk is aiding the consumer.

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Contracts: Government’s role: what contracts are legal and by whom; what contracts are enforceable; what contracts are penalizable, i.e. criminal; how contracts are made; how contracts are executed; must be according to the law carried out; penalties for breach. Law and existing contracts: Impairment of contract by law: present, not future contracts; applies to reducing money value; does not involve procedural changes, e.g. gold and mortgage moratorium – money value not reduced (actually enhanced in the case of gold). Early concept, 1790: rigid concept, still involved procedural changes. Patents, trademarks, copyrights: Have nature of limited monopolies granted by government; government favor at time of Constitution. 1943: “stroke of genius” as to what is patentable; original invention or improvement advancing and having practical value. Originally, only genuinely original thing may be patentable; most are improvements. Government Aids to Business Tariffs: Universal form of aid to business. Tariff Commission, 1909–1910: protective to extent of difference of cost at home and abroad. Whose cost: marginal or best producer? Still harder to get information regarding foreign cost. Basic tariff is low today. President can increase but not reduce duties. Reciprocal treaties have reduced duties substantially. Have most-favored-nation clause with all or most treaties; what say to one applies to all. Reciprocal Trade Agreements Act of 1933: use of tariff treat mechanism, quid pro quo. Present issue: Reciprocal Trade Act expired in 1954. Eisenhower recommended three-year extension, got one year. Now battle. Issue more whether we should have a high tariff, not whether there should be a tariff. Tariffs more a local issue than a party or economic-class issue. Subsidies to new and unprofitable industries: Had them in the depression years to a considerable extent. Loans at low rates to risky industries. More permanent: Airlines; now top five do not get “permanent” direct subsidies; still have regarding carrying air mail etc. Direct: Shipping lines and ship building; difference between domestic and foreign cost. Tax exemptions: partial and complete; Puerto Rico, ten years to industries. Indirect: Government bears cost and sells to private industry below cost – e.g. rubber plants, fifteen cents on the dollars; all war plants from World War II. Unprofitable industries: urban elevated and surface lines.

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Loans for developmental purposes: where cannot be gotten from private interests: RFC: few failures, most of loans to new businesses; SBA: small business. Loans to businessmen in financial trouble: Considerable during depression period. RFC: banks, insurance, railroads, manufacturers. To farm and home owners of some kind; property already delinquent. Loan guarantees: W. Riefler the originator of guaranteed loan in mid-1930s. FHA: 90% of risk, borrower borrows from bank. Government limits interest rate. GI loans. Export-Import Bank, guarantees to exports. Government services below cost or government paying excess amounts for government purchases: Low mail rates for newspapers, air mail subsidies, ocean mail subsidies, free government research. Benefits to particular businesses: Indirect but important: highway construction – boost to auto industry and its suppliers, trucking; technical school. Conclude: Never laissez-faire in U.S. Not generally recognized. Aids not un-American. More than government aid to people in their economic endeavors. Policy has been sound in U.S. Lecture Effects of Government Expenditure and Taxation on Business Fiscal: Expenditure, borrowing and repayment, and taxation. Effect on particular businesses overall. Effect of tax levies: Usually emphasized; neglect of effect of expenditures. Sloane of GM: the more government takes, the less each has. McCormick: repeal of income tax, reduction of all taxes; best public servant is the least affluent – if not, seeks greater power. Technocracy: Use labor units, not money. Townsend Plan: government payments, had to spend proceeds. Plan by two Canadian engineers, Foster and Catchings; adopted in British Columbia and Alberta; province retails title to right to wealth beneath land. Technocracy group: Columbia University engineers; has appeal in Pacific Northwest; government spending and distribution, and then get out. See Sylvio Gesell, Keynes: Increased government expenditures to bring employment also means increased tax revenues. Effects through treating expenditures and taxes (receipts in general) as two sides of same coin: collection and distribution. In long run, have to be equal.

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Receipts not irreparably lost: spent and pretty quickly. Come from an go to private individuals and enterprises. Expenditures: (1) (2) (3) (4)

Materials, supplies, equipment, etc. Fastest increase. Nationally, 40%. Wages and salaries to civilian and military personnel. 30%. Financial aids to individuals and corporations. Payment of principal and interest on public debt.

All eventually ends up in channels of private enterprise. All expenditures, public and private, have multiplier effect, stimulating further expenditures. Some individuals pay more than they get back, and vice versa. Manufacturing and welfare recipients get more than they pay. Incidence varies with type of tax and type of expenditure. Overall effects lay not in production but in distribution of income (balance in long run). In balance, expenditure has effect on production. With deficit: boom, inflation. Keynesians exaggerate effects. Effects not large in comparison with total Federal budget (now). With deficits, most taxes spent. Even now, continued high government expenditure seen as mark of prosperity. Psychological attitude important: confidence in Eisenhower administration a reason for prosperity. Class association determines voting, not particular measures per se – for Republicans and Democrats and regarding use of Keynesian economic measures. Summary: Government income yields expenditure and dollars are not lost. Has distributive effectives, because different from pricing process. Keynesians overstate effects; government cannot control level of economic activity solely through fiscal activities. Lecture Government Ownership and Competition Extent: largest: service activities: 2/3s in terms of assets. Highways, water utilities, including irrigation projects, 15–20% of electricity generation. Columbia river, 40% of U.S. water potential; greater in volume than Mississippi. Electricity distribution, 15–20% by public plants. Largest is Los Angeles, from Hoover Dam. Many small towns, because companies would not come in. REA, cooperatives with government loans. Philadelphia, publicly owned gas plant leased out; else, little. Transportation: little, and if so at a loss. Communication: none except army telegraph lines.

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Next week: Economic Planning: (1) meaning; (2) today in U.S.; (3) war and peace; (4) totalitarian countries; (5) practical governmental limitations to it. Sources: Dimock, pp. 73–61; J. M. Clark, Social Control of Business, pp. 455–471; Lippmann, Good Society, pp. 91–105, S. Harris, Saving Capitalism, pp. 159–167, NAM, AIES, vol. 2, pp. 966–971. Government loans: Farming: farm land banks; long term and intermediate. RFC. SBA. Export-Import Bank: guaranteed loans in field; W. Riefler, Housing Act of 1935. Insurance: governmental social insurance; state insurance of own property. Differing meanings of “ government competition:” (1) Production of goods etc. sold to private parties by public enterprise in competition with private enterprise: Little. TVA: no retailing. Public plants. Farm cooperatives – retailing. Utilities, large firms. Prison labor: farm products. (2) Government production for own use: Prison labor. Navy yards and arsenals. Mint and engraving (stamps). State insurance of own property. Amounts to loss of commissions by agents. (3) Government operation in fields where there is some private enterprise. (4) Government operation in fields where private enterprise is prepared to take over: Government pays development costs. Private industry comes in when it is profitable. Atomic energy. University heating. Views of policy regarding government ownership: Is government inherently inefficient? Insurance (e.g.): no: costs 3% of receipts, lower than private companies. Not valid criticism. Fairness of government competition: “yardstick” idea, from 1920s and TVA. Taxes and interest rate. Government not able to operate efficiently through ordinary government department – political device. Government has to be on bid, not at distressed prices, and cannot readjust price; need to post bond regarding contract compliance. Public corporation device aimed at getting away from troubles of government controls and handicaps. Lecture Economic Planning Concepts: (1) Careful advance studies and action based thereon, e.g. commissions on antitrust revision, intergovernmental relations, foreign-trade policies, national construction program. (2) Conservation etc. of natural resources.

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(3) City and county planning (also regional). Traffic. Schools. Also state planning, since 1930s, regarding economic resources: water development, highway building, public works. (4) Advance planning of public works: Cumberland Road (Gallatin), post road. American Association for Labor Legislation: pre-planned public works program proposed, 1920s. Hoover, 1930: Public Works Planning Board, no accumulation of funds. FDR: Natural Resources Planning Board. (5) Overall advisory economic planning: Council of Economic Advisors, biennial reports, programs, recommendations. (6) Authoritative central economic planning: planning and direction. Government and private types of planning. Belief: Planned economy leads to centrally planned economy and substantial degree of direction. Differences between American planning and totalitarian planning: War: Extensive throughout entire economy; involved presidential authority via blank-check legislation. Burns: great control over civilian production and economy. Reliance on motives of private enterprise: economic incentives with club in background, indirect. If different military situation: operation similar to World War I railroads – with fair profit, interest on capital taken over. Authoritarian in sense that government had the power to do it, not that free enterprise won the war but we relied upon the motives of free enterprise to win the war. Europe: actual management of industrial properties, operation as a unit. Peace time: No direction to speak of; overall planning feeble and general, not specific. Authoritarian: Planning and control of production. Control therefore of consumption. Control of labor, extensive and highly important. Lecture Government and Full Employment

:

Government and full employment: (1) Meaning: Frictional. On verge of inflation. Full utilization of all resources and factors. Labor: Size of labor force depends on demand for labor. Long continual unemployment – increase in labor force. Present: unemployment decrease, total labor force decrease. Unemployed: willing and able to work and actively seeking work; complicated by “job sought.” Lampman: don’t measure full employment on basis of unemployment: number seeking jobs determined by economic conditions.

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Capital equipment: Problem of obsolete and old, discarded equipment. Problem of efficiency: In boom, marginal producer falls, and vice versa. Problem of number of shifts used. Concept varies, therefore, with demand. Resources: Problem of rapid use and therefore shortages: exhaustion – conservation. Difference between stability of business cycle and full employment: Pretty much the same thing: general level of business. Full employment: stable high-level volume of business. Mitchell 1913: waves with some degree of regularity. (2) Recent concern over and emphasis on full employment: Term popularly used in 1930s; “business cycle” in 1920s. How to get out of depression. Depression of 1937–1938 a boon to Keynes and General Theory. In recovery, how now to avoid similar situation again. Late war years: concern over post-war unemployment. Post-war consideration of inflation. Now: increasing production; decreasing employment. Automation: Slow but pronounced effects. Ultimately more will be employed. But likely to have more production with fewer working for some time. Social problem – reflected in politics (Michigan in 1954 to Democrats). Office employment affected immediately. Defined: substitution of machine for judgment, not merely for labor power. Cost of machinery precludes discontinuous employment; dispose of products “in some fashion” – Peter Drucker. But what about those employed now? Smaller firms: rent or hire services etc. from firms producing automatic equipment. (3) Government and insuring full employment in past: 1920s: Economists: monetary controls within control of Federal Reserve System. Commons: had much faith therein: reserve requirements, rediscount rate, security transactions on open market. Expanding public works to offset loss of or to increase construction – Hoover. 1930s: Centralized operation. Federal Reserve Board and not independent banks. Little faith in this type. Late 1930s: American Keynesian ideas: government spending. Employment Act of 1946. Recent period: School and highway programs. Private expansion. Allotting government contracts to regions with considerable unemployment (done in 1937–1938, 1949–1950, 1954). (4) Built-in mechanisms. Employment Act mechanism minor. Monetary policy: not important in deep depression. Unemployment insurance. Increase of government employment and expenditures. Stock market controls. (5) Full employment as a completely adequate economic objective: Depends on what you employ people for: war and its preparation – easy

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remedy, 1930s – Hitler; futility of “leak raking.” Can have boom and long run unfavorable consequences. Advantage of leisure vs. increase production. Conclusion: not the end objective. Lecture Government and Business Abroad (1) Economic impressions from trip to Europe, Near East, and North Africa: (a) Hard-working people: physical labor, lacking modern techniques; much harder than in U.S. (b) Poor resources compared to U.S.: minerals, fertility; population pressure: poverty seems to be greater in some richer countries, e.g. Saudi Arabia (stressed). Europe: 2/3s of area of U.S., twice the population. (c) War destruction: Still considerable evidence. Ruptured economy, temporarily. Considerable job of reconstruction. Bitter memories of war and Germany, also of collaborators. Only a little reconstruction by private capital (stressed). (d) Good recovery in terms of increase of per capital wealth (income). Except for Egypt: considerable increase in population; per capita income down with total production up. Low countries especially; also West Germany, England, Northern Italy. Businessmen in U.S. sell cheaper in wider market; in Europe, do not, still have uncertainty from the war. (e) Not much of increased production has gone to lower income groups; profits high. Holland: deliberate restraints on wages and consumption, to increase growth of capital; large profits in foreign trade. Near East: pre-capitalistic: assets in land and house wealth, as in Switzerland, rather than corporate stock. (f) Communism: Weak in North Europe. Large campaign against communism in Italy. Outlawed in Arab countries. (g) Rearmament: Western Europe: many feel that American aid is similar to hiring Hessians: hiring others to do our fighting for us. U.S. unpopular in most of Europe and in Arab lands: except England, Low Countries, and Scandinavian countries. High in France and Italy: “American aid all goes to the rich.” Afraid of U.S. being involved in war. Fear of U.S. being taken over by McCarthy – seen as a Hitler; fear of American fascism. Concern over what our foreign policy really is; inconsistency – do not see any policy. Will not go communist: afraid of Russia. Nationalization: Role of government in the economy, notably in Great Britain, whose economy is still predominantly private enterprise. Nationalization:

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(a) Public utilities: Governmental for long time. Electricity, Act of 1931. Not an issue any more. (b) Bank of England: Previously closely controlled; mixed enterprise. Is central bank, similar to Federal Reserve System. Now fully public; banks still private; first nationalized by labor party. (c) Coal mines: Under conservative government: bankrupt industry; little deposits remaining; high-cost mines; modernization too expensive but carried on a little since nationalization. Still, principal export product, especially to Italy (but starting to change to natural gas and oil). (d) Steel: Act of 1946, carried out 1950–1952. No visible change in operations. Still one of better industries. Nationalization put through without great demand by unions – theoretical approach: Steel a basic industry serving other industries. Legislation for denationalization has not been put into effect: government has been unable to sell them: labor party threatens restoration of nationalization when returned to power. Nominal government control: same management as before. (e) Transport: (i) Trucking (lories): unpopular to labor and owners; denationalized by Churchill government. (ii) Railroads: nationalized 1947, still so; losing money. European Labor Relations: Outside of England, collective bargaining does not exist; co-determination a weak substitute; have not gotten too much out of it. Conservative Government: Denationalized transport (trucking); tried to do it to steel but failed – threat of labor party hangs over this. Private sector more cartelized than free competition. Labor party plank is restoration of competition and elimination of monopoly; also repeal of statute allowing denationalization of steel; anti-inflation. No real demand for nationalization; also, weaker position of Bevan in party. F. A. Hayek not worried over nationalization; have had some a long time and is still limited. More concerned over town and country planning boards with considerable land and investment control by government. European Nationalization: Greater than in England. Government investment in shaky private enterprise widespread, e.g. largest French auto firm. Some successful, some not. Rotterdam, new buildings built or aided by municipal government. Only a few basic industries – manufacturing, e.g. in France – in poor financial condition. Much mixed enterprise – proprietary activity by government. Wartime controls maintained much longer than in U.S. – in Great Britain until 1954. Conclusions: In Western Europe, no complete socialism or fascism; private enterprise tied closely to government, financially; basically the same economy as U.S. with only minor modifications.

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Lecture Antitrust Laws and Policies Monopoly and competition at common law and Classical economic theory: Competition approved, monopoly condemned. Classical economists: Competition is regulator of the economy – prices, production, distribution; automatic. Monopoly: matter of governmental favors – exclusive franchises and privileges, renewable patents – not agreement among producers. Restraint of trade a nineteenth-century term. Earlier: regrading, engrossing: contracts eliminating competition among producers, raising prices – or by one monopolist. Early American anti−monopoly movements: Against governmental favors and special privileges. General incorporation laws, c. 1840s. Granger movement: post-Civil War: Railroad rate charges. Monopoly still thought of as matter of government privilege, e.g. land grants, charter. State anti−trust movement; Federal agitation: 1870–1880s. Directed against pools and trust arrangements; not government privileges, rather combinations of private producers, especially by railroads – effective control of production. Sherman Act, 1890: Of relatively minor importance in Congress at the time; McKinley tariff of 1890 received more discussion and had more impact. Didn’t think it amounted to much; to satisfy public clamor without force and effect. Provisions received no real amendments, only procedural ones. Amended by way of supplementary legislation. Early decisions: few important ones for some time. Knight case, 1894 (American Sugar Refining): is not in interstate commerce; manufacturing is intrastate, only shipment is interstate. Held until 1937. Issue, over power of government to regulate. Test is effect on interstate commerce; earlier developed over railroad rate making. Northern Securities, 1903: holding company device, dissolved as violation of Section 2, dissent by Holmes. What is a restraint of trade?: any compact among competitors which replaces competition no matter how economical. Had tremendous affect on trusts etc.; stock prices went down and they failed. Criticism: statute says agreements that restrain trade, not every agreement. Decision repudiated and negated by Standard Oil and American Tobacco cases, 1911. American Tobacco and Standard Oil, 1911: “Rule of reason:” “substantial lessening of competition” required. More than combination alone; extreme discriminatory acts; price fixing. Court held for government after repudiating Northern Securities case. Became political issue in 1912 campaign. Argument

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over method of splitting; stockowners got proportionate share in each new company. Called fake; did not turn out so; ownership changed. Rule of reason: reasonable interpretation, not reasonable and unreasonable monopoly or restraint of trade. Net effect: new legislation – intended by administration to be one bill, Clayton Act as substantive, FTC Act as procedural in general. Clayton Act, 1915: Spells out restraint of trade. Nor much more definite than formerly; “substantially lessen competition.” FTC Act, 1915: Cease and desist orders; less per court action. Section 5: “unfair trade practice” likely to lead to a restraint of trade and substantially lessen competition. Construed as unfair to competitor until 1938 (Wheeler-Lea Act), then unfair either to competitor or to consumers; originally aimed at false advertising and monopolizing. Interpretation of Clayton Act: Always narrowly: substantially lessen competition, not merely affect it. Labor union exemption narrowly construed. FTC not important until 1930s. From Clayton Act to New Deal: Exemptions: (1) Labor unions (Clayton Act, Section 6). Gompers: Magna Carta of labor. No real change in the law: always legal for workers to get together and form unions. Norris-Laguardia Act of 1932 meant, after 1940 decision, unions not exempt; covered under different conditions: cannot combine with businessmen for non-competitive purposes. (2) Webb-Pomerene Act, 1918: allows export combinations to form subject to FTC regulation. (3) Cooper-Volstead Act, 1922: allows cooperatives subject to similar idea. 1919–1922, U.S. Steel and American Tobacco cases: What is monopolizing in re Section 2 of Sherman Act? Re large dominant company in a field. Doctrine: neither size, percentage, etc. controls; close to “no monopoly unless acts in restraint of trade.” Price leadership not sufficient evidence. Control had decreased from 90 to 50% from 1901 to 1920. Law until now, now doubtful. Trade association cases of 1920s: Eddy, 1910: open competition, all the facts; result of Northern Securities case. Can give information, but re future. Affect of 1920s: consolidated producer following live-and-let-live, could do okay, if not re price; smaller ones could not use trade associations. Hoover trade practice conference: act reasonably re fair trade practices – codes – real start of NRA codes. Depression: Price cutting etc. – hard hit. General Johnson, head of CCUS committee on codes and NRA. Wanted codes to be government enforced. Product of depressed state of affairs. Self-government and government enforcement. Government got in at codification. Section 7A, re labor unions. Burroughs amendment: codes could modify anti-trust laws. Schechter case: NRA unconstitutional.

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Tried to get substitute for it; decision too broad; idea waned. Much of codes written in laws: Robinson-Patman Act, Wheeler-Lea Act, 1938. Wagner Act, better than Section 7A. FLSA, 1938, minimum wage rates. War period: Partial suspension of anti-trust; key businesses grew bigger and stronger; got prime government contracts; at end of war, got plants through preferential rights. Growth of big business resulted in Anti-Merger Law of 1950: corrected defect in Clayton Act which forbids combining per stock ownership (substantially lessening competition), but allowing acquisition of physical assets with same effect. Post-war: slight tendency toward further concentration, helped by Korean War. Merger movement. Student Reports (1) Recent thought on competition and implications for public policy: Classical view: competition the normal and natural case, monopoly the exceptional case. Duopoly more important than free competition. Competition a justification for capitalism. Reversal of pessimism about market system and competition of last fifteen years. Figures: Walton Hamilton; Berle and Means; Edward Hindman; von Stackleberg; Chamberlin; Joan Robinson; Corwin Edwards; A. D. H. Kaplan (Brookings Institution); Triffin; Edward Mason; J. M. Clark; Schumpeter; Galbraith, D. Mc. Wright; H. M Gray; Stocking and Watkins. Chamberlin: no homogeneous products, no free entry re identical goods but only similar goods. Triffin: substitution per cross elasticity of demand; each commodity competes with all other commodities; single seller not a monopolist. Oligopoly theory: same results of monopoly. “Spontaneous coordination:” explicit role implicit – action results in same result, whether independent or not. Conscious parallelism – Cement Institute case: collusion inferred. Price leadership; basing point. 1940s, reinterpretation of meaning of competition (Mason, Clark): Effective or workable competition. Meaning differs in judges’ minds. Theory designed for policy: pure competition an ideal standard; can lead to bad policy results. High overhead cost, low mobility of factors, ability of consumers to buy elsewhere, horizontal demand curve, due to potential competition, substitute products. Not much of case for vigorous anti-trust; okays price cutting.

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Later definition: flexible price, option to buy elsewhere. Function of government to support forces working for workable competition. Schumpeter: Corporation to innovate. Father of economic development. Innovation requires prospect of monopoly profit, similar to patents, etc.; creative destruction – competitive progress. Critical of antitrust: basis of innovation is search for higher profit margins by multi-product firms; maintenance of research. Innovation will destroy entrenched monopoly position, e.g. recent DuPont case. Key is innovation, and neither entry nor size. Galbraith: Countervailing power. Part of the “new competition” centering on workable competition. Monopoly engenders monopsony; they elicit each other. Benefit to consumers: lower prices. Minimization of social tension, not maximization of social income. Supplements view of automatic forces working for welfare. Calls for weak anti-trust – though anti-trust is a countervailing power. Corwin Edwards: One aim of anti-trust is to keep distribution of income within bounds. Public policy: Competition is but one avenue and is not self-maintaining and permanent. One effect: on other rivalry relationships. Cornerstones of competition: substitutable products, innovation – future competition by substitute products, potential competition. Theory of a prosperous economy. (2) New Deal Intellectuals: Knowledge, Ethics and Power: Power: Realistic influence, authority. Berle and Tugwell: Tugwell: A “man of knowledge and location of power in America.” Moderate revolutionary, without force, rather by reason. Goal of planned economy, run by government, not businessman. Influenced by Dewey (friend), Patten (teacher), Veblen. Whipping boy of critics of brain-trust. Pictured as re-maker of America on Russian model. Emphasis on role of man of knowledge. Concept of change: moderate, not radically destructive. Advocate of application of realistic psychology to economic theory. Oligarchy vs. cooperation. Anti-classical and anti-Marxist economists. Critical of role of anti-trust laws as attempt to maintain wasteful conflict; concentration inevitable. Industry Comes of Age, 1927. Criticism by Paul Douglas as system of legalized cartels with no power outside of capitalism to control it – could not see nation of employees controlling employers (suggested labor party). Did not accomplish much in government; had his mind toughened through gaining knowledge of power in America. Berle: Concern with concentration of economic power, the result of economic revolution in America. The Modern Corporation, 1932. Abuse of power, a major

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interest. Interested in relation between law and economics. 1920s, corporation lawyer; 1927 on, Columbia University professor of law. Earlier, fairly radical; later, quite conservative apologia, with emphasis on conscience and courts. Thought corporation might replace government as dominant social institution, with corporation law replacing constitutional law. The Twentieth Century Corporate Revolution, 1954. Stuart Chase: would result in new type of feudalism unless government stepped in. Harry W. Laidler: critical that Berle and Means neglected how to use corporation for social good. (3) What is role of government in encouraging retirement security? (a) Social Security. (b) Employee pension plans (tax encouragement). (c) Individual retirement plans (tax encouragement). 1935: Social Security Act. 1942: Section 165, Internal Revenue Code. 1947: Silverson, Rudick, Nicholson. 1952: Reed-Koegan Bill. 1953: Jenkins-Keogh Bill. Ray Bill. 1955: Jenkins-Keogh Bill. Criticism: By agriculture, life insurance, AFL. Fager Amendment: social security floor. Twelve million now under private pension plan status. Private plans: employer contribution is tax deductible cost; income to employee when received – in lower bracket. (4) Development of thought on role of government in underdeveloped countries: Motives: (1) Raise living standard. (2) Self-sufficiency; dependence on raw material exports as cash crop. (3) Political independence through economic independence. (4) Economic development needed to get ahead of low death/high birth rates. Hard to get domestic capital invested in manufacturing, etc. Turn to extractive industries for export, luxury building, etc. Former capital export for exploitation and nothing else. Foreign investment distasteful to underdeveloped countries in circumstances unfavorable to them; okay when benefits both. Present capital export: (1) Political: anti-communism. (2) Sources of raw material repr[incomplete] market; also can better export raw materials. (3) Humanitarian. Case of helping them: (1) avoid loss of raw materials. (2) if they prosper, will trade more.

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Puerto Rico development corporation starts industry and then sells it. (5) Agricultural policy of Greece: Agriculture represents 60% of population, 50% of national income; agricultural policy therefore is important. 1832–1910: No government policy. Private-initiative development by peasants. 1912–1922: War conditions. Refugee increase a problem. c. 1914, agricultural ministry founded. 1918: agriculture department. 1930: school of agriculture. Farm bank: credit, education, and government organization. Land reform: two stages: Greek Revolution, 1820s; 1922. Little landlordism left. Were only slightly compensated. Resulted in boom. Hit by depression, 1932. Fields of government activity: (1) Land shortage due to increasing U.S. land reclamation program. (2) Land reclamation: considerable extent, public and private; economic basis. Swamp area reduced by 7/8s, 1922–1950. Effective control of malaria. American aid after World War II. (3) Agricultural credit: Agriculture Bank, 1929. Guaranteed deposits; short-term loans; long-term loans also; assistance to farmers of all kinds; encouragement of cooperatives for processing and marketing. (4) Protection of agricultural products – price supports: Subsistence farming into commercial farming in world market. Reasons: Farmers formerly in poor bargaining position. Mountainous area means low mechanization; therefore hard to compete with other countries. Quality with low yields due to short growing season, short rainy season. Forms: Cooperatives to strengthen bargaining power. Cooperative loans. Acreage allotments. Government purchase of supply to match low demand. Quality improvement plans. Conclusion: Efficient government aid very important.

ROBERT LAMPMAN’S COURSE ON “GOVERNMENT AND BUSINESS,” ECONOMICS 146, FALL 1955 Notes taken and edited by Warren J. Samuels I. COURSE SYLLABUS GOVERNMENT AND BUSINESS (Economics-Commerce-Political Science 146) INSTRUCTIONS, CLASS OUTLINE, AND SELECTED BIBLIOGRAPHY First Semester 1955–1956 A. GENERAL INSTRUCTIONS Class Meetings: All students including graduate students are expected to attend the two lectures and one discussion group each week. The lectures are given at 9:55 A. M. on Tuesdays and Thursdays in Room 401 Sterling Hall. The discussion groups and their place of meeting are as follows: Discussion Group

1. 2. 3. 4.

1:20 Mondays 1:20 Tuesdays 2:25 Tuesdays 7:45 Wednesdays

Room 310 Sterling Room 310 Sterling Room 310 Sterling Room 310 Sterling

Wisconsin “Government and Business” and the History of Heterodox Economic Thought Research in the History of Economic Thought and Methodology, Volume 22-C, 93–158 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(03)22047-2

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No student may change the discussion group in which he is signed up without the approval of Mr. Samuels, who will be in charge of the discussion groups. In the discussion groups subjects will be taken up which are not dealt with in the lectures. The subjects to be taken up in the discussion groups of each week and the assignments relating thereto will be announced well in advance of the meetings. Textbook: The textbook used in this course is: Marshall E. Dimock, Business and Government, New York, Henry Holt and Company, 1953. Class Materials: A considerable quantity of mimeographed material on subjects dealt with in the course and prepared and made available by Professor Edwin E. Witte will be distributed to the members of the class. These are listed in the Class Outlines following these Instructions and are required reading in the course. Additional References: The professor in charge of the course will be glad to supply any student with additional references on any subject dealt with in the course. Also attached is a selected bibliography which will be helpful to those who wish to read more widely in the field. Required Work: All students are held for the information presented in: (1) the lectures; (2) all assignments in the texts and in distributed material, as listed in the Class Outlines; (3) points developed in the discussion groups. Quizzes and Final Examination: There will be two regular quizzes in the course during the semester, both of which will be given during regular class periods. All students are required to take these quizzes. This is particularly important in connection with the first quiz, as University rules now require that the grades of all students in the first six weeks must be reported to the Dean and students who fail to take the first quiz without an excuse deemed adequate by the professor in charge must be given a grade of “F.” The first quiz will be given within the first six weeks of the semester; the second, several weeks before the end of the semester. The exact time of each quiz will be announced in class periods, well in advance of the quiz. The first quiz will cover all of the work in the course up to the date of the quiz; the second, the work subsequent to the first quiz. A special quiz will be given in the last week of the semester. This will be an hour quiz, much like the regular quizzes, but will be based on the work in the entire course, not on any particular part of the course. Any student may take the special quiz and students who have missed a regular quiz are strongly advised to do so.

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The final examination, two hours in length, will come on Thursday, January 26, 1956, at 10:15 A.M. It will be based on all required work in the course. All quizzes and the final examination will be of the essay type. Their major purpose will be to bring out whether a student understands the subjects dealt with in this course, but some weight will be given to organization, as distinguished from content. All cheating in quizzes or in the final examination will be reported to the Student Personnel Offices as required by the University regulations. Basis of Grading: Numerical grades will be given on all quizzes and in the final examinations and letter grades will be assigned on the basis of the University’s standard scale, Grades will be recorded numerically, but the final grade will be expressed in the appropriate letter grade. No grade once given will be changed except for clear error and upon re-reading of the entire blue book (not merely the particular question in which a student may claim to have been graded too low). Changes in grades can only be made by the professor in charge. Basis of Final Grade: The final grade of students in this course will give approximately equal weight to: (1) the average grade made in quizzes; (2) the final examination grade; and (3) the discussion group grade in which account will be taken of the regularity of attendance at the lectures and in the discussion groups. Office Hours of Instructors: The professor in charge of the course and the Assistant will maintain office hours as indicated. Students are invited to consult them about any problem they may have in connection with this course but should do so during one of the specified office hours or by special appointment. Mr. Lampman – Office 309 Sterling Hall Office Hours:

Mondays, Wednesdays and Fridays at 8:50–9:45 A.M. Tuesdays and Thursdays 11:00–12:00 Noon.

Mr. Samuels – Office 309 Sterling Hall Office Hours: 1:20–3:15 P.M. Thursdays. B. CLASS OUTLINES I. An Introductory View (1) Definition of terms. (2) Theories regarding desirable relations between government and business.

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(3) Basic facts about the American government. (4) Basic facts about the American economy. (5) The legal basis for government control of business. Assignments: Dimock, Business and Government, 1–121. Witte, The American Concept of Government (Distributed). Witte, The Economic Side of American Life (Distributed). II. Government and the Basic Economic Institutions (1) (2) (3) (4) (5) (6)

Origin and Present Legal Status of the Basic Economic Institutions. Property and Contract. Patents, Trade-marks, and Copyrights. Bankruptcy, receiverships and foreclosure. The Business Corporation. The Government’s Role as Rule-maker and Umpire in the Business World. Assignments:

Witte, Some Data on the Relation of Government to the Basic Economic Institutions (Distributed). III. The Protective Role of Government (1) The governmental activities which are primarily protective. (2) Extent of the protective activities of government. (3) Relation of the government’s protective activities to business. Assignments: Witte, The Growth of the Protective Functions of Government (Distributed). IV. Governmental Service Activities (1) The major governmental services for the entire population. (2) Governmental service activities for special groups in the population. (3) Relation of governmental services to private business.

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Assignments: Dimock, Government and Business, 350–378. Witte, The “ Bug-A-Boo” of the Welfare State (Distributed). Witte, The Role of Government in Research (Distributed). V. Direct Government Aid to Business (1) Tariffs, quotas in aid to business. (2) Government subsidies, grants, loans to business. (3) Government expenditures for business development and trade promotions. Assignments: Witte, Governmental Aids, Subsidies, and Loans to Private Business (Distributed). VI. Governmental Regulation of Business (1) Relation of “Regulation” to other types of government action affecting business. (2) Types of regulation applying to business generally. (3) Business subject to more intensive regulation. Assignments: Dimock, Business and Government, 454–513, 635–646. Witte, The Legal Basis of Regulation (Distributed) VII. The Government’s Role in Agriculture and Labor (1) (2) (3) (4) (5)

Governmental aids to agriculture prior to the twentieth century. Twentieth century aids to agriculture. Farm price supports. Protective labor legislation. Labor relations legislation. Assignments: Dimock, 214–236, 243–275, 276–314, 321–323.

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VIII. Government’s Role in Protecting Consumers and Investors (1) Protection of consumers. (2) Wartime price and related controls. (3) Securities regulation. Assignment: Dimock, 650–675. IX. Competition, and Monopoly (1) (2) (3) (4)

Competition and monopoly in economic theory. The facts of competition and monopoly in American business. Anti-trust and fair trade practices legislation. Possible alternatives to present policies. Assignments:

Dimock, 124–213. Witte, What the Anti-Trust Laws Do and Do Not Provide (Distributed). Additional References: Mund, Vernon A., Government and Business (Second ed.) Chapters 9–22. Papandreou, A. T., and Wheeler, John T., Competition and its Regulation. X. Government as a Purchaser, Producer, and Competitor (1) Government as a purchaser from private business. (2) Governmental enterprises which essentially are non-competitive with private business. (3) Nature and extent of governmental competition with private enterprise. (4) Problems in the operation of governmental enterprises. Assignments: Dimock, 543–584. Witte, Extent of Government Ownership and Competition in the United States (Distributed).

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Additional References: Fainsod and Gordon, 657–734. National Association of Manufacturers, The American Individual Enterprise System, Vol. 2, 713–717, 806, 827. Chamber of Commerce of the U.S., Reprivatizing Private Enterprise. XI. Governmental Expenditures, Taxes, and Debts (1) Facts of federal, state, and local government finance in historical perspective. (2) Effects of public finance on business. Assignments: Dimock, 587–614. Witte, Government Finance Statistics (Distributed). Witte, The Effects of Government Fiscal Operations on Business (Distributed) Additional References: Fitch, Lyle, “Trends in Federal, State and Local Government Expenditures since 1890.” American Economic Review, May, 1953. Groves, Harold M., Financing Government, Fourth Ed., 1955. XII. Currency and Credit (1) Government and the currency. (2) Government and banking. (3) Loaning operations of Government. Assignment: Dimock, 617–635. XIII. Government and Full Employment (1) Full employment as a major governmental objective. (2) Views on the role of government in promoting full employment.

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Assignment: Dimock, 677–732. XIV. Economic Planning (1) Varying concepts of economic planning. (2) Economic planning in the United States. Assignments: Dimock, 734–761. Witte, Differing Concepts of Economic Planning (Distributed). XV. War and International Relations in their Impacts upon the American Economy (1) (2) (3) (4) (5)

Economic aspects of war. The United States in World War II. Governmental policies and actions in the present “Cold War.” The impacts of war on government and business. International relations and American business. Assignments:

Dimock, 382–451. The Economy of the United States in World War II (Distributed). XVI. Reaction of Business to Government (1) The interest of economic groups in government. (2) The efforts of economic pressure groups to control government. Assignments: Dimock, 74–103, 214–219, 236–240, 308–314, 334–336. XVII. The Changing Government and Changing Economy (1) (2) (3) (4) (5)

Major changes in the American government. The enduring character of the fundamentals of the American government. Major changes in the American economy. Major changes in the relations between government and business. Trends in relationships between government and business abroad.

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(6) Factors likely to be determining in future relations between goverment and business. Assignments: Dimock, 42–71, 10–14, 25–40, 764–784. Witte, The American Concept of Government (Distributed). Witte, Major Changes in the Economy of the United States (Distributed). Witte, The Economic Side of the American Way of Life (Distributed). Statements on the American Way of Life and Its Future (Distributed). Witte, Government and Business in the United States: The American Way of Life (Distributed). Selected Bibliography for Government and Business I. Textbooks in the Field of Government and Business Anslen, Melvin and Wormuth, Francis D., Private Enterprise and Public Policy, 1954. Edwards, Corwin D., Maintaining Competition, 1949. Fainsod, Merle and Gordon, Lincoln, Goverment and the American Economy, 1948. Hale, Ford P., Government and Business, Third ed., 1949. Hoover, Edgar M., Jr., and Dean, Joel, Readings in the Social Control of Industry, 1942. Koontz, Harold D., Government Control of Business. Lyon, Leverett S., and others, Government and Economic Life, two volumes, 1940. Mund, Vernon A., Government and Business, revised ed., 1975. Papandreou, Andreas and Wheeler, John T., Competition and Its Regulation, 1954. Taylor, Jack, Business and Government: An Introduction, 1952. II. Textbooks in Related Fields Adams, George P., Jr., Competitive Economic Systems. Adams, Walter, (Ed.), The Structure of American Industry, revised ed. 1954. Bain, Joe S., Pricing, Distribution and Employment, 1948. Clemens, E. W., Economics and Public Utilities, 1950. Gagliardo, Domenico, American Social Insurance, rev. ed. 1955–1956 Groves, Harold M., Financing Government, Fourth ed., 1955. Hansen, Alvin H., Fiscal Policy and Business Cycles, 1941. Hansen, Alvin H., Economic Policy and Full Employment. 1947. Hart, Albert G., Money, Debt, and Economic Activity, 1948. Lindblom, C. E. and Dahl, R. A., Politics, Economics, and Welfare, 1953.

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McIver, Robert M., The Web of Government, 1947. McIver, Robert M., Democracy and the Economic Challenge, second ed., 1952. Redford, Emmette S., Administration of National Economic Control, 1952. Renne, Roland R., Land Economics, 1947. Stigler, George J., Theory of Price. III. Books on the Monopoly Question Arnold, Thurman W., The Bottlenecks of Business, 1940. Berle, A. A. and Means., G. C., The Modern Corporation and Private Property, 1933. Burns, Arthur R., The Decline of Competition, 1936. Galbraith, J. K., American Capitalism, 1952. Gordon, R. A., Business Leadership in the Modern Corporation, 1945. Kaplan, A. D. H., Small Business: Its Place and Problems, 1948. Lilienthal, David, Big Business: A New Era, 1953. Lynch, David, The Concentration of Economic Power, 1945. Machlup. Fritz, The Basing Point System, 1948. Purdy, Harry L., Lindahl, Martin L., and Carter, Wm. A., Corporate Concentration and Public Policy, 1942. Stocking, George W. and Watkins, Myron W., Monopoly and Free Enterprise, 1951. Stocking, George W. and Watkins, Myron W., Cartels in Action, 1946. Wilcox., Clair, Competition and Monopoly in American Industry, TNEC Monograph 16, 1941. IV. Books on Some Specific Questions Considered in this Course Benedict, Murray, Agricultural Policy in the U.S., 1954. Eldridge, Seba, The Development of Collective Enterprise, 1943. Hart, A. G. and Brown, E. C., Financing Defense, Johnson, Gale, Trade and Agriculture, 1950. Lerner, Abba P. and Graham, Frank D., Planning and Paying for Full Employment, 1947. Lilienthal, David, TVA – Democracy on the March, 1944. Lincoln, G. A., Stone, and Harvey, T. H., Economics of National Security, 1950. Redford, Emmette E., Administration of National Economic Control. Schultz, T. W., Production and Welfare of Agriculture. U.S. Government, The United States at War, 1946. Van Hise, Charles R., The Conservation of Natural Resources in the U.S., 1913.

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V. Books on General Questions Considered in this Course Adams, H. C., Relation of the State to Industrial Action (J. Dorfman, ed.), 1955. Clark, John M., Social Control of Business, rev. ed., 1939. Clark, John M., Alternatives to Serfdom, 1949. Burnham, James., The Managerial Revolution, 1941. Harris, Seymour (Ed.), Saving Capitalism. Harris, Seymour, Economic Planning: The Plans of Fourteen Countries with Analyses of These Plans, 1949. Hayek, F. A, The Road to Serfdom. Dewhurst, Frederick, and Associates, America’s Needs and Resources, rev. ed., 195L. Keezer, Dexter M. and others, Making Capitalism Work, 1950. Lewis, Blu W., British Planning and Nationalization, 1952. Mund, Vernon A., Open Markets, 1948. National Association of Manufacturers, The American Individual Enterprise System, 2 vols, 19. Oliver, Henry M., A Critique of Socio-economic Goals, 1954. Schlatter, Richard B., Private Property: The History of an Idea, 1955. Schumpeter, Joseph A., Capitalism, Socialism and Democracy, 1942. Solo, Robert (Ed.), Economics and the Public Interest, 1955. Simons, Henry C., Economic Policy for a Free Society, 1948. Wootton, Barbara, Freedom Under Planning, 1945. Wright, David McC., Democracy and Progress, 1948. Wright, David McC., Capitalism, 1951. II. QUESTIONS FOR REVIEW AND DISCUSSION, LAMPMAN GOVERNMENT AND BUSINESS, 1955 Fall Questions for Discussion and Review: (1) Why are you “the silent generation?” (With reference to role of government, criticism of business arrangements, social reform.) (2) In what ways is our life more collectivized and “socialized” than it used to be? Is this an accelerating trend? Why or why not? (3) What significant historical changes are making for a new role for government? (Technical, war, industrialization and urbanization.) (4) Do you think the dynamic and creative forces in economic affairs are found largely in the private sector or the public sector? Give examples to support your argument.

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(5) Distinguish “Routinist” from “Adventurist” economics. What is the importance of this distinction for role of government. Which kind of economy do the policies you advocate seem to encourage? (6) What are the most important determinants of Amcrica’s spectacular economic progress? (7) In what sense are the vast majority of Americans “radical” in politicoeconomic affairs? Why would most business leaders fail to measure up as true “conservative.” (Definitions by Russell Kirk and Clinton Rossiter.) (8) Distinguish the following in terms of view of “Progressive” and “Obstructive” elements in society: Adam Smith, John S. Mill, Marx, Veblen, Keynes, spokesmen for big business, organized labor, farm groups, organized medicine, religious leaders, cooperative movement. (9) In what ways are “capitalism” and “democracy” linked together? (10) What basic functions must government perform in order for private competitive business to function? What functions beyond this does government perform in America today? Government and Business

Fall 1955

Questions for Discussion and Review (#2) (1) Why is it argued that the very asking of the questiont “What is the appropriate role for government?” is significant? What does it assume concerning the character of “government’l and “business?” (2) Can you imagine a situation wherein “private enterprise” is formally private but in fact publicly run? Where government is formally “public” but in fact privately run? (3) If we believe in laissez-faire principles why have we departed so far from them in practice? (4) May the laissez-faire philosophy be interpreted as a justification of the enterprising role in our economy, and hence as only a partial view of the appropriate role of government? (5) In what ways does present American capitalism differ from what has been described as “classic capitalism?” (6) What does “bigness” of private organizations have to do with the necessity of government intervention? What does “interdependence” have to do with it? (7) In the views of Smith and Mill why is the presumption always against the expansion of the role of government? Are these reasons similar to those held by present advocates of a limited role for government?

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(8) Characterize capitalism in terms of the following distinctions. (1) private v. public (2) individual v. collective (3) individualism v. socialism (4) freedom v. direction (5) planning v. direct control

(6) rules v. specific direction (7) monism v. pluralism v. atomism (8) voluntaristic v. central direction (9) de-centralized v. centralized

(9) What is the most popular view of the origin of property rights? (Natural v. positive law). (10) Give an example to illustrate that property is “a bundle of rights and duties.” Further give examples to show that the content of the bundle is changed from time to time. (11) Does the constitution guarantee property rights in any way? What parts of the constitution refer to property? (12) What connections are there between property and contract? (13) Is freedom of contract protected under the constitution? (14) Did the advent of the corporation change the nature of property? If so, how? (15) What does the constitution, as interpreted by the Supreme Court, have to say about corporations? (16) Is a patent property? How do patents differ from copyrights and trade-marks? Is the social justification the same for all three? (17) What parts of the constitution establish limits on the powers of government to control business? (18) How is the institution of bankruptcy fundamentally changed from 100 years ago? Has this change been in the social interest? Does it represent a basic, departure from “classic capitalism?” Government and Business Questions for Discussion and Review #3

Fall 1995

(1) What is the “doctrine of social fault?” How may it be argued that adoption and extension of this doctrine meant a fundamental modification of classic capitalism? Where does this doctrine appear in social insurance legislation? (2) How does the law of Torts relate to the protective function of government? (3) Is the protective function of government largely responsible for the growth of size of government in the last 50 years? (4) What is the division of the protective function among governments in the U.S.? Is this division made constitutionally?

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(5) Why do we have government assume the role of protecting property as well as persons? Why not leave the protection of private property in private hands? (6) Abraham Lincoln said that the purpose of government is to do for the people that which they cannot do for themselves or cannot do as well for themselves. Does this statement provide any guide for stopping the expansion of government? (7) What is the difference between the service function of government and the protective function? (8) Classify service activities into services to persons, to industries, and to the whole community. Can you think of a different basis for classifying services? (9) The leading service programs in terms of money spent are education, highways, social security. How could private enterprise be more encouraged in each of these fields? Why or why not do you think the private role in these fields could be greater? (10) How does government promote business in general? (Expansion of market area, information, research, foreign business aid, et al.) (11) What industries have received the most direct and indirect government aid in the U.S.? What is the reason for helping these businesses more than others? (12) Is conservation of resources a problem beyond control of the market? Is the fish resource different from agricultural land in this respect? (13) What does a “faulty tenure system” have to do with the conservation problem? (14) How does a tariff differ from other types of government intervention? Is it the same as a subsidy? (15) Does every type of government assistance to one industry hurt another industry? Can you give examples? (16) In what ways are subsidies preferable to tariffs for protective purposes? How would quotas differ from either of the above in effect? (17) List all the types of government intervention which we have discussed thus far in the course. Which type of intervention has the most far reaching effect on present-day American life? Review and Discussion Questions for Government and Business, Fall, 1955 #4. (1) Distinguish the concept of “business affected with a public interest” from “public utility.” (2) Develop the idea that there have been more legal and judicial problems in regulation of prices than in outright government ownership. (3) Trace the shifts in court thinking shown in the following cases: Munn v. Illinois, Wolff Packing Co. v. Kansas, Nebbia v. People. Where is court thinking now on the subject of what business may be regulated?

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(4) Outline the background of commission regulation of public utilities. Why did the three separate branches of government prove inadequate for this job? (5) What dangers do you see in the commission form of government organization? (6) What are the leading problems encountered by commissions in doing a good job of regulating. (Have the courts been responsible for most of these problems, or is the job inherently too difficult?) (7) Do you think commissions are necessary in the promotion and developmental phases of utilities? In the declining phase? Why or why not? (8) “The need for commission regulation of railroads has long since passed with the advent of motor transport and air transport. Railroads are no longer monopolies.” Comment. (9) Would you approve limiting the size of public utility companies as a way to make regulation more effective? (10) Do commissions have control over capitalization of utilities? Is it necessary that they have such control? (11) Appraise the role of the federal government in the regulation of utilities. (12) What actions of the federal government make state regulation of utilities more feasible? (13) What particular aspects of business operation are typically regulated by a public utility commission? Which one is most important? (14) Is regulation substituted for competition as well as monopoly? Give examples of each. Does regulation aim at protecting the producer as well as the consumer of the service? Give examples. (15) Write a brief essay on the importance of the fourteenth amendment in the public utility field. (16) What is the significance of the Hope Natural Gas Co. case? (17) “The public utility commission is a bargaining agent for the public trying to get the best possible deal for the consumers.” Comment. (18) “To do it’s job properly a commission must know more about the business than the managers do.” Evaluate. (19) What problems arise in deciding what are legitimate costs of utility operation? (20) Ben Lewis has said the court at one time gave the impression that “fair value was the unpredictable product of incalculable considerations.” Discuss. (21) “Utility regulation of price may be so effective as to discourage technical progress.” What incentives are there for a regulated monopoly to introduce technical innovations? (22) Dimock says, “More than anything else, transportation needs bold and imaginative planning. It needs positive stimulation, not repressive measures

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and rigid rules.” Who can do this planning? What considerations are involved in such planning? (23) Henry Simons argued that regulation had “all the affliction of socialization and none of its benefits.” What merit is there in this view? (24) “Regulation is our last best hope in the battle against socialism.” Comment. Review and Discussion Questions for Government and Business, Fall, 1955 #5 (1) Classify the types of government intervention in the field of agriculture. Which of these have had the most far-reaching effects? (2) What is the rationale of government aid to agriculture? Is there any reason for giving more aid to agriculture than to any other type of industry? (3) Review the changes in the number of people in agriculture and the percentage of income produced in agriculture over the years. What significance do these facts have in determining appropriations of public policy? (4) Into what parts do you think the “agricultural problem” is best divided? Is it commercial vs, subsistence agriculture? Or is it by type of crop? (5) Compare regulation of agricultural prices with regulation of the prices of electrical utilities. In what respects are there differences in methods followed? (6) Why are output controls necessary in any attempt to establish minimum prices? (7) Explain the differences among the following programs to increase farm incomes: (a) the AAA output restrictions; (b) price support by purchase; (c) subsidy payments under the Brannan Plan. (8) What relationships do the above programs have to international trade policy? (9) How would a program of paying people terminal subsidies to leave agricultural activity work out? How about paying them to withdraw land from producing saleable products? (10) What weight do you think should be attached to non-economic aspects of the farm problem? Make a list of such aspects. (11) How do you reconcile traditional farmer “individualism” in thought with his view of an active role for government in the field of agriculture? (12) How is the extraordinary political influence of farmers to be explained? Is the balance of power between employers and organized labor relevant here? (13) What are the repercussions on other parts of agriculture likely to be of a price support program just for corn? What does this suggest concerning the efficacy of “basic crop” programs? (14) Why may it be argued that a little bit of regulation in agriculture will lead to more and more regulation?

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Questions for Review and Discussion #6 Government and Business, Fall, 1955 (1) “The Emancipation Proclamation is the most significant government intervention in the field of labor in the history of this country.” Comment. (2) Distinguish the role of government necessary to establish: (a) a serf-lord relationship; (b) a free contract by individuals market; (c) a free collective bargaining relationship; (d) a government-dominated labor market. (3) What are the leading arguments for a free contract market? What are the main arguments for limitations on freedom of individual contract? (4) What does the constitution have to say about labor market arrangements? (5) How do you explain the fact that enunciation of policy on unionism was left to the courts until the Twentieth Century? (6) Name the statutory forerunners of the Wagner Act. (7) “The Wagner Act represented a minimum of interference with the labor market.” Comment, indicating reasons for answering yes and no. (8) One of the stated purposes of the Wagner Act was to reduce strikes. How would you interpret this with reference to experience since 1935? (9) How does the Taft-Hartley Act differ from the Wagner Act in terms of: (a) purpose; (b) scope of topics covered; (c) degree of government intervention. (10) Appraise the growth of union membership in the last 50 years. What is presently limiting the growth of membership? (11) How do unions limit the freedom of workers? of Employers? (12) American unions have been characterized as “job conscious.” What does this mean? (13) Which of “labor’s” objectives cannot be accomplished by economic action? Which cannot be accomplished by political action? (14) Review the record of governmental regulation of wages and hours and child labor. In what other ways than by direct legislation has government affected wages and hours? (15) Dimock says, “. . . in the U.S., where labor is relatively so conservative, the danger of subverting economic and political freedom by revolutionary means is far greater from the extreme right than from the political left.” Comment. (16) In the Norris-la Guardia Act, what is the significance of the phrase, “. . . in any case growing out of a labor dispute?” (Dimock, p. 255). (17) What are the alternatives to collective bargaining in settling labor disputes? (18) Name three types of activity of courts with reference to labor affairs. Would you say the courts have been more important than the legislative branch in labor matters? What is the role of the executive branch in this

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connection? How important are states relative to the federal government in this area? (19) “Legislation has done far more to promote the welfare of workers than unions have.” Evaluate. (20) “Compulsory arbitration of labor disputes can serve only to emphasize the weakness of democratic government.” Comment. Questions for Review and Discussion #7 Government and Business, Fall, 1955 (1) The fact that 200 corporations control over half the manufacturing assets in the U.S. is often cited as indicative of the degree of business concentration in America. Why or why not do you think this is indicative? What other data do you think more significant? (2) Why is it difficult to establish whether or not concentration is increasing? (3) What separable social problems are associated with: (a) the corporate form; (b) bigness; and (c) monopoly? (4) Explain the differences between anti-trust policies aimed at: (a) structure; and (b) behavior. What types of situations are covered by one policy and not the other? (5) Can you reconcile the Robinson-Patman act and the Miller-Tydings Act, or are they aimed at different objectives? Do the two named Acts complement or contradict the Sherman Act? (6) Compare national policy in labor and agriculture with policy in the anti-trust field. (7) Distinguish competition, monopoly, oligopoly, public utility, countervailing power, inter-product competition. Give examples of each. (8) What is the (alleged) difference among perfect competition, workable competition, fair competition, out-throat competition, orderly and disorderly marketing? (9) What is meant by each of the following? How is each practice looked upon by the Courts?: (a) price leadership; (b) market sharing; (c) trade association price information exchange; (d) basing-point pricing; (e) false advertising; (f) discriminatory pricing. (10) A business complaint sometimes voiced is: “I may be ‘hung’ if my prices are the same as my competitors, and I may be if my prices differ.” Comment and explain. (11) List the exceptions to and exemptions from the Sherman Act. How important are these when compared to the rest of business and business actions? (12) What legal background has been developed for a broad program of dissolution of structural monopolies?

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(13) Is there any contradiction between trying simultaneously to prevent monopoly and trying to eliminate certain practices inherent in competition, e.g. price-cutting? (14) How do the following relate to anti-trust problems?: (a) tariffs; (b) patents; (c) manufacturer-retailer arrangements; (d) interlocking directorates? (15) Distinguish vertical, horizontal integration and conglomerate mergerse. (16) What do you think is the major cause of monopoly? Why is it hard to determine whether efficiency is responsible for bigness or not? (17) What are the alleged consequences of monopoly that may be classified under the following headings?: (a) economic costs; (b) social costs; (c) political costs. (18) Argue that the anti-trust laws: (a) have; and (b) have not had significant ef’fects on American business, structure and business practices. (19) How do you account for the fact that there has been such popularity of anti-trust legislation and yet so little money and effort expended in enforcing those laws? (20) How is the monopoly problem altered by the existence of professional management and minority control of corporations? (21) Would you support any of the following? (a) federal chartering of corporations (b) progressive tax rates on corporate income (c) penalty tax on retained earnings (d) compulsory patent licensing (e) policy of prohibiting all conglomerate mergers. Questions for Review and Discussion #8 Government and Business, Fall, 1955 (1) What percentage of all spending in the economy is done by the government in the U.S.? Is this a good measure of the importance of the government? (2) What percentage of goods and services produced are purchased by governments? (3) What percentage of goods and services produced are produced by governments? Explain the difference between purchasing and producing as far as the government sector is concerned. (4) How are government taxes, purchases, sales, and transfer payments handled in national income accounting? Why is the government so difficult to “account for” in social accounting? (5) How do federal government purchases differ from state and local purchases as far as balance between: (a) wages and salaries; and (b) supplies and equipment? How may this be explained?

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(6) For what lines of private business are governments the leading customers? (7) What difference does it make whether government is a purchaser or a producer of, say, roads? (8) How many alternative ways can you think of for the government to accomplish the purpose of “education for all” besides government ownership and operation of schools? (Purchase, transfer, et al.). Apply this question to other government service activities. (9) When government is the sole customer, as in munitions, is there any sense in buying from private companies? Is it better to have government ownership and private operation? What alternatives can you think of for this case? (10) “The role of government as a producer has not varied significantly since colonial days.” Comment. (11) In what ways has the federal government encouraged local public ownership of electrical power distribution? (12) Distinguish among the following and give examples of each as related to role of government as competitor. (a) where government and private enterprise both offer the same goods for sale in the same market. (b) where government produces for its own use. (c) where government operation excludes all private enterprise. (13) Evaluate the following arguments against government ownership and operation. (a) government is inherently inefficient (b) government is an unfair competitor because it doesn’t pay taxes nor does it have to show a profit. (14) “Public power is best because no profits are taken away from the consumer and after the debt has been paid off there are no interest charges. This means the consumer collects both the profits and the interest.” Evaluate. (15) “A public corporation chartered to cover all its costs is the only form government should use in its role as a producer.” Evaluate. (16) Which are the most important reasons for government entrance into production?: (a) demand for service private enterprise won’t supply; (b) military necessity; (c) failure of a private company; (d) consumers feel they are being “exploited” by private monopoly; (e) doctrinaire belief that public enterprise is “better.” (17) How should we interpret the fact that government enterprise usually has different purposes than private enterprise? Does this mean that relative efficiencies cannot be directly compared? (18) How do the problems of getting private enterprise into the atomic energy field compare with the development of railroads, banks, aviation, electric

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power and other industries? After the government has assumed much of the developmental cost and risk is it appropriate to leave the field for private enterprise? (19) How may the government in its roles of purchaser, producer, and competitor aggravate or alleviate “the monopoly problem?” What other leading social questions arise in connection with these roles? (20) How does the conduct of a war alter the role of government as a purchaser and producer? Does government need power to seize any and all productive facilities in modern warfare? Questions for Review and Discussion #9 Government and Business, Fall, 1955 (1) What percentage of national income is taxes in the U.S. currently? How does this compare with 1900, 1920, 1930, 1940, 1945, 1950? How does it compare with England, USSR, other nations? (2) What other ways besides taxation may government use to divert money to the public sector? What other ways to divert goods to the public sector? (3) Briefly relate the changing importance of the federal and state and local governments in the tax-expenditure picture over the last 50 years? How do you account for this change? (4) How important is war as a cause of high expenditures, high taxes and large debt since 1914? Give specific answers for recent years. (5) What are the most important programs from an expenditure point of view at the state level? At the local level? Has the current picture changed since the depression? (6) What percentage of World War II cost (apart from normal government) was financed by current taxation? If the debt incurred in World War II is never paid does that mean that we will escape paying for the war? (7) Distinguish carefully between real and money costs of war. Can the real burden of the war ever be shifted to succeeding generations? Could it ever be that a country could have a negative economic burden of a war (where real costs are exceeded by real rises in income, aside from conquest of territory)? (8) What important trends in forms or “sources” of tax revenue are apparent at each level of government? At which level of government are taxes presently most “progressive?” Where most “regressive?” What does the difference in tax policy have to do with pressures for state and federal aid? (9) Why have state and local governments looked more and more for help from central governments? How could this trend be reversed?

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(10) What are several devices for inter-governmental sharing of financial sources? Start with grant-in-aid, central collection, and local sharing, separation of sources. Which of these is best? Why? (11) “The more the government taxes away the less each of us has.” Is this true or false? How would the truth of this vary from an inflationary to a deflationary situation? In your answer distinguish carefully between the flow of goods and the flow of money. How does government spending of the tax money alter the picture? (12) Why is it argued there are “two worlds” in government finance, namely, the world of full employment and the world of less than full employment? Is it true in either world that thriftiness may be a bad policy? (13) How does personal finance differ from public finance? How does federal government finance differ from state and local? How does corporate finance differ from all the others? (14) Rank the following in terms of likely expansionary effect: (a) Government surplus, balanced and deficit budgets (b) Deficits financed by borrowing from public, from commercial banks, from central banks, and by printing new money (d) Government expenditure on transfer payments, on purchase of capital goods, of consumer goods, on loans or grants to foreign countries (d) Repayment of debt by paying off individuals who hold bonds, banks or central banks (e) Financing by progressive or regressive taxation (15) What are the various meanings of the term “burden of the government debt?” III. LECTURE NOTES Lecture: The scope of the course encompasses the two areas of “government” and “business.” By government is meant the large network of rules and regulations and the apparatus for enforcing those rules – in the United States, on several levels. By business is meant all private activity for pecuniary gain – a large group of people in a large number of categories. The analysis in the course is composed of, first, an objective view – say, from the mountain top, with the important factor of disinterest – of the roles played by different groups in America today; and second, what is and what ought to be those roles. We will go from the scientist to the policy maker. We will use three approaches: (1) the abstract and theoretical, examining different views concerning the proper role of government and the nature of

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business; (2) the historical, viewing the course or progress of those relations; and (3) the problem approach, selecting current problems of importance for analysis, such as monopoly, the agricultural market, labor, small business, etc. But what of the students conducting this examination in this class? What is their frame of mind, how can they be characterized, and what pitfalls might we encounter in our analysis? The median birth year of this class is 1935, a year in the era of disorganization and consequent disillusionment; a period of suffering and loss, especially of confidence – a great conditioning experience, but one influencing more directly the students’ parents and older relatives. Most of the class came to their political consciousness later – during and after the time of the great conflict, World War II. They were four in 1939 and still only ten when the war began and ended. We have since seen the beginning of and passed into the atomic era. Your political consciousness came to the surface, and is maturing, in a time of the political and economic supremacy or leadership of the United States – to date the highest growth of the American nation. This is an era of great opportunity. America is a leader in the world. America is both the richest and the most rapidly advancing nation in the world. We are children of science and the industrial revolution, something that has continued since the Renaissance and, it is to be noted, something that is absent from many foreign lands. Here is a world of freedom, not orthodoxy; change is the expected thing, it is a way of life, pervading out entire outlook, a special kind of American spirit. We are therefore a confident people, believing in our mastery over science and industry. But we are not so confident over other things. We fear the use of newly discovered and applied forces by madmen. We are fearful over the future of unleashed forces beyond comprehension. We are in the age of the Cold War as well as the nuclear age. Much economic literature, analogous to the teaching of military strategy, viz, fighting the next war on the experience of the last, was written as if the 1930s were imminent and impending. Similarly, in the 1930s business literature was written as if the 1920s were imminently returning. This generation has been characterized as the “silent generation,” a group of no protest, of little aggressive idealism, representing a low point in the examination of social and economic problems. Characteristic of present-day American life are: (1) the new and important role of the military: we are in the age of militarism; (2) the extensive role of the national government, closely identified in a way with the increased role of the military, but which also takes a path into what was formerly the realm of private concerns; (3) our living in the age of big business, in which big business is enjoying its height of popularity; (4) our living in an age of private and public collectivization,

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“collectivization” meaning large-scale organization. We are a land of workers; 80% work for someone else, many still closely knit into working groups. We think of social groupings rather than individualism in our work; a highly interdependent complex; [indecipherable] helps in being prepared for and entering into the complex. Delving into the psychological for a moment, we must realize, if we are to individually and collectively succeed in gaining knowledge and insight from this course, that we have each developed prejudices concerning government, business, labor, and agriculture. Several questions will elucidate the point at issue: (1) What is the source of creativity in American business or economic life? Government? Private business? (2) What is the cause of trouble in society, such as depressions, wars, social disorganization (e.g. juvenile delinquency)? The private business economy? Government? (3) What image is first conjured up in our minds when we think of “business,” “government,” “labor,” “agriculture?” “Business”: the corner grocer, Wall Street, a yachting millionaire, a part of the community hostile to the welfare of all, the employer group, inventors and contributors to progress and change, something that America stands for, a middle-class view of life consisting of thrift, honesty, comfort, etc. “Labor”: a distant and “foreign” group off in Detroit who strike and cause trouble, someone you know, a family worker down the street, vague distrust. “Agriculture”: a farm with two Cadillacs in the garage, an enterprising businessman, a poor tenant farmer in poverty and illness. “Government”: a policeman, tax collector, the military, particular politicians or statesmen (dead politicians). We must be aware of our own prejudices. We must abstract and simplify. We must develop new stereotypes to get to the real nature of the foregoing terms and examine them, their history, their interrelations, and future rules. Lecture: Theories of Desirable Relations between Government and Business Important relevant questions are this point include: (1) How does an economy function? (2) To what end is it moving? (3) What is the role of the institution of government? Economists are well called the “worldly philosophers.” Adam Smith is today the prophet of American business and of competitive business, and is a part of our subconscious, particularly in America and England.

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Smith conceived of economics as being concerned with the wealth of nations, i.e. how do we get richer, or get maximum production of the goods people want. His was a reaction to Mercantilist philosophy and practice, which placed emphasis on government, exports, the accumulation of precious metals, and the building of the military. Wealth, to Smith, included goods as well as precious metals; more important is his transfer of meaning from the sovereign to the people as individual consumers. The problem of the time was the elimination of the “dead hand of government.” Under Mercantilist practice government was all-pervasive, though not totalitarian. It was government by special privilege and government consent. There was regulation not only of production but of labor and living – a hangover from the Mercantilist period that ended about 1750. Smith proposed that welfare could be found under the system in which the invisible hand led all to maximize public welfare, in which each individual trying to gain for his own advantage will be guided in his decision-making by the competitive market and transmuted into the public welfare – a prerequisite of which is the complete freedom of action and decision on the part of individuals. Smith was a wild-haired radical in his day, even though the patron saint of many conservative interests today. Economic progress was, to Adam Smith, a function of: (1) increases in the supplies of inputs, i.e. resources; and (2) increases in the efficient allocation of those resources. Those resources he classified as land (natural resources), labor (human effort), and capital (man-made instruments of production), which constituted, in addition to technique, the basic factors of production. To most Europeans, part of the success story of the United States is the vast store of resources available in North America, absent in. Capitalism, as the new system began to be called, was a treaty among the classes under which the rich would reinvest their wealth and income to increase production for the benefit of all, i.e. capital formation as decided by those closest to the picture. Smith also emphasized the extent of the market, for the market had to be of some size in order to operate most efficiently. Free trade thus arises, based on the division of labor and economies of scale. Entrepreneurship – enterprise or risk taking based on a “dream” – is also needed, but will likewise only come forth if the dead hand of government is eliminated. Also needed is the spirit of enterprise, a basic purpose or challenge. Government, it has been said, cannot grow entrepreneurs in a hot-house – then we get the sham capitalism of Tsarist Russia and Japan. Weber and Tawney have postulated that change and progress require important religious transformation, and consequently attach importance to the Protestant Reformation. Countries affected by it have by and large become successful capitalistic nations,

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not so with Catholic nations or non-Christian countries. In recent decades some economic progress has been associated with emperor worship, as in Japan, fascism, as in Germany, communism, as in the Soviet Union, and religious fanaticism, as in Turkey. Few economies have grown without some element of presumed national destiny, of some contribution to the world. Toynbee thinks of challenges and responses thereto as the progenitor of progress. For example, modern Turkey was subject to challenges to its very existence; military development and top-down economic development have resulted. War is also an important part of economic progress, often a revitalizing and reconstructing force, as in the United States during World War II following the depression. Europe, on the other hand, was devastated and some see World War II as the marking of the closing days of European world supremacy. David McCord Wright classifies societies as routinist, the continuity of sameness, of traditionalism, and as adventurist, the orientation of progress through change and progress, in which reform often marked the social fabric, and from which, consequently, we must prevent the dead hand of government from stifling adventurist progress – therefore, no stifling of the trend to supermarkets and large-scale enterprises. Turning now to the question of the proper role of government in the economy, several important writers have identified the “important group” in society. Adam Smith considered the business group, the capitalists, to be the most creative group and that, therefore, it should be possible for them to do what they want, enabling them to elevate the nation and raise living standards. John Stuart Mill, though less positive about the entire matter than was Adam Smith, felt freedom was the important goal. Freedom not only for business groups but for all social groups. The pursuit of riches was thought by him to be a way to develop the entire personality even though riches is not all there is to life. Therefore, he, too, strove for limited government; his notion of an economic system of many voluntary associations is a continuation of Smith’s thinking. Karl Marx, the father of modern socialism, conceived the important creative role to be played by different actors from time to time. The dynamic element for change to him is the passing of ownership of the critical means of production from one class to another. The critical means of production changes and thus a new group comes into power, violently: from ownership of land to that of capital to that, lastly, of labor, when the proletariat will inherit control of society from a disintegrating and failing group of capitalists. Thorstein Veblen has the scientist, the engineer, the technical person, playing the important creative role. Progress now requires, says Veblen, the overthrow of the bankers, who think not of progress but of money. The twentieth century is for

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him the age of the scientist. Not a Marxian, Veblen had little faith in the labor class and its potential. Joseph A. Schumpeter propounded a theory in which progress comes almost automatically and is almost a committee activity. His thesis is that we in America are becoming more collectivistic, changing from.individualist capitalism to collectivist capitalism, and that we will be so successful that capitalism will destroy itself. Schumpeter’s thesis is not be reckoned with lightly. It influences the Harvard Business School, Fortune Magazine, and many business executives. Ford is an example of one of the last capitalists in Schumpeter’s view – one who could start from nothing and amass a fortune. Today the progress comes from big firms, through bureaucratic hierarchies associated with no one person – progress by committee, taken for granted as no one is associated with it. He therefore foresees the growing realization that we do not need private capital; that all we need is public capital if with it we can get scientists to work and thereby assure progress – institutionalized progress formerly with the large firm, then with the state. The managers themselves would contribute perhaps the most to the demise of individualistic capitalism. This would seem to indicate that we could have a routinist or adventurist feeling at different stages of society. More directly concerning government, a minimum amount of law and order, a basic assurance of continuity in social institutions, is a prerequisite to economic progress. Similarly a good deal of “social overhead” is desirable, a social investment in goods and services not ordinarily forthcoming from private enterprise, such as railroads, schools, and roads. Government may be said to engage in two lines of activities: (1) law and order; and (2) actual outlay on social account. Part of social progress is an investment in human beings, building better people – consisting in part of education, health and the opportunity to fully exercise human faculties. One’s concept of the role of government is a function of: (1) attitude to economic change; and (2) how much and what we think government can contribute. Lecture: This is an era of national prosperity. National income is on the upswing, as is gross national product – the latter increasing at the rate of 3% per year; in 1950 it was 280B, in 1955, it is $385B. At 65 million we have reached a peak of labor employment – it increases 700,000 per year. The only major blemish is the continuing downtrend of agricultural income and welfare. Productivity is increasing at the rate of 2% per year. Population increase is also rapid. Per capita national real income is about $1,800 and is increasing at about 2% per year, the same rate as the productivity increase.

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Current appraisals are not thinking of keeping up with the record of last year, but keeping on a continuing set of increasing curves, even with brief detours. This is an era of change to which we have become accustomed, take for granted and therefore expect. Inflation was important before 1950, but prices have been steady since then. With a stable price level and wage increases, productivity is distributed through wage increases rather than price decreases – a continuation of a national trend continuing since the colonial era. We prefer to work less for more money or work the same for much more in wages, through increasing productivity. Consumer credit at $35B is less than 10% of national income. The problem of fluctuations in transactions is due to fluctuations in transactions due to credit being greater than fluctuations, if any, in income – more vulnerable. The general idea is that people differ in their ideas about the proper role of government because, in the main, of their differing ideas as to how the economy functions. To increase wealth we have to increase the supplies of resources and increase the efficiency of the allocation of those resources. But there are differing views turning on the concept of the real dynamic or creative force in society. Adam Smith concluded that an invisible hand guided individual businessmen to maximum public wealth through the totality of market operations, despite their seeking their own fortunes. His control device was the competitive market; his energizing device was the individual profit seeker. Marx, on the other hand, had the view that the businessmen would fulfill their historic destiny to be succeeded by the proletarian class. Veblen saw society in the hands of technical and production people, not the money-minded people. He was na¨ıve about the latter and glorified the former. He was the father of technocracy, though it was his illegitimate child. Schumpeter institutionalized progress through committees. As for the efficient allocation of inputs, the questions are: production by whom, on what, when, and who gets the income. In a capitalist economy, the market is the central plan, i.e. the price system, an elaborate device accomplishing all allocation in the most efficient manner. The consumer makes his wishes known to the consumer goods producer, who does likewise with the producer goods producer, thence to the factors of production – all through the price system. Therefore, knowing price helps us to decide how much one will take – a continual and complete conditioning by price. There is no central direction. Data is distributed to those needing it, i.e. efficiently. This is the opposite extreme from central direction. Still, “it is just as much government policy to decide to have a price system operating as it is to decide on any other system.” [Quotation marks in the original notes, signifying direct quotation of important point made in lecture.]

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Role of Government in Economic Progress in Historical Sense We are interested in the relationship between capitalism and democratic political institutions. Capitalism was a reaction against Mercantilism and similarly oriented political pressures in England c.1750; capitalism and democracy were thus historically associated. Both aimed at maximum freedom for the individual, elevating the individual as political entity, as a consumer, wage earner, etc. Limited government is a radical concept of government – that government should consciously limit itself, that the individual has rights supreme above government. Similarly, the role of government was to be limited in relation to capitalist institutions. In most societies government has a more central role. The Philosophical Radicals in France and England limited government in all areas of human affairs. Bentham was a radical in the sense of believing people are good and if let alone to make their own decisions they will make good and right decisions; that evil is in or comes from institutions – government, church, business. He also believed that people are rational and in getting together they are still rational – the basis of democratic government. And he believed that people will contribute to and believe in the melioration of difficulties – optimism. This sort of radical believes in goodness, rationality, and optimism in regard to human beings. Edmund Burke, a conservative, felt that people were evil, that restraint comes from their fear of the gallows and hell, that the heavy hand of tradition keeps them in line, being basically creatures of whim and avarice, decidedly not rational. He also felt that there is no trend to meliorism, as tomorrow can be worse than today, and that the only thing keeping good things with us is the institutions perpetuating church and aristocracy. See Russel Kirk, The Conservative Mind, and Clinton Rossiter, Conservatism in America. Smith, Marx, Veblen, Keynes are all Radicals in this sense; even Herbert Hoover. The Radical has a presumption against government in favor of individuals. But certain functions of government are admitted by all but anarchists: (1) Maintenance of internal and external security. (2) Protection against fraud and dishonesty in business. (3) Supply the legal definition of property and contract, i.e. as rule maker and umpire. (4) Issue and regulate money. Lecture: Adam Smith wrote that government has three functions: the defense of the country, the administration of justice, and the maintenance of certain public works. The

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third was omitted from the end of the last lecture; on the other hand, he only later mentions the issuance and regulation of money. Government to Smith was the restrictive government of Mercantilism, which promoted only the welfare of the Crown. The basic theory of Smith, Bentham and J. S. Mill was that government is the oppressive agent of a limited class and a dead hand limiting the originality and creativeness of individuals. Newer extensions of government activity have been along several lines: (1) Protection of the weak against the strong. Smith did not place too much emphasis on “conspiracies,” against groups in society, conscious or unconscious. (2) Acting concerning important community or neighborhood effects, where individuals do not contribute to maximum total welfare, such as dumping refuse in a river by a manufacturer does more bad to others downstream than it does good to him. (3) Help and promote business. Smith felt that the only thing necessary to help business was to eliminate the dead hand of government. Now many accept other aspects of Smith but add government promotion of business. (4) Back to the Mercantilist idea of national welfare, to an extent that some call the present era Neo-Mercantilism, the era of nationalism regarding power, security, influence, and wealth. This is not the question of the welfare state. It is governmental activism regarding prosperity and peace. The basic theory of capitalism has therefore undergone some fundamental changes. Smith’s economy was that of eighteenth century England; it formed the basis of his understanding and reasoning. That economy was highly centralized and regulated. He envisioned an atomistic group of responsible private property holders, many small centers of power, all free to move, developing in individual businesses, quite opposite to the Mercantilist system in which the sovereign exercised direct and pervasive control over economic activity. The randomness of a diffused and atomistic society and economy would result in a good and successful economic picture, all because of responsible private property. Property was seen to exist “originally” with the people and was only expropriated and confiscated by the state. A natural society was one in which property was privately owned, and the privacy of the person similarly respected and inviolable. By “responsible” private property Smith meant that individuals were responsible for their own actions. They could profit from them and they could suffer the pains of their own failures. Unlimited liability was the logical conclusion. Frank Knight feels that Smith overlooks that the freedom to compete is also the freedom to conspire. Smith felt that the people would not run to the state for aid. The state is seen as the result of the people seizing power.

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As for the “meaning of government and business,” the mere asking is an important question. For often there is no meaning to the question in a particular society, e.g. in Mercantilist countries and in South America today, there is no division between the two. In Latin America the “man on the make” must go from the military to the government and thence to business. We assume, with Smith, first, a limited governmental role and, second, a free and self-vitalizing private sector. But on what basis are we to distinguish between “government” and “business?” We might consider government to be the rule-making organization, and business as the follower. This is not a good distinction. Government does more than promulgate rules, for example, property functions, education, health, post office, military; and business also makes rules, which, while not enforcible by violence, are by other sanctions, e.g. the working rules of the place of employment, enforced by firing. Unions do also. It is hard to distinguish between government and business. It is equally hard to distinguish between them on the basis of proprietary function. It is not feasible to define government by what it does and business by what it does. A more useful distinction defines government as the organized power of the state with a monopoly on violence – crude but hitting directly at the central characteristic of government – and business as any activity carried on for the gain of private individuals, thought “sanctioned by government” should be added. We will test throughout this course whether what Smith held in 1776 is appropriate today. We will see that there have been important changes in the economy of his time – transitional from much earlier capitalism – and ours. In 1790 there were four million people in the U.S.; now there are 165 million. The country’s population increased at about 35% per decade until 1860, and about 20–30% per decade to 1910, from 9 to 10% during 1920–1930, and from 14 to 15% in the 1940s. We may question whether his theory applies to a large and vast society, quite dissimilar to that of Great Britain in 1776, which was more rural than urban. In 1790 the U.S. was but 5% urban (cities of 2,500 or more); in 1920 we were over 50% urbanized; today about 60% live in urban areas. While the farm population per se is now about 17%, in 1790 it was about 90%. Today the nation is industrialized; only 8 million of 67 million workers are needed on the farms – about 15% of the labor force. In 1954 non-agricultural employment was 49 million out of 67 million employed. Manufacturing had only 16.1 million employed, or about one-third of the non-agricultural working force, yet much of our thinking is oriented by manufacturing. Construction accounts for 2.5 million; transportation and public utilities, 3.9; trade 11; finance, 2.1; service, 5.4; government, 7.1; etc.

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No longer are we a nation of atomistic enterprises. Today two-thirds of business activity by value is done by corporations; 95% of manufacturing and almost 100% in transportation and public utilities. That is, we have had a basic revolution in the organization conducting business. Only in agriculture (10% corporate) and retailing (50% corporate) are there still mainly partnerships and single entrepreneurships. The financial organizations are not the only ones for collective action. In addition to the corporation itself, cooperatives, unions, charities, and religious groups are collectively organized. Collective action is the typical pattern, not necessarily to the exclusion of individual action. We have gone far in converting away from human power to machine power. In 1850 only 6% of power was derived from machines; in 1950, 95% of power was so derived. The Industrial Revolution was “introduced” in England c.1750; it was not until 1850 that it took on importance in the U.S. A second Industrial Revolution took place by 1920: the mass-production assembly line and the revolution in applied chemistry. There have been, therefore, basic changes in the relation between man and what he works with and the energy he puts to use. This has culminated with the revolution of automation, with machines doing not only the work but also the thinking of man. Since 1776 there has been a great continuing series of changes or technological revolutions. The new economy is, therefore, different from what Smith could envision. Even the constitutional founders had not seen the steam engine or gas engine, they had not gone beyond the horse and buggy or sailing transportation. Our forefathers were not oriented to the kind of economy we now take for granted. The conditions of business have changed more than our views on the subject. The difference between views on the role of government has been conditioned by our view of the functioning of the economy and by the views handed down and less influenced by conditions existing in a society at a particular period of time; i.e. a “tyranny of ideas,” by handed-down theories. Despite the customary outward hostility of the typical businessman to theories of any sort, they are the unwitting product of theories of government and business written over 150 years ago in a different social complex than exists today. Government and the Basic Economic Institutions We are going into what government does today and be more specific. The first role of government is that of providing a framework for business; the conduct of business would not be possible without government making rules. Property: Property is usually thought of as the exclusive right to control a physical thing – land, buildings, and animals. Blackstone considered it to be the exclusive and despotic domain of an individual over an external thing.

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Government declares what is and what is not property. While “property” at any point of time is usually taken for granted, the same things are not property now that were so some years ago. We are continually changing the concept of property, adding here and taking away there. Property in intangibles, such as good-will and expectations, and paper designating a share in a corporation have been added; ownership of gold and slaves have been taken away. Property today is thought to be a bundle of rights and duties, designated by government and subject to change; and as such is part of the basic law, though promulgated by statutes, administrative rulings, court decisions, etc. Lecture: Classic capitalism envisioned as society one in which the dominant institution was private property responsibly held. Private property was then mainly personal property. Society was one of individual relationships, atomistic; the only large grouping of power was the state. Personal private property responsibly held had three features: individual, atomistic, and material. Functions of Government I. Establishment of the Rule of the Game and Umpiring: Extremely pervasive though unknowingly to more citizens. The fundamental requirement is that the rules are workable and widely accepted. Property: Blackstone’s definition is too primitive; better is “bundle of rights and duties.” Two views of rights of property have come down. The natural rights view – held by such men as John Locke and Clarence Manion, the former dean of Notre Dame law school and first chairman of the Commission on Intergovernmental Relations – is that the right to own property is antecedent to government and that government itself is the result of a contract between individuals existing before government. They are stuck, however, on the introduction of new forms of property rights, such as intangibles like corporate stock and goodwill. The relativist or positive law view centers on the statement by legal authority of what is the law and is thus antithetical to natural law. What has constituted property has changed numerous times, through both additions and deletions. Property now consists of both tangibles and intangibles, but does not include slaves or gold. Similarly, the component rights and duties have been altered. The rights to exclusive use, to dispose, and to earn income are relative and limited by rules, the rights of others, regulations, custom, and the neighbors’ use of their property. Property is less a matter stated in terms of physical items and more in terms of the rights and duties associated therewith. In Hitler’s Germany, all rights were absent but the right to income,

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which itself was limited by the state’s power to confiscate; the same is true of Franco’s Spain. The duties of property also follow certain rules and prohibitions. In an 1898 Massachusetts court decision by Justice Holmes, no damages were awarded to the parents of children injured by falling into a pond of acid on the property of a tanner, although such property was customarily used for a shortcut to and from school. It was held that the owner had no duty and hence what happened to the trespassers was not his fault, it was the duty of the parents. That doctrine is not applicable now; the doctrine of attractive nuisance holds despite the trespass by the children. The net effect is that there probably are more duties and fewer rights – the changing of classic and harsh capitalism, if such ever existed. As for the source of property, natural-law adherents believe the source is supernatural and inalienable. The positive-law view is that property is simply what government says is property. The alternative to theft or conquest – “let’s fight” – chaos – is to have government set up property and its rights and duties. [The “let’s fight” phrase comes from a joke told by Lampman: A man, walking down a country road, meets a farmer working in his field. The two talk. The man asks the farmer, “How did you get this land?” The farmer replies, “From my father.” “From whom did he get the land?” “From his father.” “From whom did he get the land?” “He fought the Indians for it.” Says the man, “Let’s fight.”] The Constitution says nothing concerning the right of property or anything elucidating that of which it consists. The Fifth Amendment established that property may not be taken by the Federal government without due process of law and just compensation, but does not guarantee property per se; it says, if there is property, then . . . Paragraph 10 of Article I prohibits the impairment of contracts. But experience during the depression shows that government has directly impaired contracts, as to time; and laws may indirectly impair them, e.g. Prohibition. The Fourteenth Amendment guarantees the same due process of law with respect to the states. Contracts: A contract is an agreement enforceable at law, one with consideration. There are three kinds of contracts: legal and enforceable; legal and non-enforceable (marriage promise – may be damages; agreement to work – may be damages, no specific performance – slavery); and illegal (gambling and narcotics). The law of contracts is similarly plastic as to particular type of contract. The purposes of the law are: (1) to set rules for the purpose of certainty, not great social policy; and (2) direction of business activity, to encourage and hinder certain activities, per social policy, such as debtor-creditor relationships. Prior to the depression, the debt contract was absolute; in the depression, mortgagemoratorium laws were enacted and were upheld by the Supreme Court, reasoning

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that it was against social policy to force bankruptcy. Similarly, contractual gold-payment obligations were enjoined after gold was declared no longer the monetary medium. Bankruptcy and Receivership: Classic capitalism envisioned complete responsibility. If mismanagement resulted in the loss of money, debtors’ jail and disgrace plus the end of one’s career were the result. Bankruptcy was established in England at the insistence of creditors who feared the loss of even partial repayment and recovery. Now it is possible for an individual to attain a clean start at his own election and ask for forgiveness of his own debts. This situation is quite different from classic capitalism – for both the debtor and the creditor, the latter of whom first sought the protection of the law, in a sense evading or avoiding his own “responsibility” for a bad loan. There is now no social disgrace; indeed, a bankrupt individual can rise to the presidency, as did Truman. The theory is more directed to social purposes than at one time: The idea of receivership is to keep the business in operation rather than dissolve it and salvage all possible funds. In the case of a railroad, the interests of riders, employers, laborers and others enter the picture. Lecture: Common law, sometimes called dog law, is law after the act: Let the dog go ahead and do it and we will determine the legality thereafter. Apropos of “life, liberty and property,” the right of contract is not spelled out specifically in the Constitution, other than the prohibition against impairment. As with property, changes have been made in the meaning of “contract.” The right of contract may be limited to: (1) protect against mistake; and (2) protect against inequality of bargaining power. Contracts are thus subject to statutes regulating hours and types of work, prices of work and products, the nature of contracts entered into (prohibition of yellow-dog contracts, in which the employee agrees not to join a union). The courts have the largest role in shaping the basic fundamental institutions; they are the basic institutions of government concerning the basic framework of the economy, especially through decisions on property and contract. John R. Commons maintained that the Supreme Court was the ultimate faculty of political economy in the United States. The courts may decide on the basis of precedent or on the personal experience and social philosophy of their members. The courts in this country are conservative in the sense that they are not influenced by pressure and not ruled by the masses, but they are socially responsible. Often judges are qualified by prior activity; and there often is a discreet relation between politics and justice; they are not sterile oracles.

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The institution of bankruptcy has brought about a fundamental change of view of classic capitalism. Formerly it was a way through which creditors prevented debtors from escaping their obligations. How it allows debtors easy escape, especially in relation to their former alternatives. Nevertheless, imprisonment for debt was on the books until 1870. Today bankruptcy is one way in which to get out of a contract lawfully. Receivership is a variant of bankruptcy. Formerly the practice was to liquidate the assets and transfer the receipts to the creditors. Now we have the concept of the “other parties,” i.e. the workers, the customers, and the public generally, who are in some way affected by the operation of the firm in question. Receivership amounts to an adjustment of debts without any liquidation and transfer, and has been in operation since 1933. The concept of a “going concern” and the realization of a social consciousness are responsible. Patents and Copyrights: Patents are the right to exclusive use of a particular technique, an outright monopoly granted by the government for a limited time, to encourage invention, progress in the arts, and innovation. To be patentable, an item must be: (a) new; (b) useful; and (c) represent a real or particular improvement. The patent per se is no guarantee; only a court test can decide. The test is on one of the three foregoing bases, and is brought by others. Criticisms of the present patent system include: (1) Most patent applications are not really tested in the patent office. (2) Invention is not now done by individuals, but by firms and their research staffs, usually the product of many individuals, and would be undertaken even if they could not be patented. Usually the real contribution is not patented. The final item is the product of many separate people throughout the world. Often a patent monopoly is granted on a minor perfection of the contribution of others. (3) The real complaints concern abuses: patents encourage monopoly through such devices as tie-in sales and terms of use, sale, exchange of patents, etc. (A. B. Dick; United Shoe Machinery cases) Copyrights are another property right, covering written material, music, and art (painting, sculpture), and are designed to encourage advances in each field. Royalties may be demanded for every performance or showing of your work. The trademark is a label associated with a firm and is therefore a valuable property. The Corporation: The most important revolution in economic affairs in the nineteenth century was the development of the corporate form of business activity. Formerly, joint-stock companies had limited liability and life independent from those of its stockholders, but were not important. A major change in the rules of

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the game occurred in the United States around 1830, the enactment of general incorporation laws. With classic capitalism one of private property, the development of the corporation meant substantial changes: limited liability, perpetual life, a separate entity, and transferability of shares. With limited liability, one lost only what one put in, thereby amounting to a reduction in liability from that of classic capitalism, whose hard rules involved your share plus all your material assets and your liberty itself. Early court decisions concerning corporations show the horror of judges at the decline of the old meaning of private property. Responsibility of classic capitalism has now been curtailed by limited liability and bankruptcy for the businessman and by social security, etc. for the worker. The difference between the corporate person and the natural citizen is the rights of citizens: the right to vote plus the discrimination by states of “foreign” corporate persons. Today, those who run a corporation may not own it, nor any substantial part of it; as a rule, management is divorced from equity ownership. AT&T has a million stockholders and GM, 300,000, both greater than the numbers of their employees. Brandeis, in Other People’s Money (1920s), envisioned business as the management of other people’s money. Management is not financially responsible in the sense of classic capitalism’s responsible private property. Under classic capitalism, contracts were to be made in your own interest on your own behalf, leading to the interest of society. Now, management may not find it in its own interest to serve the interest of the corporation. For example, in the case of the Credit Mobilier, the managers formed a separate company to contract with the firm they managed to build for it at a higher price than was otherwise necessary, thereby bleeding the corporation they did not own in favor of the one they did own. Labor Unions: Quite new in legal form, they are as original in America as the corporation. In Commonwealth v. Hunt, 1845, the formation of unions to pursue economic interests by peaceful means was allowed. This, too, involved a departure from classic capitalisms, which did not envision bargaining on the part of large groups with individuals not personally responsible. Similar to the corporation, the separation of owners from managers has resulted in the latter often having much power. Lecture: Evolution of Tort Law: Formerly the individual was responsible for damages because of either deliberateness or negligence as the basis of fault for determining damages. Now a different approach is used, the doctrine of social fault, especially in industrial accidents. This doctrine does not seek the immediate cause of a particular accident but the person who can be penalized with an eye to two

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important considerations: the person most able to prevent future accidents and the one with the highest ability to pay. Damage suits therefore involve all parties who might be interested, or affected. If there is an industrial accident, the burden is on the employer as the one most able to prevent future accidents and to pay, for he can spread out his insurance cost over all the items of production. Although the doctrine has its historical beginnings as far back as the 1400s, Roscoe Pound has said that capitalism ended when the doctrine of social fault began. II. Protective Role of Government A. Internal and External Protection: Government has the dual function of promoting internal law and order and promoting external protection – defense – from foreign enemies, as well as assisting the citizenry in expanding their territory, their natural resources and their markets. The protective function involves the greatest percentage of government expenditures. In 1952, all governments in the U.S. together spend one hundred billion dollars, sixty billion of which were Federal, on all functions; of this amount, some sixty-three billion dollars went for “protection.” External protection included such expenditures as military defense (the largest single item), $40 billion; the cost of wars, past (war interest, $6B and veterans’ services, $5B), and future (prevention of war, including foreign aid, international affairs, and some atomic energy, $6B), a total of $17B; a subtotal of $17B, and $57B total external. Internal protection, Federal, state, and local, included crime control and protection, $1.4B; general government (courts, legislature, etc.), $3.4B; and fire, $.5B, a subtotal of $5.3B total internal. The grand total is $62.5B. National income in 1952 was some $359B; $57B for national defense amounts to about one-sixth of national income. Historically, crime control and internal order have been functions of state and local governments. It is the constitutional prerogative of the Federal government to have a monopoly of external protection. States and individuals are unable to enter into foreign affairs on their own. Treaties are the supreme law of the land, indicative of the high status originally given to the external protective function. The cost of the national guard is met by the Federal government, and it is subject to the President’s call. In World War I, they retained their own identity. In the Civil War, they were locally established and led (through local elections); volunteer corps were formed. This indicates the changing nature of ideas; the first peacetime draft was in 1917 and has continued since then. External protection has always been our largest item of expense, with the exception of the depression years when welfare and relief programs rose above defense spending.

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The major reason for the eclipse of state and local government and the rise of the Federal government is the growing importance of the protective function. In 1939, Federal spending was less than the total of all other government spending, then being only $9B. Internal protection: Protection of Person and Property: Theft, fire, malicious damage. The amount spent here has not grown rapidly: Some seven percent of state and local expenditures. Wisconsin is about typical, with fifty million out of a $750M budget. There has been a shift from strictly local law enforcement to interstate compacts, e.g. regarding hot pursuit. The trend began after World War I, when we saw the development of interstate crime syndicates, especially regarding Prohibition. Also, Federal activity has slightly grown in this area. Although nothing was so frightening in the 19th century as the idea of a secret central police, the FBI, the national or Federal police, came into being, though after a long delay. They function mainly as an information and training center. We are gradually moving toward greater Federal enforcement of criminal law, such as narcotics, white slavery, and kidnapping. We can expect Federal activity here to get more important, due to the ineffectiveness of locally interested governments in the face of national problems. Prevention of Fraud: May be malicious (harmful) or unharmful, except to the pocketbook. The Federal government entered this field around 1900, regulating advertising, product, SEC, pure food and drugs, etc. The legislation is still going forward; the last major act was in 1938. An indirect form of fraud prevention by state government is the licensing of various professional people, such as medical practitioners and lawyers, though often economic motives for such regulation are present, though the public does still benefit. Also on the Federal level, the Bureau of Standards determines whether products are as advertised; it also engages in grading and labeling activity. Protection again fraud is a governmental activity that is growing in importance. Public vs. Private Performance: Why not have fire protection be a service provided to subscribers? Because there is an overriding public interest in the protection of property exceeding the private interest. It is important to a neighbor that his neighbor’s house is protected. There are, therefore, safety, zoning, and other ordinances as well as fire protection. We have a social interest in each other’s property. In addition, there is the status of businesses that have their own policy who are deputized; the corporation is thus a government in an important sense. Usually their police are important in the case of strikes. Ford’s use of private police instilled a vast spy network in the system.

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Furthermore, employers have many sanctions, per the working rules, similar to the police power. They can discipline in many ways other than incarceration, in order to maintain order. B. Prevention of Obstruction to Interstate Commerce: This includes the maintenance of a free trade area unequalled in size or history of operation in the world. The Federal government has the only power to regulate interstate commerce. No state, therefore, can levy tariffs, etc., even though we still have discrimination against out-of-state firms – trucks, use taxes, foreign corporations – that approximate a tariff in effect if not purpose. It has been agreed that a legitimate function of government is that which imposes taxes to protect, in Wisconsin, butter, the tax on oleo, although this clearly limits interstate commerce. There was a great increase in such activity in the states during the depression. Ninety percent of the value of all commerce is interstate. All state economies are, therefore, built on the national, or international, economy. Some state protection is against each other; some increases their ability to go along. Lecture: The American economy is now that of a garrison state. External protection is a, if not the, most important aspect of American life. The role of the professional soldier is now more important than ever. Similarly, the way to power and prestige is now more through the military. Many other institutions that are only in part related to the military are drawn in, for example, university research, which is now one-half military, is subject to security clearance, etc. The emphasis on military security, loyalty, and the need for conformity has changed the entire American way of life. We cannot today foresee the future without a security program. We will learn to live with it, though it poses a threat to our understanding of the relation between government and the individual. Today we are protecting America not only at home but on every continent. There is a virtual assumption of protectorate status in many areas of the world; for example, the Mediterranean is an American naval lake. Numerous defense commitments and treaties also are a part of the picture. This has led to the importance of foreign policy and understanding. The foregoing indicates the great need for national solidarity, scientific development, etc. The Protective Function in Relation to Business: Internal and external protection, without any doubt at all, is an appropriate role of government. Business requires these protections for its operation, and constantly asks for and demands

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more. Undoubtedly business is the greatest beneficiary thereof. This brings up the question of the benefit theory of taxation: those who have the most to lose benefit most. Freedom benefits those who have the most to use under freedom and should, therefore, per Anatole France, pay most of the cost. Business also receives the largest share of government military expenditure. III. Government Service Functions Government performs service functions to individual persons, industries, and community development. Persons: All states have become welfare states today – America, Argentina, Spain, Great Britain, Hitler Germany, etc. – in the sense of services to people that are desired and asked for. The service function is associated with both democratic and non-democratic nations. Earlier, in the 1930s, it was referred to in political science journals as the “service state,” even primarily a service organization for the public. John Foster Dulles introduced the term “welfare state” in 1948 while campaigning in New York for the U.S. Senate against Lehrman. This was a blooper, as it raised the semantic difficult of being “against welfare.” By welfare, we mean education, social security, public health, etc. – minimum income and insurance against the hazards to family security. The service function currently costs, on all levels, some $25 billion, including OASI, with $10 billion for education. (1) Public Education: The largest single service activity in terms of both money and employment. First and farthest in the U.S. From elementary to college. Compulsory in early years. All characteristically American. First great socialistic enterprise across the country, with local action, some state, and virtually none from the Federal government. Vast program in total to invest in persons – public investment: (a) minimum necessary for national unity (one language, almost unique in world history; one way of thinking; and one set of values); and (b) makes us more productive economically. Expect all today to be able to at least read and write, in industry, etc.; also specific skills. Who benefits from educating everyone? Detroit auto manufacturers, who employ Tennessee hillbillies; parents; individuals themselves; etc. – all benefit from education of other people’s children. Largely a local function to begin with, becoming more and more a state function as regards support and therefore control. Little sign of Federal growth in this area. (2) Welfare Institutions and Social Security: Second largest activity. More important since depression. Most dynamic service. Social insurance programs amount to $6.5 billion (paid for by private contributions to OASI, UC). Public assistance – old age, blind, handicapped, etc.:

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$2.7 billion. Public health and welfare – hospitals, free medical service, research, sanitation programs: $3 billion. Twenty-five percent of health expenditures in U.S. come from government – bogey of socialized medicine. Veterans’ programs amount to another $4 billion, covering pensions, health, education, etc. Relatively few people are employed directly in welfare institutions, e.g. social security, but the number is expanding. (3) Highways: Third largest service function. Third largest expenditure in almost every state. Almost entire state budget is in terms of education, public welfare, and highways. Local and state education is the largest. Many are employed in highway building and maintenance, as many as two million people in a year. Eisenhower has stated that we need more, better, and more rapid roads. We are moving toward a larger role of government in all three of these areas. (4) Conservation of Natural Resources: A large function of government, especially of community development as is highways, in the protection of the public interest, especially of the prosperity of future citizens. Government is the only one who can take a long view of our needs. (5) Recreation: Government is expected to provide recreation for people: schools, parks, military parades and shows – an increasing function. Highway development and education are adjuncts. (6) Postal Service: One-half million employees, largest Federal department next to defense. Provided for in constitution. Perpetual monopoly with the exception of railroad express, telephone and telegraph. (7) Waterways and Airports: Important government activities in transportation and communication of all kinds. (8) Research and Information Services: A rising function of government. Always important in agriculture, now in many fields. More fundamental research and knowledge done by and in government hands today than ever before. Caused by defense effort and atomic energy. Therefore, a source of creativity is shifting to government laboratories and planning boards. National Security Board decides program of technical advance. Servicing any given area stimulates beyond what would have developed in the absence of the service, affects allocation of resources. Lecture: Thesis to Date Government is a party to every economic transaction; through common law, granting of charters, etc. Government is active in all of our lives through the protective function. The existence of our lives and of a complex society depends on this function and on an active government, especially with respect to the evils

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and problems arising in such a heterogeneous society and economy. We look to government in case of “acts of God,” disaster. The service function applies to a tripartite classification: persons, industries, and the community at large. Differences in rationale are present. Persons: (1) Education: largely publicly operated and financed, compulsory attendance with regulation of content; could have another system varying some parts of these elements. General citizenship education vs. vocational education, e.g. engineers, with directly ensuing profit. Rationale: Investment in people for mass social benefits. Requirement of democracy and citizenship. All benefit by others’ education more than individual educated. Perhaps begins to fall down when applied to vocational education. (2) Social Security: in-kind benefits (public health, direct medical indirect services), minimum income or cash benefits. Rationale: Community effect of public health benefits: disease and epidemics. Rationale of Social Security: Group compact between young and old in complex economy and society, dissatisfied with autonomous provisions for aged; correcting bad result of free-market system: poverty concentrated in old-age group, mal-distribution of income computed by government; social investment or prevention of disaster but conscience bound; also an important pressure group: 14 million over 65 years of age (8% of population and a rising percentage). Problem of growing awareness since depression; program of conscience, not of necessity. Poverty and therefore “pauperism” no longer seen as indicator of criminality and consequent withdrawal from community activity and loss of civil rights. (3) Medical Field: New frontier of government service. (a) Minimum-income basis of health hazard: disability expense, social sharing of risk. (b) Socialize medium, as with education; publicly operating, financed, regulated, and compulsory. Function of views on education. Relation of patient to doctor similar or identical to that of student to teacher. Age of experts, less of family doctor. Industries: General: (1) Information dissemination (weather, business conditions, markets, prices, costs, technical, etc.). In Wisconsin, to agriculture especially. Research (increase in creativity in government, e.g. rise of atomic energy, medical). Testing. Specific: Aviation (airport finance; navigational aids; by-product of military needs – experimental design, etc.). Merchant shipping (would largely disappear if not for government aid). American business abroad (Departments of State and Commerce often serve as representatives of U.S. business abroad; not as agents but as necessary participants in contractual negotiations; Agriculture: services of many kinds; granting use of public land for grazing, roads and passways, etc.). Rationale: Better done by government than by private organization. Also, motivation of applicants is that of getting a bargain, i.e. government will pay a good part of the bill. How government gets into a business: first, as a requested service; easily goes into regulation

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of some activities, and therefore complaints about government regulation and socialization. Departments of Agriculture and Commerce founded as and looked upon as service organizations, not regulatory – though possible to conceive of them thus. Community Services: (1) Highways, Post Office. (2) Conservation of natural resources, similar to establishment of basic economic institutions. Necessity for government to set working rules. Forestry, minerals, fisheries (best example: a free, unowned resource, with conflict between individual and social interest). Question whether there would be no conservation problems if resources were properly owned, with supply and demand operative in regard to the future as well as the present. Faulty tenure arrangements. Formerly cutting right on government land; right to catch, now. Market conserves resources when privately owned and people are not ignorant of future prices and their own interest: some feel that farmers are ignorant of market forces – too present-oriented. Thus, bad results; therefore government action: free resource, faulty tenure system, ignorance of possible future values. Lecture: Government as a “treaty making organization” among groups in society: (1) Employers and employees: Workmens’ Compensation: cost of burden of industrial accidents: doctrine of social fault except when employee is negligent; formerly, responsibility on employer only when he was at fault. Unemployment Compensation: Burden now on employer, not the unemployed; doctrine of social fault, who best able to bear burden and prevent. (2) Old and young: Subsidization by OASI of old until about 1970, or one generation from 1935. From family to social treaty, due to breakdown of family unit in industrialized and urbanized economy and society. (3) Rich and poor: Treaty as alternative to class war. Partial redistribution of income because market determination of worth is felt not to be entirely valid – without any loss of citizenship rights. Individualistic interpretation of success coupled with socialistic interpretation of failure – a prevalent dualism in America. (4) Present and future: Conservation, also education. (a) Market cannot make an appropriate treaty. (b) Import rather than export basis of U.S. regarding natural resources; in 1975, 25% will be imported. U.S. used more natural resources in 1900–1950 than the rest of the world during the entire history of mankind. Presently exploited resources unable to supply all if all were industrialized like the U.S. (c) Quite self-sufficient in food. Critical shortage is in manufacturing raw materials.

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Conservation: Different Types of Problems (1) Why is the market unable to conserve? With dwindling supplies, expectations of high prices should elicit conservation, withholding supplies and postponing use. Why is that not always done? (a) Non-ownable resources: fish. No private interest between the present and the future; no individual control over future supply. Best way to encourage waste is to let people use what they do not own – public grazing lands – present use the only consideration. Looting of public resources. (b) Faulty tenure system: oil, forest lease. Adjoining drillers work in same pool. Private property rights but with present advantage to secure as much as one can before the others do. Purchase of only timber rights – of no interest to cutter (or to sharecropper) to maintain land, and owner lacks interest. Best system is therefore owner-operation. Conservation activities: (a) Education for conservation. (b) Producers forced to cooperate: oil: setting of maximum drilling. (c) Regulation of entire industry: fish, forestry. (2) How does conservation pay off? Is it a good idea? In general, we do not know. From the economic perspective: (a) any expenditure would be justified by a higher national income in the future than might otherwise have, considering the cost, including interest on invested capital; and (b) does money spent compare favorably with alternative ways of expenditure in terms of increasing national income, e.g. educating engineers vs. conserving forests. It is good economic to take the alternative with the highest marginal yield. But is the cost test compatible with Adam Smith’s third function of government? (c) Other considerations also enter into the picture: (i) Regional politics: Most money is spent in U.S. in the West and Southeast, where the annual rainfall is less than 20?, i.e. is politically important due to regionality of issue. Also community development issue. Reclamation projects are often highly expensive and will not cover cost, even excluding interest, and involves transfer of irrigation cost to power users. Deliberate policy to promote development of all regions of U.S., per idea of Manifest Destiny. (ii) Religious belief in conservation: Devotion to principles that a civilization must be tested by its treatment of the land. That no basic resource be wasted, i.e. do not consume your capital; to waste is a basic sin. Leave it as good as when you came. Conserve our heritage for future use. Against: (a) mining of soil; (b) getting away from contact with soil and nature – inherent evil in city living, in part losing the feeling for the need to conserve the land, etc; (c) non-economic set of values; and (d) treaty between present and future. (3) What is waste? The whole of economics is to prevent waste: Waste as any procedure not giving the greatest value of output for the least value of input.

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Waste is a relative matter: it is wasteful not to use a process giving a little more for a little less. Also, waste may be seen only in retrospect, with the development of new methods; what is wasteful today may have been least wasteful process yesterday. In addition, the market does not always give a valid allocation between present and future. Lecture: We have seen government in three roles: (1) As rule maker and umpire: This moves away from the classic capitalism approximated 170 years ago. It has included changes in the rules in favor of the weaker party, e.g. non-property owners, employees. It has evolved the American economic system as we know it. (2) As protector: The most important by many criteria; internal and external. (3) As service agent: A government of, by, and for the people, responding to or anticipating the needs of the people. A treaty maker as a service to individual persons. Promoting different notions of appropriate measures, policies, criteria; e.g. conservation (Hells Canyon: power and irrigation vs. preservation and public hunting groups) for the community, education for the people. Services to Business The period from 1800 to 1875 has been called the age of promotion to business, though such promotion did not end in 1875. The main function of government in relation to business is that of promotion, not regulation or interference. More money is spent on promotion than on regulation. Government is primarily a promoter, not a regulator. In the colonial period and afterward, in addition to favorable taxes, direct aids on an extensive scale from state and local governments: banks, canals, railroads, ships, munitions, manufacturing; such did not cease with the adoption of the Constitution. After the War of 1812, the major issue in American politics was that of “internal improvements” – private transportation financed by public funds, i.e. with government capital. In the early days, American businessmen were not very enterprising; not until after the Civil War were Americans characterized by Europeans as hard working. Before that, the higher standard of living enjoyed by Americans from the beginning was attributed to natural resources. Creativity until then was seen located in the government. The first entrepreneur was not until after 1870. The controversy over internal improvements was not over government vs. private action but over state vs. Federal action. Conservatives wanted Federal action;

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liberals, state action; there was no doubt as to government aid per se. Jefferson inaugurated Federal aid, the Cumberland Road, despite his doubt of Federal authority. This took the form of Federal and grants, not cash subsidies. The grants of land went first to the states, which in turn disposed of them to the private firms. After the Civil War, the grants went directly from the Federal government to private enterprise. The Erie Canal and the Pennsylvania Railroad, for example, were built in the former war, the latter being sold to private interests for $7 million, “covering” the cost of $250 million. Ten percent of the American land area was given away to promote such development, an area the size of Texas. This, plus other forms of aid, paid for the original cost of the railroads. Land grants today are still employed for airports, etc. The justification for such promotion was the American belief in “Manifest Destiny.” Aid was given to private enterprise with the emphasis on private enterprise, not state socialism. Hamilton in his Report on Manufactures, 1790, declared that the government should promote business, mainly by tariffs and embargoes. The U.S. has been as tariff conscious as any country, despite the avowed belief in laissez-faire concerning government – contradictory, since tariff protect ion was the main criticism in Adam Smith’s message. Tariffs were first justified as a service to businesses to enable them to compete with foreign firms. Current Services: These include: (1) (2) (3) (4)

subsidized air and second and third class mail; operational and construction differentials for the merchant marine; loans, either not obtainable from private lenders or at lower rates (RFC, SBA); loan guarantees (FHA and VA housing): private housing, socialized finance; government assumption of risk to encourage private ownership and construction; subsidy to private person, bank lender, construction employment, suppliers and regulatory bureaucrats; government acquisition of mortgages from banks (FNMA); (5) research and development, e.g. aviation, atomic energy; government carries the risk and after development gives technical and other rights to private enterprise. While transportation – coming under Smith’s third function of government – is appropriate, many of these services of government, such as tariffs, are not consistent with the laissez-faire concept of government and its role. Aid often benefits one industry while hurting others. The first test of a service activity concerns its legality: Is it constitutional? The government can provide any kind of service for anyone; only when there is no discernible public benefit will the courts interfere, i.e. when the service aids only a particular individual.

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Public Utility Regulation Regulation is quite different from basic rule making; price setting is different from general incorporation laws. All business transactions and activities are regulated by “adverse interests,” and must be harnessed for the public good through competition. Government must insure competitors so as to get competitive price. Firms therefore must respond to the market as to type, quantity, and rationing of product produced. Types of government intervention regarding public utilities: (1) (2) (3) (4) (5)

promotion: direct and indirect subsidies, services control of entry: absolute (narcotics), limited, or encouraged quality regulation: safety, standardization price setting: maximum, minimum produce rationing.

The ultimate aim of this entire regulatory program is price control. The purposes of government regulation include: (1) the substitution of a monopoly for competition in the interest of the consumer or buyer when the latter is not working properly: high price, restricted production, discriminatory pricing and services (2) the substitution for monopoly in protecting producers against the bad effects of excess competition: low prices, product differentiation (not standardized): agriculture; much government regulation involves setting minimum prices for producers, maximum prices for consumers (3) substitution of rationing for market allocation when conservation, health, morals, etc. are in danger; e.g. government rationing of Salk vaccine (4) government regulation to accomplish a “social purpose”: national defense, family-size farms, consumption of particular products, provision of essential services, conservation of natural resources. Businesses traditionally subject to special regulation: (1) (2) (3) (4)

banking: supply of money, general price level fiduciary institutions: trusts, estates, insurance, deposits vital services: education, health, protection of life and property essential to community life: historically, inns, carriers, wharves, millers of grain; more generally, transportation, communication, power; always controlled, usually government owned; common carriers: service must be offered to all at same common fare.

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Public utilities represent a technique midway between competition and public ownership: regulated monopoly. Applied where decreasing cost is significant over a long range of output, a “natural monopoly.” Lecture: Regulation: (1) general rules; (2) adverse interests; (3) government interference: (a) promotion, entry, quality, price, rationing; (b) traditionally regulated businesses. Public Utilities: A strictly legal term; there are no specific economic boarders. Four important characteristics are: (1) decreasing cost throughout significant range of output; most economical to have only one producer-seller – “natural monopoly (2) increasing cost over some range, e.g. adding telephone connections (3) local market boundaries – convenience, duplication of facilities (4) character of service: biological and/or cultural essentials bought continuously by many small consumers whose need is urgent and not postponable, with no acceptable alternatives. History of Public Utility Regulation: Key cases: Munn v. Illinois; Wolff Packing – certain ones, determined by courts; Nebbia v. NY – allowed regulation of milk, okaying anything called public utility by legislature. Current doctrine follows Nebbia case, that the legislature is the appropriate body to determine price control. The courts will determine due process of law and proper control. In 1950, the Steel investigation committee minority, led by Paul H. Douglas, recommended that the steel industry become a public utility. Public utility status gives the government power to control rates, extend services, regulate service quality, assure technological change. Public utilities account for 20% of America’s invested wealth. In 1954, four million people out of a 65 million-person labor force were employed in transportation and public utilities. In 1953, 10% of all private non-agricultural income was derived from utilities. In the first period of regulation, roughly the latter half of the 19th century, the promotion of public utilities was the major role of government on all levels. The railroads, the electric utilities, etc. were given land, tax privileges, special franchises, etc. The second period, regulation, began with state-issued charters, usually exclusive but not always; this was marked, however, by much graft and corruption as well as abuse of power by companies. Home rule was then adopted, with local governments in charge. Next came regulation by commission, which was pretty

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much a failure but still the dominant mode of regulation. The first were advisory in nature; they had to appeal for a special legislative act or seek a restraining order in the courts. The system did not work well. The period from the Civil War to the ICC was one of promotion, also of ineptitude. Regulation by commission was becoming general by the beginning of the 20th century – the state commission movement in the early 1900s in which the first effective commissions were in Wisconsin and New York, the leaders in the field. The ICC was strengthened in 1920, and power regulation was added; in 1934, the FTC became important. State commissions are still the most important today, though the role of the Federal commissions has been rising in recent decades. Problems of Public Utility Regulation: Goods at reasonable price; acceptable pattern of services and prices; amalgam sought of competitive result with efficient government ownership. Former is impossible, and latter is undesirable. Problem one of bargaining relationship: government representing consumers, companies representing producers; commissioners representing consumers in way better than the consumers could represent themselves; also represent the company to the consumer. Going-concern idea: aim of commission is to establish company as a going concern and husband it along in a flourishing and servicing way. The commission must consider the interests of classes of stockholders, bondholders, consumers, and employees as well as the managers. Series of possible phases of company history in relation to the activities of the commission: (1) establish the company; (2) developmental – growth; (3) maturecompany situation – expanding but still vigorous, though not developing as rapidly as before; keep on even keel; (4) declining – falling off of revenue, over-expansion of facilities – defends company’s needs to the consumer. Much government activity deals with the promotion and declining phases. The commission acts as prosecutor for the consumer and as judge of what is fair. Can the same agency do both? A quasi-judicial administrative commission. The commission: (1) determines who enters, and how many, issuing certificates of convenience and necessity; (2) sets the price, all changes of which must be listed with the commission and approved beforehand; and (3) considers all the problems of managing the business: to achieve a fair price, must go into cost and operations and thus into all the relationships among the various parties. Price must be reasonable, give fair return on fair value, and be sufficient to attract new capital. Rate base is critical in rate making. Shows how a little regulation involves entry into further regulation and control that pervades an entire operation, in exchange for guaranteed, but not strictly guaranteed, return.

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Lecture: The regulatory role of the commission, representing all sides, is an ambiguous one and hence is often declared impossible. Fair rate of return = return/rate base. Focus is on valuing rate base. Smyth v. Ames, 1898, suggested plurality of determining factors. Courts at first examined procedure, holding no clear formula, and not letting commissions establish a clear formula; for some thirty years, held commissions mainly wrong. McCardle case, 1926: height of obscurity; Hope Natural Gas, 1924: FPC to determine formula, court to determine due process of law as to procedure – not in regard to substance – as a function of a standard – leaving clear role for commission. Leading question concerns legitimate expenses of operation; also, “fair return.” Differentiated return: look at capital structure, allow enough to pay debt interest, common stock, and leave remainder to attract capital. Issues: What is a public utility? How to measure value? Fair return. Commision vs. courts. Monopoly vs. regulation vs. government ownership. 1935 Holding Company Act provisions limited growth and extent of holding company ventures. Cannot have more than two levels of holding companies and one of operating. Increasing role of Federal government: FPC, 1920; transportation, ICC, 1887. Government operation increasing in recent years, especially on local and county level – Nevada, Federal government – making regulation more possible as only hope of companies is to make regulation work. Demonstration that socialization is answer to unsatisfactory service. Henry Simons: In regulation, have worst of two possible fields and benefits of neither – private monopoly and socialization. Have limited alternatives, none very good: private monopoly and socialism, neither wanted, which leaves regulation. Only in U.S. has regulation been important. Nineteenth-century free-enterprise liberals have been apt, however, to recommend socialization on seeing regulation at work. Henry Simons as modern apostle of Adam Smith. Reverse in Europe. Likely for category to grow, with increase commission public-utility regulation of business and industry, e.g. atomic energy, through changing technology. In communications, regulation is not on rate as much as on entry. Steel; national-defense allied industry; new transportation and communication media; milk and other foods; farming. Public utilities are an important category of government intervention, regulating businesses owning 20% of wealth in U.S., including 4 million workers and some of largest companies in the U.S.

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Lecture: Agriculture American agriculture is characterized by independent farming. This has determined American agricultural policy – also labor relations, anti-monopoly policies. First government aids: land grants to settlers – Homestead Act. Deliberate policy of not selling to the highest bidders but giving to those who will live on the land. Political importance of farm policy: minority of population but influential through geographical representation in Senate and in state legislatures and through emotional influence: everyone has an agrarian background. All think similarly to farmers, except industrial labor. Farmers are also self-conscious about their basis strength and position in the nation; such fervor adds to the other sources of strength. What is good for agriculture is good for the nation. Represents only a minority of population; earlier a majority. Proportion in agriculture rapidly declining while total population is increasing, accompanied by rising production. American economic progress built upon withdrawal from farms, both absolutely and percentagewise. Trend also to fewer farm units. Several different farm problems exist: (1) Income problem: About one-third of farms sell over three-fourths of farm products. Could eliminate one-half of farmers and not notice it in market; are virtually subsistence farmers whose cash income from farming is virtually nil. About one-half contribute about all marketed produce. Farm income per capita is about one-half of non-farm income: $907 vs. $1800. Add 10% for farm-produced food, and imputed income (rental), still have real difference. But top half live with less such divergence. Many farmers are part-time workers for wages in city, plants; have to add non-agricultural income as well as non-money income. Rural income far less than urban income. Active farming constitutes 13% of population, receive only 7% of national income. Should policy aim to yield them an income percentage equal to their population percentage? General agreement that farmers are as prosperous as non-farmers. Real slum areas are on farms in South and West and mountain states. Education, health, general living standards far below. Agriculture has not shared American progress. (2) Unstable prices: Important to commercial, not subsistence, farmers. Great fluctuations in agricultural prices, more than in any other prices, which are “administered,” think the farmers: keep price steady and vary output, whereas farmers keep output steady and vary price; have no control over production. Causes of price fluctuation: Inelastic supply in short run – due to always maximizing production. Relatively inelastic demand – relatively constant purchases of food,

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as can only eat so much. Shift composition as relative prices vary. Increasing inelastic supply with inelastic demand, exposing farmer to slight changes in demand. Whereas in industry demand and supply adjust to each other, this does not happen in agriculture. War problem: increased consumption in armed forces, feeding of allies, led to considerable increase in demand and, with it, price; supply curve was also an increasing function; therefore agriculture adjusted to an inflated situation. Long run problem: continually advancing supply schedule with given demand schedule. Population increase not as great as supply increase. Post-war: Demand curve fell back; price level reduced (13% since January 1953); supply is more normal: inelastic. Korean War kept agriculture out of recession. Agricultural exports very important in recent years (last 15). Inelastic supply curve widely believed by farm spokesmen. Policy alternatives: (1) Focus on prices: stabilize farm prices. Government to underwrite (set minimum) prices; emergency legislation establishing price level below which unhealthy to do; maintenance of minimum price. Policy of floor followed since Hoover administration; Farm Credit Administration. Lecture: Parity = prices received/prices paid. Agriculture needs aid because: (1) government encouraged wartime increase in production; (2) relative inelastic demand; (3) relative inelastic and increasing supply; with result that the lower the price, the more is produced, and not vice versa. Proposals: (1) Allow unregulated supply and demand to work. Cause exodus of farmers and consequent adjustment. Has been happening over time. Does not work in short run: misery, low prices and incomes, no exodus, slum dwellers, stagnating agriculture. Based on idea of inelastic supply schedule. (2) Restrict output. Deliberate prohibition of production, payment for not producing. Not clear whether it would increase farm income: depends on elasticity of demand – the more inelastic, the higher the raised income. Really involves marketing control, methods, alternative uses of land and product as well as output. (3) Parity price: free market with government purchase of excess over market price. Does not control farmer directly. Still hurts farmer, e.g. buying feed while helping another, seller of feed. Farmers encouraged to divert production from non-supported product to one supported. Therefore, supply schedule

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shifts; domestic and foreign; therefore, need to establish barrier, insulating against rest of world. Discouraging domestic farmers from exporting. Pressure to dump products abroad. Rationale: stabilize price; let out surplus in poor crop year. Gradual lowering of parity price: flexible price program (1949 law, delayed until 1954). Brannan Plan: Market determination of quantity and price, thus no surplus. Set parity price and pay difference directly to farmer. No direct control; no purchase for storage; low consumer price. Don’t know size of bill beforehand. No incentive for farmer to sell at higher price; could be adjusted by percentage of parity price received. Objections: (a) offered as universal program for agricultural products, not just basic crops; and (b) involves direct payment from government, not liked by farmers: “a subsidy,” and therefore socialistic. Restrict imports using quotas, tariffs, and dump surplus abroad without any other controls: two-price system, domestic and foreign. Encourage farm monopoly practices by cooperatives and horticultural associations – exempt under Clayton Act. Reduce farm costs: private and public research to lower costs; education; increasing markets. Encourage movement off farms: a necessary policy; through direct subsidy, education. Labor

Freedom of contract, an important element. Original government role allowing parties to associate and disassociate themselves evolved out of feudal, slavery, master-servant relationship. For long time, had free and slave labor systems side by side, until 1864 and Emancipation Proclamation. Positive role for government establishing free labor market, largely through Common Law. Common Law did not have concept of association of employees. History: (a) master and serf; (b) collective decisions by guilds; (c) free individual; (d) free association and collective bargaining. Courts have destroyed not free trade unionism but other types of labor contract. Early Common Law restricted unionism. 1845, Commonwealth v. Hunt, “labor’s Magna Carta,” allowed unionism, court review of methods of going about wages, hours, and working conditions. But 1880–1890, revival of conspiracy doctrine, and upholding freedom of contract only by individual laborers. Clayton Act, 1914, first labor legislation; earlier only Common Law rights of voluntary association. Exemption of “normal” union activities from anti-trust. Courts are very conservative in treating with unions; tend to apply restrictive Common Law.

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1917, War Labor Board Enabling Act, encouraging labor organization. atmosphere disappeared and reversed itself after World War I. 1927, Railway Labor Act, recognized existence and rights of organized labor in railroads and contained phrase “right of collective bargaining.” Norris-Laguardia Act, 1928, reemphasized Clayton Act’s basic statement and tried to limit role of courts, especially regarding injunctions and willingness to intervene in every labor dispute. NIRA, Sec. 7, 1933. NLRA – Wagner Act – 1935, repeated same Sec. 7. Taft-Hartley, 1947, modified Wagner Act. NLRA: affirmed right to organize and bargain collectively; denied employers’ interference with the right: must bargain with certified union. Union membership: 1900, 1 million; 1920, 5 million; 1930, 3 million; 1940, 9 million; 1946, 15 million; 1955, 18 million. Wagner Act given much credit for increase in membership. Taft-Hartley: forbids closed-shop agreement, not in Wagner Act; lists unfair labor practices by unions, coercing membership; limits contributions from union funds for political purposes; creates national emergency strikes, with fact-finding boards and injunctions. Enters into actual contract terms; also direction national intervention into labor disputes. Significance resides in bringing government more and more into labor picture. Many specific items, whereas with Wagner Act, “one general thing.” Unionism: Present membership: urban, manufacturing, Northern. Wisconsin – Selig Perlman: job conscious vs. class-conscious unionism (the former worked, the latter failed – test of experience) due to climate of American public opinion: independent agriculture set tone of capitalism, middle class pro capitalism. Workers see their progeny as future capitalists. Property in job sought – job opportunities; not anti-capital but extension of rights of capital to labor. Takes away parts of right of employer autonomy and rights of employers to compete for labor. Collective bargaining – equality with management, equal voice regarding certain aspects of running a business – not seeking to eliminate employer. Lecture: Taft-Hartley brought government into the regulation of collective bargaining. Wagner Act merely affirmed government’s protecting role regarding right to bargain collectively. Collective bargaining in America has developed particular type of unionism: job consciousness – particularistic, not generalistic – concerned with own jobs – no mass movement dedicated to overthrow of employers – wants protection of own job, limit on employers’ choice of workers – jobs belong to the union, union

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allocates jobs to members – a capitalistic ethic – property in own job territory. Seeks security for workers, job control. Employer’s multiplicity of opportunities vs. worker’s limited opportunities, especially with age. Optimism vs. pessimism; source of considerable differences in collective bargaining. Labor seeks development of the job – the sole alternative; shortsighted, perhaps, but derived from their view and psychology. Indicates highly conservative attitude of unionism in America. Radicals, viewing change, open new horizons, are the employers, scientists, initiators of change; workers try to develop and maintain security patterns. AFL-CIO: job action in both the dominant activity and philosophy. Most union political activity concerned with achieving and maintaining freedom to bargain collectively. Only recently, active in social legislation; even regarding Wagner Act, what government can give or encourage, government can take away. Has operated as a pressure group on particular candidates and officeholders, rewarding friends, etc. American political parties are not ideologically organized; hence a pressure group can work on both parties as a lever. Concentration on economic action and in a conservative way. Alternatives: (1) Abolish unionism, return to free labor market; would require considerable government intervention: requires government police action to get “freedom” – suppress unions; individual vs. associational freedom. (2) Encourage collective bargaining: extend unionism, delegation of rule-making power to employer and union through collective bargaining; what labor wants. Many people are excluded from collective bargaining: young people, people transferring jobs; agreement may satisfy only bargainers. Can lead to national catastrophe: may involve strikes (in railroads), hurt interdependent society. (3) More government intervention determining conditions of work and agreement: direction of Taft-Hartley. Government involved in every dispute, agreement, policy affecting national security. Exposes weakness of democratic government: what could government do in the event of a coal or railroad strike? Jail? Forced labor? Peacetime seizure? Neither labor nor management should be forced to do what they do not want to do. Other types: protective labor legislation: On Federal level since 1930s – Social Security, 1935, Fair Labor Standards, 1938. Inability of state legislation. Individual employee and employer unable, unwilling – failed – to obtain minimum of security known earlier in farm or small-business society. Depression upset old ideas as myths. UC, OASI, assistance programs; minimum wages, maximum hours re overtime, fringe labor market conditions, working age.

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Lecture: Monopoly and Competition Agriculture Alternatives: (1) free market (2) private collective action (3) public regulation, determination of prices, quantities, etc.; limited or broad in scope. Labor Alternatives: (1) free competitive market: needs government intervention (2) private collective action: collective bargaining (3) labor market planned by government: allocation and wage-rate setting, as with military peacetime draft. Business Alternatives: (manufacturing, utilities, finance, professions) (1) free competitive market: free entry, no certainty of tenure (2) private collective action, i.e. monopoly, one effective decision maker (3) public ownership or regulation. General model: firms, households, factor market, commodity market: Free market: competition in each area, between buyers and between sellers. Monopoly: competition between buyers and sellers. Countervailing power: monopoly countered by monopsony, i.e. rivalry or bargaining, not competition; in competition there is no haggling and only one price exists; under countervailing power, have bargaining and many prices. Spectrums: from competition to monopoly; countervailing power: large numbers with or without countervailing monopolies. American economic system: all alternatives: unionism, regulation of utilities, anti-trust. Government and Monopoly Classical economics: strongly anti-monopoly, but their monopoly was from government. Frank H. Knight: neglected that freedom to compete is freedom to combine. Smith: in any collusion, always present is the chiseler who made it ineffective. History: both freedoms with technological impetus to combination.

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U.S.: national bank, opposition to monopoly bank (Schlesinger, Age of Jackson). American liberalism: control dynamic force of business tending to monopoly despite its creativity. Post-Civil War: trustification of American business aroused monopoly problem. Grange and Knights of Labor mainly anti-monopoly – especially railroads and bankers, the controllers of the destiny of the West, not manufacturing. Sherman Act followed state laws and some state constitutional provisions (Washington). Common Law refused to enforce contract in restraint of trade. 1903, Northern Securities case: railroad holding company, parallel lines; controlled prices and services; clear violation of Section 1. Interesting: in area of ICC, where now have regulation. Result: undermined trusts formed in 1890s. 1911, American Tobacco and Standard Oil cases: dissolved holding companies; Standard Oil, obiter dicta: substantial lessening of competition, “rule of reason,” not motives; departed from “clear violation” of Northern Securities. 1916, U.S. Steel case: price leader with less than 50% control of market; court sought steps to monopolize, or conspiring; Common Law doctrine: seek cause, not effect. Company won: no agreement or attempt. International Harvester case: eliminated tie-in contracts; left effective monopoly on basis of price leadership. Economics: monopoly exists in potential control. Courts: monopolizing, not monopoly, is bad. Doctrine changed in post-World War II cases: ALCOA: potential monopoly is monopoly and unlawful (90% control). Economics: monopoly is ability to control price. Legal: monopoly is practice involving restraint of trade. Other: size. Recent trend is toward economics meaning; alarming to businessmen; all 200 largest companies subject to prosecution – could break them up, alter their operations, etc. Involves getting back to Jackson’s days: possession of power, bigness as such. Monopoly = size a live issue: 250 corporations control 55% of assets in manufacturing; also in finance. Non-agricultural sector: 1946: 250 largest have 79% of newest facilities built by government, 55% of total assets. 1948: 1.3% of firms with 100 or more employees have 55% of employees; nation of employees, concentrated in large groups. Lecture: Common Law: wouldn’t enforce monopoly contract. ALCOA case: size, share of market. No case yet to break up a company.

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Themes in enforcement of anti-trust: (1) Structure of industry: firm size, absolute and relative; interlocking directorates. (2) Behavior: particular practices: agreements in restraint of trade, attempts to monopolize: price discrimination; tie-in and similar agreements; buying stock of other companies to lessen competition; interlocking directorates; unfair methods of competition (FTC); quantity discounts per Robinson-Patman Act (aimed at practices symptomatic of monopoly; yet Miller-Tydings and McQuire Acts: legal to establish uniform prices – aimed at loss leaders; Lampman: fair trade not compatible with Sherman Act: idea: competition gives single price; but does not allow for efficient retailer); price fixing – except fair trade, agriculture, labor; output limiting; market sharing; certain trade-association agreements; price leadership – informal, tacit agreement; basing point system – a form of price leadership. Much time spent by counts in determining which practices and behavior patterns are illegal. Alternative policy foci: (1) maintain competitive structures: prevent mergers (1950 Act), break-up large firms. (2) attack practices and behavior. Businessmen complain more about practices of monopoly and less about fact of monopoly itself; also, that government be reasonable and let them know what is and is not legal – trade rules per FTC – develop sets of agreed fair trade practices. Facilitates getting around the law. Anti-trust: a game in which government is trying to keep businessmen from setting down, that any once-legal practice may later be misused; keep business on its toes. Later, they will think up a new device to do it. Dilemma of anti-trust and enforcement. George Stigler: dissolve big business: oligopoly implies collusion in one way or another, i.e. implies monopoly. Opposes central direction of economic life. Minimum government intervention – less than at present; conservative. Absence of competitive structure means no competitive behavior. Great majority of academic economists agree. Lecture: Causes of Monopoly Power (1) Natural monopoly: economics of large scale: efficiency. Cost and profit structure not always better (U.S. Steel). Firm economies vs. social economies.

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Therefore, denied by many from different points of view. Also, division of General Motors into divisions – competition within firm. Vertical combinations, such that competitors must buy from them, e.g. raw materials. Horizontal combinations: formal, informal; merger, trade associations, agreements. U.S. Steel: 485 different steel plants. Control over technology: patents, dominance through research. Monopoly through advertising: present cigarette companies – oligopoly; no efficiencies of scale. Conglomerate mergers: multi-product firms; some tax considerations. Interlocking directorates, built on top of several holding companies. Eight power centers control American manufacturing and financial business: DuPont, Morgan, Phelps Dodge, Rockefeller. Much done through banks, as directors, customers. Family, friendship relationships. Government aid and comfort: (a) Free chartering, any lawful business; present corporate form per se. Solution: Federal charters, revocable and limited, eliminate holding company activities. (b) Encouraging monopoly by laws and government purchasing: 200 companies receive 80% of war contracts. Could have encouraged new firms or dealt directly with small firms. (c) Patent and tie-in sale laws, leases. (d) Refusal to effectively enforce anti-trust laws.

Control alternatives: (1) Revise corporation laws: O’Mahoney, Kefauver; Federal chartering (2) Prevent further merges participated in by any large company. (3) Attack minority control: force dividend distribution (90% or 100% profit distribution), undistributed profits tax law of 1936. (4) Let monopoly problem go its own way and appeal to businessmen to be responsive to the public interest. Lecture: Government as Purchaser, Producer, Competitor Purchaser: Largest single purchaser in country and in many communities. At least 10% of all goods and services; 15%, when include employees. Largest item in Federal budget is supplies and equipment, not labor. Re materials, Federal government is important – military function. Big payroll is by state and local

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governments. Many industries produce almost 100 or 100% on government account. U.S. unique in not having nationalized all of munitions. Performance bond (usually) required. Large businesses get disproportionate share; Walter Adams: has encouraged monopoly. Important regarding economic stability: Eisenhower shift from military defense to highway and construction; mere change in composition. Government a competitor for labor. Purchaser: where and by what standards? Producer: Produces 15% of national income (25% of government expenditure is transfer payments): schools, roads, defense, conservation, airports. Getting more or less public ownership? Hard to determine: Role of producer not essentially different than in Colonial days, especially in services: roads, forests, parks, schools and military; little if any competition. In early years, most of land owned by government, ports and roads, too; also public utilities; subsidized early banks, manufacturing directly; many state operations. American experience has been that publicly originated business was later turned over to private enterprise – not government taking over private enterprise – especially with regard to war construction, commercial aviation (until 1925, air mail carried by the military); usual function is to carry the cost burden of development (airlines, atomic energy). Over last 25 years, highway and military spending has increased. Government share of total has not increased dramatically over the years. Public ownership (Federal and local) of public utilities, of generation and distribution, has increased, but share has not changed. No wholesale government participation in manufacturing. Competitor: Not inconsiderable. (a) When supplies same good in same market with privately produced goods; prison, war surplus, post exchange, university housing and dining. (b) Government production for own use; e.g. self-insurer. (c) Government operation where there is any private activity in the field: parks, resorts, schools. (d) Where there might be private firms in the future; currently not, due directly or indirectly to government activity. The argument is made that government is inherently inefficient, due to politics, huge bureaucracy, and corruption. The reply is that much of government production is impossible to run profitably, e.g. a state mental hospital. The retort is that no taxes are paid, they don’t have to make profits, they make hidden subsidies, and are unfair. The reply is that if they are inefficient, how can they be unfair competitors? Also: Additional purposes are loaded on them, on which they are unable to make money. Government cannot engage in sharp labor practices. Government is not set up for doing business. Again, not an unfair competitor. Government has come in when a widespread demand for services was not supplied by private firms – at reasonable prices, on terms the public seems to want, with items which satisfy public needs. Rubber plants, local transport.

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Government lends, then gets in by default and operates when the firm goes broke. Same with local utilities. Also to get profits to cover other government expenses, as a substitute for taxes. Few cases where government deliberately went in to compete – electric service in New Deal – yardstick. Government participation increases scope for private activity. To increase efficiency, need more independence of managers, more cost accounting and less money accounting, more like a government corporation, as in England. Government Expenditures, Taxes, and Debts Government involves 25% of national income. 60% in World War II. 25% is slightly less than before World War II, less than England and other so-called advanced countries, higher than “underdeveloped” countries. Correlation, therefore, between stage of economic development and percent of income going through government channels. Over American history, trends are (1) rising share of income (2) rising importance of Federal government. Abrupt change at World War II. (3) increasing progressivity of taxes – through increasing reliance on income taxes – over long run. Still, total tax system is regressive for most of the population. Lecture: Regressive taxes: excises, general retail sales, wholesaler, property. (4) education expenditures increasing in importance for state governments, still important for local governments. State: highways, second; welfare, third. (5) debt: dramatic increase in government debt, especially after World War I (almost entirely financed out of current taxes), mostly war debt; no immediate prospect to reduce it; best prospect is for balanced budget. England is still paying interest on the Napoleonic War debt. Are government taxes a burden – dead weight – on the business community? Answer: Government does something with the receipts, does not just tax. Extreme views: Sloan of General Motors: government takes more and leaves less. Townsend: government spends. Each talking about different economic circumstances. Sloan assumes full employment; Townsend assumes less than full employment, a variable “pie.” Two very different worlds of economics, leading to much controversy based on misunderstanding. Burden of government debt assumes analogy with personal debt: has to be paid. Government, like corporation, has no intention of paying off; trades on equity, borrowing at 3%, earns 8%, a high return on net worth. Furthermore, government

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includes all debt-owners and bondholders; we owe it to ourselves (really to different groups), thus a transfer over time. Debt itself not a proper burden of burden. More important, psychological cost of paying off the debt, of transferring money from non-bondholders to bondholders. Also, measure interest cost as percent of national income: 2% now. Compare also debt with national wealth – nebulous. Burden borne by people at time debt is incurred; real cost paid during the war. Also borne by sufferers of inflation resulting from use of debt to finance cost of war, especially after elimination of price controls. Debt also a large part of money supply. Finally, government is spending as well as taxing: affects prices, availability of money and credit, and allocation of resources. Planning for Full Employment High dependence on government to watch level of national income: annual economic report by President – one of three annual messages. Partly due to Great Depression – shaken faith in private economy, that the natural condition of the economy was full employment. Many now have opposite view. Lecture: Keynes: investment a function of: (1) state of technology and introduction of major innovations; (2) rate of obsolescence of existing equipment and concentration, cyclical, in certain years; (3) rate of increase of population – important in relation to construction; and (4) autonomous, exogenous factors – opening of new territory, war, sudden demand outlets. Note: little, if any, stress on rate of interest. Compensatory finance: C + I + G = Y, and if investment falls, cannot expect consumption to rise and offset it; so government must expand its spending. Right of sovereign government to create money; government to borrow from itself through Federal Reserve System. Economic function of government, or of sovereignty – like monopoly on violence. 1929: both investment and consumption fell: what was good for individual – getting more liquid – was not good for the group. Fallacy of composition – like getting on a raft, seeing parade. 1930s: no full use of Keynesian economics. States contracted debt, Federal government expanded debt. (1) Purely monetary controls. (2) Fiscal controls: (a) Built-in flexibility. (b) Deficit by tax forgiveness.

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(c) Deficit by government spending: on housing, power, etc.; using producergood industries; transfers to consumers only marginally useful. Lecture: Economic Planning Types of planning: (a) advisory (peace); (b) authoritative (war); (c) totalitarian (USSR: one is free to serve the state). U.S.: Planning in regard to roads, railroads, airlines, tariffs; Hamilton’s Report on Manufactures). State legislative or executive planning commissions on industry, agriculture, conservation, etc. Advance planning of public works, at local, state, and Federal levels. Hoover: waste if you do not plan. War planning: Government control plus private ownership. Virtually a planned economy. Partial planning of large economic sector. Office of War Mobilization: A. F. Burns, exercised President’s unlimited war power. Before Pearl Harbor, “capital strike,” afterward, no freedom of choice. Much reliance on economic incentives as well as patriotism; some bluffing, e.g. threat of draft. Direct controls: important for direction of investment and allocation of strategic materials; especially through control over few essential items. Other controls: credit, tax incentives. Contract renegotiation; not “cost plus.” Employment Act of 1946: Popular Act. Continues mild form of overall planning: government responsibility of high and stable employment. Many planning boards exist today, e.g. National Security Planning Board. USSR: Controls all production. Uses other than economic incentives. More capitalistic during war. War economy in U.S.: Cost of World War II, $400B. Change in national debt, $225B. War, without domestic destruction, has served to strengthen the U.S. economy. World War II: Rise of militarism. Relation of government and business now between military and business – procurement liaison. Security consciousness. Business involved in foreign policy. More national consciousness. Government becomes predominant technological leader – researcher, etc. Great entanglement of government and business on all levels. Neo-Mercantilism. Lecture: Emergency planning for war and depression: Americans have delegated responsibility for protection to government. Close interlocking of the two. Changing Government-Business Relationships American economic changes: (1) From agricultural subsistence to highly organized urban market economy.

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(2) Associational change: from independent frontiersman to nation of associations yet still individualistic. (3) Increasingly an international unit depending on world economy and part of world picture. International trade only a small part of GNP, c.10%, but dependent for strategic items, and increasingly so. American government changes: (1) Quantitative increase in government activity; in every decade, more important. (2) Relative growth of national government; in every way, especially in prestige. (3) Rise in importance of executive and administrative department; one cause is national emergency or threat thereof. (4) Rise in importance of department organization (Cabinet) – are, in a sense, governments themselves, though not in Constitution. (5) Rise of administrative promotional and regulatory commissions. (6) Increasing work done by non-elected people – experts, career men. (7) No great change as producer – always important. (8) Has not changed as regulator and promoter of business. (9) Rise and fall in importance of different branches of government: Decline in state governments: did not abandon functions – Federal government added own on top: regulation, welfare. Courts: have frequently changed: formerly, important for economic role of government in economy; now, withdrawn from active regulatory role – since end of New Deal court of 1935. (10) One of least changing governments in the world. Most important changes here were (a) voting: direct election of senators, 14th and 10th (women suffrage) Amendments – increased democracy. 16th Amendment (Federal income tax): not per se important, i.e. idea not new. Qualitative changes: (1) Humanized our economy a great deal by both government and voluntary associations – despite high rating of business motives and income as status. Duties of corporation to stockholders, employees, communities. Also, unions. (2) Shift in creative center toward government – emphasized by role of military. (3) Rise of neo-Mercantilism: spirit of the times is nationalism; group aims: survival. Close merger of government and business: government contracts are the important ones – firms need representation in Washington, DC. Rising importance of businessmen in government: merger of elites from business, labor, military, and government groups – indistinguishable group who move freely from positions of control in one to another. Orientation to world economy in which government and business must cooperate for benefit of all.

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Roles of Government: (1) Establishment of basic economic institutions: property, etc., price system; to make price system work: competition, regulation. (2) Rule maker – most important. (3) Regulator – relatively little effort. (4) Promoter – much (5) Protection (6) Service (7) Financial: ensuring stable prices and economic development. Without government, business is anarchy. Government must work within private economy; needs vibrant private economy. Growing importance of interrelationships of government and business: not alien or competitive, but complementary: military, foreign affairs, size, local awareness. Progress is America’s trademark.

PAPERS FROM A CONFERENCE ON THE HISTORY OF HETERODOX ECONOMICS IN THE 20TH CENTURY: INTRODUCTION Warren J. Samuels A conference on the history of heterodox economics in the twentieth century was held during 3–5 October 2002 at the University of Missouri-Kansas City. The conference organizers were Frederic S. Lee and John King. Several papers presented at the conference are published below, several in significantly revised and/or expanded form, together with one paper distributed at but not formally presented at the conference. Malcolm Rutherford’s paper, “On the Economic Frontier: Walton Hamilton, Institutional Economics, and Education,” will be published in History of Political Economy. All of the papers published here have been reviewed. The first group of articles examines the diverse treatment of heterodoxy at the department level at six universities, Manitoba, Michigan, Michigan State, Oklahoma, Texas and Utah. Each study treats what its author considers important, but few approach comprehensiveness, and, needless to say, the end results converge into the eclipse of heterodoxy. Several of the authors attempt to explain that eclipse. A principal factor is status emulation. If the so-called leading departments were heterodox, the emulating departments would look different; but the leading departments are not heterodox. In this connection, the reader’s attention is called to Eli Ginzberg’s “The Economists’ Neurosis” in volume 22B (2004) of this series. Wisconsin “Government and Business” and the History of Heterodox Economic Thought Research in the History of Economic Thought and Methodology, Volume 22-C, 161–166 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(03)22048-4

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The second group of articles, four in number, examines several heterodox ideas and their reception and evolution. The topics include the treatment of institutional economics in mainstream economics’ journals, the transformations of Barbara Wooton from economist to sociologist and of Marxian theory, and the survival of Richard T. Ely’s (and others’) heterodox institutionalist economic theories in real estate appraisal theory and practice. A word is in order about Edward H. Shaffer’s paper. It was distributed but not formally presented at the conference. It complements David Hamilton’s paper. Hamilton examines the treatment of heterodox economics at the University of Texas-Austin during the early period of the Cold War; Shaffer does likewise with the University of Michigan. The difference between the two cases is that Shaffer was one of the directly affected activists. Shaffer’s paper is a contribution to the history of ideas, specifically the reception of heterodox ideas, and to the history of economics, notably the control mechanisms of the discipline, the university, and the larger society. Shaffer may not be familiar with the literature, but his analysis, partisan though it may be, is consistent with that of studies on academic socialization and academic freedom/freedom of speech and with that of Vilfredo Pareto, who identified force and fraud as means of social control. Shaffer’s original paper (it has been only slightly revised) was sent to two of his contemporaries at Michigan, Lawrence R. Klein (1980 Nobel Laureate) and Myron Sharpe (of M. E. Sharpe Inc., publishers), to a long-time member of the faculty at the University of Michigan, Daniel R. Fusfeld, and to another referee, who has had no similar connection with the University of Michigan. The first three readers confirmed that Shaffer’s account, in the words of Fusfeld, “presents the experience of one student in the Economics Department as seen by the student himself. Its most important lack is that the student does not present the position of the UM administration regarding student testimony before the Clardy committee in the early 1950s, which was true official repression. But Shaffer was just not knowledgeable about it” (Fusfeld to Samuels, October 17, 2002). Shaffer, of course, could not have known the position of the Michigan administration regarding student testimony before the Clardy committee in the early 1950s, which, in Fusfeld’s view, was true official repression. Fusfeld recently wrote to Shaffer, “The situation here was far worse than you knew about” (Fusfeld to Shaffer, October 29, 2002). Shaffer concurs about his “lack of knowledge of official University policy during the Kit Clardy era. The only thing I know is . . . the urgings of Haber and Hatcher and Ackley’s document” (Shaffer to Samuels, November 4, 2002). Shaffer thus writes to Fusfeld (November 8, 2002), “Though I suspected that Stern’s letter to me was based on departmental policy, I did not realize that this policy was dictated from above.” Klein underscores

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Fusfeld, saying “Shaffer does not really appreciate all the things that happened, and does not know the full story. He is mainly concerned about how he was ‘wronged’ and about his personal views on the social economy” (Klein to Samuels, November 5, 2002). Shaffer also notes that he “was not fired from any University job (I had none) and as far as I know the University applied no pressure to fire me from my jobs [part-time insurance agent and taxi driver]. It didn’t have to. After all the publicity I received neither employer wanted to have anything to do with me” (Shaffer to Samuels, November 4, 2002). Fusfeld understood that the Dean of the Graduate School was opposed to the students who did not respond favorably to their interrogators at HUAC. For that reason, none of them received their degree. As Fusfeld put it, “Charles Sawyer, Dean of the Graduate School, decided that none of the roughly 10 teaching fellows who, like yourself, were vocal antagonists of McCarthyism, would ever get a University of Michigan degree. He succeeded. Everyone of them left the University” (Fusfeld to Shaffer, October 29, 2002). Dean Sawyer also felt, Fusfeld understood, that any student who was indicted should have their relationship with the University of Michigan terminated; none were indicted and none were fired, but none received their doctoral degree. Apparently HUAC was more interested in three professors; apparently one of them was both indicted and fired, and at least one other, unindicted, was dismissed. Within the last decade, a committee at Michigan was formed to discuss the situation of the fired professors plus general issues of academic freedom. The committee was not charged with discussing the situation of the students. Klein held a research position at Michigan, “making the first macroeconomic model regularly forecasting GNP for the U.S.” The department, seeking to retain him, recommended him for a professorship. “But, years before, when a . . . [research associate (Klein to Samuels, December 2, 2002)] at Chicago, Klein took a job teaching an economic[s] course at . . . [the Abraham Lincoln School (Klein to Samuels, December 2, 2002)] . . . and had to join the party to get the job. He did not attend any party meetings, however. It was wartime and the Soviet Union was our ally. All this was known to the Economics Department. One professor in our department, an accountant and strong anti-communist, threatened to give all this information to the newspapers if the appointment was approved. With this threat in mind the President turned down the appointment of Klein when it was presented to him” (Fusfeld to Shaffer, October 29, 2002). Klein writes, “Shaffer’s paper is fully believable on most factual matters. His description of the attitude of the UM Administration reads very much like my own experience. They were on the side of the external investigators from the federal and state governments. What he fails to note is that the UM regents are elected and,

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consequently, very political. Many private universities were much more forceful in protecting academic freedom. When I came to Penn, the President, Provost, and Dean were very explicit for me – teach econometrics and forget about the external investigators” (Klein to Samuels November 5, 2002). Klein, too, points to the accountant. William Paton was probably the best-known accounting professor in the country; his textbook series was the market leader for many years. “The problem, for me, came from William Paton, who was reportedly in touch with influential Regents” (Klein to Samuels, November 5, 2002; anti-Semitism likely was also a factor). Klein questions parts of Shaffer’s account: “What Shaffer says about the motivation for ASTP (p. 3) does not seem plausible. His views on the attitudes and supportive action by Department members do not seem to be well thought out. I had excellent relations and help, all round, from Gardner Ackley, Bill Haber, Rensis Likert, George Katona, James Morgan and, much later, from Harold Shapiro and Saul Hymans” (Klein to Samuels, November 5, 2002; Klein to Samuels, December 2, 2002). In or about 1963, when the terminated students attempted to re-enter Michigan, they were told that they would have to retake the theory course. None of them were willing to do so, and their appeals were turned down by the Department Chair. Shaffer’s account was confirmed, or at least echoed, by another of the heterodox students. Myron Sharpe acknowledges that he “was an uncooperative witness before the House Committee on Un-American Activities. I was also leader of the Labor Youth League on the campus. In short, persona non grata.” Sharpe’s experience included being twice asked to rewrite his dissertation on the national emergency provisions of the Taft-Hartley Act and his realization “that the University was not going to grant me a Ph.D. no matter what I wrote” (Sharpe to Samuels, October 1, 2002). (Sharpe also comments, “What passes for mainstream now was regarded as lunatic fringe when I was a bit younger.” Sharpe to Samuels, December 16, 2002.) The referee who has had no connection with the University of Michigan questioned whether Shaffer fully appreciated the distinction between judging a student’s technical competence and judging their political ideology, and that a decision could be made on the former ground but be interpreted as due to the latter. This referee nonetheless appreciated the situation of the early 1950s. In response to the foregoing, Shaffer made the following comments: Klein contrasts his treatment at Michigan with that at Penn and implies that the difference arose because “the UM regents are elected and, consequently, very political. Many private universities were much more forceful in protecting academic freedom. When I came to Penn, the President, Provost, and Dean were very explicit for me – teach econometrics and forget about the external investigators.”

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I question whether this difference can be attributed to the differences in governance between public and private universities. Before we can make such a conclusion we have to know if Klein would [have] been hired by Penn if he had refused to cooperate with HUAC. The record of private universities on this issue is ambiguous. Stanford, despite intense pressure, refused to fire Baran. Harvard, on the other hand, fired Ray Ginger, a Michigan alumnus, because he refused to discuss with the administration the political activities of his wife. This devastated him and could have possibly led to his premature death. Several years ago, long after his death, his widow received an apology from Harvard for its actions. In addition, Michigan did not fire Clement Markert, a biologist, who refused to cooperate with the HUAC. The difference between the treatment of Klein and Markert probably is due more to the inability of Bill Paton to have any influence over the biologists than to the political connections of the Regents. In any event it might be appropriate for someone to examine whether there was any significant difference between the public and private universities in the treatment of dissidents during the McCarthy era. Finally, Klein defends the Department of Economics, pointing out that he had the solid support of its members. I am sure that Sharpe and I would have also had this support if we had cooperated with the Committee. The Department blacklisted us because we did not cooperate. I wonder if Klein would have [had] such support if he had refused to cooperate. On a personal note, I am not familiar with the literature on academic socialization. My fields were labor, industrial organization, international economics and energy. I know more about Pareto’s economics (ordinal preferences, impossibility of interpersonal utility comparisons, etc.) than of his social philosophy – except that I knew that Mussolini was his most famous student. I was unaware of his identification of force and fraud as a means of social control. In the last few years I have been interested in the question of fraud and deceit as an integral part of economic life. This interest has been heightened more recently by the Enron affair. About ten years ago I wrote a spoof on neoclassicism in which I claim that there is a “gullibility market” whose existence is known to businessmen and politicians but not to economists. If you are interested, it is “TV Evangelism, Public Goods, and Imperfect Competition,” Journal of Economic Issues, XXVII No. 2 June 1993, pp. 639–646. (Shaffer to Samuels, December 1, 2002)

Finally, Klein, after reading the rest of this introduction (and suggesting several clarifying or correcting changes), wrote the following: In the ms. of Shaffer, he refers . . . to correspondence with Gardner Ackley. I think that he misjudges Gardner. I had many personal interactions with Gardner in 1954–55 and again when I came to Pennsylvania. He was extremely positive in all professional dealings with me, and was an extraordinary source of support, as I later came to know when some private files were shown to me, on the occasion of coming to Ann Arbor for the 50th Economic Outlook in November 2002. Melvin Reder’s paper on anti-Semitism, which I read only recently, provides strong additional evidence in support of Gardner’s stand. (Klein to Samuels, December 2, 2002; the cited paper is, Melvin W. Reder, “The Anti-Semitism of Some Eminent Economists,” History of Political Economy (2000), 32.4, pp. 833–856).

[Full disclosure requires notice that in the early 1990s I co-chaired the dissertation committee at Michigan for David R. Andrews. Andrews’s dissertation, “The Relationship between Sraffa and Keynes: Toward a Reconciliation,” was accepted

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in 1993. I also have had dealings with the University of Michigan Press. In addition, I published several books with and edited a series on institutional economics for M. E. Sharpe Inc.; and was editor of JEI between 1971 and 1981.] I greatly appreciate the cooperation of Daniel Fusfeld, Lawrence Klein, Edward Shaffer, Myron Sharpe, and a referee in preparing this Introduction; and of all of the authors in revising or preparing their papers for publication.

HETERODOX ECONOMICS AT THE UNIVERSITY OF MANITOBA Fletcher Baragar In terms of the entrenchment and hegemonic influence of neoclassical economics, economics departments in Canadian universities are virtually indistinguishable from their mainstream counterparts in the United States. A notable exception exists at the University of Manitoba, where heterodox economics1 figures prominently in both the undergraduate and graduate curricula, as well as in the active research programs of the faculty. This paper traces the emergence and character of this heterodoxy. The starting point is the aftermath of the Second World War. Part I presents the institutional setting for what initially was known as the Department of Political Economy and Political Science, and briefly sketches the social and intellectual climate of the period. The years 1949–1962 are examined in Part II. During these years, the size of department remained small. There was, however, no turnover of the core staff in this period. This created conditions in which they could place their distinctive stamp on a department. The exceptional academic abilities and particular research interests of this core cadre served to not only define the range and scope of economics at Manitoba, but to prepare the ground in which heterodoxy could take root and flourish. Part III covers the succeeding decade. This period of dramatic expansion of the university and the department brought increased opportunities for heterodox economists, but this very expansion also carried with it attendant dangers. Consequently, the attempt to manage institutional growth in an environment of social and intellectual upheaval and change proved to be a formidable task. Part IV of the paper focuses on the period from 1972 to the mid-1980s. In the wake of the rapid expansion of the 1963–1972 era, the department was engaged in a struggle for identity – a struggle which manifested itself in internal departmental

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debates over hiring procedures and priorities and over the curriculum. Part V carries the analysis through to the present. In these years, although the previous struggles over hiring and curricula were by no means definitively resolved, the department was also forced to contend with the implications of fiscal restraint, fluctuating enrolment levels, an aging faculty and staff reductions. A brief conclusion then follows.

1. INSTITUTIONAL AND INTELLECTUAL BACKGROUND The emergence and maturation of the social sciences is an important component of the expansion of institutions of higher learning in the 20th century. The discipline of Political Economy, increasingly institutionalized in various Canadian universities in the early decades of the century, secured a Chair at the University of Manitoba in 1909. After 1914, its title became “Political Economy and Political Science” and the department subsequently served “as the great mother department to which were attached newer social science disciplines until it was deemed appropriate to let them launch out on their own” (Pentland, 1977, p. 3). Political Science became independent in 1948, Geography in 1951, and Sociology and Anthropology in 1962 (p. 4). Agricultural Economics, which was taught in the Manitoba Agricultural College, became its own department when the college joined the university in 1924. In the 1930s, Agricultural Economics was absorbed into Department of Political Economy. However, according to Pentland (pp. 4–5) it was not until the late 1940s that agricultural economics became a significant “sub-department.” It subsequently separated itself from Political Economy and, in 1954, became an independent department in the Faculty of Agriculture (p. 5). The result of these disciplinary developments was that the faculty of the Department of Political Economy had, from time to time, members whose expertise lay outside the increasingly well-defined terrain of economics. Despite this, however, they did not seem to have any long-lasting direct impact on shaping and defining the curricula in Economics. Since these other disciplines left and became independent when they had reached a certain size or degree of influence, Economics was left to define and pursue its own agenda unencumbered by the needs of these former associates. In the early years, given the very small size of the department and the absence of any national or even international standardization of the content for a newly institutionalized discipline, the curricula tended to reflect the background and interests of a small handful of people. In the 1920s the preferences of the first head, A. B. Clark, resulted in an emphasis on the economics of J. S. Mill and the

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English historical school rather than the “theorizing of Alfred Marshall” (p. 14). Clark’s replacement as head, Robert McQueen, introduced, after 1935, “a more modern and American curriculum,” but, as Pentland points out, this needs to be kept in context. Until the end of the 1940s, even the introductory economics course contained a substantial historical component which stressed “the evolution of European institutions” (p. 14). In the 1940s, then, there was room for and acceptance of both history and theory in the Economics course offerings at Manitoba. At the time, this sort of composition would be unremarkable in comparison to the offerings elsewhere in Canadian universities. Economic history constituted a significant component of what was then the norm for Canadian economics. The towering figure of Harold Innis, who chaired the Department of Political Economy at the University of Toronto, had made and continued to make the case for an institutional and historical approach to economic analysis and research, and the economic historians at the University of Saskatchewan were in the process of forging their western-hinterland perspective to enrich and enliven the debate on the nature of Canadian economic development and policy. The potentially fertile confluence of these historical and theoretical streams gives rise to an intellectual context in which explicitly heterodox perspectives could emerge. Furthermore, Winnipeg’s history of cultural diversity, class conflict and radical politics had produced a social environment in which bearers of various heterodox tendencies could develop and secure support. In terms of employment, however, institutes of higher learning were not especially accommodating to those who professed to have unorthodox beliefs, especially of a socially-progressive or radical kind. Referring to anglophone Canadian universities in the decades prior to the 1960s, Michiel Horn writes that “Universities and colleges have been supervised by lay governing boards on which wealthy and socially-prominent Canadians have usually been more than willing to serve” (Horn, 2000, p. 440). According to Horn, These lay boards have been (and still are) the employers of all those who work in the institution, with the right to appoint and dismiss. The boards’ authority, although generally modified by a presidential right to recommend appointments and dismissals, long influenced faculty staffing. Until faculty members came to be involved in recruitment during the 1960s, presidents, deans of faculties, and eventually department heads did the actual work of selecting candidates, but they tended to recommend men (and occasionally women) who were unlikely to encounter governing-board disapproval. “Safe and sound” candidates have usually been preferred (pp. 440–441).

There is documented evidence of this gatekeeping arrangement by the Winnipeg elite acting to explicitly influence hiring in economics at the University of Manitoba. In 1935, Robert McQueen was being considered for a position in the

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department. The university president, Sidney Smith, was told that “McQueen was a radical in his economic thinking.” Consequently, Smith reportedly refused to consider McQueen for the position. It was only when J. W. Dafoe, the editor of the Winnipeg Free Press, managed to convince Smith that the rumours of radicalism were entirely groundless that Smith changed his mind and approved the employment of McQueen (Horn, pp. 441–442). In 1948–1949, H. S. Ferns had a temporary appointment sponsored by the Departments of Economics and History. Seeking to have it converted into a permanent position in economic history, Ferns consulted W. J. Waines, Head of the Department of Economics. According to Ferns, Waines “consulted around” and then concluded that Ferns “could not expect to make a career in Manitoba.” Ferns realized that this was partly because it was difficult for the university to obtain the necessary funding for new positions, but he also surmised that a mutual dislike had developed between him and the Winnipeg business class, and that the latter would not assent to have him installed in such a significant position2 (Ferns, 1983, pp. 266–269). To the extent that the gatekeeping arrangement was effective, or was even perceived by potential candidates to be effective, the chances for the appointment of a radical economist3 at Manitoba would be low.

2. 1949–1962: STABILITY AND DISTINCTION Canadian universities experienced a surge in enrolment in the years immediately following the end of the Second World War, and universities were forced to scramble in order to secure staff and space to meet this influx.4 By 1948–1949, however, enrolment was decreasing and moving back to the relatively modest and stable levels that characterized the early and mid-1950s. The number of instructors engaged in the department reached a peak of seven in 1947–1948, but was pared down to four in 1948–1949, a level which it remained at for all but one year until 1959–1960 (Pentland, p. 12). W. J. Waines remained department head over this period but “his career developed primarily in terms of administrative work,” serving as Dean of Arts and Science from 1947 to 1961 (p. 7). These circumstances provided an opportunity for the three remaining department members, all of whom were hired in the 1946–1949 period, to play an instrumental role in forging the character of the department. This triumvirate worked in the department for close to thirty years and, over that time, they were the formative influence in the development of Manitoba’s heterodox component. Reuben Bellan was hired as a lecturer in 1946. He had earned a M.A. at the University of Toronto, where he had come into contact with Innis and was exposed to the historical-institutional approach to Canadian economics. After

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completing his M.A., he did graduate work at Columbia. The salience of the historical approach is evident in his 1958 doctoral thesis, “The Development of Winnipeg as a Metropolitan Centre.” Urban economic history remained an important research interest for him over the succeeding decades (see Bellan, 1971, 1978). Bellan had also embraced the new current of Keynesian economics, and his contributions to the national debates on macroeconomic policy in the 1980s (Bellan, 1981, 1986) exhibited a decidedly Keynesian character at a time when the centre of gravity in the profession had shifted onto essentially non-Keynesian terrain. Bellan’s insistence on the necessity of history to complement economic theory was evident in his introductory textbook Principles of Economics and the Canadian Economy (1960). The text, which was to appear in seven editions over the next quarter century, was modelled on Samuelson’s (1948) classic textbook.5 Into the Samuelson mould Bellan poured a Canadian and historical mixture. As he (1960, p. vi) noted in the Preface to the first edition, “The book contains rather more historical matter than is found in most textbooks on principles.” By way of justification, he argues that not only is the historical approach more interesting, but that knowledge of the historical background “contributes indispensably to real understanding.” The text stands as an important indicator of the content of the basic “Principles of Economics” courses offered by the department during the late 1950s to early 1960s era. The prominent position of economic history in the curriculum and in the research undertaken in the department was significantly enhanced by the presence of H. Clare Pentland. Born in rural Manitoba, Pentland obtained a B.A. in Economics at Brandon College, and a M.A. in 1943 from the University of Oregon. He initiated his doctoral studies at the University of Toronto in 1946, and lectured there from 1947 to 1949 (Phillips, 1981, pp. vi–x), after which he joined the department at Manitoba. Not surprisingly, Innis was subsequently identified as having the most significant influence on Pentland’s intellectual development (p. x). Phillips argues that Pentland’s interest in the impact of technology, and his methodological preference for an historical approach to the Canadian economy at the relative expense of “abstract and partial equilibrium theorizing” suggests an affinity with the “Toronto staple school.” Pentland had, however, long been interested in labour issues and had become familiar with Marx and much of the English Marxist literature in labour and economic history. His doctoral research investigated the formation of the working class and industrial labour in Canada. Completed in 1960, it circulated in manuscript form for many years among economic historians and political economists interested in the nature and character of Canadian industrialization and class formation (Kealey, 1979; Phillips, 1981).6 Pentland’s focus on class, especially the emerging working-class, constituted an advance beyond the established confines of the staple school and consequently created an avenue

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through which a more explicitly Marxian approach could contribute to Canadian political economy. Pentland’s research interest helped consolidate the prominent position occupied by economic history in the department’s curriculum in the 1950s and early 1960s.7 It also boosted the attention given in the department to issues concerning labour8 and class, a concern which ultimately resulted in the establishment of the Labour and Workplace Studies program in the 1980s. The third member of the trio was Clarence L. Barber. Born in rural Saskatchewan, he witnessed the full impact of the Great Depression on the prairie economy, an experience which “shaped his choice of study and has profoundly affected his way of thinking” (Waterman, Hum & Scarfe, 1982, p. 1). He graduated with a B.A. (Hons.) from the University of Saskatchewan in 1940, earned a M.A. at Clark University in 1941, began his doctoral studies at the University of Minnesota in 1942, and, after stints in the air force, the Dominion Bureau of Statistics and at McMaster University, he joined the Department of Economics at Manitoba in 1949 (pp. 1–2). Barber was essentially a macroeconomist, and his orientation was explicitly Keynesian. The overarching trajectory of his research agenda as it developed through the 1950s and 1960s was informed by his efforts to apply the Keynesian framework to the analytical and policy issues incidental to the Canadian economy. Appreciation of the peculiarities of the Canadian economy necessitated modifications and emendations of that theory, and this was one of Barber’s strengths. His “undogmatic, Keynesian approach” (p. 1), empirically rooted but devoid of excess formality (p. 6), is already evident in his thesis, completed in 1952 and subsequently published by the University of Toronto Press with the title Inventories and the Business Cycle, with Special Reference to Canada (Barber, 1958). This methodological approach and line of inquiry proved especially productive, as was demonstrated in his formulation of the notion of effective tariff protection (Barber, 1955), and his explication of the problems of effective monetary and fiscal policy in a small open economy under fixed exchange rates (Barber, 1962). Concomitant with his rising stature in Canadian macroeconomics, Barber displayed a strong and open commitment to faculty rights, working conditions and academic freedom. He joined the fledgling Canadian Association of University Teachers (CAUT), and, serving as its president in 1958–1959, became directly involved in the Crowe affair.9 Horn notes that, in Barber’s farewell address as CAUT president, he remarked that many members of the governing boards of Canadian universities seemed to have, in Barber’s words, “little genuine understanding of the basic importance of academic freedom in our society”(cited

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in Horn, 1999, p. 244). He went on to argue that a set of governing principles and procedures was needed in order to enhance and secure academic freedom and tenure, as well as some reform in the composition of these governing bodies (p. 244). These beliefs concerning the importance of academic freedom and the rights of the faculty, were not inconsequential for the department since it was Barber who succeeded Waines as Head in 1963. Collectively, this triumvirate put its stamp on economics at Manitoba in the 1950s. The economic training imparted to students who passed through the program consisted of a blend of theory and history with a strong Keynesian element, a particular concern with the peculiarities of the Canadian economy, and opportunities to investigate further specific issues pertaining to labour. At the beginning of the decade, the history-theory combination was not especially unusual in comparison with other Canadian universities, but the enduring dominance throughout the decade of the history-Keynesian grouping at Manitoba was not widely replicated. At the end of the decade, rising enrolment and a less austere and more education-friendly provincial government resulted in opportunities to expand the department. K. J. Charles was hired in 1959, F. S. Chen in 1962 and Rubin Simkin in 1963. All three were trained in theory, with Charles and Chen possessing some interest in the growing field of development. Significant, though, was the diversity of the group. Charles earned his doctorate from McGill, but had been exposed to radical economic thought. Chen was a more orthodox theorist and was a graduate of the London School of Economics. Simkin, who earned his undergraduate degree at Manitoba and thus had already been exposed to Manitoba economics, had completed a M.A. at the University of Toronto. His field was macroeconomics, but was situated more in the left-Keynesian or post-Keynesian camp,10 rather than in the increasingly orthodox stream identified with the neoclassical synthesis. Thus, on the eve of the Barber regime, methodological diversity had taken root in the department, without any palpable erosion of its prominent economic history-Keynesian orientation.

3. 1963–1972: GROWTH Clarence Barber served as Head of the Department from 1963 until 1972. His term coincided with a period of unprecedented growth in the enrolment and staffing levels in universities across Canada. The University of Manitoba was no exception, nor was the Department of Economics. Student enrolment in economics rose from 1023 in 1963–1964 to 2579 in 1971–1972 (Pentland, 1977,

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pp. 12–13). The growth in faculty was even more dramatic, rising from six positions to 31 in 1972. This fivefold expansion in the span of a single decade inevitably altered the character of the department and its program. In terms of staffing, rising enrolment in conjunction with expanding university budgets tended to create a situation of sustained excess demand for academic economists. Institutional adjustment to this relatively severe and protracted disequilibrium necessitated some departures from past practice. Especially significant was the diminution of the gatekeeping role undertaken by previous boards of governors. The legacy of the Crowe affair, increased strength of CAUT, the relative shortage of trained academics, and a changing social and political climate that was more open to diversity implied reduced support for any governing board that wanted to take issue with a candidate’s particular political or theoretical inclinations. Furthermore, the sheer numbers of candidates being drawn into the university was such that it was virtually impossible for board members to give close and detailed attention to the backgrounds and orientations of the applicants. Consequently, Deans and Heads had considerably more discretion and could make recommendations without undue concern about whether or not the candidate might be acceptable to the board. In Economics, as new positions opened up, the Head’s discretionary authority was such as to virtually allow him to make a job offer to any promising candidate. Barber was always on the lookout for strong candidates, but his job offers tended to be preceded by an informal process of communication and consultation with his colleagues in the department, with the result that, in practice, he could effectively be said to be operating on behalf of and with the consent of the department.11 Furthermore, Barber’s avowed commitment to academic freedom, combined with the already somewhat diverse composition of the department, implied that his search for candidates was not likely to depend on their ideological or methodological disposition. In principle, any and all could apply. In practice, however, it is almost tautological to say that the supply side of market was dominated by orthodox (read: neoclassical) economists. Not surprisingly, the majority of the new hires were economists trained in and prepared to work in what was the mainstream of the profession,12 and this enabled the department to expand its course offerings and establish itself in such fields as microeconomic theory, econometrics, natural resources, and the more explicitly mainstream material in macroeconomics. Personal connections appear to be significant in the composition of the heterodox subset in the group of new hires. Cy Gonick, who was teaching at the University of Saskatchewan (Barber’s alma mater), was one of the first to be hired by Barber and joined the department in 1964. At Saskatchewan, Gonick had met Paul Phillips and persuaded him in 1969 to come from British Columbia to Manitoba. Clare

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Pentland encountered Paul Deprez at a European conference on population in 1965 and induced him to apply for a position in the department. Deprez in turn was aware of the work on European industrialization by the promising Belgian scholar Julie Laureyssens and was instrumental in securing her appointment in 1970. Thus, through Pentland, the addition of Deprez and Laureyssens bolstered the economic history group in the department. Phillips, who had studied at Saskatchewan in the twilight of its golden age of economic history, made further important contributions in this area. Gonick, a committed socialist, brought a Marxist perspective to bear on the field of macroeconomic and industrial policy. As founder, editor and contributor to the (initially) bi-monthly socialist magazine Canadian Dimension, a radical perspective on political and economic issues was established. In the 1960s and 1970s, Canadian Dimension served as an important forum for the debates and analyses of issues concerning the nature of Canadian economic development and the consequent contemporary structure of the Canadian economy. Pentland and especially Phillips (even before he joined the department) were frequent contributors to Dimension, but articles and reviews by Barber, Chen, Charles, and Bellan also appeared in its pages. More generally, Dimension, along with the scholarly work of Gonick on macroeconomic policy (e.g. Gonick, 1975), Pentland on labour and class formation, and Phillips (1967a, b, 1973, 1976, 1977, 1979) on regionalism, the national policy, and on labour and mining in the BC economy, contributed to the revival of a distinctive Canadian political economy in the 1960s and 1970s,13 and, as such, raised awareness of the heterodox element in Manitoba. Pentland, reviewing a book by his colleague Charles in Dimension, remarked that there is “evidence that a distinctive ‘school’ of economics may have developed at Manitoba” (Pentland, 1968, p. 36). For Pentland, that school, marked by “a certain similarity of approach among several Manitoba economists” had a definite affinity with the newly emerging concerns of the aforementioned renewed Canadian political economy tradition. It implied concern for issues such as dependency, foreign ownership, industrial policy, and full employment, and a critique of modes of analysis that abstract from issues of nationalism and economic power or smack of the ideology of laissez faire (pp. 36–37).14 The vitality of the emerging Manitoba school and the larger revitalization of Canadian political economy is reflected in a 1970 conference organized by department members titled “Themes on the New Industrial State.” Invited presentations were given by Mel Watkins (University of Toronto) and Stephen Hymer (Yale), as well as by Phillips and Barber (Department of Economics, 1970). The relevance of these concerns for students is demonstrated by the report that a 1971 debate on the Gray Report on foreign ownership with Gonick and Bellan played to a capacity audience in a large meeting room in the student union centre (Bumstead, 2001, pp. 192–193). Barber (1973) also felt compelled to discuss the report, and the larger issues of

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dependence and industrial policy, in his 1973 presidential address to the Canadian Economics Association.

4. 1973–1984: THE STRUGGLE FOR IDENTITY The aggregate enrolment levels and the overall size of the department were relatively stable over the 1973–1984 period. However, these years were marked by a considerable turnover of staff.15 As a result, there was still a great deal of hiring activity, but that process had become a weightier and more contentious matter. In a no-growth environment, each hiring decision was perceived to have long term implications for the composition and character of the department. The heterodox wing of the department was becoming increasingly concerned about the status of heterodoxy within the department, especially in light of recent hirings. From 1970 to 1974, 13 new hires were given permanent or term positions in the department. Only one of these (Laureyssens in 1970) was in the field of economic history. Other than the possible exception of the new development economist Richard Lobdell, who received his doctorate from McGill, none of the 13 had expertise in radical or post-Keynesian economics, nor were any of this group explicitly committed to the fields of history of economic thought or Canadian political economy.16 There was, furthermore, some concern that the direction the department was taking, at least insofar as it could be discerned from the background and research interests of the recent additions to the faculty, was not necessarily reflective of the collective will of the existing faculty. As a result, Department Council meetings in the 1974–1980 period were frequently embroiled in efforts to clarify what the department’s preference actually was in regard to defining and filling new positions, and how that preference could be made to govern the hiring process. An appointment and renewals committee was struck, but debate continued over the selection process of the committee members, over whether or not that committee should report to council or to the Head, and over whether or not the recommendations of the committee should be binding on the Head in terms of selecting candidates and recommending appointments.17 The internal tension came to a boil in 1978 over the decision on whether or not to offer a permanent position to John Loxley – a situation which induced a group of angry students who supported Loxley’s application to storm into the office of the Head. It also precipitated the resignation of a faculty member. The situation flared up again in 1979 when an offer was extended to a labour economist, Wayne Simpson, and the resulting conflagration contributed to the subsequent resignation of the Head.18 The following year a motion was presented to the department council by the Appointments, Renewals and Promotion Committee, which read “That each

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[new staff] appointee have a solid training in both economic theory and political economy.” After “considerable discussion” an amended motion was put before council. It read “That the Department’s tradition of methodological pluralism be retained.” The amended motion carried (Department of Economics, 1972–2002, Department Council 11/1/1980). Notwithstanding the addition of Loxley, the heterodox profile in the department had been diminished by the departure of Simkin in 1974 due to poor health, and by the passing of Pentland in 1978. In 1980, the ARP Committee, acknowledging the impact of these departures as well as the significance of the pluralistic affirmation, recommended consideration of job candidates who could strengthen the department’s pluralistic character. Gonick, who was awarded the headship in 1979, was unambiguously committed to this goal. Furthermore, the net loss of five faculty members in the 1977–1979 period opened some vacancies in the department. Consequently, an especially propitious conjuncture developed in which heterodoxy could be enhanced. The moment was seized. In 1980–1982, six new people were hired in term or permanent positions. Two of the six (D. Mole and R. Chernomas) had expertise in Marxian economics. A third (M. Pujol) had a strong feminist and radical foundation. The fourth, K. Dennis, had strength and research interests in the history of economic thought, institutional economics, and methodology. The struggle to define the heterodox content of the department also spilled into the realm of course content and program requirements. The rapid growth of both enrolment and the size of the faculty in the 1960s facilitated an expansion of the range of course offerings. In general, the department proved willing to create courses that reflected the expertise of one or more instructors who were prepared to teach those courses, and to actually offer the course if student demand was sufficient. Furthermore, even if numbers were small, it was possible for interested students to enrol in special directed readings courses at the undergraduate, honours and graduate levels. This flexibility on the part of the department and the willingness of individual faculty to accommodate students has been preserved and remains strong. It was in regard to the set of specific program requirements and the content of the core courses of those programs that the internal struggle over the role of heterodox economics manifested itself. One important strand in this debate concerned the role of economic history and the significance of the historical approach to economics. As the emphasis on economic theory increased, there was concern that economic history would be diminished. In 1972, council defeated a proposal to add an economic history component as a requirement for the honours degree. In 1975 and 1976, the economic history group, led by Pentland, urged the department to explore the possibility of an alternative stream for students who wished to pursue an

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economic history option, implying that there could in practice be some substitute of economic history for economic theory if students so wished. Although some economic history was retained as a requirement for the Ph.D.,19 an alternative history stream was not realized. Support for the historical approach, however, manifested itself in a somewhat unlikely place: the content of the intermediate theory courses. Thus, in 1979, the department council passed a motion stipulating that the intermediate theory courses “integrate economic theory, history, institutions and policy (Department of Economics, 1972–2002, Department Council 28/9/1979). In practice individual instructors had considerable discretion in determining the course content of the courses they taught, with the result that by the 1970s, there was no standardization in terms of the selection of textbooks or readings, nor of the form or content of the final examinations. The general constraints under which instructors operated, other than their personal commitment to academic integrity, was that the course had to be consistent with its calendar description. The discretion that this allowed meant that there was considerable variety across the numerous sections of the introductory course offered by the department. An introductory course in economics, however, was important for students in other faculties, including Home Economics, Engineering, and Administrative Studies (later the Faculty of Management). Servicing these students raised enrolment figures for the department, which enhanced its ability to win and maintain its share of the resources available within the university. The Faculty of Administrative Studies expressed dissatisfaction with the material that many of their students were receiving in selected sections of the introductory economics courses, and the department received a memorandum from the Associate Dean of Arts that attested to that dissatisfaction (Department of Economics, Department Council 11/12/75). The sections that were of concern to Administrative Studies were those that were taught by instructors in the heterodox camp. Despite some internal opposition, the department committed itself to provide advance notice of who would be teaching what section, along with the attendant reading lists, to Administrative Studies. A committee was also formed to examine the content of the introductory Principles course. The committee’s report, delivered to council the following year (Department of Economics, 1976) noted survey results that revealed that a majority of the Administrative Studies students wanted the course’s historical material to be dropped. In its recommendations, the committee identified a set of required elements which were to constitute the core of the introductory course. This core was to absorb approximately 60% of instruction time. Despite this apparent move to formalization, however, the committee also reported that, even with the diversity of the various intro classes, “a common core of material is being taught in all

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sections.”20 As a result, there was no subsequent restructuring of the introductory “Principles of Economics” course. History of economic thought had long been a requirement in the honours and doctoral programs, and throughout the 1970s the department was prepared to retain it as such. However, the theory requirements for the B.A., B.A. (Hons.), M.A. and Ph.D. degrees implied neoclassical theory for microeconomics, and primarily neoclassical and Keynesian theory on the macroeconomic side. Post-Keynesian, Sraffian and Marxian theory were in fact situated outside what was perceived as required core theory. Thus, Gonick, who had written three books on the Canadian economy and macroeconomic policy in the 1970s (Gonick, 1975, 1976, 1978), did not teach any of the core macroeconomic theory courses. The anchor provided by Clarence Barber, however, offset the pull of the monetarist and subsequent rational expectations revolutions that swept up many in the field of macroeconomics. Barber and his co-author John McCallum21 were leaders in the critique of the Bank of Canada’s embrace of monetarist theory and policy (Barber & McCallum, 1980).22 Barber continued to teach some of the core macroeconomic theory courses up until his retirement in 1982, and he left his mark on many students, two of whom, C. Nicolaou and F. Baragar, eventually ended up teaching some of those same courses themselves. Under Gonick’s stewardship in the early1980s, abetted by the stimulus given to heterodox economics by the background and orientation of the recent wave of hires, there was some explicit assignment of unorthodox theorists in some of the core theory courses. Thus, in 1981–1982, Mole and Chernomas combined with A. Waterman to offer a very theoretically eclectic version of the core graduate course in macroeconomics. Subsequently, Mole ventured to teach one of the required microeconomic theory courses in the honours program. These episodes, however, are better viewed as aberrations rather than as an indication of an actual and permanent pro-heterodox shift in the theory content of the department’s degree requirements. The place of heterodox theory in terms of the core of the department’s degree programs was not resolved until the restructuring that occurred in the mid- to late-1980s. Overall, though, by the early 1980s heterodox economics at Manitoba was well entrenched, and arguably was poised to enjoy a sort of “golden age.” However, the extended period of intense debate, internal struggle, and the formation and reformation of coalitions associated with hiring and defining the character of the department exacted a toll, a portion of which inevitably was borne by the Head. After Barber stepped down in 1972, there was considerable turnover at the top. Over the next 12 years, four different members of the department served relatively brief terms as Head. It was only after the appointment of John Loxley in 1984 that stability was restored in this office.23

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5. 1985–2002: RESOLUTION AND NEW CHALLENGES In some respects, the mid-1980s were a golden age for heterodox economics at the University of Manitoba. Marxian economics was enhanced with the introduction of a graduate course on the subject in 1982. A centenary conference on Marxism was held at the university in 1983, directly involving a number of the economics faculty and, as a result, bringing Marxist economists such as A. Shaikh and E. Mandel on to the campus. The department put Shaikh to work, having him deliver a paper in the department’s own seminar series as well as acting as an invited lecturer in the graduate class. Barber had retired but, as Professor Emeritus, remained connected to the department and found time to give papers and contribute to faculty seminars in addition to serving as a Commissioner for the federal government’s Royal Commission on the Economic Union and Development Prospects for Canada. In the mid-1980s, a highwater mark of sorts was reached when the three different instructors for the intermediate macroeconomic theory course all chose the textbook by H. Sherman and G. Evans (1984). The history of economic thought, a subject which Mark Blaug (2001, p. 147) once characterized as being a “haven for heterodoxy,” had attracted the attention of a growing number of faculty members. In particular, the shift by A. Waterman that placed the history of economic thought at the forefront of his active teaching and research agenda helped make this field one of the department’s strengths. Manitoba’s comparative advantage in this field was further enhanced when E. Forget joined the department in 1989. Development economics had emerged as another area of strength and the structuralist, non-neoclassical approach was exemplified in the research agenda of Loxley (see for example, Loxley, 1981, 1986, 1989) and further through his influence in the classroom and as supervisor of numerous M.A. and Ph.D. theses. An interdisciplinary program, Labour and Workplace Studies was established in 1982. Housed and administered by the Department of Economics, this degree program examines the world of work and the employment relationship from the vantage point of the worker. This perspective tended to distinguish the program from the more mainstream industrial relations programs with their attendant focus on human resource management.24 Labour Studies, by contrast, placed greater emphasis on the impact of class and power. As a result, the program affirmed the relevance of heterodox economics, and especially its historical, institutional and radical strands. The economics courses that labour studies students were required to take were almost invariably taught by instructors positioned in the heterodox wing of the department.25 The new head, John Loxley, was committed to bringing the department together. Also at this time, the university had initiated a comprehensive internal

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and external review for the department. The internal review committee delivered their report to council in 1985. In the report, the committee wrote that What distinguishes our teaching program from others in Canada, a distinction which is seen as a source of strength, is the commitment by the department to exposing students to a number of different approaches to economics. This commitment to “methodological pluralism” finds reflection in both the course offerings . . . and in the course outlines and readings lists of individual faculty members. It also expresses itself in the research and writing interests of the faculty . . . A major point of consensus in the review process is that the commitment to “methodological pluralism” must be preserved and, where necessary (as in the graduate program), strengthened. It is, therefore, taken into account in the hiring of staff and in the design of new programs and courses (Department of Economics, 1985, p. 22).

In the wake of this report, the department restructured some of its course offerings and degree requirements. By the end of the 1980s, the essential structure of the present-day degree program was in place. The changes were especially significant at the graduate level. The core graduate theory courses were replaced with a set of eight half courses: four in microeconomic theory and four in macroeconomic theory. M.A. students were required to take two of the new theory half-courses, Ph.D. students were required to have four (two micro and two macro). From a heterodox perspective, two of the new half courses (one micro and one macro) were explicitly courses on alternative theory,26 and, in principle, they were deemed equivalent and in fact substitutable with the orthodox theory courses in terms of degree requirements. At the honours level, alternative theory made more limited inroads: microeconomic theory remained essentially orthodox, but a 3rd year half course entitled “Alternative Approaches to Macroeconomic Analysis” was added to the two orthodox macro courses as part of the required curriculum. History of Economic Thought was retained as a degree requirement for both honours and doctoral students, and the latter had to have some economic history, although an undergraduate course in economic history would be sufficient to meet this requirement. The continued insistence on a 3rd year alternative macroeconomic theory course and a 4th year course on the history of economic thought as requirements for the Honours degree highlights the difference between the Honours program at Manitoba and its Canadian counterparts. It is also testimony to the strength of the heterodox tradition in the department, to the tolerance and support of that tradition by many of the more mainstream faculty, and to the interest in those subjects by students. However, the basic requirements are still predominantly orthodox courses, and there have been intermittent attempts to waive the alternative theory requirement as well as periodic questions about whether the history of economic thought should still be mandatory.

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However27 qualified the status of heterodoxy is at the honours level, it is much less satisfactory in the graduate program. While there are several heterodox subjects on the books as electives, the prerequisites, especially for pre-M.A. students, are largely mainstream courses and those teaching micro and macro theory, in effect, become the gatekeepers for admission to thesis work, whatever the interests of the students and their supervisors. This problem has been especially acute in regard to undergraduate students who have a strong background and interest in labour studies. Ph.D. students are compelled to take at least 50% of their core theory in the form of mainstream economics. It is not possible, therefore, to complete a Ph.D. Economics degree within the confines of heterodox economics or Political Economy, even though there is some student interest in this.28 This tends to drive some of the more progressive students to undertake doctoral work in other programs and departments, such as political studies, environmental studies, international relations, and public administration. Theoretically, they could register for a Ph.D. in Interdisciplinary Studies, requiring registration in three departments, but students in this program tend to be ones drawn from other disciplines who recognize the value of taking some economics at the graduate level. It is difficult to ascertain how many potential graduate students opted for other choices on account of these impediments. Furthermore, the swing to the right in the political and intellectual environment in the late 1980s and 1990s probably eroded the appeal of a heterodox stream in the minds of some students. However, these years also saw expression of concern within the economics profession over the attractiveness of graduate study in economics. Whatever, the reason, graduate enrolment in the department declined from 91 in 1985–1986 to 52 in 1995–1996 (Loxley, 1995) to 38 in 2002–2003 (Department of Economics, 2002). The decline in numbers implied that many of the courses listed would only be offered occasionally. Alternative theory, Marxian economics and economic history did very poorly in attracting graduate students. Department records show that the graduate theory course “Marxian and Neo-Ricardian Microeoconomic Theory” has not had any students since 1987. The graduate course “The Economics of Marx” also had zero enrolment between 1987 and 1997. Two students enrolled in it for the 1997–1998 year, and two honours students in 1998–1999. Only one student had enrolled in the other graduate course in Marxian theory, “Debates in Marxian Economics,” over this entire period. The “Post-Keynesian and Marxian Macroeconomic Theory” course did somewhat better and was in fact offered in most of these years. However, enrolment, which ranged between four and seven students in the late 1980s had fallen to zero in 1996–1997 and had only a single student the following year. A Report of the Graduate Committee to the Department Council in 1997 (Department of Economics, 1997) pointed out that no Ph.D. candidate has sat for candidacy examinations in the fields of Marxian Economics or the History

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of Economic Thought since at least 1992, and over that same time period there had been only one candidate in Economic History. Thus, at the doctoral level, it was primarily in the field of Development that heterodox research was being pursued. More generally, the research interests of many of the heterodox members of the faculty are not particularly evident in the department’s actual graduate course offerings. In the general degree program, some recent developments have acted to raise the profile of alternative approaches. Falling enrolment levels in the mid-1990s precipitated discussion and investigation into the department’s introductory courses. The result was the creation of two new introductory half courses which offer a more explicitly heterodox approach to first year students. First introduced in the 1999–2000 term, this innovation, from a heterodox perspective, has been successful, as attested by the fact that enrolment is either at or close to capacity and also by the fact that the School of Business now will not allow their students to receive credit for these particular introductory courses. In 1998, Department Council approved the introduction of two 2nd year half courses in “Political Economy” in order to accommodate the requirements for a new interdisciplinary program in Global Political Economy. As overall enrolment levels have reversed the decline that they experienced in the mid-1990s, it is hoped that the higher numbers combined with the impact of these new undergraduate courses will generate renewed interest on the part of students in various non-mainstream approaches to economics. Despite the unambiguous message contained in the report of the internal review committee, the tenuous nature of the attachment to methodological pluralism has been further revealed in the still contentious issue of hiring. Concern over hiring, which had been heightened when the era of growth had been replaced by a period in which the size of the department was held constant, has, in the 1990s, been intensified further as retirements increased and positions were lost. The hiring process has also become more centralized. Hiring committees replaced the almost complete discretion of Heads, and Arts Faculty hiring committees have replaced essentially departmental ones. With each move towards centralization, the politics of hiring have shifted. The Head’s influence is no longer great and even democratic majorities can be overturned. On one notable occasion, a committee decision, supported by the Head, to hire a progressive feminist economist was overturned by the Dean following appeals from faculty members in the department. This economist, the late Michelle Pujol, went on to publish a critically acclaimed book, Feminism and Anti-Feminism in Early Economic Thought (Pujol, 1992), but was deemed unacceptable to some in the department, on both sides of the ideological spectrum, on such spurious and unacceptable grounds as “she’s difficult to work with” or “she doesn’t like men.” In a cryptic allusion to her problems of finding

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acceptance in the department, Pujol wrote the following in the Acknowledgements in her book: “Finally, I must thank my former ‘Colleagues’ at the University of Manitoba who have provided me with a practical experience of what it means to be a feminist in a male-dominated discipline, experience which has contributed to the theoretical elaboration of this book.” While the rejection of Pujol might be argued away as a “one-off” having more to do with inter-personal relations than with heterodoxy, there can be no question of there being structural problems in the hiring process which are biased against hiring heterodox economists. The first such problem is that the faculty complement has been shrinking due to budget constraints and due to the centralization of vacant staff positions in the President’s office for allocation to so-called “high priority” sections of the university, which is usually a euphemism for the professional faculties. The result is that replacement faculty in the department are few and far between. When vacancies arise, priority ends up being given to “core” subject areas that are requirements for the Honours and Graduate degrees, namely mainstream micro and macro theory, and econometrics. Thus, in recent years, the loss of those teaching political economy subjects, or even teaching in applied areas of the discipline, is not given serious weight by the more orthodox members of the department. Secondly, the interpretation of what constitutes appropriate theory and econometrics remains quite narrow with the result that applicants with left-wing approaches are vigorously resisted and their qualifications often vilified. Thirdly, this denigration of the heterodox candidates often finds resonance with the “outside” members of the hiring committee, since heterodoxy in other departments in the Faculty of Arts is not, by and large, as well represented as it is in Economics. An incidental implication of the broadening of hiring committee membership has, therefore, been the deepening of the bias against heterodox candidates. It is, in fact, in hiring decisions that the tolerance of methodological pluralism is revealed to be quite fragile and the process is more often than not rancorous and unpleasant. This is not to say that heterodox candidates are no longer hired. The department recently managed to hire a young political economy-oriented faculty member, though not without resistance and the usual questioning of his qualifications. In this case, there were, fortuitously, two vacant positions and therefore it was easier to argue for one of them to be filled by someone other than an orthodox theorist. Despite these internal challenges, the public profile projected by the heterodox component in the department was enhanced in the 1990s by the contribution that many of them made to the production and publicization of a series of alternative provincial and federal budgets (see, for example, Choices and Canadian Centre for Policy Alternatives, 1998, and Canadian Centre for Policy Alternatives and Choices, 1997, 1998). This yearly exercise, designed as much to mobilize and

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empower citizens to effectively criticize and reshape public policy as it was to produce a progressive and fiscally creditable alternative to the economic agendas defined by the governments themselves, attracted considerable local and national attention. Loxley played an especially vital role in this process, serving a number of years as co-Chair for first the provincial and later the federal alternative budgets. Altogether, at least five of the heterodox economists at the University of Manitoba made important contributions to this project.

6. CONCLUSION The heterodox tradition at Manitoba extends back over half a century. Its relative status has ebbed and flowed over the years. It has been a source of considerable pride for many who have been associated with the department, but it has also been a source of tension. Accommodating heterodoxy and providing an environment in which critical exchange can occur without unleashing the centrifugal forces that ideological and methodological differences can generate, has proven to be and continues to be a challenge. Circumstances and institutional features incidental to the Department of Economics at Manitoba have contributed to the production and maintenance of such an environment. The social and political diversity that characterizes Winnipeg and the province of Manitoba helps by providing a setting that is potentially conducive to pluralism. In particular, the legacy of a progressive labour movement and radical politics, and the alternation over a 40 year period between a socially democratic government and a conservative one at the provincial level have helped sustain a regionallybased ideological resistance to the hegemony of orthodoxy in social and political thought and policy. Personal and professional ties between the provincial New Democratic Party (NDP), especially when it formed the government, and various members of the heterodox wing of the department helped offset any tendency of the latter to retreat behind walls of academe.29 These ties, and the broadly progressive orientation of the NDP, also helped provide a market for graduates who have been exposed to, and in many cases, enthusiastically embraced, heterodox and even radical economics, thereby providing some not insignificant “real world” confirmation of the relevance of heterodox training. The separation and independence of the department, institutionally positioned in the Faculty of Arts, from the Faculty of Administrative Studies/School of Business, has enhanced the department’s ability to chart its own course despite the growing size of the Business faculty and the increased influence of the external financial resources emanating from the business community. Institutional arrangements within the department have also had a positive effect. The department’s

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weekly seminar series, instituted in the 1960s, provided a forum in which faculty and graduate students could critically engage in discussion over the scholarly research of the faculty. Acceptance of methodological pluralism and tolerance of heterodox approaches was further enhanced by the introduction in 1985 of an annual weekend seminar retreat. This has been held at the University of Manitoba Delta Marsh Research Station on Lake Manitoba. Originally designed to improve relationships within the department, the retreat concept was enthusiastically endorsed by most department members and is eagerly looked forward to each year. An attempt is made in most years to obtain some ideological/methodological balance among invited speakers. Topics have included price flexibility and unemployment, game theory, neo-conservative economics in Canada, entropy and steady-state economics, privatization, the nature of the history of economic thought, globalization and national economic policy, and feminist criticism of economic theory. The retreat ensures some exposure to heterodox ideas and guarantees at least a minimal amount of socialization among the faculty – circumstances which are virtually essential for academic tolerance. In hiring, good use has been made of some of the department’s own graduates. Bellan, Simkin, Vogt, Dennis, Baragar, and I. Hudson are all heterodox economists who have received at least one economics degree from Manitoba. Three other members of the department who have received part of their economics training from the department are strong and committed supporters of the department’s heterodox tradition, even though their own research and teaching lies primarily within the mainstream. Finally, achieving a critical mass of heterodox economists who are able to work in what is by and large a non-fractious, non-rancorous department has provided a powerful incentive for those economists to stay with the department for the long term. This is especially valuable in light of the fact that salaries at Manitoba are not in the top echelon when compared with the leading departments in the country. It also makes Manitoba a somewhat attractive place for other economists seeking a department with a strong heterodox tradition. Consequently, when the department does advertise a vacancy for an economist with strength in one of the areas that define economic heterodoxy, the quality of the applicants are exceptionally high. Hopefully, this advantage can be utilised in the near future, as challenges posed by further retirements and the uncertainty in regard to securing new faculty appointments underscore the reality that, in the social world, past achievement is no guarantee of future success.

NOTES 1. In this paper, heterodox economics, broadly defined, encompasses alternatives to mainstream economic orthodoxy. The ascendance of neoclassical economics within the

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profession was evident in Canada in the 1940s and 1950s, and by the 1960s, neoclassical economics reigned supreme. Parallel to this emergence, heterodox economics is consequently increasingly defined in terms of alternatives to neoclassical economics. The heterodox alternatives also contain, albeit to various degrees, a critical stance towards the neoclassical mainstream. 2. Ferns had been instrumental in launching a new co-operative Winnipeg daily newspaper, the Citizen, to the intense dislike of the owners and editors of established Winnipeg Free Press and Tribune. He had also served as a representative of organised labour on numerous conciliation boards set up to investigate and mediate various labour-management disputes. Furthermore, in 1947 he had accepted an invitation to speak to the Canadian-Soviet Friendship Council (see Ferns, 1983, Chap. 9). 3. Radical economics, following the definition advanced by Roberts and Feiner (1992), refers to a methodological and theoretical approach to economic analysis that draws upon the work of Marx and various Marxist traditions. As noted by Roberts and Feiner, radical economists “typically share a commitment to a broadly socialist critique of capitalism” (p. 1). 4. On the efforts of the University to cope with the demands placed upon it by the sudden surge in enrolment incidental to demobilization, see Bumstead (2001, pp. 109–121). 5. The influence of Samuelson’s text was confirmed in a personal conversation with R. Bellan in September 2002. 6. Pentland’s thesis was finally published posthumously in 1981 with the title Labour and Capital in Canada 1650–1860 (Pentland, 1981). 7. According to Phillips (1981, p. xxxii), “Pentland considered himself as much as historian as an economist and was hostile to the concentration on economic theory courses in university economics programs.” 8. For example, in the University of Manitoba General Calendar, 1958–1959 (University of Manitoba, 1958), the Department of Economics lists four graduate level (700) courses. Two were taught by Pentland: one on Economic History, the other on Labour Problems. In the 1960s, Pentland was commissioned to produce a background study on the Canadian industrial relations system for the federally appointed Task Force on Labour Relations (Phillips, p. xii). 9. The Crowe affair became a cause c´el`ebre in the Canadian academic community in 1958–1959, concerning as it did the issues of academic freedom and governance. For a well-documented description of the affair, and the role played by Barber and CAUT, see Horn (1999, Chap. 9). 10. I am indebted to Paul Phillips and Jesse Vorst for information concerning Simkin’s macroeconomics. 11. I am indebted to Costas Nicolaou for this insight into Barber’s administrative activity. 12. According to the Department records, 30 economists were hired in either permanent or term positions from 1964 to 1972. Of that group, only 6 (Gonick, Vogt, Deprez, Vorst, Phillips and Laureyssens) would be classified as residents of the heterodox camp. 13. For an introduction to the revival of political economy in Canada in the 1960s and 1970s, see Clement and Drache (1978). 14. Pentland (1968) suggested that geography had played a role in forging this Manitoba perspective. In particular, Manitoba’s position as a lynch-pin in a national transcontinental economy induces an enhanced appreciation for the nature of and benefits accruing from this constructed system, as well as an awareness of the dangers it faces. 15. From 1958 to 1972, a total of five faculty with term or permanent appointments left the department. From 1973 to 1984, there were 19 departures (Pentland, 1977 and

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department records). Reasons for departures were varied, but included retirement, health, death, non-renewal of contract, and, in many cases, the perception of better opportunities elsewhere. 16. This is not to imply that all, or even the majority, of these new hires were fundamentally opposed to the presence of heterodox economists and/or heterodox economics. Indeed, the explicit support for what came to be referred to as methodological pluralism by some of the new faculty proved indispensable in attaining whatever successes the heterodox advocates were able to achieve in regard to hiring and curricula. 17. See, for example the minutes of the Department Council meetings of 22 March 1974, 10 January 1975, 5 May 1976, 17 March 1978, 12 March 1979, and the 11 April 1979 (Department of Economics, 1972–2002). 18. It is somewhat ironic that these two especially contentious hiring decisions resulted in the hiring of the two individuals, Loxley and Simpson, who, subsequently, not only served as successive Heads of the department, but also as Heads who enjoyed strong and broad support from both the orthodox and heterodox camps. 19. The Ph.D. program had been established in 1967. 20. W. Thirsk, one of the members of the Committee, stated in the report that “Differences in the treatment of these concepts relate mainly to the significance or importance attached to the purely competitive model of market organization and its welfare implications” (Department of Economics, 1976). 21. McCallum had joined the Department in 1976. It was he who resigned in 1978 in the midst of the imbroglio over the hiring of Loxley. It should be noted that he supported Loxley’s candidacy. 22. According to Neill (1991, p. 210), Barber and McCallum’s “empirical refutation of monetarism was archetypical,” although “their theory was not neoclassical.” 23. Loxley served as head until 1997. A list of department heads is presented in the Appendix. 24. In a recent article surveying the field of Industrial Relations, Anthony Giles (2000) argues that IR experienced a crisis of relevance in the 1980s and 1990s, and that, rather than redefining the field in terms of Employment Relations, a more promising alternative would be something conceptualized as “work relations.” At Manitoba, this had already been done. 25. The interest in and commitment to labour and workplace issues on the part of various members of the department is further highlighted by their involvement with the University of Manitoba Faculty Association (UMFA). Heterodox economists in the department have played a prominent role on the formation and administration of UMFA. UMFA was, in 1973, the first anglophone university faculty group to apply for union certification in Canada, and was granted certification in 1974 (Bumstead, pp. 191, 195). Roy Vogt, one of the members of the department’s heterodox wing, was an important force in these early formative days of the union. The anti-union faction was led by Brian Scarfe (p. 195), who was a pillar in the orthodox camp. Polarization over this issue undoubtably exacerbated tensions within the department. Those tensions periodically resurface. In 2001, during the most recent round of contract negotiations – a round that was marked by a faculty strike – the radical economist, R. Chernomas, was a vital player conducting negotiations for the union. Three other members of the department were on the UMFA bargaining team. Across the table, representing the administration, was another department member, R. Lobdell. Although the majority of department members have been staunch supporters of UMFA, the support has never been unanimous.

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26. The calendar descriptions (University of Manitoba, 2002, p. 68) of the two alternative theory courses are as follows: “Post-Keynesian and Marxian Macroeconomics: A review of post-Keynesian and Marxian macroeconomic theories of the domestic and international economy and their policy prescriptions”; and “Marxian and Neo-Ricardian Microeconomic Theory: A review of Marxian and neo-Ricardian microeconomic theories and their extension to monopoly, segmented labour markets, labour reproduction and the household.” 27. For the material comprising the remainder of this section of the paper, the author would like to acknowledge the generous assistance and the not inconsiderable input provided by John Loxley. The usual disclaimers still apply. 28. Graduate students with a preference for only mainstream theory, however, can easily avoid the alternative theory courses. 29. Two of the more notable instances of these connections are: (1) Cy Gonick’s spell as a member of the legislature in the NDP government of Ed Schreyer; and (2) John Loxley, who, prior to his joining the department, served as Secretary or Deputy Minister of the Resource Economic Development Secretariat, which was a wing of the Planning Secretariat of Cabinet.

ACKNOWLEDGMENTS I would like to acknowledge the assistance provided by many former and current members of the Department of Economics at the University of Manitoba, and in particular would like to thank R. Bellan, J. Vorst, P. Phillips, I. Lipnowski, N. Cameron, P. Deprez and C. Nicolaou for the information and insights they provided. I would like to thank B. McGregor for her help in providing access to various departmental records. A. M. C. Waterman read an earlier version of this paper. His incisive comments and constructive suggestions have improved the quality of this revision. Above all, I wish to thank John Loxley for his considerable assistance and unwavering encouragement. None of the above are responsible for any of the errors or limitations that may remain.

REFERENCES Barber, C. L. (1955). Canadian tariff policy. Canadian Journal of Economics and Political Science, 21(November), 513–530. Barber, C. L. (1958). Inventories and the business cycle, with special reference to Canada. Toronto: University of Toronto Press. Barber, C. L. (1962). Canada’s unemployment problem. Canadian Journal of Economics and Political Science, 28(February), 88–102. Barber, C. L. (1973). A sense of proportion. Canadian Journal of Economics, 6(November), 468–482. Barber, C. L., & McCallum, J. C. P. (1980). Unemployment and inflation. Ottawa: Canadian Institute for Economic Policy. Bellan, R. C. (1960). Principles of economics and the Canadian economy. Toronto: McGraw-Hill.

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Bellan, R. C. (1971). The evolving city. Vancouver: Copp Clark. Bellan, R. C. (1978). Winnipeg’s first century. Winnipeg: Queenston House Publishing Co. Bellan, R. C. (1981). The Canadian economy: Problems and options. Toronto: McGraw-Hill Ryerson. Bellan, R. C. (1986). Unnecessary evil: An answer to Canada’s high unemployment. Toronto: McClelland and Stewart. Blaug, M. (2001). No history of ideas please, we’re economists. Journal of Economic Perspectives, 15(1), 145–184. Bumstead, J. M. (2001). The university of Manitoba: An illustrated history. Winnipeg: University of Manitoba Press. Canadian Centre for Policy Alternatives and Choices (1997). Alternative Federal budget papers 1997. Ottawa: Canadian Centre for Policy Alternatives. Canadian Centre for Policy Alternatives and Choices (1998). Alternative Federal budget papers 1998. Ottawa: Canadian Centre for Policy Alternatives. Choices and Canadian Centre for Policy Alternatives (1998). Show us the money: The politics and process of alternative budgets. Winnipeg: Arbeiter Ring Publishing. Clement, W., & Drache, D. (1978). A practical guide to Canadian political economy. Toronto: James Lorimer. Department of Economics (1972–2002). Selected minutes of the meeting of the Economics Department Council, University of Manitoba. Department of Economics (1976). Final report of the ad hoc committee established to review the content and instruction of 18.120. Department of Economics (1985). Internal review. Department of Economics (2002). Graduate studies committee report (September). Ferns, W. S. (1983). Reading from right to left: One man’s political history. Toronto: University of Toronto Press. Giles, A. (2000). Industrial relations at the millenium: Beyond employment? Labour/le Travail, 46(Fall), 37–67. Gonick, C. W. (1975). Inflation or depression: The continuing crisis of the Canadian economy. Toronto: James Lorimer. Gonick, C. W. (1976). Inflation and wage controls. Winnipeg: Canadian Dimension. Gonick, C. W. (1978). Out of work: Why there’s so much unemployment, and why its getting worse. Toronto: James Lorimer. Horn, M. (1999). Academic freedom in Canada: A history. Toronto: University of Toronto Press. Horn, M. (2000). Canadian universities, academic freedom, labour and the left. Labour/le Travail, 46(Fall), 439–468. Kealey, G. S. (1979). H. C. Pentland and working class studies. Canadian Journal of Political and Social Thought, 3(2), 79–94. Loxley, J. (1981). The ‘great northern’ plan. Studies in Political Economy: A Socialist Review (6), 151–182. Loxley, J. (1986). Debt and disorder: External financing for development. Boulder and London: Westview Press. Loxley, J. (1989). Introduction (with Bonnie Campbell). Chaps 1 and 3 in: B. K. Campbell & J. Loxley (Eds), Structural Adjustment in Africa. London: Macmillan. Loxley, J. (1995). Internal memo. Department of Economics, 21 September. Neill, R. (1991). A history of Canadian economic thought. London and New York: Routledge. Pentland, H. C. (1968). Review of the myth of inflation by K. J. Charles. Canadian Dimension, 5(4), 36–37.

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Pentland, H. C. (1977). A brief history. Winnipeg: The Department of Economics, University of Manitoba. Pentland, H. C. (1981). Labour and capital in Canada 1650–1860. Edited with an Introduction by P. Phillips. Toronto: James Lorimer. Phillips, P. (1967a). Confederation and the economy of British Columbia. In: W. George Shelton (Ed.), British Columbia and Confederation (pp. 43–60, 221–224). Victoria, BC: Morris Printing Co. Phillips, P. (1967b). No power greater: A century of labour in British Columbia. Vancouver, BC: Federation of Labour. Phillips, P. (1973). The national policy and the development of the Western Canadian Labour movement. In: A. W. Rasporich & H. C. Klassen (Eds), Prairie Perspectives 2 (pp. 41–62). Toronto: Holt, Rinehart & Winston. Phillips, P. (1976). Canadian labour and the new industrial state. In: W. Gagne (Ed.), Nationalism, Technology and the Future of Canada (pp. 123–145). Toronto: Macmillan. Phillips, P. (1977). National policy, continental economics, and national disintegration. In: D. J. Bercuson (Ed.), Canada and the Burden of Unity (pp. 19–43). Toronto: Macmillan. Phillips, P. (1979). The national policy revisited. Journal of Canadian Studies, 14(Fall), 3–13. Phillips, P. (1981). Introduction to H. C. Pentland Labour and Capital in Canada 1650–1860. Toronto: James Lorimer, pp. v–xliii. Pujol, M. (1992). Feminism and anti-feminism in early economic thought. Brookfield, Vermont: Edward Elgar. Roberts, B., & Feiner, S. (1992). Introduction: Current controversies in radical economics. In: B. Roberts & S. Feiner (Eds), Radical Economics (pp. 1–13). Boston, Dordrecht and London: Kluwer Academic Publishers. Samuelson, P. (1948). Economics: An introductory analysis. New York and Toronto: McGraw Hill. Sherman, H., & Evans, G. G. (1984). Macroeconomics: Keynesian, Monetarist and Marxist views. New York: Harper & Row. University of Manitoba (1958). General calendar 1958–1959. Winnipeg: University of Manitoba. University of Manitoba (2002). Graduate calendar 2002–2003. Winnipeg: University of Manitoba. Waterman, A. M. C., Hum, D. P. J., & Scarfe, B. L. (1982). Introduction to The Collected Economic Papers of C. L. Barber. Edited with an Introduction by A. M. C. Waterman, D. P. J. Hum & B. L. Scarfe. Winnipeg: Institute for Social and Economic Research, Faculty of Arts, University of Manitoba, pp. 1–19.

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APPENDIX Heads of the Economics Department, 1909–2003

A. B. Clark H. C. Grant Robert McQueen H. McD. Clokie (Acting Head) W. J. Waines Clarence L. Barber A. M. C. Waterman Brian L. Scarfe Norman Cameron Cy Gonick John Loxley Wayne Simpson Source: Pentland (1977) and Department of Economics (1972–2002).

1909–1934 1934–1935 1935–1941 1941 1941–1963 1963–1972 1972–1976 1976–1977 1977–1979 1979–1984 1984–1997 1997–present

REPRESSION AT THE UNIVERSITY OF MICHIGAN Edward H. Shaffer In this paper I will: (1) look at the question of repression as a societal tool; and (2) relate it to my experiences at the University of Michigan. While I could give examples of repression in other places, I will concentrate on Michigan for two reasons. First, there are many people who suffered because of holding heterodox views; I therefore do not think it is appropriate for any one person to take too much space dwelling extensively on his or her personal experiences. Second, my experience at Michigan is much better documented than elsewhere. If someone from these other places wants to challenge my assertions, the reader will have to decide, without any corroborating evidence, which one of us is telling the truth.

REPRESSION AS A SOCIETAL ISSUE Repression is an integral part of a class-based society. In these societies a relatively small number of people own a very large share of productive resources. This concentration of asset ownership inevitably leads to a highly unequal distribution of income and with it a division of society into a small number of haves and a much larger number of have-nots. The haves constantly fear that the have-nots will seize their property either by outright force or through legislation. Over the centuries they have devised methods of social control to preserve the existing property relationships. They use two basic means of control: physical force and ideology. Physical force involves the employment of the police and military, the erection and running of Wisconsin “Government and Business” and the History of Heterodox Economic Thought Research in the History of Economic Thought and Methodology, Volume 22-C, 195–205 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(03)22050-2

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penal institutions and the establishment of a judicial system. There are however limits to its effectiveness. Among them is the adverse (from the point-of-view of the haves) impact on wages in the private sector if a significant portion of the labor force is shifted to the military and police. The cost of protection might become unduly high. In addition a large police and military force may become difficult to control. The inculcation of an ideology justifying the existing class relationships is a more effective method of social control. In the past, and to some extent in the present, religion has served this purpose. In most monarchies, the rulers justify their claim to the throne as a divine right. Their motto usually is “rex [regina] gratia dei” (king [queen] by the grace of God). In republics leaders often give the impression that they are carrying out God’s will. In World War II, for example, German soldiers had the words “Gott mit Uns” (God is with Us) inscribed on their belt buckles. The United States, in a similar vein, added the words “under God” to its Pledge of Allegiance after that war. A more sophisticated method of ideological indoctrination is the control of media. In countries where media ownership is highly concentrated, this control is usually enforced by the owners themselves. At times, however, the government assumes this role. This was true in the United States in the McCarthy era, when numerous actors and screen writers were both blacklisted and imprisoned. Another method involves the control of education, both at the grade school and university levels. It means insuring that those who impart values and knowledge to a nation’s future leaders are themselves well-indoctrinated. This is especially true, at the university level, in the social sciences as a whole and in economics in particular. This control moreover relies more on economic than legal sanctions. In economics, the market has become a divinity. Today’s market theologians, like the religious ones of the past, dare not question its role. The most obvious example of this attitude is the separation of economics from politics by changing departments of Political Economy into departments of Economics. The result of this has given economists a tunnel vision in which the interaction between the economic and political variables is either glossed over or completely ignored. Political events are usually considered as exogenous variables devoid of economic content. Alan Greenspan illustrated this tunnel vision in speech extolling the globalization of 19th century in Mexico City in 2002. He argued that: . . . our great grandparents lived in a world in which the product of their efforts well may have been sent to foreign shores. Quite often, those efforts were funded in part by foreign investors. As a result, what happened in the financial markets of the City of London, however distant, would echo around the globe. Although this system produced inevitable errors of mispricing and panic on occasion, it reliably funded the opening of new economies and the rolling back of frontiers across the Americas. A considerable portion of the most impressive infrastructure built over the centuries – including the center of old Mexico City itself, our system of canals in

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the United States, and thousands of miles of railroad track bed and bridges in all our countries – provides eloquent testimony to the net benefit of that international trade and finance (“Globalization,”Banco de Mexico 75th Anniversary Conference, Stabilization and Monetary Policy: “The International Experience,” Mexico City, November 14, 2000).

What he did not mention was that the 19th century was also the age of imperialism in which many wars were fought over colonial spoils and that its benefits were unevenly divided among the nations. Also he did not mention that World War I brought an end to this “Golden Age,” implying that there was no causal linkage between these two events. This blindness to the relationship between an economic variable, investment flows, and a political one, war, prevents orthodox economists from understanding the forces shaping our society. Instead they firmly hold the belief that the market is a harbinger of social harmony when, in reality, it is a breeder of conflict. The market theologians enforce their dogma by branding dissidents as “heretics” and their work as “descriptive,” “unscientific,” “non-analytical” and “inferior.” They also impose their will by refusing to accept these expounding heterodoxy, refusing to hire suspected “heretics” and by denying tenure to those who managed to slip through their conformist filters. They furthermore may decide to give poor references to students to whom they have granted advanced degrees, thus effectively preventing them from obtaining both academic and research positions. This repressive system, like all other such systems, is enforced with varying degrees of zeal. The degree of zealotry often depends on external forces, like pressure from government bodies on public universities and by wealthy donors on private ones. Its enforcement however violates one of the fundamental reasons for the existence of universities – the pursuit of truth. This pursuit entails the questioning of existing paradigms and the establishment of new ones. Because of this, repression engenders resistance from individual faculty members and students. At times this resistance is able to keep the repressive forces in check. Repression thus moves in waves, sometimes increasing and at other times decreasing. While today repression is less pronounced than in the McCarthy era, it would be a mistake to conclude that it will not rise again. Events in the present so-called “war on terrorism” may well give birth to a new repressive era. Given these general observations, I would like to relate them to my experiences at the University of Michigan.

MY EXPERIENCES AT THE UNIVERSITY OF MICHIGAN I first came to Michigan by accident in 1943 as a soldier in the U.S. Army. It was a time before the invasion of Europe and the offensive in the Pacific. The training

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camps in the United States were filled as were the bases in England and in Australia. At the same time the universities, desperately short of male students, were encountering severe financial difficulties. To bail them out the army set up the Army Specialized Training Program (ASTP) in which they selected a number of troops to go to various institutions of higher learning. I was selected to go to Michigan. My stay in Michigan was a very positive one. I was very impressed by the vibrancy of the student body and the quality of the faculty. It was much superior to schools I had previously attended – Frostburg State Teachers College in Frostburg, Md. and the University of Maryland in College Park. It was at the latter school that I volunteered for the Army. After my stay in Michigan, approximately six months, I was sent back to the barracks and then shipped to Europe where I served in the Combat Engineers. I witnessed some of the horrors of that war and eventually became a “peacenik.” When the war was over, I was hoping to return to Michigan but I was not sure I would be accepted. The universities in the early postwar years were swamped with applications from veterans, many of whom could afford to go to college for the first time in their lives because of the GI Bill of Rights. The Bill paid for the tuition and books and gave every veteran a monthly stipend. Because of this increased demand for education, the universities adopted a policy of giving priority to their former students. Since I did not want to return to the University of Maryland, where I knew I would be admitted, I was hoping that Michigan would consider me a former student because of my brief stay during the war. They did and I enrolled in Michigan as a third year student in 1946. Michigan was a beehive of political activism. Because of my experiences of growing up in Pittsburgh during the Depression and of fighting in the war, I was already radicalized when I arrived there. I was convinced, and still am, that capitalism is a system of permanent general disequilibrium that degenerates into economic chaos, conflict and war. I eagerly participated in left-wing student activities and I spoke quite openly about my beliefs. One of the things I did was help bring Gerhard Eisler a prominent member of the prewar German Communist Party who later became Minister of Information in the German Democratic Republic, to the campus. A near riot ensued. I was worried how that incident might affect my academic standing. Shortly afterwards, much to my surprise, I was told that I was selected to graduate with honors in economics. I received my B.A. in 1948 and was admitted to the graduate program in that year. I received my M.A. in the following year. I suffered no adverse consequences from this incident. Nevertheless I remember that when I took Gardner Ackley’s class in macroeconomics. I took issue with his statement that a deficiency in consumption was the reason for economic downturns. I argued that a rise in demand caused by an

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in increase in real wages would lower profits and investments, which would also cause a downturn. I said that the system was in a trap from which it could not escape. He answered that proper fiscal policy would enable the system to escape the trap. Shortly afterwards, several students, without my knowledge, asked him if he would let me expound my views to his class. He refused on the grounds that he could not fit me into his schedule. As an aside I might add that several years later, when I was a graduate student, Paul McCracken invited me to lecture to his class in the business school. He then sent me a letter saying that it was the most stimulating lecture that was ever given to his class. McCracken later became the chair of Eisenhower’s Council of Economic Advisers. During my first stay in Michigan from 1946 to 1949, I majored in labor economics. My M.A. thesis was titled, “Pragmatism in the American Labor Movement.” After receiving this degree I decided to do more research on the subject by getting a job in the auto plants in Detroit. While there, I worked at Ford, Chrysler, Briggs and General Motors. I also joined the United Auto Workers and participated in its activities. In 1951 I applied for readmission to the graduate program and I was accepted. I wanted to do another dissertation on labor under the supervision of William Haber. A little while later two incidents, reflective of the atmosphere at that time, pushed me into the limelight. I had a girl friend, a student from Canada, who one day came to me and told me that she was an FBI informer. She became distraught over her role and felt she had to confess to me. She said she had been recruited by a University official in the foreign students’ center, who introduced her to the local FBI chief. She reported to the FBI on a regular basis. I asked her if she would come with me to a notary public and swear out an affidavit, detailing the story she told me. She agreed. Though I wanted to keep this incident private, I was not able to do so. Someone leaked it to the press. It caused a major sensation and embarrassment to both the University and FBI. There were both shock and anger at the University’s collaboration with the FBI in spying on students. Shortly afterwards the second incident occurred. I was subpoenaed, along with another economics graduate student, Myron Sharpe and three faculty members: Chandler Davis, a mathematician; Mark Nickerson, a pharmacologist and Clement Markert, a biologist, to appear at the hearings of the House Committee of un-American Activities (HUAC) in East Lansing, Michigan.1 Upon receiving the subpoena I notified Haber about it. He urged me to cooperate with the Committee. I refused. Sharpe and I told Ackley, who was the department’s chair, about it. He thought that the Committee was stupid to subpoena students. He arranged for us to see the president of the University, Harlan Hatcher. We met with Hatcher and other top University officials. They all urged us to cooperate. We again refused.

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At the hearings in East Lansing, all of us, with the exception of Davis, took the Fifth Amendment against self-incrimination. Davis, whose father, an economist at University of Missouri at Kansas City was also an unfriendly witness, took the First Amendment. Since the Committee did not recognize the First Amendment as legitimate grounds for refusal to answer, he was convicted of contempt of Congress and sentenced to prison. He was also fired from the University along with Nickerson. Markert, who, unlike the other two, agreed to discuss his political beliefs with the University’s Board of Regents, kept his job. Sharpe and I were brought up before the Student Judiciary Committee for “conduct unbecoming a student” and were both acquitted. An interesting sidelight to this story is the apparent shift in public opinion that occurred around the time of the Committee’s visit to Michigan. After I received my subpoena, I tried to find a lawyer in Ann Arbor, a Republican stronghold. Everyone I approached refused to take my case. Exasperated, I wrote a letter to the Michigan Daily, the student newspaper, berating the legal profession for its cowardice and pointing out that if I had been accused of murder many of them would have been eager to take my case yet no one would to have anything to do with me even though I was not accused of any crime. After the letter was published, a law student put me in touch with a lawyer, a prominent Republican, who agreed to represent me before the Committee. When he appeared at the hearings, the Committee’s chair, Kit Clardy, the Republican Congressman from the area, look stunned. Then he stated that my attorney was doing what a lawyer should do and no one should question his patriotism. About a year after the hearings, Clardy ran for re-election and was defeated. My lawyer ran for a judgeship and was elected. After the hearings I was fired from my two part-time jobs (I had worked as an insurance agent and as a taxi driver). I applied for a loan from the University and was refused. Since my payments from the GI Bill had expired (there was a time limit on them), I was in dire financial straits. Some friends offered me a temporary job in New York City, which I accepted. I left Ann Arbor in 1955 without doing any work on my dissertation. After holding a number of jobs, I was hired to work for the oil consulting firm of Walter Levy. Levy, a German refugee, was a consultant to all the major oil companies, except Gulf, many foreign governments and the U.S. State Department. During the war, he worked with the Office of Strategic Services (OSS), the predecessor of the CIA, on strategies to disrupt the German oil supply. He was one of the planners of the Allied air raid that devastated the Ploesti oil fields in Rumania, which had been Germany’s main source of oil. One of my tasks there was to keep tabs on changes in the U.S. oil import program and publish them in the newsletter he sent out to his clients. I also wrote

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reports on changes in oil policy. I had mixed feelings about my work. Though I found it interesting, I also felt like a prostitute when I wrote reports favorable to the oil companies. Fortunately, from my point of view, Levy put his name on everything emanating from his office without giving credit to the authors. But I stayed on because I needed the money. In addition, I was learning a lot about the machinations of the oil industry, which I wanted to use in a book. But I also had personality conflicts with my immediate superior that exacerbated over time. So I was not surprised when he called me into his office one day and told me that I was being fired because of an office reorganization. I attributed my firing to these conflicts. Before I left the company, Levy called me into his office and asked me what I intended to do. I said I wasn’t sure. Then he said that he could get me a job with the CIA in Washington but told me that it would involve a loyalty oath and asked me if I would have any trouble with that. Without directly answering that question, I declined his offer saying that my wife doesn’t like the climate in Washington, which was true in more ways than one. I thus assume, but cannot prove, that real reason for my firing was that the FBI informed him about my past. I then recalled that one of my landlords in NYC told me the FBI visited him and asked questions about me. I was told a similar story by the superintendent of another apartment in which I lived. After this experience I decided to write my Ph.D. dissertation on the oil import program. In 1963 I sent an outline of my proposed dissertation to Haber. He never replied to me. Instead Robert Stern, Director of Graduate Studies in Economics, wrote me saying that since more than seven years have passed from the time of my entry into the Ph.D. program, I would have to take a year of residency in Ann Arbor and that I would also have to make major revisions to my outline. Though I was not happy with the residency requirement (I had by then married and had two small children to support. Besides, moving to Ann Arbor would make it difficult to do consulting.), I did not view it as unreasonable. What disturbed me was his critique. In a letter date May 27, 1963 he wrote: I have read carefully the outline of your proposed thesis and have discussed it with members of the Graduate Studies Committee. I regret to say that the Committee did not accept your thesis proposal, and therefore voted against recommending a time limit extension to the Graduate School to enable you to pursue work on the thesis. The basis for the Committee’s decision was that your proposal did not offer the prospects of a significant contribution to the field of economics. What you were proposing wuld amount mainly to a descriptive summary of the United States oil import program. The facts of this program are already very well known and have been presented in a number of private and governmental publications of various kinds. Moreover, your analysis dealt mainly with points that are on the whole fairly obvious, and your policy conclusions were as a consequence not surprising.

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The proposed topic might be of greater interest if you were able to quantify the costs of the oil import program in terms of the effects both upon consumption and output in the United States and abroad. For this purpose, it would be necessary to formulate a theoretical economic model and to establish values by statistical techniques of the important parameters that would form the basis of your estimates. Your proposal, in its present form, could hardly begin to accomplish this end. At the same time that the Committee reviewed your proposal, they also reviewed your academic record when you were at Michigan. Since you passed the preliminary examinations in economics ten years ago, a considerable amount of knowledge has been accumulated in economic theory and in the application of theory. In accordance with a recently formulated departmental policy concerning time limit extensions for doctoral candidates, the Committee decided that you would have to pass successfully the preliminary examinations in economics as they are presently constituted before consideration for a time limit extension would be given. There would then be no guarantee of such an extension unless the thesis proposal was acceptable to the department.

After reading this, I was sure that I would be wasting my time if I moved my family to Ann Arbor to work for a Ph.D. degree. I knew, for instance, that Stern was wrong when he wrote that the “facts of this program are already very well known and have been presented in a number of private and governmental publications of various kinds.” This could not have possibly been true. The oil import program began in 1959 and I submitted my outline in 1963, only four years after its inception. From my work, I knew that very little had been written about it. That is precisely why I chose to pick that topic for my dissertation. I suspected that the Department had blacklisted me but, aside from this factual error, I had no proof. My suspicion was confirmed 35 years later when. I obtained from the University a copy of a letter Ackley wrote to Dean Ralph Sawyer on December 13, 1954, arguing against demands that Sharpe and I be denied entry to the doctoral program because of our political activities. He stated that admitting us to the program would be “an action adhering to the long and dear tradition which opens the doors of learning to all who can qualify on intellectual grounds, regardless of race, religion, or political belief.” But in the very next sentence he went on to say that “we [the Department] freely confess that individually we could not, and will not, recommend either of these men for teaching or research positions.” On the one hand, he was claiming publicly that the Department would use only academic criteria to determine admissions but on the other, saying privately that it would use other criteria to determine recommendations. Recognizing that there may be a contradiction between granting a degree and then saying that the recipient is unfit for both teaching and research, the Department apparently decided to deny us entry on “purely academic grounds.” After reading Stern’s letter, I decided to obtain a second opinion. I went to Columbia University, walked unannounced into the office of Albert Gailord Hart,

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showed him my outline and asked to be admitted to the graduate program. He told me that I was applying too late but agreed to read it. He then called me and said he would make arrangements to admit me despite my late application. I subsequently received a letter from Mark L. Peisch, Director of Graduate Studies, which read “in recognition of your outstanding academic achievement, we are pleased to inform you of your appointment as a President’s Fellow. This appointment pays tuition and fees and carries a stipend of one thousand eight hundred dollars.” The differences between the academic evaluations at Michigan and Columbia were indeed striking. At Columbia no one raised questions about my political beliefs until I defended my dissertation in 1966. One member of my committee was Roy Blough, who had been on President Truman’s Council of Economic Advisers. I was worried about him because in my thesis I criticized Truman’s oil policy. During the examination, he asked me if I really believed my conclusion that public utility regulation was the answer to the oil industry’s problems. I hesitated, remembering Levy’s offer of a CIA position, and wondered what he knew about me and whether he was testing me to find out if I had changed my views. Then, in an indication of the atmosphere during that time, he looked at me and said something like this, “You don’t have to worry. This place is not bugged. There are no FBI agents here. Nothing you say here will leave this room.” After hesitating a few minutes, I said that “nationalization” was the only solution. He replied, “I see that we have an intelligent man here.” My dissertation was accepted. Two years later Praeger published my thesis. It received many favorable reviews and was cited in reports by government agencies in the U.S. and other countries and in academic journals. In this respect I would like to quote from an unsolicited letter, dated October 7, 1969, from Edward Symonds, Senior Economist, First National City Bank of New York, who wrote: I have just completed reading your interesting study “The Oil Import Program of the United States – an Evaluation.” This is one of the most thorough studies of the subject that I have come across.

After receiving my doctorate I held three academic positions at Western Washington State College, Occidental in California and the University of Alberta in Canada. When I was at Western Washington, I wrote, as I did every year since the early 1950s, a letter to the Council of Economic Advisers, requesting a copy of its annual report. Much to my surprise the report of that year contained a handwritten note from Ackley, who was then the Council’s chair under Lyndon Johnson, stating he was glad to hear from me. This was the first and only note I ever received from a member of the Council. I still find it puzzling that a man who blacklisted me would write such a note. But it tends to confirm my belief that the crack down

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on heterodoxy is pursued with varying degrees of zeal depending on the political atmosphere of the times. My experiences in the three schools I taught at also tends to confirm this belief. During my stay at the first two, the opposition on campus to the Vietnam war intensified and so did the repression, especially at Occidental. I had a number of run-ins in both these schools, but, as I indicated earlier, will not dwell on them in this paper. I finally obtained a position at the University of Alberta in Canada in 1970 because of their interest in my book. Alberta is the Texas of Canada. Its economy is highly dependent on oil. In Alberta there was far less political repression than in the States. On the other hand the neoclassical malaise was more virulent. When I was at Michigan, Columbia, Western Washington and Occidental institutionalism was accepted. There was a growing but relatively minor emphasis on quantitative analysis. At Alberta, I found the opposite to be true. Most of my colleagues were younger people trained in the States. They were gung ho for quantification. The history of economic thought was no longer taught. Models became a fetish. My work at times was termed “descriptive” and therefore of poor quality. I remember once, when we were discussing a paper, one of my colleagues said that it wasn’t really an economics paper because it didn’t contain a single graph or equation. I replied, “You are right. It is just like Adam Smith’s Wealth of Nations.” That ended the conversation. Despite these academic differences, I regard my experience at Alberta as a positive one. I stayed there from 1970 until 1988, when I retired. While there I wrote two books and commented frequently on economic events, especially those related to oil and energy, in both the print and electronic media. Upon retiring, I moved to Vancouver, one of the most beautiful and liveable cities in the world, which has a vibrant cultural and political life. In summary, despite the misfortunes I encountered, I ended my academic life on a happy note. Regrettably, many others who suffered more than I did, through no fault of their own, were not that fortunate. It is the fate of these people that should concern us.

CONCLUSION In my retirement I have been devoting most of my time to the peace movement. The horrors of World War II are still fresh in my memory and I want to do what I can to stop other wars from occurring. I am on the national executive board of Veterans Against Nuclear Arms, an organization of men and women who have experienced war. In that role I have been emphasizing the relationship between

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capitalism, economic chaos and war. This is especially important now, when the dogs of war in the United States, the heart of world capitalism, are once again howling for blood. This abhorrence to war is also fuelled by the existence of the bomb. Its use can bring about the end of civilization as we know it. Karl Marx may have been wrong when he stated in the Communist Manifesto that in previous times the class struggle ended “either in a revolutionary reconstitution of society at large, or in the common ruin of the contending classes.” At least, he cited no examples of when, if ever, this “common ruin” occurred. The existence of the bomb may well turn this historical misstatement into a prophecy. This is why it is necessary to promote heterodox economics. We have to show students how to look at the real world, a world governed by the trinity of capitalism, economic chaos and war, rather than mislead them with the mythological world of neoclassicism.

NOTE 1. I also learned much later that the Committee subpoenaed another faculty member, Lawrence Klein, the econometrician, to appear in a secret session. He was a friendly witness.

THE SPARTAN SCHOOL OF INSTITUTIONAL ECONOMICS AT MICHIGAN STATE UNIVERSITY A. Allan Schmid Heterodox scholarship at Michigan State University (MSU) was influenced by the institutional economics of John R. Commons at Wisconsin. But it was far from monolithic and had many other sources and originality of its own. A case can be made that the center of institutional economics moved across Lake Michigan from Madison to East Lansing and blossomed in the second half of the 20th century with such Wisconsin Ph.D.s as Raleigh Barlowe, Warren Samuels, Allan Schmid, Harry Trebing, and others.1 Equally important in making MSU a center of institutional economics were scholars from other institutional backgrounds such as Paul Strassmann, economic development; Robert Solo, science and technology; James Shaffer, agricultural marketing and consumer behavior; Nicholas Mercuro, law and economics; and others. Commons was in the Wisconsin Department of Economics, but one of his major disciples and collaborators was Kenneth Parsons of the Department of Agricultural Economics (Lampman, Baldwin et al., 1993). This close relationship between the Wisconsin Departments of Economics and Agricultural Economics was also the case at MSU. This mutual stimulation was reflected in the Spartan Group whose social and intellectual interaction will be noted below. This paper will concentrate on teaching, but it will be necessary to explore the research upon which it was based.2 Teaching of institutional economics at MSU was notably concerned with content rather that preparing “horses for courses.” Some of the

Wisconsin “Government and Business” and the History of Heterodox Economic Thought Research in the History of Economic Thought and Methodology, Volume 22-C, 207–243 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(03)22051-4

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faculty wrote books explicitly for the course taught and others made extensive use of their own articles and others, rather than using standard texts. The large number of institutionalists at MSU was not a stable of prot´eg´es of an entrepreneurial superstar, but rather a group of independent scholars in three departments who nevertheless complemented each other. Circumstances allow the main actors to speak for themselves.3 If the complementarity of themes and ideas emerges, it is from the self-described facts and not from the selective interpretation of one author.

DEPARTMENT OF AGRICULTURAL ECONOMICS The first Wisconsin Ph.D.s who came to MSU with an institutional bent were agricultural economists and included Henry Larzalere (Ph.D. 1938) whose major professor was Asher Hobson. Larzalere recalls the influence of Commons who retired in 1933. Upon graduation, Larzalere worked a short time for Wisconsin Governor Phillip Fox LaFollette who won passage of the nation’s first unemployment compensation act. Commons had earlier helped LaFollette’s father, Robert, to a number of institutional innovations.4 Larzalere continued the Commons’ tradition of contributing to the development of new institutions rather than being content to provide an efficiency apologia for existing private governance structures. He helped Michigan farmers form cooperatives. He taught land economics prior to Barlowe’s arrival in 1948, but primarily taught agricultural marketing. One of his Master’s degree students was Glenn Johnson (see below). Larzalere retired in 1977. Other Wisconsin graduates included Raleigh Barlowe (Ph.D. 1945) who taught land economics in the tradition of Wisconsin’s Richard Ely and George Wehrwein; Garland Wood (Ph.D. 1958) who taught economic development; the late Glynn McBride (Ph.D. 1954) working in marketing; Darrell Fienup (Ph.D. 1955) who came to MSU in 1973 from Ford Foundation work in Latin America and helped lead a unique Kellogg International Fellowship Program for mid-career government and university persons from around the world; Dan Sturt (Ph.D. 1954) who organized a program in agricultural labor. Colletta Moser (Ph.D. 1971) from Wisconsin’s Department of Economics teaches an undergraduate course “Women and Work” and is an extension specialist in farm labor and community development. She is active in AAUP on campus. Moser was co-author with her former major professor of a text in labor economics (Reynolds, Masters et al., 1998). Farm co-ops are like labor unions in the sense that they represent collective action that allows atomistic individuals to countervail against the market power

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of employers and farm input suppliers and output processors. The late Orion (Cherry) Ulrey (Cornell Ph.D. 1934) taught cooperation and worked abroad.5 (A course in farmer cooperatives was taught as early as 1915 in the Department of Economics by the late Wilbur Hedrick.) Ulrey initiated the MSU Employees Credit Union in 1934 and served as its president for eight years. He also helped organize student housing cooperatives at MSU, and Ulrey House was named after him. Ulrey was an outspoken social critic in the tradition of Veblen, which made him persona non grata to the Chair of the MSU Board of Trustees who represented a conservative farm organization. George Motts was at MSU from 1931 to 1960 and organized a horticultural auction to bring together small producers and retail stores.6 A. Allan Schmid (Ph.D. 1959) went to Wisconsin because of the influence of Wisconsin grads Don Kanel and Kris Kristjanson who were on the faculty of agricultural economics at the University of Nebraska. He was also influenced by Clyde Mitchell, an iconoclastic researcher of farm policy who later left Nebraska under pressure from the state’s conservative element. It was in Mitchell’s course that Schmid was introduced to the thinking of Elmer Davis, Charles M. Hardin, Jerome Frank, J. K. Galbraith, and Gunnar Myrdal among others. Schmid’s major professor in Madison was Ray Penn. He was also influenced by Kenneth Parsons as well as Robert Clodius and Willard (Fritz) Mueller in industrial organization. He took courses from Martin Glaeser in public utilities, Selig Perlman in communism and socialism, Walter Morton in monetary policy, Edwin Witte in government and business (with Warren Samuels as his teaching assistant), W. R. Parks (political scientist) in government and agriculture, Karl Bogholt in the philosophy of John Dewey, and Jacob Beuscher in the Law School. Schmid’s class notes from Perlman’s course have been published (Schmid, 1999). Schmid inherited Barlowe’s “Advanced Land Economics” in 1962 (AEC 810). He asked why natural resources were treated as a special case in economics. Changes in land use were often non-marginal in character, which did not fit neoclassical theory very well. What characteristics did they have that made collective action particularly important? Schmid noted that high exclusion costs and non-rivalry in consumption (marginal cost of another user = zero) were typical in environmental products. So he began to look at these features in other goods and began to focus the course on a series of goods characteristics including economies of scale, information and transaction costs, etc. These were illustrated with a wide variety of goods and services including but not limited to natural resources. Thus, the title of the course changed to “Economics of Public Choice” in 1973 and finally “Institutional and Behavioral Economics” in 1992. His book, Property, Power and Public Choice (Schmid, 1978) (second edition, 1987) is used in the course.

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While retaining his applied interest in resource economics, Schmid devotes himself to developing institutional economics theory. He is currently working on a book manuscript with the objective of developing an integrated conceptual framework useful for investigation of formal law as well as informal custom, and for contrasting the performance impact of alternative institutions as well as understanding the process of institutional change (evolution). Schmid also taught an undergraduate version of institutional economics applied to problems of state and local government entitled “Community Economics.” Students probably most remember the fundamental economic interdependencies illustrated by Isaiah Berlin’s apt phrase, “Freedom for the pike is death for the minnow.” The courses emphasized that human interdependence emanated from a range of inherent features of goods that were the basis of why one person’s behavior affected others. It was formal and informal institutions that sorted out who had what opportunities and thus economic performance in terms of who gets what. Instead of the structure, conduct, performance framework of industrial organization, Schmid made the character (situation) of the good being produced explicit in a framework of Situation, Structure and Performance. Structure included many more institutional variables than market structure. The market is not a single entity, but rather alternative detailed market rules matter. The market and the law unavoidably form a nexus rather than being separate alternatives. Here the influence of Warren Samuels is evident as expressed in his article, “The Legal-Economic Nexus”(Samuels, 1989). Schmid also converted the AEC 811 “Land Problems and Policies” grad course first into “Property, Tenure and Land Policy” and then to a more general “Public Program Analysis” (benefit-cost) course taught between 1962 and 1991. He wrote a book for the course entitled Benefit-Cost Analysis: A Political Economy Approach (Schmid, 1989). Political economy meant that the methodology addressed how political judgments of Congress and administrators could be systematically incorporated into the ranking of publicly financed projects and regulation. This is in contrast to the more usual welfare economics stance that the analyst can independently establish what is efficient. Schmid questioned the assumption that distribution and production could be separated. Efficiency is not a single unique thing, but is derived from collective judgments of whose interests count. Schmid conceived of a regulatory budget and incorporated both regulations and spending projects into an integrated framework that was incorporated into a centralized review of regulations by the Systems Analysis Group (Corps of Engineers) of the Office of the Secretary of the Army and the Office of Management and Budget. Schmid spent 1968–69 with the Systems Analysis

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Group whose staff raised too many questions and was later abolished by Congress. See htttp://www.thecre.com/ombpapers/ Schmid’s courses can be seen on the web at http://msu.edu/course/aec/810/htm and http://msu.edu/course/prm/201/htm. In his graduate course, he uses the Socratic method and borrowed the idea of the Journal File from Shaffer (see below). He maintains an institutional economics web page with working papers and institutional economics course outlines at various universities at http://www.msu.edu/user/schmid/instecon.htm James D. Shaffer received his Ph.D. from the Department of Agricultural Economics at MSU in 1953. He evolved a theme of study he referred to as “institutions, behavior and performance.” In Shaffer’s own words: “My Bachelors was in Political Science. I intended to go to law school and was admitted to the University of Michigan. For family reasons I decided to delay law school and started graduate work at MSU in Economics, thinking that law and economics were complementary. I had read enough even at that stage to believe it was a mistake to separate law, political science and economics. My graduate work was standard for that time with fields in trade, fiscal policy, theory, and agricultural economics. Along the way I managed to include several good courses in psychology. There were no courses identified as institutional economics although some courses in Industrial Organization had institutional economics content. My Ph.D. research involved developing methods for obtaining and using a flow of information about consumer food purchases to assist firms and farm groups to better target markets. From that I developed a strong interest in consumer behavior. I continued work on the large, well-funded project for several years after joining the faculty at MSU. My fifty-year career at Michigan State focused on three areas, the economic performance of agricultural markets, agricultural and rural policy, and economic development of poor countries.7 The work I did was at a very practical level. My early interest in development was fanned by a program I participated in during the summer of 1947 studying the problems of economic reconstruction following WW II at several universities in Europe. Faced with the real problems in these areas it was obvious that the simplified models of economics were inadequate. More realistic ideas about behavior, organization, and constraints had to be used. As I went along I found ideas of those identified as institutional economists as well as many others who were simply interested in dealing with practical problems useful. Fortunately for me I developed both a personal and professional relationship with Al Schmid and Warren Samuels. We spent many years exchanging ideas about economics and many other things. When the Spartan Group was meeting I participated bringing practical ideas and skepticism to the discussions while

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learning from the others’ large output of scholarly work that explored concepts in institutional economics. My first venture in teaching a graduate course dealt with consumer behavior. In the course we explored ideas and literature about perception, learning, decision making for individuals and organizations (including households), culture, as well as studies of consumer behavior done by businesses and others and asking about the implications of these ideas and findings for practical marketing, economic policy and the way we think about economics as a field of study. It was not necessary to spend much time discussing the utility of the concept of maximizing utility as a description of consumer behavior. As the scope of my research and extension expanded more into economic development and policy, and as I was influenced by the work of my colleagues, the course evolved and I managed to get it renamed “Institutions, Behavior and Performance.” (At the students’ suggestion I tried “Shaffer’s Course,” but institutional rigidities prohibited it.) The course was a seminar and workshop. [Note: His question and discussion method was modeled after a suggestion of the psychologist, Carl Rogers, on “student centered teaching” (Rogers, 1951).] Students were asked to develop what I called a Journal File [following a suggestion of C. Wright Mills in his Appendix on “On Intellectual Craftsmanship” (Mills, 1959)]. In the Journal File students were encouraged to write themselves out developing ideas contributing to their own framework (paradigm) for understanding political economics and doing practical policy analysis. They were encouraged to look at a political economy as an evolutionary process, to consider institutions as formal and informal rules of political and economic life which constrain and facilitate behavior of participants, to consider behavior under uncertainty about situations, preferences and consequences of actions, and consider performance as outcomes which are payoffs for different participants, which in turn influences future institutions and behavior. The course was offered for about 25 years from the mid-1960s through 1991. Most of what I wrote and used in the course was written for the course or as reports associated with research projects or workshops. Among my published articles used in the course were: “On Institutional Obsolescence and Innovation (Shaffer, 1969).” and “On the Structure of Power in the United States Political Economy (Shaffer, 1975).” His theoretical framework was laid out in “Food System Organization and Performance: Toward A Conceptual Framework (Shaffer, 1980). Institutional economists tend to be actively involved in creating new institutions. Shaffer followed this tradition and reports, “I was Chair of the Michigan Railroad Advisory Council for several years while the problem of rail abandonment was a hot topic. I found a record of the Council meeting in 1976. As I recall the Council

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met for several years. Prior to the Council I served on an advisory committee dealing with rail problems in Michigan. They were both advisory to the Highway Department. Again I became involved because I had held extension sponsored workshops dealing with rail abandonment and rural development and was asked to join these advisory groups.” Shaffer found an interested audience among fruit growers who were developing associations for collective action. The associations promoted enactment of the Michigan Agricultural Marketing Act that gave accredited cooperative association exclusive bargaining authority with processors. The Act was challenged in the Michigan and U.S. Supreme Courts (Michigan Canners and Freezers Assoc. vs. Agricultural Marketing and Bargaining Board, 467 U.S. 461, 104 S.Ct. 2518). This was a classic case of property rights in a high exclusion cost good. The price negotiated by members would also be available to non-members who had not borne any of the organizing costs. The free-riding non-members reduced the effectiveness of the collective bargaining as is the case in labor negotiations as well. The U.S. Supreme Court ruled that the Act could not “interfere with a producer’s freedom to choose whether to bring his products to market himself or to sell them through a producers’ cooperative association.” This is another example of “Freedom for the pike is death for the minnow.” Shaffer describes his involvement, “The Michigan Agricultural Marketing and Bargaining Act was passed in 1972. I was the first Chairman of the Board established by the act, probably starting in late 1972 or 1973 and continued for about 10 years. The Michigan House and Senate passed a joint resolution saying nice things about my contribution to Michigan Agriculture in 1984, which I recall was a year after I quit as Chair. Contrary to accusations, I did not write the Bill. I did do quite a bit of extension work prior to the legislation discussing the possibility of legislation and some of the things to be considered. As I recall, I also had an opportunity to comment on an early draft, but I was not responsible for drafting the legislation. The legislation had some problems which might have been avoided had I had the opportunity to write the legislation. During this period I was active in national meetings dealing with marketing orders and agreements and in farmer bargaining legislation and the activities of these associations.” Work questioning the value of the advertising of farm products caused a strong reaction from certain vested interests. “The executive director of the Michigan Press Association demanded that I be dismissed because anyone who would raise such questions must be at least a misinformed economist if not a communist. The Dean, I was told, was a strong defender of his faculty in this case.” While Shaffer was on sabbatical leave in 1988, Schmid taught his course and emphasized even more the behavioral and cognitive dimensions that then fed back into Schmid’s own course. Shaffer emphasized that behavior was learned and reinforced by feedback from the environment. His attention to behavioral

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economics predated the current growing interest represented by faculty positions in the subject at Harvard and MIT. Shaffer’s course was always changing as he added new materials from his wide reading each year. http://www.msu.edu/user/ schmid/shaffer-809.htm He searched for new institutions to solve the chronic low incomes and oversupply in agriculture. He came up with the idea of universal forward contracts wherein the price would be known before the crops were planted (Shaffer, 1990). Shaffer was named a Fellow of the American Agricultural Economics Association and also honored with a special retrospective session at its annual meetings in 2000. At the time of his retirement in 1997 he presented his lifetime musings in a departmental seminar with the subtitle “Observations From Over The Hill.” http://www.msu.edu/user/schmid/shaffer2.htm. Shaffer as much as anyone combined ideas and action, university and government. John Staatz (MSU Ph.D. 1984, student of Shaffer) has made a contribution to the theory of cooperatives (Staatz, 1987, 1989). He is co-director of the Food Security Project and played a major role in developing a market information system in Mali. He co-teaches a graduate seminar in economic development (Eicher & Staatz, 1990). He also teaches a professional practice course developing skills in applied economic analysis. He and Roy Black offered a graduate course in “Information Economics” for the first time in 2001. Lawrence W. Libby (Cornell Ph.D.) was at MSU from 1970 to 1987. His program in his words, “In my view, the real strength of the institutional economics framework developed at MSU is its usefulness in organizing and conveying information about real policy choices. I came to Michigan State to do extension and research work in natural resource policy and to develop a course in the new Public Affairs Management (PAM) curriculum. The term “institutional economics” was not an explicit part of my Cornell experience, but David Allee encouraged me to explore beyond conventional economics. I took or audited courses in political science, rural sociology (my minor), public administration and planning from some of the nation’s best faculty and applied those ideas to my interest in natural resource economics. The Cornell system readily accommodated such intellectual searching. I knew there was something more to life than efficiency analysis. One of my first responsibilities was to replace Ed Rossmiller as the MSU delegate to the annual National Public Policy Education Conference sponsored by the Farm Foundation. I soon learned from Jim Hildreth and others the policy education liturgy – “alternatives and consequences.” “We don’t tell people how to guide land use or reduce water pollution, we just lay out the policy alternatives and their likely consequences. People and communities then make their own decisions.” There is no best way to solve a policy problem or to use natural resources, just some options that have different results for different people.

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“Efficient” land use is defined with reference to a particular set of market rules: different rules = different efficiency (Libby, 1994). That made sense then, and still does. The MSU adaptation of the familiar industrial organization framework (Structure/Conduct/Performance) for policy work fit that policy extension framework very nicely. It is both an analytical paradigm and an attitude about how economic information is used in public decisions. I used the S-C-P framework in talking to Michigan people about emerging state and local land use policy questions, groundwater quality protection, public forest management, all based on analysis of the likely consequences of alternative rules establishing rights and obligations for people making resource use decisions. I also organized my undergraduate course, “The Policy Process,” around that framework – the policy structure, behavior patterns of people with respect to the rules and the resources, and the results as measured in both efficiency and distributional terms. The approach enabled, in fact demanded, the introduction of principles from other social science disciplines in understanding how people seem to behave and the prediction of policy outcomes. There is an impressive network of policy analysts and educators, spawned by the MSU institutional approach and sustained by the National Public Policy Education program for extension, at leading land grant universities and in government agencies throughout the country.” Libby left MSU for the University of Florida where he became department chair, and in 1995, President of the American Agricultural Economics Association. He is currently at Ohio State University.

OTHERS Agricultural economics at MSU until 1949 was a section within the Department of Economics, College of Arts and Science (Hill, 1972). The section was led by Clifford Hardin who later became Secretary of Agriculture. Agricultural economists in the Economics Department averaged about ten between 1927 and 1946.8 The number had grown to 19 in 1949.9 It was then separated and combined with the Department of Farm Management (founded in 1928) to become the Department of Agricultural Economics in the College of Agriculture. The first chair was the late Thomas Cowden. Subsequent chairs such as the late Larry Boger, Harold Riley, Larry Connor, Les Manderscheid, and Larry Hamm explicitly strove to maintain pluralism in the Department. Several departmental planning documents point toward achieving racial, gender, and intellectual diversity.10 Warren Samuels suggests that a part of the answer to the question

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of why institutional economics grew at MSU is that “hiring of specialists who happened to be heterodox, when specialists often were antagonistic to conservative mainstream economics, and when specialized fields were haven for maverick, deviant and dissident folks.” The scholars mentioned below were not necessarily maverick, deviant dissidents, but were arguably sympathetic and complementary to diverse points of view, if not explicitly institutionalist. Former department chair Larry Connor says farm management, marketing and policy specialists “utilized institutional economics to much greater extent than was the case in many other departments around the country. For example, farm management dealt with such areas as environmental regulations, crop insurance, estate planning, etc. The other areas of the department benefited highly from students who had taken courses in institutional economics, and used some of that background in their dissertations (Connor, 2002).” The early intellectual leaders in the Department of Agricultural Economics believed that a broad training was important for applied analysts. The late Lawrence Witt, a Wisconsin undergraduate and master’s student (Ph.D., Iowa State 1941), came to MSU in 1947 when agricultural economics was a part of the Department of Economics. When the Agricultural Economics Department was formed, he taught a graduate level “Introduction to Agricultural Economics” that exposed students to different schools of thought and an understanding of the major institutions of agriculture.11 This included links among land grant university research, extension, and the U.S. Department of Agriculture programs. Ph.D. students in agricultural economics were required to pass a field exam in “General Agricultural Economics” as well as their major and minor fields and economic theory in the Department of Economics. The preparation of applied economists at MSU included much more than general equilibrium economic theory. It added marketing (which is more than industrial organization), management, and policy (institutions). This facilitated a pluralistic approach to economics.12 Some regarded this as a strength of MSU grads and others a weakness. The general field exam was abolished in 1998. Some few other departments copied the MSU general field requirement, but it was never widespread as specialization proved more popular. Witt’s own career is representative of the kind of applied work that he wanted MSU students to be able to do. He was advisor to George McGovern in the Kennedy White House and helped develop the Food for Peace Program. He served as consultant to the Food and Agricultural Organization of the United Nations, the Agricultural Colleges of Colombia, the University of Ankara, Turkey, the Economic Research Service of the USDA, Committee for Economic Development, and the Inter-American Bank. Witt, Glenn Johnson and others set the department on a path of international service. International commitments

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were possible in the MSU environment guided by the world vision of President John Hannah. Many other departments in the nation needed special permission to travel out of state, let alone abroad. Larry Hamm offers the hypothesis that the existence of an internationally oriented (and oligopolistic) auto industry in the state provided both a worldview (and resources) from which the department and university benefited.13 Glenn L. Johnson (Chicago 1949) with his Chicago background was one of the national leaders in developing agricultural production economics. At the same time that he emphasized micro-theory, he understood that farm management was multi-disciplinary and not simply sub-field of economics (Johnson, Halter et al., 1961) (Johnson, 1997).14 He received a M.Sc. in economics in 1942 from MSU and recalls the lack of mathematics and statistics in course offerings. But, there was breadth in those interested in public policy such as Henry Larzalere, Herman Wyngarden, Everett Hagen (Hagen, 1962), and Harald S. Patten “author of Grain Growers’ Cooperation in Western Canada, [who] served as professor of economics until his death in 1945, although he was in Washington during many of his sixteen years to assist governmental agencies concerned with depression recovery and war mobilization (Kuhn, 1955, p. 380).”15 Johnson’s first job was in Washington working with O. C. Stine, a Wisconsin graduate, in the Bureau of Agricultural Economics, U.S.D.A. Johnson, Witt and Hathaway were in fundamental agreement on the breadth of the agricultural economics Ph.D. requirements. Johnson taught the graduate “Research Methodology” course using his book, Research Methodology for Economists: Philosophy and Practice (Johnson, 1986). He placed pragmatism on an equal footing with other philosophies guiding inquiry. The complementarity of institutionalists at MSU is illustrated by Warren Samuels’ chapter on methodology in Johnson’s festschrift volume (Samuels, 1997). Johnson often referred to his appreciation for his teacher, Frank Knight.16 Johnson spent a sabbatical studying philosophical value theory at the University of Cambridge (Johnson & Zerby, 1973). He was active in his local Lutheran Church and contributed to its exploration of the relationship of science and religion. Among many international activities, Johnson headed a major rural development project in Nigeria in the 1960s. The work continued with the Consortium for the Study of Nigerian Rural Development, 1969–1985. He also headed a Korean Agricultural Sector Analysis project running simulations of the consequences of alternative policies, 1971–1985. He distinguishes between econometric models and simulations, arguing for the policy utility of the latter. In his production economics research and teaching, Johnson made a major contribution to the theory of investment and disinvestments. He developed the idea of “fixed assets” to explain why agriculture was in a constant state of

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disequilibrium (Johnson, 1962) and (Schmid, 1997) Chap. 5. He developed this idea prior to Williamson’s analysis of specific assets (Williamson, 1975). Whereas Williamson used the idea of specific assets (and transactions costs) to show that firms would choose an efficient form of private governance, Johnson emphasized that farmers would keep on producing even when returns did not cover acquisition prices as long as the marginal value product was greater than variable costs plus salvage value of capital assets. These assets could be specific to the production of a particular farm product or to the agricultural industry (rather than to a particular set of transacting parties) and became fixed in production (did not exit) under the above conditions. So while Williamson’s theory gave a rationale for the best of all possible worlds, Johnson saw a troublesome “overproduction trap (Johnson, 1986).” Williamson argued that if left alone, firms would negotiate private arrangements that would protect against losses to specific assets caused by the opportunistic behavior of trading partners. Johnson argued that without collective action, farm firms making their best choices at the margin could not escape continuing asset losses as each wave of technological change became fixed in the agricultural sector. Institutional, human, and resource changes could cause the same problem. “Decisions by consenting individuals will not necessarily produce the best of all possible results in the face of transaction costs (imperfect information).” Market clearance brings huge and painful losses. Johnson’s point is somewhat like Keynes’ idea of an equilibrium at less than full employment (less than that necessary to avoid widespread and chronic asset losses). He agreed with Arrow, “Judging the desirability of what the market does is not within the domain of economic theory. That judgment has to come from an understanding of the interdependence of perspectives from markets, science, government and religion.”17 This is indeed a theme consistent with institutionalist thought. Johnson was a Fellow of the American Agricultural Economics Association and a past president of the International Association of Agricultural Economists. Johnson retired in 1988. The Department of Agricultural Economics was pre-eminent in the field of agricultural policy, and faculty included Dale Hathaway (DPA Harvard, 1952) whose seminal work, Government and Agriculture, was used in his graduate course (Hathaway, 1963). Hathaway had a command of data on the agricultural economy like no other (somewhat in the tradition of Wesley Mitchell and Simon Kuznets). He was on the staff of the Council of Economic Advisors. In many roles, he advised the government on trade policy. Hathaway today is director of the National Center for Food and Agricultural Policy, once a part of Resources for the Future and currently independent. Edward Rossmiller, a former MSU grad and faculty member, was also one-time director of the Center and on the staff of the FAO in Rome.

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Several other members of the Dept. of Agricultural Economics were sympathetic to institutional economics and were part of its community of interest. James Bonnen (Harvard, 1964) specialized in agricultural policy and data and was a Fellow of the American Agricultural Economics Association, American Association for the Advancement of Science, and the American Statistical Association. He wrote definitive articles on science policy, research institutions and organizations of agriculture (Bonnen, 1988, 1987). Bonnen was a member of the President’s Advisory Commission on Rural Poverty whose 1967 landmark report was entitled The People Left Behind. He was Senior Staff Economist, President’s Council of Economic Advisors, 1963–1965, and was Executive Director, The President’s Reorganization Project for the Federal Statistical System 1978–1979. He joined the MSU faculty in 1954 and retired in 1996. Others whose work was (and is) complementary to institutionalist themes were Eileen van Ravenswaay (Ph.D. Carnegie-Mellon, 1980) working in ecological economics and food safety (van Ravenswaay, 2000), Sandra Batie (University of Washington, 1967) (Batie & Ervin, 2001) working in environmental economics and agricultural policy, Lindon Robison (Texas A&M 1975) working on social capital (Robison & Schmid, 1994), David Schweikhardt (MSU, 1989) a student of Bonnen’s who teaches AEC 817 “Political Economy of Agricultural and Trade Policy” (Schweikhardt & Browne, 2001) (Bonnen & Schweikhardt, 1998), Lynn Harvey an extension specialist in public finance and state and local government (Harvey, 1994) and a Ph.D. (1989) student of Shaffer, Patricia Norris (Virginia Polytechnic Institute, 1988) in resource economics, Christopher Peterson in strategic management,18 and Larry Hamm, a Wisconsin masters student, working in dairy marketing and policy, a Ph.D. (1981) student of Shaffer. Hamm was department chair from 1992 to 2002. Larry Libby (Cornell, 1970) emphasized the economic implications of alternative institutional means for protecting agricultural land in an urbanizing society, altering land use patterns in the interest of protecting groundwater quality, and altering farm production practices to reduce non-point pollution and soil erosion 1970–1987 before going to the University of Florida where he later became department chair and president of the American Agricultural Economics Association (Libby, 1994). While at MSU he taught the undergraduate PAM 320, “Public Policy Process,” building on the institutional economics framework of 201, “Community Economics.” The Department was a leader in researching the development of agriculture in Africa and elsewhere. Carl Eicher followed Johnson as director of the Economic Development Institute in Nigeria and developed an internationally recognized program in Africa and agricultural research institutions (Eicher, 1982, 1999).19 Eicher led a U.S. Agency for International Development funded Alternative Rural Development Strategies Project20 that evolved into the Food Security project.

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This 15 year-old project is directed by Michael Weber (MSU Ph.D. 1976) (Jayne, Yamano et al., 2001) and John Staatz noted above. Many Ph.D. students who had been in the Peace Corps came to MSU to study economic development and appreciated institutionalist courses.

DEPARTMENT OF ECONOMICS Two institutional economists in MSU’s Department of Economics played key roles in the formation and leadership of the Association for Evolutionary Economics (AFEE). Harry Trebing was a member of the Wardman group that founded the Association and he later served as its president. Warren Samuels was the editor of the Association’s journal, The Journal of Economic Issues (JEI) from 1971 to 1981. Both men received the Association’s Veblen-Commons Award. Samuels was also president of the Association for Social Economics. Before relating the work of Trebing and Samuels, the foundation of the modern Department of Economics can be noted. Wilbur O. Hedrick after some training in Europe became assistant professor of history and political economy in 1893 teaching economics, American constitutional history, English history, civil government, logic, psychology, and ethics (Kuhn, 1955, p. 183). Hedrick founded a cooperative bookstore in 1897 and helped form cooperative student housing (p. 357), one of which is named Hedrick House to this day. Sociology and economics were separated in 1916. Economics was transformed from a minor field to a major in 1922 during the college presidency of David Friday, “an economist of national repute who possessed a special competence in agricultural economics (Kuhn, 1955, pp. 278–281).”21 Friday’s (1920) book, Profits, Wages and Prices “was commonly cited in the institutionalist literature in the 1920s (Rutherford, 2002).” The number of courses increased and the faculty doubled from three to six. Michigan Agricultural College graduated its first Ph.D. in 1925. “Sociology was the eighth department in the College and the first in liberal arts to receive authority to confer the Ph.D.; economics and education followed shortly (p. 296).” Economics at MSU like at other American universities began embedded in social sciences broadly considered and moved toward specialization (Parrish, 1967). Harry M. Trebing is one of the country’s foremost specialists in public utility regulation. His contributions are assessed in (Samuels & Miller, 2002). In Trebing’s own words, “I was introduced to institutional economics at the University of Maryland (MA, Economics, 1952) by Allan G. Gruchy, Dudley Dillard, and Eli Clemens. I continued my studies in institutionalism at the University of Wisconsin (Ph.D. economics, 1958), working with Martin G. Glaeser, Edwin E. Witte, and Selig Perlman. I was president of the John R. Commons Club at Wisconsin, and we

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invited a number of distinguished institutionalists to come to the campus. (These included such people as Rexford G. Tugwell et al. The only person who declined our invitation was J. M. Clark, who stated that he was not an institutionalist!) I worked as a member of the original Wardman Group, which created AFEE. We worked on the bylaws and sought to define the concept of evolutionary economics to embrace institutionalism. As Secretary-Treasurer of AFEE, I worked closely with Ben Seligman while he was Editor of the JEI. In addition, I was the person who suggested that AFEE establish the annual Veblen-Commons Award. My teaching focused on the industrial organization sequence where duties were shared with Walter Adams. I had primary responsibility for Econ 821C “Economics of Public Utility Regulation,” and I taught Econ 821A “Industrial Organization Theory” on an as-needed basis. Walter taught 821B “Anti-Trust.” I also taught the undergraduate equivalent of these courses. The themes that I stressed involved the interrelationship between market structure, corporate behavior and strategies, and the strengths and weaknesses of government attempts at regulation (Trebing, 1998). The dimensions of market failure and market power were also unifying themes (Trebing, 2001). I taught these courses over the period 1966–1991. At the same time, I founded the Institute of Public Utilities at MSU and served as its first Director; I also served as Administrator of all of the educational programs for the state and federal public utility regulatory agencies. The latter involved close collaboration with the National Association of Regulatory Utility Commissions. Designing programs and conferences for NARUC and the Institute, as well as for individual state utility commissions, permitted me to integrate economics, law, and technological change into a coherent, institutionalist framework. Between 8,000 and 10,000 federal, state, and foreign regulators attended these programs and conferences during my tenure. They included commissioners, attorneys general, engineers, statisticians, and economic analysts. Foreign representatives included regulators from diverse regulatory climates, including Japan, Taiwan, Spain, South America, Africa, Europe, and the Middle East. Since my retirement in 1992, I have continued as a Professor Emeritus of Economics and Senior Fellow with the Institute of Public Utilities. I write and lecture on different topics pertaining to the problems faced by public utility industries in a changing climate. My principal focus is on the shortcomings of deregulation, and the superiority of the institutionalist approach to the neoclassical approach in examining the consequences of deregulation.” Trebing continues to render public service, including being a member of the Michigan Utility Consumer Participation Board. Trebing in his remarks above mentions his colleague Walter Adams, one of the nation’s pre-eminent scholars of industrial organization that has always been a

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complementary theme to institutional economics (Adams & Brock, 1991, 2001). Adams (Yale 1947) was well aware of the interrelationship between economic and political power (Adams & Brock, 1999). Adams came to MSU in 1947 where he died in 1998. Another IO person who was once on the MSU faculty was Joel Dirlam (Dirlam & Kahn, 1970). Another in the same vein in agricultural economics was Ronald Cotterill (Wisconsin, 1977) who moved to the University of Connecticut in 1981 and established The Food Marketing Policy Center.22 Upon Trebing’s retirement, the work of the Public Utilities Institute was continued by Johannes M. Bauer of the Department of Telecommunications. Warren J. Samuels claims that he has enjoyed doing economics so much that he hesitates to refer to it as work or a career, “so much for the marginal disutility of labor.” His institutional credentials run deep. As an undergraduate at the University of Miami, he studied with A. J. Noetzel, one of J. R. Commons last doctoral students. This had something to do with Samuels going to Wisconsin for his Ph.D. awarded in 1957. He states, “I was much influenced by Edwin Witte’s down-to-earth but deep approach to the economic role of government; Harold Groves’s philosophical approach to questions of public finance; Selig Perlman’s perceptive and personal approach to questions of capitalism, socialism, and social reform; Walter A. Morton’s direct, non-ideological, and even somewhat cynical approach to questions of theory and policy; and Martin Glaeser’s and Kenneth Parsons’s diverse approaches to Commons (Samuels, 1995).” Samuels wrote the following about what institutionalism meant to him and is included here because it sums up what many Spartan institutionalists could embrace (Samuels, 1995): (1) A willingness to dissent and to proceed differently and perhaps alone. (2) An evolutionary and holistic conception of the economy. (3) A matter-of-fact, rather than a metaphysical teleological, orthodox, and/or doctrinaire, approach to doing economics, while appreciating the socially constructed nature of putative facts. (4) The centrality of the problem of the organization and control of the economic system and therein the crucial importance of the human belief system, selective perception, hypocrisy, and the legal-economic nexus. (5) The recognition of the hermeneutic character of language and belief, including the importance of interpretation in contrast with absolutist claims of fact and truth. (6) Social constructivism and the importance of the complex processes of working things out. (7) The importance of institutions in generating economic performance, especially of legal institutions informing and channeling the operation of markets.

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(8) The serious limits of the neoclassical strategy of seeking to produce unique determinate optimum equilibrium solutions. (9) The importance of technology concerning substance, consequences, and interrelations with social structure and process. Samuels’ research and teaching focused on the history of economic thought and the economic role of government. His history of economic thought course taught students to “think in terms of multiple paradigms or different schools . . . ” (Samuels, 1996, p. 39). He assembled a large private library of 16,000 works in history of thought and other topics of interest. For 21 years he has published an annual series of Research in the History of Economic Thought and Methodology and has co-edited with Malcolm Rutherford two collections of the work of Commons and a ten-volume collection of institutional economics. In his grad course “Economic Role of Government” (which might have been titled law and economics), he challenged students by arguing that “the idea of laissez faire has almost no analytical or policy-analysis value” and “The idea of an autonomous optimally function economic system is purely a conceptual (and ideological/metaphysical construct” (Samuels, 1996, p. 40). In addition to history of thought and the role of government Samuels taught public expenditure theory, about two-thirds undergraduate and one-third grad and macroeconomics for MBA students (1991–1997). He also taught from time to time courses in comparative systems, radical political economy and public utility economics substituting for Harry Trebing. After his retirement in 1998, he has returned each fall to teach EC 819 “Economic Role of Government.” http://www.msu.edu/ user/schmid/samuels.htm One of Samuels’ canonical ideas was that cost is not a natural phenomenon, but rather socially constructed by the institutions that make one individual or group’s interests a cost to another. This theme was elaborated in a chapter (Samuels & Schmid, 1997) entitled, “Cost as a Concept in Economics.” Samuels with Geoffrey Hodgson and Marc Tool edited a two-volume Elgar Companion to Institutional and Evolutionary Economics (Hodgson, Samuels et al., 1994). A five-volume selection of Samuels’ work up to 1992 was published by Macmillan and New York University Press (Samuels, 1992). Samuels was a leader in the founding and operation of both History of Political Economy and the History of Economics Society. He was president of the Association for Social Economics, served on the editorial board of many journals, and the board of directors of the Robert Schalkenbach Foundation. The next generation of economics professors who taught history of thought at MSU is represented by Jeff Biddle. Biddle has written a number of articles on Commons and Mitchell among others (Biddle, 1990, 1999).

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Robert A. Solo contributed to institutional thought topics ranging from macroeconomics, methodology, and organizational behavior to science policy. He earned his Ph.D. from Cornell in 1954 and was a faculty member at several universities before coming to MSU in 1966. Previously, Solo was part of the Division of Industrial Economics of the U.S. Department of Commerce in 1940. Secretary Hopkins established the Division to bring Keynesian thinking into the Department. Solo’s work on science and technology policy at Princeton brought him to the attention of James Webb, director of NASA who hired Solo to advise him on cooperative relationships with universities. His career themes in his own words: (1) Critique and development of Keynesian Expenditure Theory and Policy: In 1941, I wrote a masters dissertation at American University as a novel analysis and critique of the theory and practice of Keynesian control of aggregate spending and developed and proposed basic new policies to achieve the requisite control without acquiring the burden of an interest-bearing public debt. The argument was reiterated in various of my publications but specifically “A Modest Proposal for a New Technique of Non-Diversionary Public Spending” (Solo, 1994). (Note: Solo shared this interest in zero-interest public debt with his colleague Allan Schmid (Schmid, 1984).) (2) An epistemological explanation and critique of the self conceptualizations, aims, rules and constraints that constitute the framework of thought, theory and method in economic thought and practice in relation to the philosophy of science: In 1947, I wrote an abortive doctoral dissertation titled, Essence, Evaluation and Social Technology at the London School of Economics asserting that the grand theories, generalizations or laws of economics and of the other social sciences are necessarily of the order of “essences” whose credibility (or truth) cannot be falsified by a specific failure of prediction as allegedly the case with physics, but rather that economics should be considered a social technology where the credibility of empirical statement must rest on time-variable judgments of evidence pro and con, and where value statements are inescapable and must be acknowledged and accommodated to. It argues that the mathematization of the language of economics in imitation of physics has been a wrong turning for the discipline. My supervisor (Lionel Robbins) was violently of another opinion. An abbreviated but further developed version of this thesis was published as The Philosophy of Science and Economics (Solo, 1991). (Note: Solo was caught between the conflicting views of co-supervisors Robbins and Karl Popper, and the thesis was never accepted.) (3) Explanation, critical analysis and evaluation or organization, of policy and of practice in “pure” (academic) science, research and development, and the

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promotion of technological advance. In sum, I created and introduced into economic discourse, at least in the United States, an economics of science, R&D and technological advance with these understood as socio-economicpolitical entities and phenomena. In 1954, I wrote a doctoral dissertation at Cornell University on the establishment during World War I of a synthetic rubber industry in the United States, under governmental aegis, going back to the scientific roots and carried through to the sale of the plants to private enterprise (Solo, 1954). (4) Explained the multi-faceted formation of ideologies and their evolution and transformation as context and determinant of individual choice and organizational behavior and, with reference to the work of Michel Foucault, Thomas Kuhn and Jean Piaget, introduced cognitive structure as a sometimes critical variable in the analysis of economic events and phenomena. I don’t remember the titles of special courses or seminars that I offered.23 But in general, I taught under the regular course titles, Industrial Organization, Comparative Systems, Public Finance, and Economic Development, but for every course I wrote my own text book and taught as I thought, which was always heterodox. When I taught price theory, for example, I used my own still unpublished 335 page book titled Price Theory in Perspective as both a development of and a challenge to neo-classical thought. But I did, for a time, achieve one curriculum change that indeed made space for the development of another order of heterodox thought. I introduced a new field of studies offered jointly by the Department of Economics and the Department of Management titled “Organization and Control in the Political Economy” taking into account the political/market interface, but also and especially geared to understanding massive modern corporate organization as the key agent in the modern economy, in contrast to the economic man of neoclassical theory. As a primary text for the new field of study I published The Political Authority and the Market System” (Solo, 1974). Solo had earlier published Economic Organization and Social Systems (Solo, 1967) and reprinted in 2002. He felt that these works together “can serve as a new paradigm replacing neoclassical economics.” Solo, like many institutionalists, gave attention to behavioral economics as evidenced by a chapter entitled, “Economic Revolution as a Revolution in Cognition” in the aforementioned book. Solo retired in 1992 and continues to write. W. Paul Strassmann is best known for his work on entrepreneurship and technology in manufacturing and construction (Strassmann, 1968, 1978), as well as work on housing and economic development (Strassmann, 1982).24 In his own voice:

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“I came to MSU in 1956 with good institutionalist credentials: C. E. Ayres at Texas; Joseph Dorfman, Karl Polanyi, Ragnar Nurkse, and Carter Goodrich at Columbia; Dudley Dillard and Alan Gruchy at Maryland. My doctoral dissertation compared the work of Thorstein Veblen and Joseph Schumpeter, finding both partly right and partly wrong. Apart from three sections of Principles in the four-course load at MSU, I was expected to teach intermediate courses in macroeconomics, history of thought, European recovery, and economic development. The last had been a course in U.S. economic history, but I changed it to one about “underdeveloped countries,” as they were then called. The first textbooks were appearing and I used one by W. Arthur Lewis. In the 1950s doctrinaire mathematical general equilibrium fanatics were minor irritants mainly confined to the University of Chicago. Most economists at MSU and elsewhere were a heterogeneous lot solving problems in a partial equilibrium way. We institutionalists thought our mission was to put some depth and structure into all that busy work. For one thing, technology was ignored by everyone as exogenous. For another, cultural factors and emotional conditioning were ignored in the role of tastes and property distribution. We stressed that objective functioning efficiency, not relativistic subjective utility, should determine policy. With some engineering background, many of us actually knew more mathematics than the average, so we liked Harrod-Domar growth models. Until 1960 I continued dissertation-follow-up research on manufacturing technology in American economic history and produced a book (Strassmann, 1959) and a few articles. One (1962) suggested that consumption could have positive externalities as well as the negative ones that Veblen pondered in The Theory of the Leisure Class. Connoisseurs reinforce one another’s enjoyment of goods by exchanging views. The arts are best for that. Ayres didn’t think that this addition was needed. My Columbia M.A. (1950) had compared organization of the U.S. and Mexican construction industries, so moving into the burgeoning development field was not all that surprising. The field hadn’t existed before, but my stress had been on international trade, economic geography, and economic history – the three pillars of development. We soon had a second-term undergraduate development course that focused on policy. Three other courses specialized on Asia, Africa, and Latin America. Around 1960 the time had come for graduate courses. I was in charge of organizing a year-long sequence. The first term stressed economic institutions; the second, growth models or secular change – capital formation and population; and the third, fairly short-run policies. The syllabus for the first course had a very institutionalist introduction:

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The less developed a society is, the greater is not only poverty but economic misinformation, uncertainty, insecurity, and fantasy. Rigid (hence intermittently unstable) economic institutions are the result. Economic development is a contest between forces tending to perpetuate rigidities, often in disguised form, and forces that raise flexibility and productivity. The process is complex and the outcome uncertain, but at its center are incentives to produce and to accept information and the management of uncertainty.

Within that framework, behavior in non-industrial societies, modernizing the labor force, urbanization, entrepreneurship, market institutions, and government planning were discussed. After I retired in 1995, MSU went to a semester system and neither of the resulting courses had such an institutional framework. Moreover, graduate students now are mostly Asians who are not as taken by such issues as were the do-gooder Peace Corps veterans of past years. Of the students who wrote dissertations with me, about half were American and half foreign. Some used American data, but most used foreign data – usually collected by fieldwork, and one was an American-Mexican comparison. Dilmus James, who wrote about capital formation with used equipment, became President of the Association for Evolutionary Economics. Ridha Ferchiou developed a stock-user matrix for housing analysis and became Director of the Tunisian School of Business and Minister of Education. My research moved from the analysis of technological change in manufacturing to that in construction. Funding agencies were especially interested in employment effects. Once I organized a meeting in Geneva on the spread of computers and automation in poor countries. I spent some years on the rise and characteristics of large international construction contractors of a dozen countries. With fieldwork I mainly investigated housing issues such as the role of self-help, industrial prefabrication, turnover of old housing, residential mobility, home-based enterprises, density of settlement, land prices, and housing indicators. Such research was funded by the Ford Foundation, the World Bank, the Agency for International Development, the International Labor Organization, and others. It led to seven books, over a hundred papers, and to participation in some thirty-two international conferences. Much of the work was a blend of institutional and conventional economic techniques. Occasionally I would write a general article on this or that topic, inevitably showing my institutionalist Dewey-Veblen perspective. Most likely, however, I was more conservative than my institutionalist colleagues. Contrary to Veblen, I had found that American innovative manufacturing entrepreneurs in the nineteenth century were creative, not just parasitic on inventors. Schumpeter, however, overstated their heroic risk taking. Fieldwork in Mexico had shown me that private enterprises were more reliable and efficient than public firms that were supposed

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to be yardsticks. Much propaganda from the likes of the National Association of Manufacturers irritatingly turned out to be true after all! For Warren Samuels’ The Chicago School of Political Economy, I wrote “Development Economics from a Chicago Perspective, (Strassmann, 1976)‘’ reviewing works of Jacob Viner, Larry Sjastaad, Arnold Harberger, Milton Friedman, and others. Unlike Samuels’ other contributors, I did not disagree with the Chicago preference of markets over planning. I merely thought that productive market behavior was not instinctive and automatic but was something that had to be learned in a proper institutional framework. Joseph Stiglitz’s keynote address to the 2000 World Conference on Development Economics suggests that this view has come to prevail.” Steve Woodbury (Wisconsin, 1981) like many labor economists is a non-self-conscious institutionalist. Woodbury puts it this way: “Apart from a couple of papers in JEI (Woodbury, 1993, 1987), it isn’t clear that what I do would be classified as institutional economics. Although I would like to think that I am a follower (or practitioner) of the Wisconsin Idea and of “looking and seeing,” this doesn’t seem to be “institutional economics” as defined by the reigning Institutionalists. (Note: In the above articles, Woodbury explores the role of culture in human capital and the role of power in labor markets.) The paper on “Economics, Economists, and Public Policy” (Woodbury, 2000) was my presidential address to the Midwest Economics Association, and admonishes economists for being too academic and not getting into the world and working on problems that matter. Several projects I have worked on and am working on make use of randomized trials to evaluate the effects of job search assistance or a re-employment bonus. A project that I finished last year used random audits of denied unemployment insurance claims in five pilot states to assess the accuracy of benefit denials. (It turns out that 10 to 15% of all benefit denials are wrongful, and the Labor Department is implementing a national program to track the extent of wrongful denials.) Regarding teaching, I have tried in both undergraduate and graduate courses to take policy issues and government programs as a starting point, then try to show that economics can be useful (sometimes) in understanding programs and designing better ones. It has been a difficult way to go, especially at the undergraduate level, because it means putting together my own materials rather than relying on one or another textbook and/or text supplements. Also, it has never been clear to me that more than a handful of the students (or my colleagues, for that matter) understand what I am trying to do or how it differs from a graduate student teaching from a garden-variety text.” A recent syllabus from the undergraduate labor course that Woodbury teaches regularly can be seen at http://www.msu.edu/user/ schmid/instecon/courses/woodbury.htm

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Nicholas Mercuro is the newest institutionalist to join the MSU faculty (1997). He is a former student of Samuels (Ph.D. 1977) and coauthor with him (Mercuro & Samuels, 1999; Samuels & Mercuro, 1979). Mercuro works in environmental economics and surveys schools of thought in law and economics. He argues in his book with another MSU grad, Steven Medema, Economics and the Law: From Posner to Post-Modernism, that there is a distinct institutional school of law and economics (Mercuro & Medema, 1997; Mercuro et al., 2000). Mercuro’s appointment at MSU allows him to teach wherever he pleases and that pleasure has manifested itself in the undergraduate James Madison College where he has taught the economics of “Legal Relationships in Comparative Perspective” and a course in law and economics in MSU’s Detroit College of Law. He also does work in environmental economics (Mercuro, 1997). For his vita see http://www.msu.edu/user/mercuro/vita.htm Others on the economics faculty with complementary interests to the institutionalists were Milton Taylor (1954 Wisconsin Ph.D. under Harold Groves) in public finance, Subbiah Kannappan in labor and economic development, Charles Larrowe in labor economics, and Daniel Fusfeld (Ph.D. Columbia 1953) in political economy (Fusfeld, 1997). Fusfeld taught introductory economics at MSU from 1956 to 1960 as analysis of conflict, not creation of harmony. He was president of the Association for Evolutionary Economics in 1971. Samuels and Schmid contributed to Fusfeld’s festschrift entitled Borderlands of Economics (Fusfeld, Aslanbeigui et al., 1997). The Department had a pluralist balance of institutionalists and neoclassicals until most of the above group retired. Still, the Department is today one of the few that require its Ph.D. students to take history of economic thought.

RESOURCE DEVELOPMENT The interdisciplinary Department of Resource Development was (is) also home to institutional economists. The department focuses on natural resources and community development. Raleigh Barlowe had an undergraduate degree in history and a Master’s in political science before obtaining his Ph.D. in Agricultural Economics at Wisconsin in 1945. He was influenced by Leonard Salter and Kenneth Parsons in agricultural economics and John Gaus in political science.25 He first worked for the Division of Land Economics, Bureau of Agricultural Economics of the U.S. Department of Agriculture in the field and in Washington. At the end of WW II (1948) he moved to MSU’s Department of Agricultural Economics in a faculty position paid half by the university and half by the government, a common

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U.S.D.A. arrangement at that time to encourage collaborative research. He taught land economics. Barlowe also offered a special problems course in institutional economics in 1956 featuring the works of Veblen, Commons, J. M. Clark, Ayres, and Hamilton. Barlowe wrote a text for his undergraduate land economics course entitled, Land Resource Economics: The Economics of Real Property, first published in 1958 and the fourth edition in 1986 (Barlowe, 1986). He also taught “Advanced Land Economics” as well as “Land Problems and Policies” at the graduate level. Land policy in this case also included property rights in water and other natural resources. Agricultural economists have investigated land tenure institutions going back to the pioneering work of Richard Ely’s, Property and Contract (1914). Barlowe studied with George Wehrwein “who taught me that no enterprise can succeed if it does not meet the test of economic feasibility. But economic feasibility is not enough. Success also calls for institutional acceptability. No matter how profitable a land use venture may seem, one cannot reap the expected benefits if he lacks a legal right of access to use the land”(Barlowe, 2002). Barlowe moved to the Department of Resource Development at MSU in 1959 where he was chair for 10 years, and retired in 1981. Raymond Vlasin (Wisconsin Ph.D. 1961) joined the Department of Resource Development as Chair 1971–1979. In Vlasin’s own words: “I came to Madison in 1957 determined to take people, not just courses. I wanted to learn what they taught, what they believed and why, and how they carried their beliefs into actions in the community, state and beyond. My main interest was group and governmental actions to improve lives of individuals. I chose faculty and others dedicated to applying their knowledge, skills and beliefs through land or resource economics, institutional economics, property law, regional planning, and community and economic development. Central in this group were Ray Penn, Jacob Beuscher, Glen Pulver, Ken Parsons, Bob Clodius, Walter Morton, Coleman Woodbury, Karl Bogholt, L. G. Sorden, plus other faculty and USDA colleagues. A great deal of what I learned occurred in their extension programs, consultations with agencies and groups, on the road, at conferences, at meals, over coffee and in their homes. My dissertation research addressed ways to lessen adverse impacts of land acquisition on farm and other property owners and operators impacted by acquisition of right-of-way for Wisconsin’s Interstate Highways. I worked with Beuscher and Law School colleagues on review and revision of Wisconsin’s eminent domain procedures and laws. Our research findings (Vlasin, 1959) plus our university involvement, fostered development of one of the most equitable and progressive state eminent domain procedures and laws in the nation at that time. My interest in institutional design and building has remained central over my nearly fifty-year career. Prior to coming to MSU, I served as head of the Resource

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Institutions Section of Agricultural Research Service, now Economic Research Service of the U.S. Dept. of Agriculture, fostering research and improvements nationally in land use planning, zoning, water laws, special and general purpose resource districts, and other resource institutions. I was invited by the U.S. House Public Works Committee to serve as its Staff Economist to design and conduct analyses of Federal eminent domain procedures and laws for direct federal programs and for federally assisted state and local programs.” Vlasin earlier was Assistant Chancellor for Outreach and Research of the newly founded University of Wisconsin-Green Bay. At MSU, Vlasin taught land resource economics in the late 1980s and 1990s infusing ecological and environmental considerations and related institutions into the course originally taught by Barlowe. He was one of the founders of the Community Development Society serving as its President (Vlasin, 1974). Vlasin became Dean of Lifelong Education Programs and later worked in the office of the director of Extension before he retired. He and Arlen Leholm are writing a book on “high performance and self-directed teams, drawing on private and public sector experiences in the U.S. and India (Leholm & Vlasin, 2003). Today in the Department of Resource Development, John Kerr (Stanford Ph.D. 1990) incorporates institutional ideas into his teaching and research (Kerr, 2002). He says, “I never studied institutional economics in grad school. It was after I moved to India to study natural resources that the importance of institutions became so completely obvious to me that I started reading about them and incorporating them into my work.”26 Many have followed this route.

THE SPARTAN GROUP Collaboration and mutual stimulation were a hallmark of the institutional economics faculty at MSU. Samuels, Schmid and Shaffer wrote a number of papers together (Samuels, Schmid et al., 1994) and with Woodbury (Samuels, Schmid et al., 1984). The collaboration perhaps reached its peak with the Spartan Group that met periodically in each other’s homes to discuss a paper in draft by one of the members or on a topic or article of mutual interest. Members of the group included Samuels, Schmid, Shaffer, Solo, and Woodbury. Dan Saks (Ph.D. Princeton 1953) was a member for a few years before he left for Vanderbilt in 1982. It was by coincidence that the last names of all but one member began with the letter “S” and earned their bread from State. The group was active for over a decade from about 1982 to 1997. Each host prepared refreshment for the group, but the fare became lighter with less use of spirits (but no less spirited) as the group grew older.

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REPRODUCTION Historians familiar with the founders of institutionalism assert that they did not reproduce themselves, which contributed to the decline of institutionalism after World War II (Morgan & Rutherford, 1998; Samuels, 1998).27 The Spartan School may yet prove to be an exception. With the variety of institutionalist perspectives and applications to draw upon, MSU students had a richer diet than that available at most other universities. Students in Agricultural Economics made more use of institutional courses in economics than economics students used courses in Agricultural Economics. That might be expected given the dominance of the neoclassical paradigm in economics. When students are being trained to teach standard courses (“horses for courses”), they do not have time to explore alternative paradigms. Students in the Department of Economics were not encouraged to reach out. Some of the outstanding MSU students who carry on the institutional perspective include: Phillip Wandschneider, Washington State University (Wandschneider, 1986); George McDowell, Virginia Tech (McDowell, 2001); Josef Broder, University of Georgia (Broder, 1981); David Schweikhardt, Michigan State University (Schweikhardt, 2001); Charles Abdalla, Pennsylvania State University (Abdalla & Shaffer, 1997); Steven Medema, University of Denver (Medema, 1998); Nicholas Mercuro, University of New Orleans who returned to MSU’s faculty in 1997 (see above); Larry Hamm, Michigan State University; Alfredo Cadenas, Autonomous University of Madrid (Cadenas & Fernandez, 1989); Timothy Kelsey, Pennsylvania State University; George Johnston, Economic Research Service, U.S. Dept. of Agriculture (Johnston, 1988); Jouni Pavola, University of East Anglia (Paavola & Samuels, 1996); John Staatz, Michigan State University; Dilmus James, University of Texas El Paso and former president of AFEE; Wesley Peterson, University of Nebraska (Peterson, 2001), Ellen Fitzpatrick, Plattsburgh State University; Thomas Jayne, MSU Food Security Project (Jayne, Yamano et al., 2001), Steve Cooke, University of Idaho; Hugh Spall, Central Washington University (Spall, 1978); James Sterns, University of Florida; Rodney Stevenson, University of Wisconsin and former president of AFEE (Stevenson, 2002); Theodore Alter, Director of Extension, Pennsylvania State University; and Judith Stallmann, Texas A & M (Stallmann & Schmid, 1987). Like students of Commons, many MSU grads were active in developing new institutions, such as Ronald Faas, Washington State (Faas, 1981), and Phillip Favero, University of Maryland (Favero, 1988), who were both awarded an Outstanding Extension Award by the Farm Foundation in 1999 for their public policy work. Favero facilitated multi-state agreements on implementation policies for phosphorous removal in Chesapeake Bay. Glenn Nelson worked for institutional change while an Extension specialist at the University of Minnesota

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(Nelson, 1983). He helped reform the Minnesota tax system. Later he worked with the Rural Policy Research Institute of the University of Missouri and is now a private consultant. Graduates were also leaders in government and business as illustrated by Gary Seevers who was a member of the President Nixon’s Council of Economic Advisors, the only Land Grant university faculty member to so serve. He was also a member of the Commodity Futures Trading Commission (1975–1979), and later, a partner with Goldman Sachs. Charles Reimenschnieder was Chief of Staff of the Senate Agriculture Committee and the FAO Representative for North America. Lynn Daft was President Kennedy’s Special Assistant for Agriculture. Michel Petit was head of the agricultural section of the World Bank and professor l’INA Paris Grignon, France. Douglas Headly was head of Agriculture Canada and a major figure in formation of agricultural policy in Canada. Jerry Trant replaced John Hannah as head of the World Food Board. Werner Kiene played a major role in the World Food Program of the Food and Agricultural Organization of the United Nations. Robert Loube was a member of the Federal Communications Task Force on Universal Service. Thomas Hebert was Senior Economist for the Senate Committee on Agriculture, Nutrition and Forestry and then was U.S. Department of Agriculture Deputy Under Secretary for Natural Resources and the Environment. He is currently with Capitolink in Washington, DC providing legislative and policy consulting services. Bill Sinclair is Director, Office of Self-Governance, Department of Interior Office of Assistant Secretary of Indian Affairs.

TROUBLEMAKERS WITH UNSAFE IDEAS Institutional economists at MSU, as elsewhere, created problems for administrators because of what was occasionally seen as unsafe ideas that irritated powerful clients (Bronfrenbrenner, 1985, p. 14). Samuels observes that status emulation led many to the judgment that “nothing should be associated with economics that would render it suspect either as science or in the world of affairs” (Samuels, 1998, p. 183). Unsafe ideas cost one MSU institutionalist approval of his thesis at another university. Several in Agricultural Economics ran afoul of “the suspect status of anything smacking of support for labor unionism and ‘socialism’.” Mention has already been made above of several calls for dismissal of faculty. Fortunately, the MSU administrators supported academic freedom. Several programs also came under attack. The Rural Manpower Center in the Department of Agricultural Economics under the leadership of Dan Sturt brought in Ceaser Chavez who organized migrant workers in California agriculture. Several

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legislators objected and tried to kill the whole program, but the educational value of diverse opinions was defended by Dean Thomas Cowden. While some attacked, there was also political and monetary support for problem-solving analysis and outreach. Several institutionally-oriented economists including Charles Killingsworth (Wisconsin, 1947) were active in the School of Labor and Industrial Relations. An earlier version of the school was seen as too pro-labor by the Michigan Chamber of Commerce who tried to kill the program. MSU President John Hannah saved it. The Food Security Project of the Department of Agricultural Economics was asked to leave by the government of Ethiopia in 1998. Project researchers reported that a disproportionate amount of food aid was going to one region at the expense of other needy regions. The favored region was the base of the party in power. Another survey project in Rwanda found that the distribution of land became more skewed toward larger holdings between 1990 and 2000 (Jayne, 2001, p. 11). The project ended before the reasons for this redistribution could be investigated. However, Human Rights Watch, a non-governmental organization, found case study evidence that many people lost land during resettlement undertaken following the period of genocide in 1994. If relevant institutional research that can inform contesting interests is done, one can expect to be involved in power issues. While reference has been made to vested interests calling for dismissal of faculty and cancellation of programs, there was also positive feedback from the broader environment that affected the evolution of programs. For example, Elton Smith, long-time President of the Michigan Farm Bureau, understood that a university was a place for exploration of ideas even when he objected to some of the specific ones. The evolution of institutional thought is not simply inside the brains of faculty, but is interdependent with its environment. Periodic supper seminars involving staff of the Farm Bureau and agricultural economics faculty kept open the lines of communication and education. MSU being in the state capital facilitated interaction among faculty, politicians, and interest groups. Institutional economists are useful problem solvers and this was appreciated by citizen groups and thus by university administrators.

THEORY AND PRACTICE The history of thought tends to emphasize theory while the practice of creating new organizations and institutions is recorded in economic history. The MSU institutionalists who helped organize cooperatives, marketing organizations, market information systems in Africa, new universities, pass new laws and

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administrative procedures, reorganize the railroads, and who became economic advisors at the highest levels of government may not be known for establishing a new school of thought, but their monuments are in living and evolving organizations and institutions. This is in the tradition of Commons who helped lay the foundations of workmen’s compensation and that of his students such as Ed Witte who developed the social security system and other graduates who staffed government agencies.

CONCLUSION A reading of the above biographies and autobiographies illustrates some of the major themes emphasized in institutional economics (echoing and rephrasing the themes that Samuels noted above as defining institutionalism for him): (1) (2) (3) (4) (5)

(6) (7) (8) (9) (10) (11) (12) (13) (14)

Evolution and role of learning: Samuels, Schmid, Shaffer, Strassmann. Cognitive science and role of beliefs: Shaffer, Solo, Schmid, Samuels. Disequilibria: Samuels, Schmid, Johnson. Property rights: Many, if not all. Less apologia for current institutions as efficient; rather active in imagining new institutions and helping others establish them: Larzalere, Ulrey, Shaffer, Schmid, Harvey, Hamm, Weber, Vlasin. Land and public utilities: Barlowe, Schmid, Trebing, Batie, Mercuro, Norris, Libby, Vlasin. Industrial organization and market organization: Shaffer, Adams, Trebing, Schmid, Solo. Sense of history of thought and economy: Samuels, Schmid, Barlowe. Technology and science policy: Solo, Strassmann, Schmid, Bonnen. Methodology: Samuels, Solo, Schmid, Johnson. Law and economics: Samuels, Mercuro, Schmid, Barlowe. Power, class, gender, poverty, income distribution: Samuels, Schmid, Shaffer, Moser, Bonnen, Strassmann. Labor – not an ordinary commodity: Woodbury, Kannappan, Moser, Sturt. Troublemakers and unsafe ideas: Many.

Warren Samuels (Samuels, 2000, p. 312) has argued, “Institutionalism is heterogeneous. There is no single school of thought at the level of particular doctrines – though there is a common orientation or set of coordinate themes.” And he implies that it is a good thing too. The history of heterodox thinking and teaching at MSU supports his contention. It benefited from lines of thought rooted in Commons, Ayres, (others) which evolved in the hands of this group of faculty

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who enjoyed the stimulation of each other’s thoughts. It remains for others to judge whether it constituted a vital center of institutional economics unrivaled in the world during the last half of the 20th century. The evidence suggests that there was heterodoxy within institutionalism at MSU. It was not a doctrinaire place, and the Department of Agricultural Economics is still pluralistic. This may have been a strength in the training of good economists, but it is probably a weakness in terms of the history of thought despite the considerable body of work of MSU’s faculty. MSU’s lack of brand identity may prevent its being known as a distinctive Spartan School of Institutional Economics.

NOTES 1. Malcolm Rutherford notes, “The Commons tradition in law and economics has also been kept alive by Daniel Bromley, Allan Schmid and Warren Samuels.” Rutherford, M. (2001). “Institutional Economics: Then and Now.” Journal of Economic Perspectives, 15(3): 173–194. Two out of three are at Michigan State University. 2. Details on agricultural economics courses can be found at http://www.aec.msu.edu/ agecon/history/teaching.htm#grad1 3. All of the autobiographical direct quotes were provided to the author during the fall, 2001. The longevity of institutional economists was noted by Oliver Williamson referring to such as Ronald Coase and Douglass North. The same could be said of those at MSU, with most of those referenced here still living at the end of 2001. Oliver Williamson, unpublished speech to the annual meeting of the American Agricultural Economics Association, Toronto, Canada, July 27, 1997, as recalled by A. Allan Schmid. 4. Henry Larzalere, conversation with the author, December 26, 2001. 5. After Indian independence in 1947, Ulrey was an adivisor to Nehru with respect to cooperatives. 6. Larzalere, Ulrey, and Motts made contributions to institutional change and new organizations more than to institutional theory. 7. Shaffer and several colleagues obtained funding for a Latin American Market Planning Center to research the role of marketing in economic development. “The long-held belief that effective marketing systems will evolve automatically is at best dubious. Since it is widely recognized that farmers and industrialists must be educated, motivated, assisted and sometime subsidized to encourage the necessary innovation to promote development, there is no apparent reason to expect market intermediaries (or more accurately, marketing system firms) to be any different. In fact, our evidence suggests that at some stage public agency efforts to stimulate markets may become crucial to development Harrison, K., D. Henley, et al. (1974). Improving Food Marketing Systems In Developing Countries: Experiences From Latin America. East Lansing, Latin American Studies Center, Michigan State University: 135.” 8. MSU was a latecomer to the granting of the Ph.D. in agricultural economics with three degrees being granted between 1927 and 1930 Gans, A. R., O. Vopelius, et al. (1930).

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“Candidates for the Doctor’s Degree in Agricultural Economics in American Universities and Colleges, 1929–1930.” Journal of Farm Economics, 12(1): 498–22. The leading universities were Cornell, Minnesota, Wisconsin and Harvard. 9. The Department has averaged about 38 tenure-stream faculty from the late 1970s to the present. 10. An external review team commented, “There is, however, adequate intellectual tension among faculty members to stimulate thought and discussion.” Final Report of External Review Team, October 21, 1986. Department Chair Larry Connor wrote, “Diversity and Heterogeneity are valued more than cloning. As a general practice, the department has pursued intellectual diversity by staffing from various institutions around the U.S.” Connor, L. J. (1986). Department Values in the Pursuit of Excellence. East Lansing, Department of Agricultural Economics, Michigan State University: 9.2.” “Different types of research are held in high regard and none are denigrated as inferior: basic and applied, or disciplinary, subject matter and problem solving (5).” And further, “All functions of the department (research, teaching, extension, international) are regarded of equal value in judging the performance of faculty for tenure, promotion, and salary adjustments.” Quoting former chair Larry Boger, “In a unit such as ours, many personalities, and interests, many backgrounds, and many viewpoints are melded together. It is natural that there are conflicts. It is not only natural to have them, but at times they should be encouraged (2).” 11. In 1965 the course was entitled “Emergence, Concepts, and Setting of Agricultural Economics.” The course description: “Historical and institutional development of agricultural economics. Central concepts and interrelations of sub-fields. Political-economic setting of agriculture and the role of agricultural economists.” 12. “A prevailing principle guiding evaluation and restructuring of the Ph.D. program was the desire by faculty to retain much of the flexibility in structure and opportunity that has characterized the Michigan State University Agricultural Economics program. The MSU philosophy has been to encourage the student, major professor and guidance committee to design a program unique to that students’ needs and preferences with overall expectation that students gain exposure to the full scope of the field.” “It is recognized that competence in Agricultural Economics requires first-hand knowledge of and experience with technologies, institutions, business and people involved in agricultural and/or natural resources. Additional courses or experience may be required by the guidance committee to remedy deficiencies in such knowledge.” Materials prepared for the Comprehensive Review of the Department of Agricultural Economics, Sept. 8–11, 1986. Graduate enrollment was 78 in 1960, peaked in 1975 at 126 and was 89 in 1986, about 60% domestic and 40% foreign. There were 73 in 2001. For a description of the agricultural economics undergraduate and graduate course program at MSU, see Connor, L. J. (1973). “Michigan State’s Curricula in Agricultural Economics.” American Journal of Agricultural Economics, 55(4), 752–724.This journal issue contains descriptions of other departments for comparison. 13. Larry Hamm, conversation with the author, January 7, 2002. 14. Johnson also understood that decisions of the typical farm firm with the family and several generations constituted a variety of public choice. 15. Glenn L. Johnson, conversation with the author, January 29, 2002. 16. Johnson points out that Knight’s book, Risk, Uncertainty and Profit, provided a place for management in economics theory that had been ignored before. Reductionist

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(deterministic) models had no place for management where learning (rather than perfect knowledge) is appropriate. 17. Glenn L. Johnson, conversation with the author, January 29, 2002. 18. Peterson with Schmid taught an experimental AEC 800, Foundations of Agricultural Economics, 1997–1999. It was designed as a basic theory course for master’s students seeking a career in business management. It combined theory of the firm with institutional economics and organization theory. 19. Eicher (1999) argued that science policy toward agricultural research, extension and teaching must be nurtured by a “good institutional environment.” “Such an environment includes a transparent legal system, protection of property rights, stable microeconomic conditions, and political participation of farmers and commodity groups (44). 20. The Alternative Rural Development Strategies cooperative project with AID was funded with $2.6 million between 1977 and 1984. A 1984 project amendment document states, “the major objective . . . will be to examine specific alternative institutional and operational solutions to food security problems . . . ” “The sensitive nature of research on policy and institutional alternatives makes it necessary to design research that addresses important problems within the context of the social, economic and political conditions of each country.” A 1970 AID grant supported the training of many African graduate students at MSU. 21. David Friday’s tenure as president was limited to one year before he left for the New School For Social Research. “Friday had not satisfied the farm groups which brought him here to reorient extension and experimental work from production to marketing. Believing that agricultural prices were governed by international marketing conditions, he told farm audiences that little could be accomplished by efforts to replace the middleman with cooperatives Kuhn, M. (1955). Michigan State: The First Hundred Years. East Lansing, Michigan State University Press.284.” 22. http://www.sp.uconn.edu/∼cotteril/FMktC1.html 23. Solo in 1971 was teaching Economics-Management 880, “Organization and Control in the Political Economy.” His taped lectures are available in the Vincent Voice Library of MSU. 24. Strassmann is also known for his satirical wit. In his review of the Spartan Group section of this paper he suggested, “why not drop mentioning that people’s names begin with “S.” Truly, so what? I’m also Leo the Lion in the Zodiac. What are you? Moreover, give a hint that it must strike some readers as ironic that we are associated with a university that has “Spartan” as an identity. Don’t most people associate Sparta with extreme rigid doctrinaire militarism, the very opposite of what institutionalists stand for? Can an institutionalist really be proud to be labeled a ‘Spartan’? Why not PruSSian? Or just plain SS? Insitutionalists of all people should show a sense of history and language.” 25. Raleigh Barlowe, conversation with the author, July 12, 2002. Barlowe mentioned that as a college student he was the beneficiary of one of President Roosevelt’s depression era programs, the National Youth Adminstration, which gave small stipends for student projects. 26. John Kerr, personal communication with the author, July 15, 2002. 27. Warren Samuels (1998, p. 192) offers the judgment that “There was only one Commons and as time passed he did not reproduce himself.” This author would like to be on record as predicting that when enough time has elapsed to put Commons and Samuels in perspective, it will be seen that Commons was more than reproduced in Samuels.

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Samuels, W. J. (1997). Determinate solutions and valuation processes: Overcoming the foreclosure process. In: A. A. Schmid (Ed.), Beyond Agriculture and Economics (pp. 223–241). East Lansing: Michigan State University Press. Samuels, W. J. (1998). The transformation of American economics: From interwar pluralism to postwar neoclassicalism: An interpretive review of a conference. In: W. J. Samuels (Ed.), Research in the History of Economic Thought and Methodology (p. 16). Greenwich CN: JAI Press. Samuels, W. J. (2000). Institutional economics after one century. Journal of Economic Issues, 34(2), 305–315. Samuels, W. J., & Mercuro, N. (1979). The role and resolution of the compensation principle in society. Research in Law and Economics, 1, 2. Samuels, W. J., & Miller, E. S. (Eds) (2002). The institutionalist approach to public utilities regulation. East Lansing: Michigan State University Press. Samuels, W. J., & Schmid, A. A. (1997). The concept of cost in economics. In: W. J. Samuels, S. G. Medema & A. A. Schmid (Eds), The Economy as a Process of Valuation. Cheltenham: Edward Elgar. Samuels, W. J., Schmid, A. A. et al. (1994). An evolutionary approach to law and economics. In: R. England (Ed.), Evolutionary Concepts in Contemporary Economics (pp. 93–110). Ann Arbor: University of Michigan Press. Samuels, W. J., Schmid, A. A. et al. (1984). Technology, labor interests, and the law. Nova Law Journal, 8(3), 489–513. Schmid, A. A. (1978). Property, power, and public choice: An inquiry into law and economics. New York: Praeger. Schmid, A. A. (1984). Broadening capital ownership: The credit system as a locus of power. In: G. Alperovitz & R. Skurski (Eds), American Economic Perspectives: Problems and Prospects. Notre Dame, IN: University of Notre Dame Press. Schmid, A. A. (1989). Benefit-cost analysis: A political economy approach. Boulder: Westview Press. Schmid, A. A. (Ed.) (1997). Beyond agriculture and economics: Management, investment, policy, and methodology. East Lansing: Michigan State University Press. Schmid, A. A. (1999). Capitalism and socialism, Economics 144, Fall, 1956. In: W. J. Samuels (Ed.), Research in the History of Economic Thought and Methodology, Archival Supplement (Vol. 8). Stamford: JAI Press. Schweikhardt, D. B., & Browne, W. P. (2001). Politics by other means: The emergence of a new politics of food in the United States. Review of Agricultural Economics, 23, 302–318. Shaffer, J. D. (1969). On institutional obsolescence and innovation – background for professional dialogue and public policy. American Journal of Agricultural Economics (May), 245–267. Shaffer, J. D. (1975). On the structure of power in the United States political economy – some issues and alternatives. In: Increasing Understanding of Public Problems and Policies (pp. 14–30). Chicago: Farm Foundation. Shaffer, J. D. (1980). Food system organization and performance: Toward a conceptual framework. American Journal of Agricultural Economics, 62(May), 310–318. Shaffer, J. D. (1990). Full participation markets for future delivery. Choices (First Quarter), 12–15. Solo, R. A. (1954). Research and development in the synthetic rubber industry. Quarterly Journal of Economics. Solo, R. A. (1967). Economic organizations and social systems. New York: Bobbs-Merrill Company. Solo, R. A. (1974). The political authority and the market system. Cincinnati, OH: South-Western. Solo, R. A. (1991). The philosophy of science, and economics. Armonk, NY: M. E. Sharpe.

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THE OKLAHOMA “INSTITUTIONALIST” SCHOOL W. Robert Brazelton INTRODUCTION The Department of Economics at the University of Oklahoma (Norman) began its Doctoral program in Economics under the Chairmanship of Jim E. Reese [Brinker, 4]. The Department graduated its first Doctoral student in 1951, a student who had received his Masters Degree of Science in Chemical Engineering, 1948. From 1951 to 1995, the Department has granted approximately 101 Doctoral degrees in Economics according to records. Its graduates teach in 62 Universities, foreign and domestic; work for or have worked for the Federal Reserve Bank; The Comptroller of the Treasury of the United States; The Council of Economic Advisors to the President; and The International Monetary Fund. Included are one sitting Congressman and one 1996 Vice Presidential candidate, as well as persons employed in private practice, business, or consulting. There have been 12 women granted the Doctoral Degree which places the Department above the national average. The studies at the University of Oklahoma (hereafter, O.U.) have had for some time an informal “Institutionalist” flavor to them, although there has never been a course entitled “Institutional Theory,” per se. As Paul Brinker, a labor economist at O.U. at the time of the beginning of the Doctoral program, indicated in an oral interview (as transcribed by the Library Archives of O.U.), Jim Reese brought in from the University of Texas (Austin) new faculty who had . . . what they called institutional theory bias or at any rate they thought the institutions and man making institutions were maybe more important that (sic) market forces (Brinker, p. 4).

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Several of the faculty that came to O.U. were in the Institutionalist vein. Jim Reese, as Chair, was largely responsible for the beginnings (Brinker, p. 4). Reese had studied under Clarence Ayres of The University of Texas (Austin), which was sometimes referred to as the “cactus branch” because of its geographic location in the semi-arid region of West Texas (Sturgeon, 1981, p. 42). Reese received his doctorate from Texas. W. Nelson Peach had also been at the University of Texas, but received his doctorate from Johns Hopkins University. Peach, an expert on National Income and Product Accounts and related statistical methods, often referred to “econometrics” as “economic tricks.” Also at O.U. was Alex Kondonassis, who recognized the importance of institutions in economic development; his doctorate was from the University of Indiana. He remained at O.U., becoming the Departmental Chair for ten years, and later for seven more years; he served as Director to over forty dissertations (Kondonassis, Sept. 27, 1996, p. 1). Kondonassis also was responsible for building a well-rounded department, with an emphasis upon international development, as have over 75 monographs, articles, and chapters during his career to date. For example, during his first chairmanship of the Department of Economics at O.U., starting in 1961, Kondonassis added to the Department significantly. He indicated that at the time of his accepting the chairmanship there was only one “theorist” out of nine faculty members, Louis A. Dow. Kondonassis expanded the Department during the decade of his first chairmanship to 16 faculty members and 29 teaching assistants. Concerning the intellectual atmosphere at O.U., Kondonassis indicated, most correctly, that “. . . which has served us well is that we were able to encourage and maintain an environment of openness and freedom of ideas rather than strict dogma. As a result, students with an Institutionalist view as well as a mathematical orientation and an economic development perspective were graduated” (Kondonassis, Letter of November 20, 1996). Various orientations were to be found among other O.U. faculty members. For example, as has already been indicated, Paul Brinker was already at O.U. and did not consider himself an Institutionalist, but rather, a labor economist with over fifty publications, primarily in the Labor Law Review (Brinker, p. 40). There was Virgil Glenn Wilhite in the History of Economic Thought and History of American Economic Thought. In terms of the feudal socio-economic system, one of Wilhite’s favorite lecture phrases was “the counts and the no-ac-counts.” He also contributed many rather “leftist” articles to the “Letters to the Editor” to the Oklahoma City Times and The Daily Oklahoman, two conservative newspapers owned by the E. K. Gaylord family of Oklahoma City. There was also Tom Curtis (referred to by one respondent as a “fellow traveler” to the Institutionalists) whose primary emphasis, like Peach, was upon empiricism (Sturgeon, 1996,

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p. 2). There was Louis A. Dow (University of Indiana) who had Institutionalist “sympathies” but was primarily a theorist in micro-economics, macro-economics, and business cycles; and who authored a textbook in business cycles and monetary and fiscal policy, Business Fluctuations in a Dynamic Economy [1968]. In all, the “Institutionalist” faculty were diverse, and some were more Institutionalist than others. There were also such persons as Muzafer Sharif (Sociology); and James Murphy (Finance), the latter having certain views concerning banking structure and power compatible to the Institutionalists. There were also courses in Money and Banking, Statistics, and Econometrics. The above indicates that the Institutionalist persuasion was not all that was taught at O.U. In fact, as several responses quoted below indicate, it was more of an “atmosphere” in Institutional perspectives rather than an actual “professing” of Institutionalist thought, per se (there were, for example, no formal courses on Institutional Theory). Nevertheless, it is worth pointing out that Nelson Peach was author of the text, Principles of Economics (1956) and that Jim Reese, along with Gilbert Fite of the History Department, were authors of the Economics text in American economic history, The Economic History of the United States (1965). Thus, even though there was an Institutionalist atmosphere at O.U., there was a well-rounded, orthodox mix of courses as well. The student, especially the graduate student, was exposed to the Institutionalist perspective, but the emphasis was more upon a curriculum that took a broad approach to economic education and teaching without excluding non-orthodoxy in economic analysis. Perhaps the most succinct way to point out some major Institutionalist points is to analyze selected parts of the principles text of Nelson Peach and other related faculty publications.

PEACH: THE PRINCIPLES TEXT In that text, which covered such topics as “Our Modern Industrial Society” (Chap. 1) to “Revolutionary Change: Soviet Russia” (Chap. 46), the main chapters of interest herein are “Our Modern Industrial Society”; “Resources and Technology”; and “Capital and Institutions.” To Peach, the turning point in world economic history was: (1) the invention of the machine; and (2) “. . . the use of sources of inanimate energy to supply power to machines” (Peach, 1955, p. 5). These phenomena relieved man of the pre-industrial era during which “. . . man and his beasts had to labor in order to be fed, and had to be fed in order to labor” (Peach, 1955, p. 5); and where leisure and accumulation beyond subsistence was difficult; but, “. . . the coming of the machine and inanimate energy broke the cycle” (Peach, 1955, p. 6). Thus, to Peach, “The subject matter of economic study embraces everything (emphasis mine) that

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will throw light on the task of producing and distributing goods and services, with due regard for conservation of resources, including human effort” (Peach, 1955, p. 8). This definition of Economics, as the accompanying Table A1 in the text indicates (see Appendix, pp. 259–261, attached hereto), included natural, capital, and human resources; technology – skills, training, human knowledge; and Institutions – government, social (family, law, tradition, custom) and economic factors (private property, free enterprise, free competition, free exchange and contract, labor) (Peach, 1955, p. 9). As Peach wrote, “. . . resources are materials – natural, created, and human – from which goods and services are produced”; “. . . technology is man’s accumulated knowledge of how to make and use tools”; and “. . . an institution is a pattern of thought and action which is a ruling force in the life of the Community – folkways, mores, stateways” (Peach, 1955, p. 9f), all of which are interrelated.

Peach’s emphasis upon resources and their conservation (as early as in the 1955 edition) went back to his respect for Erich W. Zimmerman, the author of World Resources and Industries (1951). Unlike the early Classical economists, Zimmerman did not believe that resources were fixed by nature. Instead, Zimmerman and Peach believed in a “functional view” of resources in which the living standards between nations depended upon: (1) supply differences of natural resources; and (2) differences in technological knowledge applied (emphasis mine) to its resources (Peach, 1955, p. 54). Quoting Zimmerman, Peach continues Knowledge is truly the mother of all resources . . . The difference between neolithic man, who roamed the earth in misery and fear, and man today, who lives in relative comfort and security, is knowledge – knowledge of petroleum and natural gas, of sulphur and helium, of chemistry and physics, the countless wonders of modern science . . . Freedom and wisdom, the fruits of knowledge, are the fountainhead of resources . . . Seen in this light, the concept of resources is purely functional, inseparable from human wants and human capabilities (Peach, 1955, p. 55).

Furthermore, and importantly, then and now, if we look at the other variables is when . . . health, social harmony, wise policies, knowledge, freedom are ignored, even though possibly these latter are more important than all the coal, iron, gold and silver in the world put together. In fact, resources evolve out of the dynamic interaction of all these factors (Peach, 1955, p. 55).

However, to Peach, invention and the innovation of technological improvements were not inevitable. There were five stages that must be completed for a new idea to have a technological and economic effect upon the socio-economic system. The correct, malleable institutions must be in place. For example, there must be: (1) pure science whose sole goal is truth itself; (2) the invention, from this science, of a “practical method of making something new”; (3) the innovation of commercial application of an invention; (4) the financing of the innovation which brings together resources, labor, capital, technology and the financial markets; and (5) the acceptance of the innovation by the society, the buying public (Peach, 1955, p. 66f).

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In the above, capital was important as the link between the innovation and the final market. Thus, capital and the institutions of capital were important to Peach. Indeed, America’s dominance was based upon its abundance of capital; its specialization of labor; a highly developed exchange mechanism; and their institutions (Peach, 1955, p. 73). Capital, and capital accumulation, are both a substitute for labor and complementary to labor. The determinants of accumulation are the willingness of the economy to save and the ability to give up some present consumption for savings. But the two are interrelated, as the ability to save depends upon the level of income itself. Investment, of course, both replaces old machines, and adds new machines and output therefrom; and can replace labor or complement it. The institutions that help in the progression are: the specialization and division of labor; the exchange mechanism; private properties acquisitive spirit, sometimes called the “profit motive” (but to Peach, “Profit motive implies businessmen whereas acquisitive spirit refers to all persons”); free enterprise; and lastly, all of the above working together to some degree of harmony (Peach, 1955, p. 85). The stress throughout Peach’s text was upon resources and their usages; physical and human capital; technological human knowledge; the institutions (such as the division of labor, as above); the ability of institutions to change; the ability to adopt and use knowledge and technology; and the degree of harmony between the above which can make or break the path to economic progress and accumulation. In his own words, Peach was trying neither to write an orthodox text, nor a theoretical one. He was, instead, trying to write a text that related to the American economy and to the empirical realities of that economy. It was empirical analysis that always interested Peach. It was that which he desired to pass on to his students. From the statements of those students that follow, one can judge him, his colleagues, and the Department of Economics as successful. Peach’s work is not the only source of institutionally orientated academic work by members of the O.U. faculty. Other long-time members of the faculty of the Institutional persuasion have also contributed. Gilbert Fite and Jim E. Reese’s joint textbook developed a statistical base for the study of history, but in such a manner as to make such a base relevant to the student. For example, they indicated that to know the number of ships on the high seas at any moment of time, or over a period of time, is “. . . only an exercise in memory” (Fite & Reese, 1965, p. iii). But, to Fite and Reese, “The significant thing is to understand how these ships help solve man’s economic or other wants and problems” (Fite & Reese, 1965, p. iii). Concerning the role of Economics in economic history, Fite and Reese state (and Peach and Zimmerman would agree) that Economic factors, however, are not the only important or motivating forces in human life. Economic wants are strong, but men are also moved by religion, politics, morals, ethics, and

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other influences. Economic history, then, is a record of one of the many facets of man’s life which constitute the fabric of history (Fite & Reese, 1965, p. iii).

Fite and Reese went on to point out that it was the combination of the right technology, the right cultural background, the correct mix of resources, and the economic and political freedoms that combined to underscore the early “. . . roots of American economic history” in that the European heritage, skills, and work ethic of the earliest settlers helped to advance economic progress in the Colonies of what was to become the United States. As to these earliest settlers, “Both their technology and concept of resources were European. Fortunately, both were readily adaptable to the New World” (Fite & Reese, 1965, p. 29). Thus, many factors, other than merely economic phenomena, were involved, as is also indicated by Alex Kondonassis concerning economic development in this century as well as the Eighteenth century discussed by Fite and Reese above. Kondonassis continues a similar theme in analyzing the problems of, the politics for, and the correct mix of attitudes and skills involved in the complex problem of economic development in the less developed countries (LDC’s) at the present period of time. To Kondonassis, many academic and policy makers have believed that the introduction of physical capital into the LDC’s would in and of itself bring about continued economic development and growth. But, to Kondonassis, “. . . machines without a literate population produce little development”; and “. . . the effective use of physical capital, it has been observed, depends on human capital” (Kondonassis, 1985, p. 175). A more effective view of the process of economic development and its continuing needs over time involves . . . discontinuing the study of human reality by fitting it into the pigeonholes of traditional academic disciplines is of critical importance. Interdisciplinary research is mandatory if we wish our research to be more relevant and the policy impact of social science to increase. It has been observed that social, cultural, political, and economic development are all interrelated aspects of the process of development. The real task which lies ahead is to learn to integrate the economic and non-economic factors of development. In this regard, a non-dogmatic, eclectic approach should pay handsome dividends (Kondonassis, 1985, pp. 176–177).

THE STUDENTS’ RESPONSES As of Fall, 1996, there have been 101 Doctoral recipients from the O.U. Department of Economics since 1951. Those who replied to my questionnaire to them graduated between the years 1957–1982. From their replies, one can gather some rather thoughtful analyses of the Department and what it attempted to transmit to its students. These comments add to the history of the Department of Economics, University of Oklahoma and to the history of Institutional analysis in general.1

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Roger Troub, for example, in a previous paper, discussed several members of the faculty during the 1960s. He indicated that Wilhite analyzed the history of economic thought in terms of “people’s beliefs, social structures, economic development, and technological advance; rather than wars and presidential elections” (Troub, 1990, p. 14). Reese, to Troub, emphasized anti-trust legislation and the oil trusts; James Murphy (Finance), the power of big banks; James Constantine (Marketing), freight rates and what inter-state highways were doing to the socio-economic system; and Kondonassis analyzed development and poverty (Troub, 1990, p. 15). Troub summarized what he believed Institutional analysis was all about: For institutional economics, the point is not that markets are unimportant. Of course they are. But they are not mechanisms but institutional processes which exist and operate in conjunction with others of importance. It is not that people do not seek pleasure and to avoid pain. Of course they do, but much more is involved in shaping economic behavior and providing for life and better living than drives for more hedonistic pleasure and less physical pain (Troub, 1990, p. 12).

The gist of “Institutionalist” analysis is: They are, however, institutional affairs, ones which are created and changed by humans, and how they work in particular situations (and what the consequences of their operation are) depends upon their interrelations with other institutional processes. In mass societies, markets are too important to be left to simple-minded “don’t inquire further, just let the market do it” treatment (Troub, 1990, p. 12).

Thus, we have: . . . evolutionary cultural and technological dynamics in interaction with bio-physical circumstances primarily directing and changing economic systems over time rather than a set of rules from a “universal mechanics” applied to changing situations (Troub, 1990, p. 5).

In terms of Troub’s specific reply to the questionnaire of 1996 for this paper, he reminds us that there was no specific effort at O.U. to turn out “Institutionalists” but, rather, a stress upon the on-going process of the society and the economy from “where we are now” and “the current feasible options available” – a pragmatic, non-ideological approach; and an acceptance of a broad interpretation of “Keynesian macro-economic perspectives” (Troub, 1996, pp. 2, 5). Two anonymous respondents indicated that the O.U. point of view was to stress technology and institutions and actual history more than the straight-jacket of only economic theory (Anonymous 2, 1996, p. 2). These concentrations enabled the student to “deal with the world, our economic training had real world relevance” (Deaver, 1996, p. 2). Another respondent stressed the O.U. emphasis upon technology and its impact on society: and Peach’s course on resources which was relevant to the respondent in the oil crisis of the 1970s; and in the

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understanding of the role of government in a free, private enterprise economy. He quoted Reese as saying: “It seems like the ‘Daughters’ of one revolution are always opposed to the next” (Phillips, 1996, p. 3). One respondent argued that Institutional theory was not incompatible to quantitative analysis (Choi, 1996, p. 1). When this author was at O.U., the quantitative analysis was stressed by Ed Crim (Statistics), and by Peach in the latter’s concentration upon the product and income accounts, et alius. This view is confirmed by a response indicating that Oklahoma “Institutionalism” was “highly eclectic, scholarly, non-doctrinaire, and entirely compatible with micro and macro theories” in that Peach emphasized “factual descriptions”; and Reese emphasized “historical descriptive accuracy, covering quantitative data, institutions and policies.” The respondent described the emphasis as “Keynesian Institutionalism” without any formal structural or doctrinaire meaning of Institutionalism” (Leathers, 1996, p. 1). The same respondent stressed the value of the quantitative analysis of James Hibdon – an analysis lacked by some (emphasis mine) Institionalists (Leathers, 1996, p. 1). One respondent indicated that he preferred the term “functional” to “evolutionary” in terms of Institutional analysis (Rucker, 1996, p. 1) – a term used by Peach in his text in relation to resources (Peach, 1955, p. 54). The respondent went on to add that the O.U. emphasis was upon how the economy really functions rather than the usual emphasis on the abstractions of traditional theory with all of the assumptions so necessary to its algebraic neatness and so fatal to its truth. And the point was always the search for policies that would move toward improved functioning in terms of productivity and improved distribution (Rucker, 1996, p. 1). For Mary Fish, there was “the recognition of the dynamic relationships continually interacting between society and the forces of technology that are all expressed through the economic system . . . and the on-going process of change, for the force of technology and science, for the power of social movements, and a recognition that economics was merely peeking at a facet of the development of humankind” (Fish, 1996, p. 1). James Weaver emphasized that Nelson Peach concentrated upon empiricism and “counting things,” especially in the latter’s interest in the income/product accounts (GDP); as well as an interest in the output of goods and their distribution. To Weaver, Paul Brinker was concerned with “how actual workers worked and lived; how unions functioned”; the role of unions and their role in “making capitalism more humane.” Jim Reese, to Weaver, was interested in American History, and the interplay between government and business. Weaver suggested that the above gave him a “healthy skepticism concerning neo-classical economics and Marxist economics”; and more open to the influence of anthropologists, sociologists, and political scientists (Weaver, 1996, p. 1f).

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One other respondent from the International Monetary Fund indicated that O.U. prepared him for an analysis of fiscal, monetary, and exchange rate policies within institutional arrangements; and the need for statistical reforms; with an analysis of the whole picture, not just part of the picture (Kreis, 1996, p. 1f). Edward Stuart suggested that the emphasis upon social and cultural values was important as “parameters in economic models”; as well as knowledge of comparative systems and comparative models of economic institutions – a “metaeconomist,” not focused narrowly on purely economic variables (Stuart, 1996). William Breit, who was at O.U. for only one year, was previously a student at the University of Texas, had an Institutionalist background from Clarence Ayers, as had Reese and Peach. Breit continued his doctoral work at Michigan State. He indicated that his own personal Institutional interests had evolved towards the neo-Institutional analysis of Douglas North. Breit went on to praise Ayers as a teacher; and the source of his own interest in music, modern art and philosophy (Breit, 1996, p. 2). Breit used the word “philosophy.” The word “philosophy” summarizes the real contribution that O.U. made to many of the respondents. It did introduce them to some of the Institutional analyses, especially through the works of Reese and Peach – but also the labor analysis of Brinker; the critique of the quantity theory from Dow; and the analysis of Kondonassis in terms of economic development. Breit reminds us that it began with Ayres; proceeded to O.U.; went with us to our own students; and, hopefully, from them to others. There were also three comments from the University of Missouri-Kansas City (UMKC), the faculty of which some O.U. doctoral graduates joined, including myself; and from which some students were sent to O.U. One such UMKC respondent, James Sturgeon, had, in a previous publication, traced the history of the Association of Institutional Thought (AFID) – an organization that he helped to found; in which he defined Institutional economics as “. . . a holistic way of thinking about science and society. It has evolved from a broad spectrum of philosophical and economic thought and is truly an inter-disciplinary approach to social science” (Sturgeon, 1981, p. 40). In his response to the questionnaire, Sturgeon expanded upon the empirical and historical perspectives of Peach and Reese, and the former’s attention to Zimmerman (Sturgeon, 1996, p. 1). John Ward indicated that the O.U. Department was well-balanced, but allowed students to pursue the Institutional approach in which faculty such as Kondonassis stressed interdisciplinary concepts in the study of human behavior (Ward, 1996, p. 2). Ben Young responded that the O.U. focus was on real problems; holistic and fundamental, not “narrow and trivial models,” especially in the courses of Kondonassis, Peach and Reese. Also, Young mentioned the emphasis upon

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resources as defined by technology; and economic development and its relation to technology, and the socio-economic system (Young, 1996, p. 2). Further, to Young, the Institutionalist view “. . . has allowed me to develop a sociological imagination. I am able to place events in social framework for socioeconomic analysis. This is a much broader perspective than merely using marginal analysis” (Young, 1996, p. 2). Lastly, Luvonia J. Casperson had previously prepared notes on the Department of Economics at O.U. for the 1991 meeting of the Southwestern Economics Association. Therein, she indicated that the Doctoral students graduating from O.U. cannot be described as being eclectic, mainstream, Institutional, Keynesian, post Keynesian, mathematical, or monetarist. Casperson indicated that at O.U. one was free to choose and develop their own position; and that “The philosophy at Oklahoma is that you can criticize any theory that you understand” (emphasis mine) (Casperson, 1996). As a result, . . . Oklahoma did not produce a particular school of economic thought but encouraged students to develop/choose their philosophy. Oklahoma produced students who were challenged respectfully and taught to think with a purpose. My recollection is that there were two basic questions that were asked. These were: (1) What do you know? (What do you believe?); (2) How do you know it? (Why). We were taught to scrutinize theories and models before accepting them as accurate or rejecting them as false (Casperson, 1996). The two questions in the above quote are at the heart of the true meaning of the scientific (empirical) method which all natural scientists and social scientists should be taught to observe and follow. Thus, this experience indicated by Casperson, is at the center of the broad economic, analytical, philosophical perspective that the Department of Economics at O.U. attempts to leave with its students, whatever their orientation. This perspective should be the basis of all institutions of learning. It is a perspective that hopefully is respected and maintained in all the places and all the phases of our lives.

CONCLUSION The above has pointed out some of the selected, salient facts about the historic development of O.U. Institutionalism; the relevant faculty; and, from responses to the questionnaires, their impact on Doctoral students. In the process of editing and compiling the replies, one notices their consistency. All were favorable to the O.U. program, whether the respondents considered themselves to be Institutionalists or not. All gave views of the “Institutional” perspective gleaned from their O.U. experience that were quite similar. That perspective (which might have been received from Peach) was the view of resources as technological, non-static, evolving, human and non-human; as well as the need for resource conservation. On the other hand, institutions (including

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Peach’s mores, folkways, stateways, see Appendix, pp. 259–261, attached hereto) were also important to the recognition, use, and conservation of those resources or potential resources. Indeed, there was on-going interaction among resources, technology, and institutions, the latter two being human-made. Thus, both physical and human aspects and the institutions of human-kind and their interactions were recognized. As in the Veblenian Dichotomy, there was the on-going interaction between technology and institutions, specifically commented on by many of the respondents. The same view seemed to prevail in the respondents’ perception of such topics as economic development, economic history, economic theory, poverty, income distribution, quantitative analysis, et alius. All of the above had roots in pure, orthodox economic analysis, but all respondents recognized the limitations upon pure theory presented by such factors as institutions, actual history, historic time as compared to theoretical time, resources, policy constraints, human nature; and that all of the above were part of an on-going, interactive process. It was a functional view, and a pragmatic view – two words or synonyms that were consistently repeated by the respondents in one way or another. Once again, even though there never was an attempt at O.U. to force Institutional analysis upon students; nor any attempt to exclude more orthodox analysis, the faculty were apparently successful in getting across a functional, pragmatic, open view of socio-economic and cultural analysis to many of the Doctoral students. Apparently, it has remained with many of these ex-students, especially the respondents. Writing in 1955, Peach may have summarized his views and the view of those respondents mentioned above when he wrote in his introductory text: “I have not written an institutional text nor a theoretical one, and I have tried to use empirical materials for more than just illustrative purposes. In the last twenty years, economic theory has developed in a way which enables it to accommodate reality and it is well on the way to becoming a subject which the world recognizes as something which can account for what it knows to be its economic problems” (Peach, 1955, p. v). Perhaps from the perspective of 1997, Peach, in 1955, was too optimistic as to what economics science would become; but he was correct as to what it should become.

NOTES 1. A questionnaire was sent to each of these 101 students on the list of Doctoral graduates. One was sent out to one who was not on that list, but who had been at Oklahoma. There were 21 replies from those respondents. All of the replies were from the U.S., and none from foreign countries (a fault, probably of the mails, and of the established time-frame for their return to me). Only those who indicated that they were willing to be quoted by

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name were quoted by name. I thank all of the respondents for their cooperation. Any errors, misinterpretations, or oversights are, of course, mine.

REFERENCES Responses to Questionnaire of September 3, 1996; and selected relevant Articles and books of respondents. Anonymous 2 (1996). Response to Questionnaire of September 3. Breit, W. (1996). Letter of October 15, 1996. San Antonio: Trinity University. Casperson, L. (1996). Letter of November 20, 1996. Shreveport, La. Louisiana State UniversityShreveport. Choi, J. Y. (1996). Response to Questionnaire of September 3, 1996. Beaumont: Lamar University. Deaver, R. M. (1996). Response to Questionnaire of September 3, 1996. New York: Deaver Corporation. Fish, M. (1996). Response to Questionnaire of September 3, 1996. Tuscaloosa: University of Alabama. Fite, G., & Reese, J. E. (1965). An economic history of the United States (2nd ed.). Boston: Houghton-Mifflin. Kondonassis, A. J. (1985). Some internal problems of social sciences: The economics of less developed countries. Social Science Quarterly, 66(March), 172–177. Kondonassis, A. J. (1996). Letter of September 27, 1996. Norman: University of Oklahoma. Kondonassis, A. J. (1996). Letter of November 20, 1996. Norman: University of Oklahoma. Kreis, E. S. (1996). Response to Questionnaire of September 3, 1996. Washington: International Monetary Fund. Leathers, C. (1996). Response to Questionnaire of September 3, 1996. Tuscaloosa: University of Alabama. Peach, W. N. (1955). Principles of economics. Homewood, IL: Irwin Press. Phillips, R. (1996). Letter of September 26, 1996. Washington: Comptroller of the Treasury. Rucker, G. (1996). Response to Questionnaire of September 3, 1996. Retired. Stuart, E. (1996). Response to Questionnaire of September 3, 1996. Chicago: Northeastern Illinois University. Sturgeon, J. (1981). The history of the association for institutional thought. The Review of Institutional Thought, I(December), 40–56. Sturgeon, J. (1996). Response to Questionnaire of September 3, 1996. Kansas City: University of Missouri-Kansas City. Troub, R. M. (1990). Institutional economics at Oklahoma: A general perspective and a personal one. A paper presented at the Southwest Economics Association, Fort Worth, TX. Troub, R. M. (1996). Response to Questionnaire of September 3, 1996. Lubbock: Texas Technological University. Ward, J. O. (1996). Response to Questionnaire of September 3, 1996. Kansas City: University of Missouri-Kansas City. Weaver, J. (1996). Response to Questionnaire of September 3, 1996. Washington: American University. Young, B. E. (1996). Response to Questionnaire of September 3, 1996. Kansas City: University of Missouri-Kansas City. Zimmerman, E. (1951). World resources and industries (revised). New York: Harper and Brothers.

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Selected Additional References The following are articles, books, et alius selected by the respondents. Each respondent had the option of selecting up to five references for use herein to indicate their professional credentials. The following are those selections, selected by the respondents.

Selected References of Respondents The following is a list of no more than five bibliographical references of the graduate student respondents themselves. Those without such bibliographical references did not send any with their responses to the questionnaire of September 3, 1996. The bibliography is reproduced as given by the respondents. Brazelton, W. R. (1980–1981). A survey of some textbook misinterpretations of Keynes. Journal of Post-Keynesian Economics, III (Winter), 256–270. Brazelton, W. R. (1981). A review of post Keynesian economics: An institutional compatibility? Journal of Economic Issues, XV (June), 531–542. Brazelton, W. R. (1989). Alvin Harvey Hansen: Economic growth and a more perfect society. American Journal of Economics and Sociology, 48 (October), 427–441. Brazelton, W. R. (1993). Alvin Harvey Hansen: A note on his analysis of Keynes, Hayek, and Commons. Journal of Economic Issues, XXVII (September), 940–949. Brazelton, W. R., Sturgeon, J., & Wienal, I. (1985, 1991). Alternative streams in economic analysis. Dubuque, IA: Kendall-Hunt. Choi, J.-Y. (1987). Non-traded goods, variable returns to scale and welfare. Southern Economic Journal (April), 874–883. Choi, J.-Y. (1990). Transfers, welfare and inter-industrial externalities. International Economics Journal (Fall), 55–67. Choi, J.-Y., & Yu, E. (1987). Nominal and optimum tariffs under variable returns to scale. Oxford Economic Papers (December), 785–798. Choi, J.-Y., & Yu, E. (1987). Immiserizing transfer under variable returns to scale. Canadian Journal of Economics (May), 249–253. Choi, J.-Y., & Yu, E. (1987). Technological progress and outputs under variable returns to scale. Economica (May), 249–253. Fish, M., & Gibbons, J. D. (1991). Ranking of economics faculties and representation on editorial boards of top journals. Journal of Economic Education, 22(2), 361–372. Fish, M., & Gibbons, J. D. (1991). Mexico’s revaluation and changes in net foreign exchange receipts from tourism. International Journal of Hospitality Management, 10(3). Fish, M., Lindley, J., & Jackson, J. (1992). Gender differences in salaries: An application to academe. Southern Economic Journal, 59 (October), 241–260. Fish, M., & Waggle, D. (forthcoming). International travel and Taiwan’s Asia-Pacific position. Tourism Recreation Research. Leathers, C. G. (1989). Scotland’s new toll tax as Hayekian policy. Scottish Journal of Political Economy (May). Leathers, C. G. (1990). Veblen and Hayek on instincts and evolution. Journal of the History of Economic Thought (November). Leathers, C. G., & Raines, P. J. (1992). Adam Smith on competitive religious markets. History of Political Economy (Summer).

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Leathers, C. G., & Raines, P. J. (1994). The new speculative stock market: Why the weak immunizing effect of the 1987 crash. Journal of Economic Issues (September). Leathers, C. G., & Raines, P. J. (forthcoming). Veblenian stock markets and the efficient model hypothesis. Journal of Post Keynesian Economics (forthcoming). Malliaris, T. G. (1996). Futures markets. Brookfield, VT: E. Elgar (Ashgate) Publishing. Malliaris, T. G., & Brock, W. (1989). Stockastic methods in economics and finance. Advanced Textbooks in Economics. New York: North Holland Press. Malliaris, T. G., & Brock, W. (1989). Differential equations, stability and chaos in economics. Advanced Textbooks in Economics. New York: North Holland Press. Phillips, R. J. (1995). The Chicago plan and new deal. Banking Reform. Armonk, NY: M. E. Sharpe. Phillips, R. J. (1995). Economic mavericks: The Texas institutionalists. Greenwich, CT: JAI Press. Self, A. (1966). White settlement in Texas: An economic base study. Fort Worth: Texas Christian University. Self, A. (1973). Southwest bank of Fort Worth: Its market, its building, its future. Fort Worth: Bureau of Business Research, Texas Christian University. Self, A., Havell, G. A., & Pearson, J. (1960). Programming circular autocorrelation for cycle research. Journal of Cycle Research, 9(3). Self, A., & Steele, J. L. (1969). South Fort Worth state bank: Market, facilities, future. Fort Worth: Bureau of Business Research, Texas Christian University. Stuart, E. F. (1984). The PQLF as a measure of competitive economic performance. Comparative Economic Studies. Stuart, E. F. (1990). The transition from feudalism to capitalism as depicted in the Russian model. Journal of Cultural Economics. Stuart, E. F. (1993). European economic union: Prospects after Maastrecht. Atlantic Economic Journal. Sturgeon, J. (1985). Oligopolistic cooperation: Conceptual and empirical evidence of market structure evolution. Journal of Economic Issues (December). Sturgeon, J. (1992). Hammers and Picasso. Journal of Economic Issues (June). Sturgeon, J. (1993). What’s in a name: Production technology in the multinational automobile industry. Journal of Economic Issues (June). Sturgeon, J. (1996). The life and work of William Nelson Peach. Review of Institutional Thought, III (December). Sturgeon, J., Brazelton, W. R., & Weinel, I. (1991). Alternative streams in economic analysis (2nd ed.) (as Alternative Economic Perspectives). Dubuque, IA: Kendall-Hunt. Troub, R. (1979). Basic negotiational processes in social organizer systems. In: Improving the Human Condition: Quality and Stability in Social Systems (pp. 979–986). New York: Springer-Verlag. Troub, R. (1980). The arts in economics: Conventional, institutional and neoinstitutional. In: W. S. Henden, J. C. Shannon & J. A. MacDonald (Eds), Economic Policy for the Arts (pp. 7–17). Cambridge, MA: Abt Books. Troub, R. (1982). A general theory of planning: The evolution of planning and the planning of evolution. Journal of Economic Issues, XVI(2), 381–390. Troub, R. (1983). General adjustment theory and institutional adjustment processes. Journal of Economic Issues, 17(2), 315–324. Troub, R. (1994). Economics, public opinion, and cultures of technical control. Journal of Economic Issues, 28(1), 240–256. Ward, J. O. (1980). Nutritional determinants and migration in the Brazilian northeast. Journal of Economic Development and Cultural Change, 29(1).

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Ward, J. O. (1990). Reflections on economic loss in the death of a child. Journal of Forensic Economics, III(2). Ward, J. O. (1993). Forensic economics: The development and outlook for the field. In: Gaughton & Thornton (Eds), Litigation Economics. Greenwich, CT: JAI Press. Ward, J. O., & Ireland, T. (1995). Valuing children in litigation: Family and individual loss assessment. Tucson: Lawyers and Judges Publishing Company. Ward, J. O., & Ireland, T. (1996). A new primer for economists and attorneys. Tucson: Lawyers and Judges Publishing Company. Weaver, J. (1995). What is structural adjustment. In: D. Schudelfsky (Ed.), Structural Adjustment: Retrospect and Prospect. Westview Press. Weaver, J., & Jameson, K. (1981). Competing paradigms of development. Washington: University Press of America. Weaver, J., Rock, M., & Kusterar, K. (1996). Achieving broad based sustainable development. Kumarian Press.

APPENDIX Peach: The Definition and Divisions of Economics The following table is an excerpt from pages 7, 8 of the text (1955) of Nelson Peach, Principles of Economics, Irwin Press. It indicates Peach’s definition of economics and his division of the economy into three sectors (as discussed in his text, p. 8). To put it briefly: “The subject matter of economic study embraces everything that will throw light on the task of producing and distributing goods and services, with due regard for conservation of resources including human effort” (Peach, 1955, p. 7). One branch of economics studies how scarce means are utilized in order to obtain given ends. In this branch of study, economics is concerned mainly with the forces operating in the market and the functioning of prices. Emphasis is placed on the factors which induce businessmen to build plants, purchase raw materials, and hire workers to produce goods and services which can be sold in the market at a profit. This type of inquiry is concerned with the factors that determine the quantity of each type of goods produced, the cost of producing them, and the manner in which they are distributed. In addition to the study of production and distribution, economics includes the study of resources, technology, and institutions, the latter three being the real factors which determine economic well-being. A general idea of their meanings may be obtained from the lists in Table A1.

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Table A1. Resources, Technology, and Institutions. Resources

Technology

Institutions2

Natural resources Land Forest resources Minerals Petroleum Water power Harbors Navigable rivers

Know-how (training & skill, all of the human knowledge which makes resources useful or usable, and which makes possible the construction of plant, machinery, etc., and the intelligent use thereof)

Governmental institutions (legislative, executive, and judiciary organs, powers, influences)

Capital resources Buildings (plant & housing) Industrial equipment (machines, furnaces, etc.) Agricultural equipment (machines, fences, wells, livestocks, etc.) Transportation equipment (railroads, highways, canals and the vehicles, ships, barges, etc.) Communications system (lines instruments, etc.) Human resources Population (able-bodied workers, educational level, skills, health, morale) a It

Social institutionsa (The family, corporation enterprise, and an intricate, infinitely complex pattern of law, custom, tradition which are actually the influences which mold, organize, regiment, drive, and dictate individual and group action)

Economic institutions (Private property, free enterprise, free competition, free exchange and contract, free labor market

might be pointed out that at least two of Nelson Peach’s students have a different view of “institutions” here than did Peach. Both James Sturgeon and Ben Young would argue that a “social institution” (such as the Family) would have both a ceremonial and institutional aspect, as well as a technological aspect, to varying individual and cultural degrees (Sturgeon).

ECONOMIC HETERODOXY AT THE UNIVERSITY OF TEXAS AT MID-TWENTIETH CENTURY David Hamilton Stephan A. Marglin of Harvard was asked to review Economic Heresies for the Economic Journal. He agreed to do so “because Joan Robinson is one of the two members of her generation who helped me to see orthodox economic theory . . . for what it principally is, an ideological defense of capitalism.” Marglin did not believe that orthodox theorists see themselves as ideologues: Quite the contrary: my teachers presented orthodox theory as a bag of neutral tools, as easily applied to criticism of the status quo as to its defense . . . Yet, the results would hardly be different if a conscious conspiracy were afoot. In the United States, at least, major universities barely tolerate dissent and criticism. If one post is conceded to a house radical, the orthodox establishment considers its obligations to diversity adequately discharged. The market place of ideas is in fact about as free and competitive as other major markets. Marjorie S. Turner, Joan Robinson and the Americans, 1989, p. 154

I Universities traditionally have had two primary cultural functions. One is to maintain the “eternal verities” of the tribe. The other is to “advance the frontiers of knowledge.” While not wholly antithetical, these two functions do at times pose a delicate balancing act. To advance the so-called frontiers of knowledge may well undermine the very foundations of conventional tribal wisdom and appear to Wisconsin “Government and Business” and the History of Heterodox Economic Thought Research in the History of Economic Thought and Methodology, Volume 22-C, 261–271 Copyright © 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0743-4154/doi:10.1016/S0743-4154(03)22053-8

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undermine the instituted hierarchy or status system of the society. This can provoke outrage on the part of the beneficiaries of the hierarchy; it may also disturb the cultural contentment of all the rest of the tribe upon whom complicity in the faith is essential for domestic tranquility. Although one might wonder at the outrage of those who might well be viewed as victims of the system, on reflection it is easily understood. To admit that which they believe is a hoax would mean that they were dupes. And no one likes to think that he or she has been taken. In other words, the British people do not like to be reminded of the cultural sham of a Royal Family.

II Within American universities, by and large, the economics dispensed to the young very much adheres to the conventional wisdom – a conventional wisdom, in its refined or Mandarin version, emanating from Cambridge University and Alfred Marshall in the decade of the 1890s. It takes only a slight deviation from this conventional mold to secure a reputation that college deans are wont to disown. Deviation is viewed as a bit scandalous and perhaps indicative that the economics being dispensed is of dubious quality. Of course, this was not exactly the case when Keynesian economics had yet to be tamed by undergoing the ministrations of Paul Samuelson to bring it within the Marshallian respectability. Harvard managed to get a reputation as being a bit heretical in the decades on each side of the century mid-point. Somewhat the same could be said for Michigan and possibly Berkeley. But this taint was pretty much dissipated by Samuelson’s brand of Keynesianism, within which Keynesian theory was relegated to a bit part within the Marshallian system. Those of Chicagoan persuasion did not even accord him a bit part. Marshall, with a little help from the Austrians, said it all! But even when Keynes was still respectable, if only momentarily so, there really was never a “Keynesian Revolution,” even at Harvard. All the time that Alvin Hansen and Seymour Harris held forth, the conventional wisdom remained safe in the hands of Schumpeter, Haberler, Chamberlin, Dunlop, and other major pillars of the department. Robert Gordon at Berkeley was well offset by Howard Ellis. In economics a department can get an unwanted reputation for heresy with no more than the presence of one alleged heretic. For deans, economics is a sensitive area. All social sciences can be, of course. Sociology on race in the south was trouble. Political science can be troublesome if some member of the department is a strong federalist, especially in the South. During the Cold War a political scientist who did not believe in the “red menace” could be an embarrassment. And any historian who deviates from the conventional

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interpretation of the Constitution and the traditional interpretation of the course of American development can be a source of trouble if homegrown “patriots” scent heresy. Of course, all of this is predicated on the grounds that those deviants make themselves visible by meeting the mandate to publish or perish. A silent dissenter who does not flaunt his/her intellectual deviations may go on without roiling the academic waters. However, this cannot characterize an entire department because of the publications mandate. This kind of silence that enables a dissenter to go unobserved also comes under the term “dead wood” and deans can tolerate only a small percentage of such useless timber without endangering the academic reputation of the college and hence that of the University. This general paradox, of course, militates against intellectual deviation without anyone consciously designing it all to do so. But it works that way. The arts can be troublesome when the community sensibilities are aroused over an alleged case of blasphemy or nudity in artistic expression. And literature departments can attract a similarly unwanted attention when heresy or blasphemous interpretation of some sacred classic is detected. But these are usually handled with aplomb and soon blow over. Engineering deans do not have sleepless nights over heresy on bridge or machine design. The physical sciences dealing with atoms, chemical elements and compounds, erosion, folding and faulting are never causes of administrative sleepless nights. An exception, of course, must be made for biology where biological evolution can still bring out fundamentalists to defend eternal verities concerning creation. But much of this has taken a turn in recent decades wherein biological evolution within the academy is not challenged; the challenge is to bring in Biblical creationism on an equal footing. While troublesome, no dean can claim restless nights, just annoyance. But this brings the discussion around once again to economics where community sensitivity seems to be especially acute. Economic theory performs two functions. It attempts to be a matter-of-fact account of what Alfred Marshall referred to as “mankind in the ordinary business of life.” He goes on to say that this aspect of humanity along with religion are the two strongest influences affecting human life (Marshall, 1930, p. 1). What is more important, however, is probably what Marshall does not say. These two aspects of humanity are not exactly unrelated to each other. The religious element is one in which mystic potencies and forces exercise an influence on just how well human beings fare on the economic side. Economic production can be explained in very routine matter-of-fact terms. The production of steel, of automobiles, of television sets, and of computers can be explained in terms of the interrelated technical and tool processes involved in their production. Who does it

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in any instance is irrelevant. It is what is done, not who does what, that begets the flow of goods of whatever kind. On the other hand, these processes can be personalized and rather than being dealt with in matter-of-fact terms of what is done, can become matters of human agency. The productive output can be ascribed to great feats in the exercise of human potencies not definable in matter-of-fact terms. Great entrepreneurs do great things in mysterious ways. Donald Trumps do build great buildings by their manipulation of financial “capital.” Within the jargon of the economist these manipulations are taken to be evidence of great productivity, justifying their generous rewards. They are being recompensed for their creative role, a singularly rare talent. A large part of economic theory is devoted to an explication of just how this mysterious world of make-believe produces the public good. And, as in the past when all good things were ascribed to the agency of the priesthood, warriors, royalty and other dealers in the occult, today it is the work of the entrepreneurs, the CEOs, the business tycoons. It is at this point that economics becomes a sensitive matter for the deans when the young are being instructed in these arcane matters. Business school deans are especially vulnerable when economics is housed in the business school. Where this housing arrangement prevails, and it is quite common, the economics department is more likely to comport itself intellectually more within the bounds of conventional wisdom. If the economist, in explaining these nuances of the economy, does so with a certain amount of doubt concerning the conventional wisdom bearing on the efficacy of these “’dynamic” leaders, trouble awaits; even more trouble awaits if the unwary instructor puts his doubts in writing. It well may become a case of publishing and perishing. The distribution of income and wealth is sanctioned by trust in these beliefs. They are held with an almost religious intensity. No less than the very justness of society is involved. This is an area within which economists can and have been known to falter. The area is a minefield ready to be set off by an economist who strays from the safe path. It is not an area for Veblen’s “idle curiosity.” Nor is teaching corporate finance from the viewpoint of Veblen’s Theory of Business Enterprise conducive to academic peace and tranquility – most assuredly to business deans!1 When analyzing production it is perfectly possible to do so critically, indicating just how some modification of the process might contribute to an enlarged output. But when analyzing the distribution of income any change may effect a change in the instituted hierarchy. All income is alleged to have been “earned” no matter how preposterous this may seem on close inspection. Five hundred and fifty million in one year for dealing in junk bonds, as was true in the case of Michael Milkin, takes a rather large stretch of the imagination to ascribe it to personal acuity, productivity,

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or what have you. But it is otherwise in the public mind. If such income is received, it must have been earned, otherwise it would not have been paid. The justness of the system is evidenced by the payment. Circularity never prevents folk belief from acceptance. Some of the notable disputes in economics have centered on the matter of creation and distribution of income – most markedly between the classical persuasion and that of Marx. Almost all systems of formal economic thought from the pre-classical to that of Marx ascribed the origin of economic well-being to one of the so-called factors of production. As Edwin Cannan long ago pointed out, these so-called factors of production are people, landlords, laborers, and capitalists. Their meaning is not a productive one; they have but a distributive meaning.

III The University of Texas Economics Department at mid-century violated every principle designed to maintain the equanimity of deans. John Kenneth Galbraith, in his autobiographical A Life In Our Times, wrote that he considered the University of Texas Economics Department the most interesting major economics department in the United States at mid-century (Galbraith, 1981, p. 24). Galbraith made this statement in conjunction with an observation concerning the intellectual climate in the 1930s at Berkeley when he was engaged in earning his doctorate. At the time a relatively liberal economics faculty gave rise to an even more liberal and perhaps radical graduate student body. This condition did attract unwonted attention from the business community and its legislative minions in Sacramento. Nevertheless, the department withstood outside unrest over the condition, Galbraith contends, largely because of a zone of ignorance that lay between the causes of the unrest and the business community. The latter were not exactly certain of the nature of their discontent. Galbraith claims that the same general condition existed at Texas at mid-century. The liberal and even radical campus economics community was protected by a veil of ignorance that lay over the capitol not a mile away. While this perception of things has much merit, it is slightly out of focus. The Texas business community and its representatives in the capitol were aware of the nature of the economics being taught and expounded at the University. So much so that one regent in the early forties handed to Homer Rainey, then President of the University, a slip of paper containing the names of four economics professors he wanted Rainey to fire. These were E. E. Hale, R. H. Montgomery, C. E. Ayres, and C. A. Wiley, who collectively represented the leading lights in the economics department (Dugger, 1974).

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Rainey refused to do so and the incident contributed to his demise as President of the University. The business community had been more successful earlier, however, in terminating the services of Nelson Peach, Wendell Gordon, J. Fagg Foster, and Valdemar Carlson. Peach and Gordon were in what would be referred to today as tenure-track positions. Foster was a graduate teaching assistant working on his Ph.D. and therefore ineligible for the tenure track. Valdemar Carlson was a visiting professor from Antioch whose contract would lapse at the end of the term in any event. The “firing” was occasioned by a Dallas public meeting convened by conservative businessmen in 1942 to denounce the Fair Labor Standards Act. Speakers claimed that the act was crippling the “war effort” by limiting hours to forty a week. That, of course, was untrue. The limitation only demanded that any hours over forty would be paid at time and a half. The four Texas economists asked to speak to the point and were denied. They then issued a statement to the Dallas Morning News correcting what was being heard from the platform. One complicating factor was the prominent presence on the platform of the President of Southern Methodist University. The “firing” was accomplished by the regents, not by the economics department or the administration, by not renewing the contracts of Gordon and Peach. However, at the end of World War II both Peach and Gordon were placed on the economics department budget, which was subsequently approved by the then regents. Although of interest at the time, this incident would not warrant Galbraith’s statement concerning the interesting nature of the Texas Economics Department. However, the composition of the department did warrant Galbraith’s assessment of it at mid-century. That appraisal was based on the major figures of the department at that time. The four individuals singled out for a demand that the president fire them, as well as Ruth Allen, are what made the department interesting. It was stated earlier that one member of a department who does not exactly uphold the eternal verities is sufficient to attract unwanted attention in any economics department. To have five so doing is bound to make things interesting, as well as uncomfortable, for deans. In a well-managed economics department, one that receives knowing nods as “sound” and “solid,” the members of the department are highly proficient in rendering the conventional economic wisdom in a recondite and exemplary form. The whole department, like a fine symphony, can render the classic opinion with only a few nuanced flourishes, to demonstrate virtuosity, as it was done by the ancients. Only minor deviation, and then so minor as to be noted only by the most abstruse minds, is tolerated. Such was not the situation at Texas. As mentioned earlier, one maverick can give to a department a reputation for being maverick. At Texas the five principals, all full professors, were each in his/her own way mavericks. No one could assert that

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there was a Texas school as one is warranted in saying when referring to Chicago. No one uniform opinion prevailed. One unifying thread was the ability of all to tolerate diversity and to live in civility with one another. The most senior member was E. T. Miller who long before had served as chairman and who was conventional in his economic views. But at mid-century he had reached an age at which he was on limited duty, which meant half-time teaching. But Dr. Miller – the only member of the department accorded the title – upheld the diversity that prevailed. It was said that his prim demeanor was in contrast to that of his wife who was a member of the fabled Maverick family, from whom today’s term maverick derives. Dr. Miller taught money and banking in the old-fashioned way. However, in upholding dissent he was strong and always cited some long unremembered case of an economist who was fired because he was for the free coinage of silver. Although I am sure Dr. Miller upheld the gold standard himself, he would defend the right of free-silverites to express their opinions. His conviction on the matter was sufficient for him to uphold the wayward ways of the other members of the department. In his assessment, Galbraith stresses that the department was sufficiently radical, even in the shadow of the state legislature, to attract Marxists. In a small way that is correct, but would not warrant the reputation of the department as a maverick one. The only Marxist on the faculty was E. E. Hale, and he most certainly to my knowledge never claimed to be such. As a matter of fact, in his courses in the history of economic thought and comparative systems, he was very careful to respond to student questions when lecturing on Marx, questions that began with, “Now you said . . . ,’ by prefacing his response with, “I did not say that; Marx said that.” And it was well known that he played poker regularly with a poker club composed of several Austin bankers. Hale published very little, and graduate scuttle – but, almost always fallacious, had it that he was a meticulous scholar unwilling to let go of anything until perfect in his eyes. It was rumored that there was a cache of unpublished work, which did in fact exist and has been published in an earlier volume in this series (Phillips & Kinnear, 2001). But he was intellectually a Marxist and as such did attract students, but most of them were local ones who generated an interest from their experience in his classes. Ruth Allen was remarkable for having reached full professorship in a major department at a time when economics was perceived as “men’s work.” Those who did reach such rank – such as Margaret Reid at Chicago, Elizabeth Hoyt at Iowa State and Hazel Kyrk at Illinois – were shunted into consumer economics for which women were held to be particularly fitted because it involved much “home economics.” Ruth Allen taught American economic history as well as labor economics. She was a pioneer in her study of the labor of women, especially

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in her “The Labor of Women in the Production of Cotton.” Unlike Hale, Allen published a number of monographs and journal articles on labor economics. Ruth Allen incorporated a kind of Fabian socialism in her political outlook. She regularly voted for Norman Thomas when he was the perennial Socialist candidate for president. In her writings on labor history and on social and economic history, many references were made to the Webbs, H. G. Wells, Tawney, Polanyi and others with Fabian credentials of some kind. Yet in class she was meticulous about a kind of objectivism within which no judgments were made. She was a populist positivist. C. A. Wiley was an agricultural economist at a time when economics departments contained courses in agricultural economics. He, in a way, represented a vestigial remain from an earlier time when agriculture composed a much larger relative part of the economy. Like Harvard’s John D. Black, Alton Wiley was not replaced by a successor when he retired. However, like his colleagues, Wiley was not a conventional agricultural economist. In his analysis of the agricultural sector of the economy he was very attentive to the technological transformation of American agriculture, both past and present. Raised in the hard-scrabble country of rural Texas, he was not enamored of the rural life and did not romanticize it. In the depression years of the 1930s there was a romance with a nostalgic memory of earlier rural life. Wiley, having experienced it, when referring to the “back to the farm” movement, would exclaim, “Backs to the farm, you mean.” But he was nevertheless aware of what the technological revolution in agriculture meant in human social costs. He prepared a lengthy paper in the late 1940s on the coming technological revolution in agriculture and the urgent need for planning for the transition of the rural population to urban and needing urban employment. He was a New Dealer in outlook, experimental, and perhaps, in his view of the role of technology, closer to Ayres than any of the other department members. R. H. Montgomery, if pigeon holed, would probably qualify as a prairie-radical, by far the most colorful personally of all his colleagues. At a time when long hair was not in style, he had long hair. He wore open necked shirts with puffed sleeves. His lecture style in large classes was flamboyant to say the least. His classes were usually overflowing, especially when those attending had been brought by those enrolled to hear “Dr. Bob.” This flamboyance, however, would not have garnered much notice for the department. Many departments have such flamboyant individuals dispensing the conventional wisdom. Montgomery, a graduate of the Brookings Graduate School, and a student and friend of Walton Hamilton, insisted that he was an institutionalist. And in the more traditional definition of that appellation, he most certainly was. He emphasized the necessity for institutions to be adjusted to

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technological change. And at mid-century, with atomic energy much in the air, he stressed the necessity of institutional accommodation. Montgomery’s interest lay in the public regulation of business, which he taught at the undergraduate and graduate levels. He was a trust-buster in the pattern of Thurman Arnold, who was also a friend. He was a populist New Dealer. His book The Brimstone Game (1940) dealt with the machinations of the Texas Gulf sulphur industry. He did attract the attention of the oil barons in Texas. C. E. Ayres would attract an unwanted interest in any economics department. He was a very articulate follower of Veblen in economics and John Dewey in philosophy. His dissertation at the University of Chicago was in philosophy and economics, entitled “The Nature of The Relationship Between Ethics and Economics.” He ranged widely intellectually, and, although competent in philosophy as well as economics, was an economist. As Galbraith once wrote, had he been at one of the prestigious institutions he would have been considered a major figure. Ayres, like Veblen, rejected the conventional interpretation of the economy as a commercial one. To Ayres technology was the dynamic force in the economy. The price system, if it could be referred to as such, was the means by which ownership and power over the technology was secured. The well being of the human enterprise was determined by the course of science and technology. It was that course of development that led human beings from Olduvai Wash in East Africa to Silicon Valley today. Capitalism, or the commercial interpretation of that advance, was at best a permissive agent and at worst an inhibitory one. Ayres was the most prolific publisher of the whole group and attracted attention through publication, most of it scholarly, rendering him fairly safe from the local keepers of the faith. But not from the scrutiny of deans. The two figures attracting most attention from the locals were Montgomery and Ayres. Any one of these department members would have been sufficient to attract the attention of the deans. For if you wish to have a well-orchestrated department that can get praise for its soundness from fellow deans at national meetings, none of these members was of help because they were not conventional. With the possible exception of Hale, they would not be considered radical in the conventional meaning of that term. They were experimental. They were New Dealers, and at mid-century, unreconstructed ones. All of them accepted Keynes in some form as giving sanction to an experimental approach to economic thought and economic policy. To those who were graduate students at that time, it was indeed an exhilarating atmosphere in which to learn. The influence of the department, however, was largely confined to the Southwest. Certainly it touched such departments as Oklahoma, North Texas, Texas Tech, Houston, Denver, the University of Missouri-Kansas City, the University of

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Tennessee, and even New Mexico, where in l950 two of a five-member department of economics were Texas products. The hiring practices of the Eastern seaboard and even those of the major west coast universities, as we shall see, limited the influence to a regional one without any conscious quarantine. It was even more effective that way as are all patterns of discrimination. It is best if the discriminators know not what they are doing. The results remain the function purely of merit. Reinforcing that quarantine was a rumor concerning the deviant economics being taught “down there.”

IV Could such a department occur again at Texas? Probably not. For what happened at Texas is a lesson on what happens to economic heterodoxy repeatedly. One thing – the Texas department came into being not by design, but by accident. Five of the six were Texans, Ayres being the only outsider. They had an association with the University of Texas as students. Perhaps the faculty when they were students may have had something to do with their heresy. The department had a long history of having had such mavericks as Walton Hamilton, Max Handman and Alvin Johnson, although the latter was not very heretical in his economic doctrine. Undergraduates now attending the University of Texas will not find such unconventionality in residence. Throughout this paper I have emphasized the role of deans in maintaining orthodoxy and eradicating heterodoxy. In most cases the deans themselves are not economists and must therefore rely on the opinions of others concerning the solidity of the economics department. Would any self-respecting dean ask the department if it is worthy? That would be analogous to a consumer asking a paint salesman if the product was worthy. Deans, concerned with the quality of the departments, must rely on outside opinion. And from where should that opinion be sought? From the best schools, of course. And where are the best schools? They are known by common consent to be those from whom other deans staff their departments. In a recent survey of the composition of the faculty at sixteen of the more prestigious graduate schools, it was found that they shop for economists among themselves. Although none would think of keeping his/her own, they might as well. For they all get their faculty from the same places. Among the sixteen institutions, 82% of the faculty came from the tight little inner circle. In-breeding is rampant. It is just not done in one school. Thirty percent came from two universities: Harvard and MIT (Hasselback, 2002).2 The post World War II drive to make Texas a university of the “first class,” in keeping with the legendary state-constitutional mandate, was almost certain to

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make sure that an economics department like that of mid-century would not happen again. And it has not done so. At the present time Texas economics is composed of a faculty who are 82% from the “16” in the study; 21% are from Harvard and MIT. This turn of events was the outcome of the deliberate effort of the deans in the 1970s, 80s, and 90s to hire only from the “best schools.” A solid department it indeed is; an interesting department it is not. Ironically, as of 2002 there had yet to appear a Texas graduate on the faculty of the elite sixteen. For a similar transition of an earlier time, one need but look at Columbia University. A department which once had Wesley Mitchell, Carter Goodrich, J. M Clark, Joseph Dorfman, and Horace Taylor, is now a respectable one, but not interesting. Here too the transformation was not accomplished by firing in response to outside pressure. The transformation was wholly an inside job. There is no conspiracy. The system works, as does the human body, with an immune system to perpetuate immemorial traditions as well as the beliefs that uphold traditional practices. Thus, even in the university, the so-called advancement of the frontiers of knowledge is constantly inhibited by the social system’s ability to perpetuate eternal verities. New knowledge within the system is treated as an intrusion endangering social stability. Economic heterodoxy is always treated as an intrusion, and not as an advancement of the frontier of knowledge. Although universities supposedly advance the frontiers of knowledge, they also maintain the eternal verities – and, perhaps, with greater enthusiasm and conviction.

NOTES 1. In the late 1930s Alan Sweezy, the brother of Paul Sweezy, was allegedly severed from Harvard University for so teaching corporate finance. 2. The universities included are Harvard, Yale, Princeton, Penn, Cornell, Columbia, Brown, Chicago, Berkeley, Stanford, Duke, Northwestern, Johns Hopkins, Wisconsin, Michigan, and MIT.

REFERENCES Dugger, R. (1974). Our divided universities. New York: W. W. Norton. Galbraith, J. K. (1981). A life in our times. New York: Ballantine Books. Hasselback, J. R. (compiler) (2002). 2002–2003 Economics faculty directory. Saddle River, NJ: Prentice-Hall. Marshall, A. (1930). Principles of economics. London: Macmillan. Phillips, R. J., & Kinnear, D. (Eds) (2001). Edward Everett Hale: The writings of an economic maverick. Research in the history of economic thought and methodology (Vol. 19B).

HETERODOX ECONOMICS AT THE UNIVERSITY OF UTAH E. K. Hunt and Allen M. Sievers with the assistance of Ginger Alewine The University of Utah is located in Salt Lake City, the home of the Church of Jesus Christ of Latter Day Saints (LDS or Mormon). This conjunction has led some to believe the University is Church-run, or at least Church dominated. In fact, the University, state-financed from the beginning, has been wholly autonomous since an incident in the early 20th Century. In that incident several faculty members were discharged for their unorthodox religious and political views. This led to an uproar and subsequent protracted controversy, the resolution of which did not reinstate the discharged faculty members but did establish the complete autonomy of the University from the Church. The Economics Department at the University of Utah began as a small unit of the College of Business. The Department was largely conventional except for Sydney Coontz, appointed in the mid-1950s. He was a Ph.D. from the London School of Economics and was an outspoken Marxist – one of the very few in the whole United State at that time. He taught and published from a Marxist point of view. Thereafter, three faculty members were appointed who had studied at the University of California, Berkeley; they were all leftists and had been influenced by Leo Rogin. They were Laurence Nabers, Robert Edminster, and Ernest Randa. In addition, the Economics Department separated from the College of Business and joined the College of Social and Behavioral Science. The Department preferred not to have any business connections.

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In the wake of this last change Allen M. Sievers was appointed chair. Sievers brought with him an institutionalist background. He had a Ph.D. from Columbia where he studied under John Maurice Clark, Joseph Dorfman and others. He had also studied at the University of Chicago under Oscar Lange and Paul Douglas. He wrote his doctoral dissertation on Karl Polanyi (published by the Columbia University Press). Sievers has also published three other books, all with a heterodox orientation. He is now Professor Emeritus. Even before recruiting Sievers, the reputation of Nabers had brought the Western Economic Journal (the publication of the Western Economic Association) to the Department, with Nabers as editor. Later, the Review of Radical Political Economics was edited by the Department under the leadership of William James. This editorship lasted eight years until the death of James. At that time of the Sievers appointment, it was agreed by the administration that the number of the faculty in the Department would be doubled over time. The 1970s and 1980s therefore saw intense recruitment. The criterion for this recruitment was to establish a balanced Department for the good of the students – orthodox theorists and heterodox economists with varied agenda. Toward the end of this period, in 1978, E. K. Hunt and Peter Philips were added to the faculty (the former as tenured professor, and the latter as an assistant professor on a tenure track). They were radically oriented, and were on record as anti-war activists. Hunt was already internationally known for his two textbooks – one an introductory text and one a history of thought text (History of Economics Though: A Critical Perspective and Property and Prophets). Both were emphatically radical and anti-neoclassical. In 1982 Professor Hunt became chair of the Department. With a break between two different stints as chair, he served in this position for fourteen years. During that period, eight radical professors, each critical of neoclassical economics, were hired. Professor Philips and the other eight radicals received tenure during that period. At present, there are ten economists in the department who are highly critical of neoclassical orthodoxy. Their names and research/teaching areas are listed below. Mark Glick: Industrial Organization, Law and Economics, and Marxian Economics. A graduate of UCLA and The New School, and Columbia University with a J. D., Professor Glick has been at the University of Utah since 1985. His research interests are focused on law and economics, Marxist economic theory, and industrial organization. He tries to incorporate the learning from several perspectives. For example, the efficiency criterion in law and economics can be viewed both from a traditional welfare perspective and from heterodox perspectives. Mark’s teaching interests include political economy and social and institutional history of the United States. He teaches the history of antitrust law, corporations, and bankruptcy law and applies various theories of institutional change to this history.

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Peter Philips: Labor Economics, and U.S. Economic History. A graduate of Pomona College and Stanford University, Professor Philips has been at the University of Utah since 1978. He researches working conditions and wages in construction, and is most well-known for his work on the prevailing wage. In relation to the latter, his basic argument has been the idea that prevailing wage regulations promote or at least do not discourage the practice of collective bargaining in construction, while their removal or absence discourages collectively bargained contracts. In his view, collective bargaining is desirable, if not for anything else, because it helps embed in short run contracts the true long-term costs of the industry including the training of the next generation of construction workers. More recently, he has also been working on the relationship between subcontracting and construction safety, and has recently completed work on school construction costs showing that school districts can save substantially on construction costs if they build counter-cyclically and in northern states if they refrain form starting construction in the teeth of winter. He is the author of numerous journal articles, book chapters and a number of edited volumes on the labor economics of the construction industry. Peter’s teaching interests are labor and human resource economics and U.S. economic history. Gunseli Berik: Economic Development, and Feminist Economics. A graduate from Middle East Technical University in Ankara, Turkey and University of Massachusetts, Amherst, Professor Berik has been at the University of Utah since 1994 with a joint appointment with Gender Studies, and she is an Affiliated Faculty member of the Middle East Center. Her research focuses on the economics of gender. She has written many articles on gender wage inequalities and changes in female labor participation in East Asia. In recent years, Berik has been exploring the dynamics of the link between international trade and gender wage inequalities in East Asia. This particular line of research is presented in two recent papers, one of which is forthcoming in an edited volume on Labor and Global Production while the other is under review in the Review of Development Economics. Each paper is soon to appear in the Working Paper Series of the Levy Economics Institute and the World Bank, respectively. More recently, she has also been working on the role of race and gender in apprenticeship training for the skilled trades in the US. This line of research in reflected in two new papers; one is a coauthored article published in the Review of Black Political Economy, while the other is prepared for a volume on prevailing wages in U.S. construction industry. Cihan Bilginsoy: Labor Economics, Macroeconomic Theory, and History of Economic Thought. A graduate of Middle East Technical University, Ankara, Turkey and of the University of Massachusetts, Amherst has been at the University of Utah since 1993. His research focuses on the synthesis of diverse theoretical

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approaches and empirical methods to address socially relevant questions. In his earlier published work, he demonstrates the theoretical and empirical fallacies of the mainstream economic policy prescriptions on various issues (including control of inflation via monetary contraction, exports as the engine of economic growth, labor market deregulation, and training through market allocation), and formulates alternative policy proposals. He focuses on testable hypotheses which he rigorously tests using up-to-date econometric methods. His articles have appeared in journals covering a wide spectrum of theoretical positions in the profession, showing his wide theoretical range that spans Keynesian, Kaleckian and structural approaches to economics. Cihan’s more recent research centers on the economics of job training, in which he shows that an extra-market institutional framework is necessary in order to escape poaching externalities and to provide an adequate supply of skilled workers efficiently and equitably. This body of work underscores that union involvement in the sponsorship of training is the critical variable in the recruitment, retention and graduation of apprentices. His latest article on this topic, which is currently under review in the Industrial and Labor Relations Review, develops an original theoretical model of quit/completion of training by applying a novel survival analysis technique to determine the factors that affect the duration of training, and the probabilities to quit and complete. Two other articles of his on this topic are forthcoming, respectively, in the Review of Black Political Economy and in an edited volume. Al Campbell: Marxist Theory, Theory of Democratic Central Planning, and the Cuban Economy. A graduate of Brown University, MIT and Woods Hole Oceanographic Institute, and the University of Utah with a Ph.D. Professor Campbell has been a Research Assistant Professor at the University of Utah since 1991. Professor Campbell’s research agenda is driven by consideration of two broad questions: (i) how does the dominant world economic system – capitalism - really function?; and (ii) could one construct an economic system that did not suffer from the obvious weaknesses of the existing economic system? Arising from those two concerns, Campbell is presently undertaking research in the following areas. The first is why neoclassical economics fails to give an even reasonably good explanation of how capitalism works. What is wrong with the assumptions concerning consumer behavior, and how are those false assumptions reflected in the neoclassical results? Mainstream Industrial Organization has long rejected the neoclassical “high theory” assumptions about firm behavior. What do those assumptions do to the neoclassical results? Neoclassical economics is now trying to encompass such types of market imperfections as non-“perfectly competitive” market structures, imperfect and asymmetric information, and various types of externalities. What impact will they have on the results of neoclassical

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“high theory” that is still presented in nearly all textbooks? He plans to study why mainstream-Keynesian economics also does not give an adequate description of capitalism. The second is what caused capitalism regimes to abandon the “social compromise” of the 1950s and 1960s and (re)turn to neoliberalism? This project begins with both a study of profit-rate behavior since WWII, and an examination of the institutions and relations of power both between classes and within the capitalist class, and in particular the role of financial capital as a distinct sub part of capital as a whole. Nilufer Cagatay: International Economics, Economic Development and the Roles of Gender in Economic Development. A graduate of Yale University and Stanford University, Professor Cagatay has been at the University of Utah since 1991. She is an affiliate of the Middle East Center and Gender Studies. She has been an economic adviser for the United Nationals Development Programme in the Social Development and Poverty Elimination Division, where she worked on the gender aspect of social development and poverty elimination. Her research spans theoretical, empirical and policy papers within these areas. She has written on a wide range of topics, including feminist movements in developing countries, international trade theories, gender and structural adjustment, poverty and macroeconomic theory and policies. The incorporation of a gender perspective into these themes is the common thread that runs through her work. More recently, her research has concentrated on the links between international trade, macroeconomics and gender. Her work has contributed to the establishment of macroeconomics of gender as a new sphere of inquiry within economics. Hans Ehrbar: Marxist Theory, Mathematics, and Econometrics. A graduate of the University of Munich, Germany with degrees in mathematics and from the University of Michigan with a Ph.D. in Economics, Professor Ehrbar has been at the University of Utah since 1985. His research focuses on the Sraffa-Leontiefvon Neumann input-output economics, useful in re-casting Marx’s theories in a modern framework. The main focus of his scientific agenda is his annotations of Karl Marx’s Capital. This is a detailed sentence-by-sentence analysis of Marx’s text. He uses the original German text, as well as manuscripts and earlier versions, when available. He uses Critical Realism to make explicit Marx’s arguments left implicit in his Hegelian metaphors. This approach gives an interesting and novel reading of certain passages of Marx. He considers the Internet an important force for social change and has been hosting international mailing lists around the world from a computer in his office. He teaches a course on Marxist Economics via the Internet that is a unique experience, one that allows anybody across the globe to follow his class on the World Wide Web (www).

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Korkut Erturk: Post-Keynesian Macroeconomic Theory, Marxian Theory, and History of Economic Thought. A graduate of New York University and The New School, Professor Erturk has been at the University of Utah as a tenured faculty member since 1992 (he came as a Visiting Assistant Professor for 1990–1991). Professor Erturk became the Chair of the Economics Department in 2002. His research since the mid-1990s has been developing a novel interpretation of Keynesian macrodynamic theory that goes against the grain as macroeconomics is practiced today in the literature. More recently, he has been extending this line of research to incorporate the dynamics of asset price bubbles into macroeconomic analysis. In recently published papers, Korkut also applies his theoretical approach to macroeconomics to a number of contemporary issues. Drawing on his experience at the United Nations, where he worked as a consultant between 1997 and 1999 on leave from Utah, he has been working on the recent economic crises experienced in emerging market economics. In his article in the Journal of Post-Keynesian Economics he provides a novel analysis of the East Asian crises, and is currently working on currency crises. In another set of papers he examines the macrodynamic implication of gender differences in the labor force. He has also been trying to revive the heterodox growth theory as an alternative to the mainstream view of economic growth. Norm Waitzman: Health Economics, and Marxian Theory. A graduate of Swarthmore College and The American University, Professor Waitzman has been at the University of Utah since 1988. His research focuses on the socioeconomic and labor market determinants of, and resulting inequalities in, health. Waitzman’s research extends the traditional “production of health” model, anchored in a behavioral and choice-theoretic framework, to one focusing on the role of economic institutions, industrial relations and the sociodemographic structure of communities. Part of his empirical work has demonstrated significant effects of labor market segmentation on mortality and hypertension, and on racial disparities in those health outcomes, even after controlling for traditional individual behavioral and socio-demographic characteristics associated with those outcomes. His more recent work, using hierarchical modeling methods, has demonstrated that resource distribution within communities, in terms of both statistical income inequality and economic segregation, are significant determinants of mortality and morbidity, even after controlling for individual-level socio-economic characteristics. In other ongoing work, Waitzman has analyzed differential health outcomes among construction trade workers, and between construction trade workers and other workers, associated with particular institutional arrangements and labor market conditions. E. K. Hunt: Marxist Theory. European Economic History, and History of Economic Thought. A graduate of the University of Utah, Professor Hunt has

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been at the University of Utah since 1978. He focuses on three separate but related areas: history of economic thought, Marx, and the integration of the various critiques of contemporary neoclassical economics. He has published numerous articles and has authored textbooks running through multiple editions. The history of thought text is widely used by in graduate and upper division classes on political economy and history of thought. Value Theory: One of his latest contributions is, “The Link Between Social Philosophy and Economic Analysis,” in a book edited by Robert Pollin of the University of Massachusetts, Amherst. In addition to the faculty highlighted above, a number of other faculty members in the department would also consider themselves critical of the neo-classical orthodoxy and open to some version of heterodox approach to economics. Among them we can cite, Kenneth Jameson who works on Latin America and development economics; Tom Maloney, whose research focuses on the U.S. labor history; and Gabriel Lozada who does research in resource economics; and Jim Rock, department chair from 1992 to 1995, who is a Keynes scholar. The Department of Economics at the University of Utah is one of a very few departments offering a Ph.D. in economics that requires students in the first year of their Ph.D. studies to take one year of macroeconomics, one year of microeconomics, and one year of political economy. The content of the year-long course in political economy focuses mainly on Marxist and Post-Keynesian economic theory. There is an optional course in institutional economics that the students may take. It is, however, not offered every year. No student who graduates with a Ph.D. in economics at the University of Utah leaves without a very considerable knowledge of the most important critiques of orthodox neoclassical economic theory. Heterodox economics appears to be, and hopefully is, firmly entrenched in the Department of Economics at the University of Utah. In a department where a majority (or nearly a majority) of the economists are heterodox there are likely to be two different kinds of problems – both of which have been present, to some degree, in our department. The first difficulty is that the main common ground for heterodox economists is their dislike of orthodox neoclassical theory. While that unites these economists on many issues, it is not sufficient to unite them on others. The theories propounded by these economists can differ significantly. Within the Economics Department at the University of Utah, there are, broadly speaking, three groups: (1) orthodox Marxists; (2) devotees of a combination of Marxist and Post-Keynesian theories; and (3) institutionalists. These differences create tensions among the heterodox economists on matters of curriculum, new hirings and choosing a department chair. To this point, these

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differences have not been important enough to prevent these economists from voting together on most other issues that arise. A second difficulty arises because the University of Utah is a state university and salaries are paid by the taxpayers. In the 1980s there was a major feature story about the career of Professor Hunt in the Salt Lake Tribune, the newspaper having the largest circulation in Utah. He was department chair at the time. In 1989 the University of Utah President, claiming to be acting on information contained in an anonymous letter, initiated a major investigation of all department records and activities. The department was scrutinized in minute detail by auditors, university police, and university administrators. The investigation dragged on for a year. It produced very meager results. For example, the auditors found that the department chair had bought cakes for the office staff on their birthdays with departmental funds. The investigation did not show any important irregularities, but it was extremely stressful for the chair and the administrative officer of the department. The current president has said publicly that he will never act on anonymous letters. More recently a Salt Lake County newspaper had a cover story on Marxists in the Economics Department at the University of Utah. The article was very inflammatory and contained many significant inaccuracies. The department chair has not, as of early 2003, felt any repercussions from this article. Despite these difficulties, the department functions quite harmoniously and our students learn an extraordinarily diverse range of theoretical viewpoints in our undergraduate and graduate courses and seminars.

THE TWENTIETH CENTURY TREND OF INSTITUTIONALISM IN MAINSTREAM ECONOMICS JOURNALS夽 Ronnie J. Phillips and Douglas Kinnear INTRODUCTION In 1978, Philip Klein wrote about institutional economists of the VeblenCommons-Mitchell-Ayres variety: Whatever we call ourselves, we are not given much credit generally among our fellow economists, but I think there is evidence that an ever-wider group of economists has begun to hear what we are saying and to accept a number of our premises . . . institutionalism must be viewed as either never having died or as being in the process of a resurrection which I suggest will endure (Klein, 1978, p. 252).

Klein’s optimism seems justified by the following quote from Joseph Stiglitz’s new book, Globalization and its Discontents: Old-fashioned economics textbooks often talk about market economics as if it had three essential ingredients: prices, private property, and profits. Together with competition, these provide incentives, coordinate economic decision making, ensuring that firms produce what individuals want at the lowest possible cost. But there has also long been a recognition of the importance of institutions (Stiglitz, 2002, p. 139; emphasis in original).

夽 This paper was presented to a Conference on the History Of Heterodox Economics In the 20th century at the University of Missouri at Kansas City, October 3–5, 2002.

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Klein and other original institutionalists should be buoyed when they hear such a statement from a recent Nobel Prize winner. One problem, however, is that the “old-fashioned textbooks” are still being published in 2003. The quote also raises a question: just who recognized the importance of institutions and when did they recognize it? Statements such as the above by Stiglitz irk original institutionalists, but why? Is it because he underestimates the prominence of perfect competition in current texts, because he is understating original institutionalists’ positions as “keepers of the faith,” or both? In any case, we may not be able to hoist the V(eblen)C(ommons) banner and claim total victory but, increasingly, more of economics today is institutional economics. A recent article by Allan Schmid demonstrates that indeed though everyone is not an institutionalist in the Veblen-Commons mold, “good economists find it useful to embrace some of its various elements” (Schmid, 2001, p. 281). In 1985, Martin Bronfenbrenner published an article in the American Economic Review assessing the impact of the institutionalist critics of mainstream economics (Bronfenbrenner, 1985). Though the article was broadly sympathetic with the institutionalist tradition, it concluded that institutionalism had been pushed “into minority status although not into complete obscurity” in the economics profession (Bronfenbrenner, 1985, p. 20). This article prompted a response in 1985 from David A. Martin and Anne Mayhew who submitted a reply to Bronfenbrenner but were rebuffed by the editor of the American Economic Review (AER) and the current and immediate past presidents of the American Economic Association (AEA) (Martin & Mayhew, 1987). This response tended to confirm a perception among many, if not most, institutionalists in the Veblen-Commons-Ayres tradition that they have been systematically excluded from access to publishing in mainstream journals. Institutionalists have felt that there was, if not a conspiracy, at least a strong resistance in the mainstream journals to the publication of critical and institutionalist perspectives. However, by 1998, the Journal of Economic Literature was ready to invite a paper on Old Institutional Economics (Hodgson, 1998), and there is a recent article in the Journal of Economic Perspectives by Malcolm Rutherford (2001). Though as Bronfenbrenner noted in his article, the AEA was originally founded by early institutionalists such as Richard T. Ely, there has long been a strained relationship between the institutionalists and the governing board of the AEA. Despite the fact that several prominent institutionalists were elected to the presidency of the AEA prior to 1960, this honor was denied to Thorstein Veblen.1 The belief that institutionalists were systemically excluded from the AER led, in part, to the formation of the Association for Evolutionary Economics in 1965, and the creation of an institutionalist journal, the Journal of Economic Issues (JEI), in 1967. As Phillip O’Hara noted in the JEI, “By the late 1950s, many U.S. institutional economists felt the pages of the American Economic Review

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to be alien territory to all institutionalists except the most well-known. Some felt the need for an alternative organization to provide a forum of dissent to the orthodox themes” (O’Hara, 1995, p. 138). Many have pondered why institutionalism fell from grace in the profession. Yuval Yonay’s book (1998) and the writings of Malcolm Rutherford have clarified many of the reasons. In brief, institutionalism was swept away by mathematics, econometrics, and Keynesianism. Positivism, as per Milton Friedman’s definition (Friedman, 1953), suggests that the realism of assumptions is unworthy of consideration, and the Chicago School’s approach led to a strong emphasis on competitive market models (and its corollary: little government intervention), two prescriptions that are at odds with the Institutionalist approach. In exploring this area, we will focus on the 1956 AEA Roundtable on Institutional Economics. This session, for all practical purposes, ended the discussion of institutional economics in the pages of the AER. But in 1998, there was an AEA session on the “New Institutional Economics.” This paper will examine these two roundtables in more detail to gain some insight on the roles of old and new institutionalism vis-`a-vis mainstream economics. To provide a context for the examination of these two roundtables, we will provide some evidence on the trend of publications of leading institutionalists in mainstream economics journals in order to measure the ebb and flow of interest in, and respect for, institutionalist economics.

ORIGINAL INSTITUTIONAL ECONOMICS IN THE MAINSTREAM JOURNALS Between 1919, when Walton Hamilton (1991) coined the term “institutional economics” and the 1956 Roundtable, institutional economics and the work of institutionalists was prominent in mainstream journals. A JSTOR search of all economics journals for the phrase “institutional economics” turned up 178 articles, including papers printed in conference proceedings. A search of business journals not included in the economics list turned up an additional 73 articles. The 178 economics journal articles mentioning “institutional economics” were chronologically distributed as follows: 1910–1919 1920–1929 1930–1939 1940–1949 1950–1959 1960–1969

3 7 25 16 33 10

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16 20 48

From these raw numbers it seems that the 1950s and the 1990s represent the periods when the phrase “institutional economics” appears most often. The significant difference is of course that the 1950s represented the apogee of the “original institutional economics” and the beginning of the “Wardman Group” that laid the foundations for the Association for Evolutionary Economics (AFEE). The 1990s represent the triumph of the “new institutional economics.” In the 1950s, the mainstream did make at least a token effort to include various perspectives, including institutionalism. This is perhaps not surprising when one considers that institutionalists held the Presidency of the American Economic Association from 1956–1958 (1956 Edwin E. Witte, Wisconsin; 1957 Morris A. Copeland, Cornell; and 1958 George W. Stocking, Vanderbilt). Since the president is typically one who is near career’s end, however, this can be construed as evidence that institutionalism was in fact waning. In 1956, Daniel Fusfeld examined the AEA program over the years 1950–1954 and found that of the 156 papers originating in colleges and universities, fifteen institutions were responsible for 73% of the papers. Harvard, California-Berkeley, and Chicago together accounted for thirty-one percent of the papers presented (Fusfeld, 1956, pp. 642–643). Though it could be argued that these universities contained the most productive economists, Fusfeld believed that the problem lay in the way in which presenters were selected. Fusfeld suggested possible solutions such as publishing in advance a list of topics to be discussed at the next meetings, establishing a clearinghouse for proposed papers, and devoting several sessions to contributed papers. In a reply to Fusfeld, John D. Black, the immediate past president of the AEA, noted that Simon Kuznets (AEA President in 1954) had attempted to solve this problem by having his executive committee write letters to department heads asking for the names of (especially) young economists who were working on subjects that might fit into the 1954 program.2 Edwin E. Witte, the then current AEA president, responded that he was also making attempts to rectify the problem, and promised to pass on any suggestions to the next president. Whether these efforts made a difference is unclear. Though the 1956 meetings included a session on institutional economics (discussed below), it is likely that this session was already planned before the Fusfeld comment. A 1960 study by Frank R. Cleary and Daniel J. Edwards (1960) found that about 47% of the contributors to the AER in the period 1950–1959 had Ph.D.s from Harvard, Columbia, or Chicago. One interesting fact was that even though Columbia had produced 22% of the Ph.D.s only 13% of those who contributed to

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the AER had Ph.D.s from Columbia. Harvard, on the other hand, produced 9.6% of the Ph.D.s but 22% of those publishing in the AER had Ph.D.s from that program. The institutions that ranked highest in terms of Ph.D. graduates publishing in the AER were (in order) California-Berkeley, Harvard, Stanford, and Yale. It would appear then that these four were the dominant institutions in terms of their Ph.D.s publishing in the AER.

LEADING INSTITUTIONALISTS IN THE MAINSTREAM JOURNALS Though it would be difficult to objectively assess the degree of difficulty that individual institutionalists may have had in publishing in mainstream journals, we can examine the overall publication trends. It would be expected that the most distinguished institutionalists would be the ones most likely to either publish in the leading mainstream journals or be invited to present at the AEA meetings. Table 1 gives the number of publications in the American Economic Review, the Quarterly Journal of Economics, and the Journal of Political Economy by the founding fathers of institutional economics: Thorstein Veblen, John R. Commons, Wesley C. Mitchell, Walton Hamilton, and John Maurice Clark. These economists all had significant numbers of articles in these top journals, ranging from 54 publications (J. M. Clark) to 16 publications (Walton Hamilton and Thorstein Veblen). This group also regularly reviewed books for the major journals and also saw their own books reviewed: Thorstein Veblen, for example, published eleven books, and Table 1. Clark, Commons, Hamilton, Mitchell, and Veblen: Publications in the American Economic Review, Journal of Political Economy, and Quarterly Journal of Economics by the Founding Fathers of American Institutionalism. Name

Articles or Comments in a Regular Issuea

Articles or Discussion in Supplementb

Book Reviews Written

Their Books Reviewedc

John Maurice Clark John R. Commons Walton Hamilton Wesley Mitchell Thorstein Veblen

25 17 12 30 13

29 10 4 15 3

31 31 10 22 4

17 14 9 11 9

Totals

97

61

98

60

a Includes

coauthored articles. notes and symposia proceedings. c May include multiple reviews (i.e. in more than one journal) of same book. b Includes

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among the AER, JPE, and QJE there are nine reviews of six of his books (i.e. some books were reviewed by more than one of the aforementioned journals). How does this group compare with a later generation of institutionalists? Though there could be considerable disagreement about the makeup of the group of prominent institutionalists, we have chosen the winners of the Association for Evolutionary Economics (AFEE) Veblen-Commons Award for closer examination to determine their degree of participation in the AEA and publication in the AER, QJE, and JPE. There are several factors to consider: where did they get their degrees, where did they teach, and were they members of the AEA? Table 2 lists the Veblen-Commons award winners for the years 1969–2003. The University of California at Berkeley and The University of Texas at Austin each produced five of the award winners; these are followed by Wisconsin, Columbia, and Harvard with three each and Chicago, Colorado, and Pennsylvania with two each.3 How did these institutions rank in terms of publishing in the AER over the period 1950–1959? Using the Cleary-Edwards measure of Ph.D.s publishing in the AER, Berkeley ranked first, Wisconsin fifteenth, Columbia thirteenth, Harvard second, Chicago sixth, Pennsylvania twelfth, with Texas and Colorado not in the top twenty. Hence there was not a strong direct relationship between the Universities producing V-C winners and those whose Ph.D.s published inn the AER, though six of the eight schools producing the largest number of V-C winners are among the top twenty on the Cleary-Edwards measure. Of the eight Veblen-Commons award winners from California-Berkeley and Wisconsin, six published in one or more of the listed top journals (AER, QJE, JPE) (see Table 3). Of the nineteen Veblen-Commons award winners from the five universities which have produced the most V-C award winners, twelve published in one or more of the listed journals. Overall, twenty-two of the thirty-four VeblenCommons award winners published in the listed journals. From these numbers, can we reach conclusions on the success of institutionalists in the top journals? Perhaps not. However, one clear difference with this group of institutionalists is that 50% of the articles in the AER, JPE, & QJE authored by the Veblen-Commons award winners appeared in regular issues; for the founding fathers, 61% of these publications appeared in regular issues. Though this is admittedly a small sample, it presents the best case for institutionalists being able to publish in these journals. The time period selected presents certain problems for interpreting the results. Of the Veblen-Commons Award winners who received a Ph.D. after 1950, Minsky is the only one to have published in the AER, while only eight of the seventeen to graduate after 1950 were published in any of the three listed journals. Though these would be the younger institutionalists among the award winners, the most recent Ph.D. among Veblen-Commons awardees is 1970.4

Name

Yr of Award

Ph.D. Inst’n

Ph.D. Yr

AEA Member

Art. In JSTOR

1891 1895 1912 1906 1916 1896 1898 1908 1891 1901 1893 1907 1899 1918 1927 1916 1903 1913 1915 1921 1925 1927 1921 1928 1919 1933 1919

1969 1969 1970 1973 1974 1974 1975 1976 1977 1978 1979 1981 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1992 1993 1994 1995 1996

Chicago Chicago New Schoola Virginia California Harvard Stockholm California Pennsylvania Cornell Tuebingen Texas Columbia Texas Wisconsin New York Wisconsin California Pennsylvania Colorado LSE California Nebraska California New School Wisconsin Harvard

1918 1921 NA 1931 1950 1930 1927 1934 1922 1928 1918 1946 1932 1951 1958 1940 1940 1940 1953 1953 1953 1958 1953 1954 1950 1957 1954

Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes No Yes Yes Yes Yes Yes Yes No Yes Yes Yes Yes Yes Yes

Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No No Yes Yes Yes Yes Yes No No No No No Yes Yes Yes

Teaching Inst’n

Occupation

Texas Cornell Massachusetts Maryland Columbia Columbia Stockholm Harvard Columbia Chicago, Oregon New School Denver Hamilton New Mexico Michigan State Texas Wisconsin Maryland Rutgers CSU-Sacramento Tennessee Penn State Nebraska Texas New School Michigan State Washington Univ.

Academic Academic Academic Academic Academic Academic&Gov’t Academic&Gov’t Academic Academic&Gov’t Academic Academic Academic Academic Academic Academic Academic Academic Academic Academic Academic Academic Academic Academic Academic&Gov’t Academic Academic Academic

289

Ayres, Clarence E. Copeland, Morris A. Seligman, Ben B. Gruchy, Allan Dorfman, Joseph Means, Gardiner Myrdal, Gunnar Galbraith, J. K. Tugwell, Rexford G. Edwards, Corwin Lowe, Adolph Foster, J. Fagg Gambs, John Hamilton, David Trebing, Harry M. Gordon, Wendell Parsons, Kenneth H. Dillard, Dudley Street, James H. Tool, Marc R. Neale, Walter C. Klein, Philip A. Peterson, Wallace Marshall, Ray Heilbroner, Robert Samuels, Warren Minsky, Hyman P.

Birth Yr

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Table 2. AFEE Veblen-Commons Award by Year of Award.

290

Table 2. (Continued ) Name

a Graduate

Yr of Award

1922 1922 1910 1922 1936 1929 1940

1997 1998 1999 2000 2001 2002 2003

work, but no Ph.D.

Ph.D. Inst’n

Columbia Texas Harvard Columbia Texas Colorado Texas

Ph.D. Yr

AEA Member

Art. In JSTOR

Teaching Inst’n

Occupation

1949 1957 1937 1953 1966 1970 1968

Yes Yes Yes Yes Yes Yes No

Yes No Yes Yes Yes No No

Columbia Texas Tech Univ NA Michigan Tennessee NA Nebraska

Academic Academic Private Academic Academic Government Academic

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Melman, Seymour Hill, Lewis Sweezy, Paul Fusfeld, Daniel Mayhew, Anne Miller, Edythe Hayden, F. Gregory

Birth Yr

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Table 3. AFEE Veblen-Commons Award Winners and Publication in the American Economic Review (1911–1999), Journal of Political Economy (1892–2000), and Quarterly Journal of Economics (1886–1997) and American Economic Review Papers and Proceedings (1911–1999). Name

Ayres, Clarence E. Lowe, Adolph Copeland, Morris A. Tugwell, Rexford G. Myrdal, Gunnar Edwards, Corwin Means, Gardiner Gruchy, Allan Gambs, John Galbraith, J. K. Sweezy, Paul Dillard, Dudley Gordon, Wendell Parsons, Kenneth H. Foster, J. Fagg Melman, Seynour Dorfman, Joseph Heilbroner, Robert Hamilton, David Fusfeld, Daniel Neale, Walter C. Peterson, Wallace Street, James H. Tool, Marc R. Marshall, Ray Minsky, Hyman P. Hill, Lewis Samuels, Warren Klein, Philip A. Trebing, Harry M. Mayhew, Anne Hayden, F. Gregory Miller, Edythe Seligman, Ben B.

Ph.D. Yr

Total

Articles in Regular Issues

Articles in Discussion or Supplement Issues

1918 1918 1921 1922 1927 1928 1930 1931 1932 1934 1937 1940 1940 1940 1946 1949 1950 1950 1951 1953 1953 1953 1953 1953 1954 1954 1957 1957 1958 1958 1966 1968 1970 NAa

9 0 38 5 3 14 10 6 0 20 13 5 2 2 0 2 5 3 0 5 1 0 1 0 1 6 0 3 0 2 0 0 0 2

3 0 18 3 2 2 7 3 0 12 9 3 2 0 0 1 2 1 0 2 1 0 1 0 1 3 0 3 0 0 0 0 0 1

6 0 20 2 1 12 3 3 0 8 4 2 0 2 0 1 3 2 0 3 0 0 0 0 0 3 0 0 0 2 0 0 0 1

158

80

78

Totals a Did

not earn Ph.D., to authors’ knowledge.

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The institutionalists were primarily academics, however, only eight of the thirty-four Veblen-Commons awardees taught at the top 20 schools measured by their Ph.D.s publishing in the AER during the 1950s. This is compared with twenty-one of thirty-four receiving degrees from this same group of institutions. The question remains whether mainstream economists with similar career paths also faced the same probability of publishing in the AER, JPE and QJE. Additionally, there is no way, at this date, to determine the extent to which institutionalists were submitting to top mainstream journals, hence it is possible that these scholars were simply sending their work to other journals which were perceived as more receptive (this may be especially true since the creation of the JEI). We conclude that it was not where the institutionalists got their Ph.Ds. that was a factor in the decline, but rather where they ended up teaching that was the more significant factor in the ability to publish in these journals. This had implications for the survival of institutionalism in the U.S. As institutionalists published less often in top mainstream journals, their messages and influence in the broader profession may have declined, leading to still greater difficulties landing positions in top academic departments.

THE FALL AND REBIRTH OF INSTITUTIONAL ECONOMICS Others have gone into greater detail on the rise and fall of institutional economics in the interwar period (Rutherford, 1994, 1998, 2001; Yonay, 1998). This paper will instead focus on the 1956 Roundtable at the AEA meetings of that year, which probably represent the end of efforts to revive the Veblen-Commons institutionalism within the mainstream of economics. Clarence Ayres chaired the session on institutional economics, Kenneth Boulding presented a paper, and there were several discussants, including Allan Gruchy. Reading Boulding’s paper forty-seven years later, it is easy to see why it offended many of the institutionalists, especially Gruchy, but the paper, in our opinion, is amazingly sympathetic with institutionalism. Boulding opens his remarks noting that institutionalism “is essentially a movement of dissent and has a certain atmosphere of sectarianism which seems to be an unavoidable concomitant of dissent” (Boulding, 1957, p. 1). He goes on to say “there is not today anything which would be called either an institutionalist ‘movement’ in economics nor even an institutionalist group.” He therefore concludes: Looking at institutionalism in 1956, therefore, one is tempted to regard it as a historical interlude – an interlude, it is true, of considerable interest, and one which made real, if small,

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contributions to the main stream of economic thought, and one which will attract the interest of historians of thought, but an interlude nevertheless which ended for all practical purposes in the thirties (Boulding, 1957, p. 1).

This audience can certainly understand that these comments would not be well received by Gruchy and Ayres. Boulding goes on to discuss the importance of dissent, and points out that often it happens that the “side streams of dissent” sometimes become the mainstream, as in the case of underconsumption theory (Boulding, 1957, p. 2). In this context he comments that institutionalism “May have gouged channels in a direction which the main stream will one day follow” and thus “(institutionalism’s) significance may be far beyond its apparent magnitude” (Boulding, 1957, p. 3). Boulding hypothesizes that the channels that the mainstream may one day follow are those established by John R. Commons. Though in 1956, Veblen and Mitchell were dominant and the books of Commons gather dust on the shelves, he predicted that in the future, Commons would be dominant (Boulding, 1957, p. 8).5 Why did Boulding believe that Commons would be more important for the future of economics? In Commons I would argue that we see the most successful attempt to enlarge the borders of the economic abstraction, not so much, however, by drawing in contributions from other social sciences as by the generalization of concepts originally derived from economics. Thus, his idea of the transaction is a generalization from the concept of exchange: his idea of the “going concern” is a generalization of the concept of the firm; his concept of “working rules” is a generalization from the notion of economic behavior . . . he foreshadows much that is happening today in the theory of organization and behavior (Boulding, 1957, p. 10).

Hence, Boulding concludes that The direct impact of institutionalism on the mainstream of economic thought has been small . . . Nevertheless, the indirect influence of institutionalism has been very great . . . The institutionalists may not have given the right answers, but they did ask some very right questions. We do need dynamics; we do need integration with other social sciences; we do need empirical feedback. And these are precisely the areas where vital work continues to be done in economics – mostly by people who have never given any thought to the institutionalists and who in no sense regard themselves as their disciples (Boulding, 1957, pp. 11–12).

Finally, Boulding states In a letter to me a few months ago, Professor Ayres accused me of having become an institutionalist. If a somewhat despairing concern for dynamics in theory (without losing a sense of the very real accomplishments of statics); if a very strong concern for integration in the social sciences and for the bringing the contributions from psychology, sociology, and the biological sciences into the construction of better theories of individual behavior and social change; if a strong (if skeptical) interest and sympathy with empirical methods is enough to make me an institutionalist, then I gladly accept the title (Boulding, 1957, p. 12).

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These quotes reflect the general tone of Boulding’s remarks. Boulding has stated that institutionalism made contributions, the mainstream changed – in part due to the institutionalist critique – and that the work of John R. Commons would be important in the future. In our view, Boulding was correct on all three counts. But how did the institutionalists on the panel, notably Allan Gruchy and Clarence Ayres, receive Boulding’s remarks? Gruchy was the first discussant and opens with the following: Professor Boulding’s new look at institutionalism gives rise to a combined moralistic, verbal, and scientific attack on this type of economics. Since his moralistic and verbal onslaughts on the institutionalists turn out to be moralizing and preachment rather than scientific analysis, I shall dismiss these onslaughts as quite irrelevant to our main concern, which is a scientific appraisal of institutionalism (Gruchy, 1957, p. 13).

If Gruchy rejected Boulding’s characterization, then what did Gruchy regard as the essence of institutionalism? For Gruchy, “Institutionalism is only secondarily a movement of dissent from analytical economics” (Boulding, 1957, p. 13) but rather “the essence of institutionalism; namely, a theory of the American economic system” (Boulding, 1957, p. 14). In so doing, institutionalists did not reject basic economic theory, but rather what the institutionalists had “done over the years is to take the basic theory of Marshall, Keynes, and others and place it in the larger setting of a theory of the evolving economic system” (Boulding, 1957, p. 14). Gruchy was thus convinced that institutionalism was the trend of the future – in both economics and as a foundation for government policy: To say that institutionalism is nothing more than a past historical interlude, or at best a negativistic movement of dissent, indicates only wishful thinking. Recent and current economic trends in this country and elsewhere are the surest guarantee that institutionalism will continue to be a significant and, in some quarters, a thriving movement . . . institutionalism, in terms of economic policy, leads to national economic programming for full employment and stable growth without inflation . . . Institutionalism as a point of view and as a body of economic interpretation is now thoroughly embedded in the progressive wing of the Democratic Party. While institutionalism is not at present prominently situated in academic halls, it does appear to have permanent riparian rights on the banks of the Potomoc River. The strong policy orientation of the institutionalist movement and its willingness to grapple with pressing economic problems make its continued survival and future progress hardly a matter of doubt (Gruchy, 1957, p. 15, emphasis added).

These very strong words were followed by remarks by Frank Knight who questioned Gruchy’s rather narrow definition of institutionalism: I face a special embarrassment: presumably put on the program as an adversary – “Satan” is the Biblical word – I am in fact as “institutionalist” as anyone, in a positive sense. I diverge only in not damning “economics” in its essential meaning. That is what the label stands for rather than any positive import. It is a cry of revolt, a call for “anything but” discussion of ends and means and free co-operation . . . I also abhor orthodoxy, in its correct historical meaning;

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but that does not make me denounce the multiplication table, the Pythagorean Theorem, or the laws of motion, though all are as unrealistic as the purest pure theory of economics – to use another institutionalist epithet. Nor does hating orthodoxy move me to deny that men economize and organize for efficiency through the purchase and sale of goods and services in the market (Knight, 1957, p. 18).

Knight, who taught a course on institutionalism at the University of Chicago, goes on to say that the fact that humankind is not completely rational in all decision making, “ hardly implies that a government, which must be run by men, will be both wise and benevolent in managing those of everybody” (Boulding, 1957, p. 21). Ayres closed the session by making two basic points at the heart of the institutionalist conception of the economy: The real determinant of whatever allocation occurs in any society is the organizational structure of that society – in short, its institutions . . . Second, what determines the relative scarcity or relative plentifulness of all resources is the state of the industrial arts (Ayres, 1957, p. 26).

Finally, Ayres agreed with Boulding that even in the future if the mainstream of economics was not known as institutional economics, the issues would be at heart institutionalist: We are now witnessing the impact of our own industrial revolution upon the rest of the world, and as we do so the significance of the technological processes and of institutional resistances is being brought home to us far more vividly than ever before. I agree with Professor Boulding that it is circumstances such as these rather than the persuasions of any dissenters that will give direction to the economic studies of the future. I agree with him too, in thinking it unlikely, and perhaps even undesirable, that the main stream of future economic thinking will be known as institutionalism. But in the years to come economists will be increasingly concerned with the technological and institutional realities by which gross national product, the level of consumption, and the level of employment are determined (Ayres, 1957, p. 27).

What do we conclude today about this review of institutionalism at mid-Twentieth Century? First, that Boulding was right about the importance of Commons; second, that Gruchy was wrong about institutionalism and the Democratic party; and finally, that many people considered themselves institutionalists even though they did not necessarily fit Gruchy’s rather narrow description.

THE RETURN OF INSTITUTIONAL ECONOMICS TO MAINSTREAM JOURNALS Gruchy saw a close connection between institutional economics and progressive politics. But as Bill Breit wrote, what began as a left-wing movement of dissent, has now moved to the right with the ascendancy of the “New Institutional Economics.” Indeed, Breit writes:

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Institutionalism started as a left-wing movement of dissent from orthodoxy, gained ascendancy in the 1920s, was seen as “the trend of economics” by friends and critics alike, and then seemed to lose its self-confidence and its future in the 1930s. From that time onward institutionalism was subjected to some scathing criticisms . . . Institutional economics has made the passage in ideological development from left to right . . . its force as an ideological movement has been spent (Breit, 1988, pp. 132–134).

Until recent years, there were few references to the old institutional economics in the mainstream economics journals after 1956. Most of the comments were not favorable. Consider Thomas Sowell who referred to institutional economics as “half economics, half sociology, and all mush” and likens the institutionalist movement to a cult built around Commons and Veblen. Sowell says: Institutionalism was like a meteor that shot across the sky and then disappeared. When someone asked Stigler about it, he replied: “Institutional economics is dying out at a fantastic rate – though still not fast enough to suit me” (Sowell, 1993, p. 788).

However, some, such as Joseph Stiglitz, have been mildly favorable to the old institutionalism: In the earlier part of the century there were major conflicts between institutional economists, who saw the particular arrangements by which particular economies conducted their economic affairs as essential, and neoclassical economists, who sought to see through these inessential details to the underlying fundamental forces – the forces of demand and supply. By the middle of the century, the triumph of neoclassical economics was – almost – complete, certainly in America and England, and by 1980, even in Germany. Yet, before the death-knell had been sounded, a New Institutional Economics had arisen, attempting to use the new insights to explain the institutions and to examine their consequences (Stiglitz, 1991, p. 136).

In 1998, there was an AEA session on the “New Institutional Economics.” Ronald Coase repeated the negative view of the old institutionalists as “anti-theoretical, and without a theory to bind together their collection of facts, they had very little that they were able to pass on.” Coase, unlike Boulding in 1956, is convinced that “Certain it is that mainstream economics proceeded on its way without any significant change. And it continues to do so” (Coase, 1998, p. 72). Oliver Williamson, like Commons, accepts the transaction of the unit of analysis (Williamson, 1998, p. 76). Williamson seeks some kindred spirits between old and new and some implication that the New Institutional Economics builds upon the old: The proposition that institutions matter is embraced by institutional economists of all kinds, old and new. What distinguishes the NIE from earlier (and some contemporary) work on institutions is that institutions are susceptible to analysis. Older-style institutional economics was content to critique orthodoxy and collapsed for failure to advance a positive research agenda. The NIE has responded to the challenge by: (i) developing a comparative institutional

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logic of organizations to which (ii) many empirical tests have been conducted and are broadly corroborative (Williamson, 1998, p. 75).

Though Coase is critical of the Veblen-Commons institutionalism, perhaps even old institutionalists would agree with Coase when he states that The success of mainstream economics in spite of its defects is a tribute to the staying power of a theoretical underpinning, since mainstream economics is certainly strong on theory if weak on facts . . . Apart from the formalization of the theory, the way we look at the working of the economic system has been extraordinarily static over the years . . . contrast the developments in biology since Darwin with what has happened in economics since Adam Smith. Biology has been transformed. Biologists now have a detailed understanding of the complicated structures that govern the functioning of living organisms. I believe that one day we will have similar triumphs in economics . . . when this is done, all of economics will have become what we now call “the new institutional economics.” . . . When the majority of economists have changed, mainstream economists will acknowledge the importance of examining the economic system in this way and will claim that they knew it all along (Coase, 1998, pp. 73–74).

These comments suggest common ground between old and new institutionalists (see Selznick, 1996).

CONCLUSION In a book on the Texas School of institutional economics, it is argued that their contributions were often years, or in some cases decades, ahead of the mainstream (Phillips, 1995). This has been true in many areas and this underlies the remark of Paul Homan (1932), and the later view of others, that institutionalism had “done its work.” Martin Bronfenbrenner in his 1985 article acknowledged these important contributions by reminding economists that “critics of the institutionalists should remember how much of our present treatment has developed subsequent to, and partially in response to, institutionalist critiques” (Bronfenbrenner, 1985, p. 19). It should be noted that institutionalists played a pioneering role in establishing fundamental data on the macroeconomy. Simons Kuznets, a student of Mitchell’s, worked on national income accounting while the Federal Reserve’s flow of funds accounting was a product of Morris A. Copeland, a student of J. M. Clark. The awarding of the Nobel Prize to Douglass North, and recognition for Oliver Williamson and other institutionalists, should hearten all students of Veblen, Commons, Mitchell, and Ayres. The profession is changing slowly – which should be no great surprise. Now is an opportune time for the institutionalist research agenda, and one should reasonably expect to find mainstream journals increasingly open to institutionalist contributions. Our conclusion? The “old” institutionalists

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should declare victory and move on. We should form alliances with those among the new institutionalists with whom we have common interests and welcome those, such as experimental economists, who recognize that “institutions matter” and that economic analysis must seek to understand the evolutionary process of society. Rather than emphasizing our differences, those who think of themselves as institutionalists should simply produce meaningful work and publish it before the most relevant audiences without regard to paradigmatic labels.

NOTES 1. In 1923, Paul H. Douglas and John Maurice Clark attempted to have Veblen nominated as the first honorary president of the AEA, though nothing came of the effort. In 1924, Wesley Mitchell, then AEA President, appointed a nominating committee made up of Veblen’s friends: Frank Taussig, John R. Commons, Harry A. Millis, James Harvey Rogers, and Paul H. Douglas. However, Allyn A. Young, who had been a colleague of Millis and Commons, and was a colleague of Taussig of Harvard, was selected (Dorfman, 1934, 491). Objections to Veblen were that he was really a sociologist rather than an economist, and it was questioned whether he would take the presidency seriously and attend the annual meetings (Dorfman, 1934, 491). It was also pointed out that Veblen was not currently a member of the AEA. The following year, Douglas circulated a petition nominating Veblen, and E. R. A. Seligman, who was then chair of the nominating committee, offered to nominate Veblen on the condition that he join the AEA and deliver an address. Veblen refused the offer and later remarked: “They didn’t offer it to me when I needed it” (Dorfman, 1934, 492). 2. In a letter to Calvin Hoover, regarding Kuznet’s attempts, C. E. Ayres wrote: “In response to your letter of January 18, I invited all the members of my department to give me reports of any research that is near completion and could be precipitated in papers for the 1954 meeting of AEA. I enclose herewith the only one I have received that seems suitable for submission to you. You understand, of course, this doesn’t mean that McDonald’s is the only work that is being done in this region! . . . I myself am working away at the old problem of the criterion of value in economic and other judgments; and if anything is planned along so philosophical a line, I would be happy to be in on it. However, in deference to younger men, I am not filing an abstract. This seems to me a very good experiment by Kuznets. I shall be much interested to see how it works up.” [C. E. Ayres to Calvin Hoover, February 16, 1954 (in author’s possession)]. For an update on AEA participation, see Hinshaw and Siegfried (1995). 3. Three award winners received Ph.D.s from non-U.S. institutions. Over the period 1904–1950, Columbia ranked first in candidates preparing doctoral theses (22%). Columbia and Chicago together supplied 40% of the candidates preparing doctoral theses. CaliforniaBerkeley supplied 2.4%, Wisconsin 8.9%, and Pennsylvania 5.5% (Froman, 1952). 4. Trebing published in the Proceedings in 1963 and Samuels in 1965. After 1968 only three articles appeared in a regular issue of the AER by Veblen-Commons award winners (Means in 1972, Galbraith in 1973, and Myrdal in 1989). In the Proceedings: Galbraith in 1970 and 1988, Heilbroner in 1971 and 1974, Minsky in 1971, Marshall in 1972, Trebing 1980, and Myrdal in 1972. For the period 1918–1994, only three Veblen-Commons winners have not published anything in either the AER or Proceedings.

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5. A Web of Science search finds 1,061 citations to John R. Commons since 1945, with nearly half, 451, since 1990.

ACKNOWLEDGMENTS The authors acknowledge the helpful comments of Malcolm Rutherford, Warren Samuels, and conference participants.

REFERENCES Ayres, C. E. (1957). Comments on Boulding. American Economic Review, 47(May), 26–27. Boulding, K. (1957). A new look at institutionalism. American Economic Review, 47(May), 1–12. Breit, W. (1988). Institutional economics as an ideological movement. In: S. Hook, W. L. O’Neill & R. O’Toole (Eds), Philosophy, History and Social Action. New York: Kluwer Academic Publishers. Bronfenbrenner, M. (1985). Early American leaders – the institutionalist and critical tradition. American Economic Review, 75(December), 13–27. Cleary, F. R., & Edwards, D. J. (1960). The origins of the contributors to the AER during the fifties. American Economic Review, 50(December), 1011–1014. Coase, R. (1998). The new institutional economics. American Economic Review, 88(May), 72–75. Dorfman, J. (1934). Thorstein Veblen and his America. New York: MacMillan Company. Friedman, M. (1953). The methodology of positive economics. In: Essays in Positive Economics. Chicago: The University of Chicago Press. Froman, L. A. (1952). Graduate students in economics. American Economic Review, 42(September), 602–608. Fusfeld, D. R. (1956). The program of the American economic association meetings. American Economic Review, 46(September), 642–644. Gruchy, A. (1957). Comments on Boulding. American Economics Review, 45, 13–15. Hamilton, W. (1991). The institutional approach to economic theory. American Economic Review, 9(March), 309–318. Hinshaw, C. E., & Siegfried, J. J. (1995). Who gets on the AEA program? Journal of Economic Perspectives, 9(Winter), 153–163. Hodgson, G. M. (1998). The approach of institutional economics. Journal of Economic Literature, 36(March), 166–192. Homan, P. T. (1932). An appraisal of institutional economics. American Economic Review, 22(March), 10–17. Klein, P. A. (1978). American institutionalism: Premature death, permanent resurrection. Journal of Economic Issues, 12(June), 251–276. Knight, F. (1957). Comments on Boulding. American Economics Review, 45, 18–21. Martin, D. A., & Mayhew, A. (1987). Comment: Bronfenbrenner on institutionalists and the critical tradition in American economics. Journal of Economic Issues, 21(March), 375–380. O’Hara, P. A. (1995). The association for evolutionary economics and the union for radical political economics: General issues of continuity and integration. Journal of Economic Issues, 29(March), 137–159.

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Phillips, R. J. (Ed.) (1995). Economic mavericks: The Texas institutionalists. (Series on Political Economy and Public Policy.) Greenwich, CT: JAI Press. Rutherford, M. (1994). Institutions in economics: The old and the new institutionalism. Cambridge: Cambridge University Press. Rutherford, M. (1998). From interwar pluralism to postwar neoclassicism. Annual Supplement to Volume 30 of History of Political Economy. Edited (with Mary Morgan). Duke University Press: Durham NC. Rutherford, M. (2001). Institutional economics: Then and now. Journal of Economic Perspectives, 15(3), 173–194. Schmid, A. A. (2001). The institutional economics theory of Nobel prize winners. In: J. Biddle et al. (Eds), Economics Broadly Considered (pp. 281–311). London: Routledge. Selznick, P. (1996). Institutionalism ‘old’ and ‘new’. Administrative Science Quarterly, 41(June), 270–277. Sowell, T. (1993). A student’s eye view of George Stigler. The Journal of Political Economy, 101(5), 784–792. Stiglitz, J. E. (1991). Another century of economic science. The Economic Journal, 101(January), 134–141. Stiglitz, J. E. (2002). Globalization and its discontents. New York: Norton. Williamson, O. E. (1998). The institutions of governance. American Economic Review, 88(2), 75–79. Yonay, Y. (1998). The struggle over the soul of economics: Institutionalist and neoclassical economists in America between the wars. Princeton, NJ: Princeton University Press.

LAMENT FOR ECONOMICS, OR HOW BARBARA WOOTTON GAVE IT ALL AWAY AND BECAME A SOCIOLOGIST J. E. King ABSTRACT In 1938 Barbara Wootton published Lament For Economics, an indictment of the state of contemporary economic theory. She complained that economics was of no use to anyone, and unintelligible to all except a small minority of specialists. Economists were unable to agree; they ignored reality, and often served as apologists for capitalism. Thus, economics was not a science, and could contribute little or nothing either to the understanding of capitalism or to the organisation of a future socialist society. Wootton’s criticism made no impact at the time, and she soon abandoned economics and became an eminent criminologist and social theorist. However, many of her arguments were repeated, 62 years later, in the French students’ manifesto that led to the formation of the Post Austistic Economics movement.

INTRODUCTION What is economics for? Why should intelligent and highly-educated people devote their lives to it? What does it have to offer the great mass of suffering humanity? These questions are rarely posed by practitioners of the art; when they are, the answers tend to be deeply pessimistic.1 One of the earliest examples dates from 1938, when the English socialist Barbara Wootton published a long polemic against Wisconsin “Government and Business” and the History of Heterodox Economic Thought Research in the History of Economic Thought and Methodology, Volume 22-C, 301–321 © 2004 Published by Elsevier Ltd. ISSN: 0743-4154/doi:10.1016/S0743-4154(03)22056-3

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the sterility of economic theory, which she called Lament For Economics. Its author had just turned forty, and her book was a deeply pessimistic survey of the discipline to which she had devoted the first two decades of her working life. It represented, or so Wootton later asserted, “the beginning of the end of my career as an economist, a title to which I would not now aspire” (Wootton, 1967, p. 88). Abandoning economics as a lost cause, she reinvented herself as a sociologist, achieving a considerable reputation as an authority on the causes and prevention of crime. As a criminologist Woootton adopted a perspective about as far removed from the “economics imperialism” of Gary Becker and his Chicago colleagues as it is possible to imagine (compare Wootton, 1959; and Becker, 1968). And the methodological issues raised in her Lament continue to resonate today.

IN A WORLD I NEVER MADE Barbara Wootton was born in Cambridge on 14 April 1897, into an intensely academic family.2 Her father, James Adam, taught classics at Emmanuel College and her mother, Adela Marion Kensington, was also a classical scholar. Barbara duly won a classics scholarship to Girton College, but had little interest in the subject. Two years into her studies, in September 1917, she married Jack Wootton, who was recalled to active service two days later and killed in action the following month. They had been married, Wootton recalled, “in theory for five weeks and in practice for something less than forty-eight hours” (Wootton, 1967, p. 51). Just before her final examinations she was laid low by a violent – and possibly psychosomatic – attack of tonsilitis and was certified unfit to sit the papers. Instead she was awarded an aegrotat (ibid., p. 54). Wootton was now able to move into economics. She proved to be a brilliant student, passing the Economics tripos after only a year not only with first-class honours but also with a special mark of distinction that had never been awarded to anyone before her. Because she was a women she was not, however, awarded a degree. After a brief period as a researcher and University lecturer in London, Wootton returned to Cambridge as Director of Studies in Economics at Girton, where she was invited to lecture in one of the compulsory subjects in the Economics tripos. As a woman she was not a member of the University, and the administration refused to allow her name to appear on the published lecture timetable. High farce now ensued: Hubert Henderson gallantly offered to lend his name as the official lecturer, if the Board would consent to add a footnote to the effect that the lectures (which he had of course no intention of giving) would actually be given by me. And in those terms this ludicrous compromise did in fact appear. It was, I need hardly say, too ludicrous to continue; and in the following year

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the pages of the University Reporter were desecrated by the appearance of my name as an accredited lecturer (Wootton, 1967, p. 59).

Wootton enjoyed the rare distinction of publishing a full-length article in the Economic Journal a month before her twenty-third birthday, in which she discussed the implications of the clause in the Versailles Treaty stipulating that “the labour of a human being should not be treated as merchandise or as an article of commerce.” The logical implication of this fine principle, Wootton argued, was the introduction of socialism: If production were arranged in accordance with statutory orders, if the factors of production were disposed by the edicts of the community instead of by the automatic directions of comparative values, then, and then only, would it be possible to treat labour otherwise than as a commodity (Wootton, 1920, p. 57).

Despite the promise of continued academic success, Wootton found that the cloistered atmosphere of Girton did not appeal to her, and she soon moved back to London as research worker in the joint research department of the Trades Union Congress and the Labour Party. When she returned to teaching in 1926, it was not to academia but as Principal of Morley College for Working Men and Women, again in London. Within two years she had become Director of Studies for Tutorial Classes in the Extra-mural Department of London University, where she stayed for the next seventeen years, organising and teaching classes for adult students in economics, politics and social studies. Inevitably Wootton published very little between her impressive debut in the Economic Journal and the Lament, eighteen years later. She did, however, write a long review of George Bernard Shaw’s Intelligent Woman’s Guide to Socialism and Capitalism, which she found too orthodox for her taste, especially on monetary policy, and very confused on “the nature and purpose of saving” (Wootton, 1929, p. 74). Its most serious defect, however, was Shaw’s “complete silence on the subject of how the workers of the socialist world are to be distributed among the various occupations which they are to pursue . . . Certainly, we must all work; but who is to do what work, and how much?” (ibid., p. 75). Wootton’s answer to this question came in 1934 in her first (non-fiction) book,3 Plan Or No Plan. Here she offered a critical comparison of capitalism and Soviet socialism, largely – but by no means entirely – to the advantage of the latter.4 At this stage in the evolution of her thinking Wootton was very heavily influenced by Lionel Robbins, whose famous definition of economics she cited with approval and whose defence of the principle of rational action she endorsed (Wootton, 1934, pp. 43n1, 53–54). This led her to assert the need, in any socialist economy, for some form of price mechanism. However, she denied that economic theory could provide a secure basis for making statements about the levels of social welfare associated with

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different allocations of productive resources. Here Robbins was hoist with his own petard. If interpersonal comparisons of utility were illegitimate, then it was indeed impossible to use the law of diminishing marginal utility to justify redistributing income from rich to poor. But this has much more radical implications. For the very reasons which make it impossible to tell that a given sum has the same significance in human experience of pleasure or pain to a rich man and a poor one also make it impossible to say that it has the same significance for any two people (ibid., p. 113; original stress).

And this is enough to destroy “the great claim that is made for the price economy,” which is “that it provides a means of measuring these apparently incommensurable pleasures and pains, and acts upon the result in accordance with the strict principle of economic efficiency” (ibid., p. 109). Although the price mechanism had become “the darling plaything of the economists” (ibid., p. 323), it was largely useless as a guide to resource allocation. “Nothing can get us past the difficulty that where one man works, and another uses the product of his work, it is absolutely impossible to say with certainty whether or not the product was really worth the making” (ibid., pp. 114–115; original stress). Thus, Wootton asserted what Max Corden later described as the “destructive version” of the “agnostic approach” to welfare economics (Corden, 1997, p. 73; cf. Graaf, 1957). Barbara Wootton, then, was no orthodox academic economist. Her impatience with contemporary economic theory was already apparent, and it reflected her professional experience and the intensely practical orientation of her thought. Forced to choose between rigour and relevance, she opted for the latter every time: relevance to the politicians and trade unionists at Transport House, to the adult students she taught at night school, and to the socialist transformation of Britain that, as an ardent Fabian, she believed to be imminent. This was evident in the “Preface” to her Lament, written four years after Plan Or No Plan, in which she acknowledged the influence of not one single economist: It would however be very ungracious not to mention how much I owe to a great and miscellaneous company of non-professional students. In social studies the men and women who think with their feet on the ground, and who continually refer the results of their own and others’ thought to the touchstone of experience in the workaday world, have a specially valuable contribution to make (Wootton, 1938, pp. 9–10).

She does refer gratefully to the “continual inspiration and encouragement” that she had received from the writings of the prolific writer on scientific topics, Lancelot Hogben (1895–1975),5 and also from H. G. Wells, neither of whom had any training in economics. It is significant, too, that Wootton spent almost her entire working life in London rather than Cambridge, and thus managed to avoid the vast intellectual shadow that was cast by Keynes.

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These biographical peculiarities had an important bearing on her critique of economic theory. Lament was not a book that could have been written, for example, by Joan Robinson, six years Wootton’s junior, who shared her politics but who took a radically different view of economics. There were serious problems with the discipline, Robinson acknowledged in her pamphlet, Economics Is A Serious Subject: The Apologia Of An Economist To The Mathematician, The Scientist And The Plain Man. In particular, its use of the circular and unmeasurable concept of utility was “a scandal” that “must be frankly admitted” (Robinson, 1932, p. 11). But economists had “built up a body of technique – imperfect, primitive, incomplete, only capable of giving unreal answers to unreal questions – but a body of technique of which we need none of us be ashamed. The time has come when the economists must stake their faith on their technique” (ibid., p. 5). Thus, the “optimistic analytical economist” must now “beg the practitioners of more advanced subjects to recognise that economics is still in its infancy, more because of the intractable nature of the subject than because of the low mental calibre of economists, and by ceasing from their gibes to allow him to cultivate a little self-respect” (ibid., p. 12). For Wootton, in contrast, the gibes were very largely justified.6

LAMENT FOR ECONOMICS “The indictment,” as Wootton entitles her opening chapter, contains five charges. Economics is of no use; it is unintelligible to all except a small number of specialists; economists are unable to agree; they ignore reality; and they serve as apologists for capitalism. In effect the first accusation encompasses the other four, since for Wootton economics is a policy science or it is nothing; she frequently draws analogies between economics and medicine (e.g. Wootton, 1938, pp. 26, 32, 69–70). Thus, the two concluding chapters assess the usefulness of economics in socialism and in a reformed capitalism. First, however, she discusses the relationship between economics and reality (in Chap. 2), its scientific pretensions (Chap. 3), and its tendency to apologetics (Chap. 4). The charges of unintelligibility and professional discord are left on the file. What, then, is the relation of economic theory to the actual economic world? The accusation is that economists “have spent too much time in minute examination of a form of society which does not exist outside the sphere of their own, rather quaint, imaginations,” that they “feed on their own tails by busying themselves with the analysis of imaginary worlds which they have themselves invented” (pp. 31, 35). Before the case for the defence can be considered, the discipline must be defined. Wootton conceives of economics, broadly speaking, as the study

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of market phenomena; this, she argues, is the common element in both Marshall and Robbins. On the assumption that people behave rationally in their economic lives, market phenomena do possess an “objectivity” comparable to that of the physical world. Why, in that case, is progress in economics so slow? She suggests three explanations, only one of which offers any comfort to the economists (and even then, not very much). She recognises, firstly, that the economic world is a very complex place, economic situations tend to be unique, and the task faced by the economist is therefore unusually arduous: The result of these difficulties seems to be that while economic theory has succeeded in producing a few very broad generalizations about market conditions which are generally accepted even by the critical public, the attempt to refine and elaborate these has been relatively barren of practical fruitfulness. That things are cheap when they are plentiful, that the prices of articles jointly demanded tend to move sympathetically with one another, that the price of either of two articles jointly supplied tends to move inversely with the demand for the other such article, that higher returns to any factor of production tend to call out increased supplies of that factor (subject in this case to even more than the usual number of exceptions and modifications) – these are some of the typical propositions in which basic market processes are analysed. Carefully stated, they are not often disputed by either economists or by others, and they are not unhelpful, But they do not take us very far (p. 77).

As if their task was not difficult enough, the economists have made things unnecessarily difficult for themselves. In particular, they have shown an inexplicable reluctance to use quantitative methods. But “all practical economic issues are quantitative, and a purely qualitative analysis will never be more than the crudest of instruments for dealing with them” (p. 78). The second reason why economics seems to be so “sterile and unreal” (p. 68) is its reliance on the existence of competitive markets. Under monopoly, however, the economists’ apparatus breaks down. Here Wootton cites Edgeworth’s famous aphorism about the indeterminacy of contract without competition (p. 84). Though she is familiar with the recently-published Chamberlin-Robinson models of monopolistic and imperfect competition, she sees little of value in them. Monopoly is continuously increasing at the expense of competition, she maintains, and the growing importance of administered prices (and quantities) is constantly restricting the range of applicability of competitive economic theory. The expanding economic role of the state serves to reinforce these criticisms, since conventional economic theory has little or nothing to say about the activities of the government and its agencies (pp. 86–90). Third, the existence of scarcity is a fundamental precondition for economic theory to apply. Involuntary unemployment, however, “undermines the whole assumption of scarcity” (p. 96), as Keynes – among many others – has demonstrated. The difficulty is clearly exposed in business cycle models such as that of Hayek’s

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Prices and Production, where scarcity inevitably converts itself into non-scarcity as boom gives way to bust, and vice versa. This opens up an “alarming rift in the foundations of our traditional modes of thought” (p. 106), since “economists are not agreed as to why, or when, or how, scarcity passes into no-scarcity, nor can they offer any practical key towards determining either the limits within which the scarcity assumption is appropriate to any given concrete situation, or any general set of rules to be substituted for the traditional scarcity-analysis in the field in which this is inoperative” (p. 107). This posed something of a dilemma. Economists are either “tool makers” or “tool users”; here Wootton cites Joan Robinson (1933, pp. 1–2), herself borrowing from Pigou. Faced with the inapplicability to reality of their existing tools, they could either be concentrating on perfecting their tools even further, or they could pay more attention to the task at hand and to the appropriateness of the tools they already possess. Wootton of course favours the second conclusion, but she does not expect it to achieve very much (p. 100). Where does this leave the economists’ claim to be practising a science? Wootton answers this question in her third chapter, maliciously entitled “The Nature and Insignificance of Economic Science.” The gulf between theory and observation in economics is vast, distinguishing it from all other self-proclaimed sciences and ruling out the possibility of controlled experiment. This alone is enough to destroy any pretension that economics is a science. Further evidence comes from the economists’ inability to make predictions. “Ultimately,” she suggests, “public respect for scientific work is based upon the scientist’s ability to produce reliable predictions on matters within the plain man’s experience,” so that telephones, aeroplanes, anaesthetics, radios and refrigerators behave as they are expected to behave. “We believe in this kind of science for the simple and satisfying reason that it works” (pp. 116–117). But economics does not work. “The reader,” Wootton asserts, “would search far and wide through the works of analytical economists before he came upon a single prediction endorsed by the weight of authoritative opinion of the course of events to be anticipated in any concrete historical situation” (p. 118). To some extent, Wootton concedes, these problems are shared by all students of human behaviour, and threaten the scientific status also of politics, psychology and sociology. But economics is by far the worst offender, partly because of the excessive reliance of economists on “umbilical contemplation” (p. 130) and partly since its scope is restricted to competitive market processes in capitalist economies. As the market is increasingly replaced by “conscious authoritarian manipulation” of prices and quantities (p. 129), the subject matter of the discipline continues to contract. Thus, “the science of economics is destined only to a very brief flowering” (p. 129). Wootton’s somewhat heavy irony is very evident here.

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Cambridge economists might have responded, at this point, that her criticisms were valid against economics as professed at the LSE but were not relevant to the more practical and policy-oriented work of Marshall, Pigou and Keynes. Her principal targets were indeed Lionel Robbins and Friedrich von Hayek, the former as author of the leading contemporary text on economic methodology and the latter as a strong critic of socialism (and proponent of a rationalist, a priorist and radically subjectivist version of Austrian economics). These targets were set up for Wootton by her Fabian colleague Evan Durbin, who worked for Robbins and Hayek at the LSE and combined a firm belief in democratic market socialism with distinctly Austrian views on macroeconomics. Wootton was a leading member of the “Durbin circle,” which brought together many socialist intellectuals throughout the 1930s (Durbin, 1987). Had she remained in Cambridge her critique of economics might have been quite different. There was, however, no personal antagonism in her relations with the LSE professors. She shared Robbins’s commitment to liberal internationalism7 , and Hayek always remembered her fondly – at least by comparison with his American critics (Kresge & Wenar, 1994, p. 102). Wootton’s views on methodology show rather more of a Cambridge influence. Her philosophy of science is doggedly empiricist, though nowhere in Lament For Economics is it very carefully defined. The only philosophical source that she cites is a popular article by Bertrand Russell, devoted to an attack on metaphysics that he illustrated with satirical pen-portraits of Descartes, Leibnitz, Kant, Hegel and Marx. All these thinkers, Russell argues, were misled by the . . . belief that important truths can be discovered by merely thinking, without the aid of observation. This belief is true in pure mathematics, which has inspired many of the great philosophers. It is true in mathematics because that study is essentially verbal; it is not true elsewhere, because thought alone cannot establish any non-verbal fact (Russell, 1937, p. 154).

Wootton cites a large part of this passage (1938, p. 118). Her obituarist, the criminologist Terence Morris, describes her as “in her personal philosophy faute de mieux a Positivist in lineal descent from Comte, Mill and Spencer” (Morris, 1989, p. 312), and in all probability this reflected a lifelong approach to her work. Twelve years after the publication of Lament, Wootton wrote a treatise on the methodology of the social sciences, with the rather curious title, Testament For Social Science. This rather optimistic book is in no sense a death notice. On the contrary, it holds out a bright prospect for an empirically-focussed sociology. “The stages of the scientific process are now generally familiar,” she wrote. “There is first the accurate observation of data; then the formulation of an hypothesis; and finally the promotion of the hypothesis by empirical verification to the status of a law” (Wootton, 1950, p. 6). Significantly, the first source that Wootton cites

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is a text on scientific method by the biochemist A. D. Ritchie, who begins by acknowledging his debt to Moore, Russell, Whitehead and Broad, along with J. M. Keynes’s Treatise on Probability (Ritchie, 1923, p. v). There is a danger of anachronism here, in reading back Wootton’s later philosophical opinions into the Lament. But she most likely read Ritchie’s book soon after its publication in 1923, and his broad intellectual orientation is entirely consistent with her own. Having found the charge of unreality proven, Wootton turns to the question of apologetics. On this issue her argument is quite subtle, and owes nothing to Marxian conceptions of ideology.8 She acknowledges the “principle of economy” as something that must be accepted by all reasonable people (pp. 132–135), and endorses the validity of the distinction between “is” and “ought” propositions. The economists also recognise the need to distinguish positive from normative statements. The trouble is that they themselves do not consistently do so, all too often falling into the trap of conflating the (positive) properties of competitive market equilibrium with the (normative) qualities of a social optimum. This error, Wootton argues, is blatant in the work of such critics of socialism as von Mises, Hayek and Robbins, but similar prejudices creep into the work even of such a cautious economist as Alfred Marshall. Perhaps normative significance can after all be attributed to the market process? This, Wootton concedes, is a crucial question for the economist as potential policy adviser. She is at pains to deny it, discussing at some length the “paradoxes” (p. 170) or “startling consequences” (p. 181) that would arise. (These are analysed in the Appendix). Her conclusion is that . . . the identification of market equilibrium with economic optimum is only made subject to far-reaching reservations; but . . . there is no agreement amongst economists as to just what these reservations should be, and . . . the processes of the market offer such a beautiful image of perpetual movement towards an apparent optimum, that there is real danger of those reservations being forgotten in practice, and the illusory passing itself off as the substantial optimum (p. 181).

Thus, there is some considerable truth in the charge of apologetics.

THE ECONOMICS OF CAPITALISM AND SOCIALISM In the final two chapters Wootton returns to the first and most serious of her complaints, that economics is no use. She devotes much of Chap. 5 to an assessment of its relevance to the reform of capitalism and the early parts of Chap. 6 to an appraisal of its usefulness in a socialist society, ending the book with a long discussion of the future of the discipline as a whole. The first of these tasks involves a critique of contemporary welfare economics (Wootton has almost nothing to say

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about Keynes’s new macroeconomics). She repeats her 1934 objections and adds a number of others, several of them very interesting but not presented in a very systematic way. The modern market offers the consumer too much choice, she argues, because of excessive product differentiation (pp. 88–89). Preferences may well be interdependent, which means that it would be impossible to derive a social welfare function simply by aggregating the preferences of individuals (p. 196). Moreover, some objects of individual choice may not be marketable commodities: the “communal pattern of living,” for example’, or a taste for “equality as such” (pp. 196–197). Lifestyle choices simply cannot be modelled in terms of standard microeconomic theory (cf. Edwards, 2002). For Wootton this does “not mean that market decisions are completely meaningless and ought in all circumstances to be disregarded entirely. Market demand is a guide of a sort, sometimes more, sometimes less, reliable – more, I think, in a socialized economy, than in one where capital is privately owned. It is just not anywhere infallible, that is all” (pp. 242–243; original stress). The role of orthodox economics under socialism was a hotly-disputed topic in the 1930s, for obvious reasons. At one extreme, individualists such as Ludwig von Mises denied that any rational economic decisions could be made in the absence of private property; at the other, market socialists claimed that Walrasian general equilibrium theory made much less sense in a capitalist context than under socialism, where free competition could be simulated and its benefits enjoyed without any of the potential drawbacks. As H. D. Dickinson had put it, five years earlier: “The beautiful systems of economic equilibrium described by B¨ohm-Bawerk, Wieser, Marshall and Cassel are not decriptions of society as it is but prophetic visions of a socialist economy of the future” (Dickinson, 1933, p. 247; cf. Sweezy, 1936 [1967]). Wootton shows some familiarity with the literature, citing (in addition to Dickinson) Barone, Dobb, Hayek, Lange, Lerner, Mises and Robbins. As a committed Fabian and firm advocate of economic planning, she is highly critical of both sides, as can be inferred from the title of Chap. 5: “Economic Individualism, Old and New Style.” For one thing, the positive/normative dichotomy could never be accepted; the socialist economist of the future would inevitably find himself “trespassing into the sphere of ends” (p. 255). All the criticisms of welfare economics that applied under capitalism would extend, perhaps with even greater force, to socialism: . . . the economist who is interested in social betterment would feel something of the same itch as he does now to scrutinize and criticize the validity of market norms in the light of external standards. In so far as the optima of the socialized markets could put up a better showing than that of the markets that we know, the itch might be less violent than it is to-day. But unless and until we reach a stage in which we are agreed that production of every kind of commodity or service should be regulated on strictly commercial principles, the itch would still be there (p. 256).

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Quite apart from these problems, Wootton suggests that the role of the economist in socialism would be short-lived: Indeed it may well be possible before long to reduce the theoretically possible changes in socialized markets to a comparatively small number of standard formulae [there is a footnote reference to Barone]. While these formulae are being arrived at, the analytical economist will no doubt be an extremely busy and important person, and his services will be in great demand at the Ministry of Socialized Production. But once this initial stage is passed, what kind of future is in store for him? (p. 258).

At most, there might be a continued demand for the services of the economist as tool-user; the theoreticians, or tool-makers, are “running a grave risk of finding themselves out of a job in our socialist society” (p. 261). Thus, Wootton concludes that bourgeois economics has very little to offer socialism (cf. Dobb, 1933, 1939 [1955]). What, then, should someone with an interest in social progress be concerned with? Wootton makes five “tentative suggestions”: . . . namely: (1) realistic applications of existing economic analysis within the imperfect market economy of contemporary experience; (2) studies of existing social situations and trends; (3) enquiries into the nature of social ends in modern communities, and the means of formulating these; (4) research into the technical problems connected with the satisfaction of social ends; and (5) attempted formulation of plans for social betterment (pp. 267–268).

But this is cold comfort. “Unhappily for the contemporary economist many of the researches indicated call for a type of training and equipment quite different from that with which he is ordinarily provided” (p. 268). Only the first of her proposed tasks is obviously within the economist’s remit. The second requires an empirical sociology, concentrating on survey research, while in the third “we are now blandly disregarding all the recognized boundaries of academic subjects” (p. 282). Wootton’s fourth suggestion involves “the human aspects of production,” where “industrial and vocational psychologists” have most to contribute (pp. 296–297), while the fifth points towards the study of “what is sometimes called administrative technique” (p. 300). Thus, Wootton concludes, “the domain of the economist has been pretty effectively partitioned among the various groups of technicians,” so that “the outlook for his future is in the highest degree dismal” (p. 301). The best that can be expected is for the term “economist” to be redefined as “student of social welfare,” dedicated to the reduction of privilege and the pursuit of social equality. This, she observes. “is more or less equivalent to saying that the instinct of those who coined the term ‘political economy’ was a sound one: that of those who scrapped this in favour of ‘economics’ or ‘economic science’ much less healthy” (pp. 306–307). Returning to the roots of the discipline might allow something to be made of economics

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after all. But there are allusions throughout the book to economists as “dinosaurs” (p. 67), their subject as “a passing historical phenomenon” (p. 129), the signing of its death warrant (p. 265) and its use of “ghostly theoretical terms” (p. 268). All in all, Wootton writes, “I am unable to hold out any great hopes for the future” (p. 302).

THE AFTERMATH The book was widely reviewed in the popular press, with an enthusiasm that distressed one academic critic: “Almost without exception the reviewer, when he was not himself an economist, treated it as an effective and indeed final expos´e of economics. Papers on the extreme left and the extreme right were particularly enthusiastic” (Fraser, 1938, p. 208n1). Academic reviewers in the United States appear also to have enjoyed reading it. The American Economic Review noted the unsystematic nature of Wootton’s reply to Hayek and von Mises, her frequent use of the first person, and the “spirited, gossipy, half serious, half amused manner” of her attack (McCreary, 1938, p. 768). The Southern Economic Journal’s reviewer seems to have read a different book, since he managed to commend Wootton, inter alia, for her “humility” (Evans, 1939, p. 557). Serious criticism came only from the United Kingdom. Writing in Economica, the New Zealander J. B. Condliffe complained that Wootton was “in fact attacking a bogey largely of her own imagination.” She was evidently unaware that many economists were indeed working on the real-world problems that she claimed to be so badly neglected. Moreover, they invariably found that economic theory was indispensable in formulating policy proposals (Condliffe, 1938, p. 238). A similar objection was made by L. M. Fraser in the substantial review article that Austin Robinson published in the Economic Journal. Wootton had relied excessively on the work of Lionel Robbins, who was not typical of contemporary economists and in any case did not hold “that value theory represented the whole of economic studies” (Fraser, 1938, p. 200; original stress). She had ignored the progress that was being made in public finance, international trade and monetary questions, often with the help of the very equilibrium analysis that she disparaged. Value theory was relevant, Fraser argued, even – perhaps especially – in the economic analysis of socialism: For how can we decide rationally between the two kinds of socialism [“planned” and “market”] if we do not have information as to whether, and if so how well, a pricing system would work in a socialist state? And how shall we obtain this information without the assistance of pure equilibrium analysis? (ibid., p. 205).

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For Fraser, Wootton had succumbed to “emotion and prejudice” (ibid., p. 207). Unfortunately, “her book will merely go to strengthen the conviction, already widely enough held among the general public, that current economic policies can best be settled by intuition and rule of thumb, undistracted by tedious preliminary investigation and research” (ibid., p. 208). There is no evidence that Lament made any impression on the academic literature of economics. Unlike Robbins’s Nature and Significance, which went into several editions, Wootton’s book was never reprinted. It does not feature in any of the standard histories of economic thought (for example, those by Mark Blaug, Joseph Schumpeter or Henry Spiegel), nor is it discussed in more recent texts on economic methodology (for instance by Roger Backhouse, Homa Katouzian or John Pheby). The only substantial analysis of Lament that I have been able to find is that by David Whynes (1986). As was seemly in a contribution to a Festschrift, Whynes showed considerable sympathy for Wootton’s critique of economics as it was in 1938, but he denied its relevance half a century on. While the theoretical core of the discipline had proved to be more vulnerable than she had supposed, its usefulness had been greatly increased by the improvement of econometric techniques, the development of the new branch of “non-market economics” and the emergence of social choice theory. “At present, therefore,” Whynes concluded, “economists have cause to feel optimistic about their studies. Uncertainty being endemic, however, it is difficult to see where the future of economic theory lies. Should ossification again threaten we must hope that a future Barbara Wootton will appear to chastise us” (Whynes, 1986, p. 72). Much greater success was enjoyed by another critical work by an English author, published in the same year as Lament. This was Terence Hutchison’s Significance And Basic Postulates Of Economic Theory, which was still regarded as essential reading for Cambridge students in the mid-1950s (Schneider, 2002) and was reprinted twice in the following decade in A. M. Kelley’s “economic classics” series. The substance of Hutchison’s attack on contemporary economics was in some respects similar to Wootton’s, and like her he pulled no punches. The difference between science and philosophy, he argued, was twofold: science was capable of progress, and its propositions were potentially testable. What distinguished science from pseudo-science, then, was its continual appeal to the facts. Scientific laws – and here Hutchison cites the physicist Ernst Mach – impose limits on what is possible. “By apparently all other scientists apart from logicians, mathematicians, and many economists, scientific laws are regarded as inductive, inferences conceivably falsifiable, though not practically falsified, empirically” (Hutchison, 1938 [1965], p. 62; original stress). On this criterion “the emptiness of economic laws . . . emerges very clearly,” since most of them are not even potentially capable of falsification (ibid., p. 61). Hutchison concludes

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that the term “law” should be reserved for empirical generalisations like the law of diminishing returns. This, he notes, “is something more than the mere suggestion of a terminological change. It implies a fundamental alteration in the quaesita and methods of Economics” (ibid., p. 64). Economists should pay much more attention to empirical research, and in particular to the formulation of falsifiable predictions. Much less respect should be paid to the theoretician’s “fascinating display of mathematical or geometrical ingenuity” (ibid., p. 120). Hutchison’s, however, was a much more philosophically informed critique of economic theory than that of Wootton. He drew heavily on the then fashionable Logical Positivism of the Vienna circle and its leading British advocate, A. J. Ayer. Wootton’s Lament was much less ambitious, with roots in nineteenth century British empiricism that never penetrated very far below the surface. Her common-sense approach to the appraisal of economic theory closely resembles the contemporary writings of the U.S. institutionalists (Rutherford, 1994; Yonay, 1998, Chap. 7), not that she refers to them. It could also have been supported, had she chosen to do so, by judicious reference to the ideas of the later Wittgenstein, an important influence on Keynes and Sraffa (Coates, 1996). But Wootton had absolutely no interest in anything so abstruse. The down-to-earth, matter-of-fact approach that she took in Lament was both a strength and a source of considerable weakness. A more sophisticated and philosophically aware treatise might have attracted the attention of academic economists, but it would also have repelled the educated general reader to whom the book was principally addressed. In the event, Lament fell between the two stools: her message was too complicated for a lay audience but too simple to appeal to the profession. Quite apart from the deficiencies in her presentation and argument, Wootton’s timing was appalling. Within eighteen months of publication the Second World War had begun, demonstrating very clearly the practical relevance of economic theory for questions of war finance and postwar reconstruction – not so much the microeconomics that she had attacked, but the new macroeconomics that she had very largely ignored. Wootton herself played a minor role in propagating Keynesian economics in Britain, both through her writings (Wootton, 1940, 1943a, b), and as a member of William Beveridge’s “technical committee” on the economics of full employment, where she worked alongside Nicholas Kaldor, Joan Robinson and Fritz Schumacher. ‘The economists on this committee were all to the “left” of Beveridge in their political views’, his biographer notes, “but nevertheless it seems to have been their influence that converted him to a Keynesian conception of unemployment and to the advocacy of full employment policies based not so much on state-ownership as on state regulation of demand” (Harris, 1977, p. 435). Wootton herself remained fully committed to socialism, despite “the astonishing revolution which has taken place in reputable economic

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thought” since the publication of Keynes’s General Theory (Wootton, 1943b, p. 358).9 At the end of the war she published a critique of Hayek’s Road to Serfdom, defending the compatibility of economic planning and political freedom (Wootton, 1945). Unlike Hayek’s most prominent U.S. critic, Herman Finer (1945), Wootton made substantial concessions to the liberal critics of socialism, leading one reviewer to conclude that her book “seems substantially to confirm Hayek’s thesis” (Barnard, 1946, p. 290; cf. Jewkes, 1946, p. 89). By now Wootton had begun to think that I had spent enough years in the highways and byways of extra-mural education and that I should like to find an internal University post. The likely field was, however, very restricted; for I did not want to leave London and I did not want – nor was I indeed any longer competent – to teach purely academic economics. Only a job with strong contacts with practical social problems would do (Wootton, 1967, p. 99).

In 1944 she became Reader (later Professor) and Head of the Sociology department at Bedford College, London, where she was responsible for training social workers. She found abstract sociological theory as little to her taste as economic theory had been. Instead she championed an “empirical approach to social questions” that reflected both her longtime personal experience as a lay magistrate and her commitment to detailed factual research (ibid., p. 212). More than usually vicious academic infighting, together with her growing aversion to administration, led Wootton to renounce her chair in 1952 and to take up a Nuffield Research Fellowship, which allowed her to work full-time on criminology and related subjects. She retired from University life in 1957, becoming a life peeress in the following year and spending much of the final three decades of her life as a Labour representative in the House of Lords. When Wootton died, on 11 July 1988, in her ninety-second year, she was remembered as a sociologist rather than as an economist. Thus, her obituary appeared in the British Journal of Sociology, not the Economic Journal (Morris, 1989). Of the 15 articles contributed to her Festschrift, only one was on her economics, the previously cited paper by Whynes (1986). Three of the four volumes of her collected works were devoted to her writings on crime, the penal system, social welfare and social and political thought, and only one to economics. But she never really ceased to be an economist, although by the 1950s her interest was confined to the labour market, conditioned by her work as an arbitrator and concentrated on her belief in the need for an incomes policy to reconcile full employment with price stability (Wootton, 1974a, b, 1992, Vol. 4, Chaps 2–11). Much earlier she had published the masterly Social Foundations of Wages Policy, interpreting wage differentials as a product of social and ethical attitudes in which “the harsh demands of economic necessity” played only a subordinate role

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(Wootton, 1955; this phrase comes from the dust-jacket). Again Wootton’s timing was poor, her book appearing just as the Chicago school was beginning to take over labour economics with a rigidly neoclassical methodology wholly incompatible with the informal, discursive, historically informed institutionalism that guided her approach to the labour market. Only quite recently, with the growing recognition by mainstream economists that the labour market is indeed a social institution (Solow, 1990), has there been any prospect that Social Foundations might be due for a sympathetic reappraisal. Can the same be said for Wootton’s Lament? The quality of her analysis is rather uneven, and some of her arguments carry little conviction today or have simply been overtaken by events. But her insistence that economics is a policy science or it is nothing retains its validity, as does her deep suspicion of formalism and her rejection of introspection as the principal basis for theory construction. She was not the only economist of her generation to abandon the discipline in mid-career, despairing of its ability to be used to improve the human condition.10 More recently, parallels have been drawn between the state of economics and the developmental condition known as autism, which tends to isolate people from the world and make it difficult for them to do anything but to live inside their own heads (Devine, 2002). I suspect that Barbara Wootton would have been quick to accept the metaphor. Wootton, it will be recalled, proudly acknowledged the contribution that her students had made to the evolution of her thought. She would have been fascinated by the “open letter” of the French graduate students, “to professors and others responsible for the teaching of this discipline,” denouncing the economics that they were being taught, sixty-two years after the publication of her Lament: We . . . declare ourselves to be generally dissatisfied with the teaching that we receive . . . We wish to escape from imaginary worlds! Most of us have chosen to study economics so as to acquire a deep understanding of the economic phenomena with which the citizens of today are confronted. But the teaching that is offered, that is to say for the most part neoclassical theory or approaches derived from it, does not generally answer this expectation. Indeed, even when the theory legitimately detaches itself from contingencies in the first instance, it rarely carries out the necessary return to the facts. The empirical side (historical facts, functioning of institutions, study of the behaviors and strategies of the agents . . .) is almost non-existent. Furthermore, this gap in the teaching, this disregard for concrete realities, poses an enormous problem for those who would like to render themselves useful to economic and social actors . . . In real sciences, explanation is focused on actual phenomena. The validity and relevancy of a theory can only be assessed through a confrontation with “facts.” This is why we, along with many students, deplore the development of a pedagogy in economics privileging the presentation of theories and the building and manipulation of models without considering their empirical relevance. This pedagogy highlights the formal properties of model construction, while largely ignoring the relations of models, if any, to economic realities. This is scientism.

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Under a scientific approach, on the other hand, the first interest is to demonstrate the informative power and efficiency of an abstraction vis a` vis sets of empirical phenomena. This should be the primary task of the economist . . . No matter how rigorous from a formalistic point of view or tight its statistical fit, any “economic law” or theorem needs always to be assessed for its relevancy and validity regarding the context and type of situation to which it is applied. One also needs to take into account the institutions, history, environmental and geopolitical realities, strategies of actors and groups, the sociological dimensions including gender relations, as well as more epistemological matters. However, these dimensions of economics are cruelly missing in the training of our students (Open Letter, 2002; electronic).

Barbara Wootton would have agreed with every word of this statement, and she would have deeply regretted the truth of the final sentence.

NOTES 1. For recent examples see Ormerod (1994), Keen (2001) and Edwards (2002); from a previous generation, see Brown (1972), Leontief (1971), Ward (1972) and Worswick (1972). 2. Details of Wootton’s life are provided in her autobiography (Wootton, 1967), the biographical sketches by Caldicott (1984), Clywd (1984) and McGregor (1986), and in the obituary by Morris (1989). 3. A book of short stories, Twos and Threes, appeared in 1933, followed by a novel, London’s Burning, in 1936, but fiction was not her forte. 4. Thus, she was criticised by a liberal reviewer for minimising the inevitable inefficiencies of Soviet planning (Halm, 1934) and by a Technocrat for exaggerating them (Florence, 1934). See Smith (1979, Part 1) and Thompson (1996, pp. 107–111, 122–123, 166) for more recent, and more balanced, assessments. 5. Hogben was an academic biologist, a prominent opponent of eugenics and Professor of Social Biology at the London School of Economics in the 1930s (Hogben & Hogben, 1998). His Conway Memeorial Lecture, The Retreat From Reason, seems to have been influential in academic circles (Hogben, 1936; cf. Dickinson, 1939, p. 25). 6. By the time of her death, in 1983, Robinson was herself deeply disillusioned (Millmow, 2003). 7. In April 1940 she accompanied him on a trip to Paris for an international conference of the Federal Union (Harris, 1977, p. 367; cf. Wootton, 1967, pp. 97–99). 8. In fact she was a strong opponent of Marxism, attacking it in Testament For Social Science as “a blind alley,” a “pseudo-scientific system” as far removed from a true science of society as were the “muddled biological analogies” associated with Herbert Spencer, Oswald Spengler and Arnold Toynbee (Wootton, 1950, p. 72). 9. Unless full employment prevailed, she noted tartly, “everything is turned upside down. Waste becomes a social duty because it makes work.” This was “crazy economics,” for a crazy (capitalist) economy (Wootton, 1943a, p. 359). 10. E. F. Schumacher took a similar decision, somewhat later than Wootton (King, 1988, Chap. 10).

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ACKNOWLEDGMENTS I am grateful for the helpful comments of Warren Samuels, and of participants in a seminar at the University of Newcastle, New South Wales, in March 2002; the Fifteenth Conference of the History of Economic Thought Society of Australia, Armidale, New South Wales, July 2002; and the Conference on the History of Heterodox Economics in the Twentieth Century at the University of MissouriKansas City, October 2002.

REFERENCES Barnard, C. (1946). Review of Wootton (1945). Southern Economic Journal, 12(3), 290–300. Becker, G. S. (1968). Crime and punishment: An economic approach. Journal of Political Economy, 76(2), 169–217. Brown, E. H. P. (1972). The underdevelopment of economics. Economic Journal, 82(325), 1–10. Caldicott, L. (1984). Women of our century. London: Ariel Books/British Broadcasting Corporation. Clywd, A. (1984). Women of our century IV: Barbara Wootton. A champion of the impossible. Listener, 112(2868), 10–12. Coates, J. (1996). The claims of common sense: Moore, Wittgenstein, Keynes and the social sciences. Cambridge: Cambridge University Press. Condliffe, J. B. (1938). Review of Wootton (1938). Economica n.s., 5(18), 238–239. Corden, W. M. (1997). Trade policy and economic welfare (2nd ed.). Oxford: Clarendon Press. Devine, J. (2002). Psychological autism, institutional autism and economics. Post-Autistic Economics Review, 16 (18 October), 5–11. http://www.btinternet.com/∼pae news/review/issue16.htm (21 October). Dickinson, H. D. (1933). Price formation in a socialist community. Economic Journal, 43(170), 237–250. Dickinson, H. D. (1939). Economics of socialism. London: Oxford University Press. Dobb, M. H. (1933). Economic theory and the problems of a socialist economy. Economic Journal, 43(172), 588–598. Dobb, M. H. (1939) [1955]. Economists and the economics of socialism. In: M. H. Dobb (Ed.), On Economic Theory and Socialism (pp. 239–246). London: Allen & Unwin. Durbin, E. (1987). New Jerusalems: The Labour Party and the economics of democratic socialism. London: Routledge and Kegan Paul. Edwards, L. (2002). How to argue with an economist: Reopening political debate in Australia. Cambridge: Cambridge University Press. Evans, J. G. (1939). Review of Wootton (1938). Southern Economic Journal, 5(4), 556–557. Finer, H. (1945). Road to reaction. Boston: Little, Brown. Florence, P. S. (1934). Review of Wootton (1934). Economic Journal, 44(175), 470–472. Fraser, L. M. (1938). Economists and their critics. Economic Journal, 48(190), 196–210. Graaf, J. de V. (1957). Theoretical welfare economics. Cambridge: Cambridge University Press. Halm, G. (1934). Review of Wootton (1934). Economica n.s., 4(November), 488–491. Harris, J. (1997). William Beveridge: A biography. Oxford: Clarendon Press.

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Hogben, A., & Hogben, A. (1998). Lancelot Hogben, scientific humanist: An unauthorised biography. Woodbridge, Suffolk: Merlin Press. Hogben, L. (1936). The retreat from reason. London: Watts. Hutchison, T. W. (1938) [1965]. The significance and basic postulates of economic theory. New York: Kelley. Jewkes, J. (1946). Review of Wootton (1945). Manchester School, 14(1), 89–104. Keen, S. (2001). Debunking economics: The naked emperor of the social sciences. Sydney: Pluto. Kresge, S., & Wenar, L. (1994). Hayek on Hayek: An autobiographical dialogue. London: Routledge. Leontief, W. W. (1971). Theoretical assumptions and non-observed facts. American Economic Review, 61(1), 1–7. McCreary, J. (1938). Review of Wootton (1938). American Economic Review, 28(4), 767–768. McGregor (1986). Champion of the impossible. In: Bean & Whynes (1986) (pp. 1–16). Millmow, A. (2003). Joan Robinson’s disillusion with economics. Review of Political Economy, 15(4), 561–574. Morris, T. (1989). In memoriam: Barbara Wootton 1897–1988. British Journal of Sociology, 40(2), 310–318. Open Letter from Economics Students to Professors and Others Responsible for the Teaching of This Discipline, Post-Autistic Economics Newsletter, 2 (3 October 2000) http://www.btinternet.com/ ∼pae news/issue2.htm (13 September 2001). Ormerod, P. (1994). The death of economics. London: Faber. Ritchie, A. D. (1923). Scientific method: An inquiry into the character and validity of natural laws. London: Kegan Paul, Trench, Truebner. Robinson, J. (1932). Economics is a serious subject: The apologia of an economist to the mathematician, the scientist and the plain man. Cambridge: W. Heffer & Sons. Robinson, J. (1933). The economics of imperfect competition. London: Macmillan. Russell, B. (1937). Philosophy: Its ulterior motives. Atlantic Monthly (February), 149–155. Rutherford, M. (1994). Institutions in economics: The old and new institutionalism. Cambridge: Cambridge University Press. Schneider, M. P. (2002). Personal communication (13 March). Smith, T. (1979). The politics of the corporate economy. Oxford: Martin Robertson. Solow, R. M. (1990). The labor market as a social institution. Cambridge, MA: Blackwell. Sweezy, A. (1936) [1967]. The economist in a socialist economy. In: Explorations in Economics: Notes and Essays in Honor of F. W. Taussig (pp. 422–433). New York: Kelley. Thompson, N. (1996). Political economy and the Labour Party: The economics of democratic socialism, 1884–1995. London: UCL Press. Ward, B. (1972). What’s wrong with economics? New York: Basic Books. Whynes, D. (1986). Is economics still lamentable? In: Bean & Whynes (1986) (pp. 57–73). Wootton, B. (1920). Classical principles and modern views of labour. Economic Journal, 30(117), 46–60. Wootton, B. (1929). Shavian economics [Review of G. B. Shaw, The intelligent woman’s guide to socialism and capitalism]. Economic Journal, 39(153), 71–77. Wootton, B. (1934). Plan or no plan. London: Gollancz. Wootton, B. (1935). The necessity of planning. In: G. Hutton (Ed.), The Burden of Plenty? (pp. 92–102). London: Allen & Unwin. Wootton, B. (1938). Lament for economics. London: Allen & Unwin. Reprinted, New York: Routledge, 2003.

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Wootton, B. (1940). Who shall pay for the war? Political Quarterly, 11, 143–154. Wootton, B. (1943a). Full employment. Fabian Research Series No. 74. London: Fabian Society/ Gollancz. Wootton, B. (1943b). Before and after Beveridge. Political Quarterly, 14, 357–363. Wootton, B. (1945). Freedom under planning. London: Allen & Unwin. Wootton, B. (1950). Testament for social science: An essay in the application of scientific method to human problems. London: Allen & Unwin. Wootton, B. (1955). Social foundations of wages policy. London: Allen & Unwin. Wootton, B. (1959). Social science and social pathology. London: Allen & Unwin. Wootton, B. (1967). In a world I never made. London: Allen & Unwin. Wootton, B. (1974a). Incomes policy: An inquest and a proposal. London: Davis-Poynter. Wootton, B. (1974b). Fair pay, relativities and a policy for incomes. Southampton: University of Southampton Press. Wootton, B. (1992). Barbara Wootton: Selected writings. V. G. Seal & P. Bean (Eds), 4 vols. London: Macmillan. Worswick, G. D. N. (1972). Is progress in economics possible? Economic Journal, 82(325), 73–86. Yonay, Y. P. (1998). The struggle over the soul of economics: Institutionalist and neoclassical economics in America between the wars. Princeton: Princeton University Press.

APPENDIX: THE PARADOXES OF MARKET ECONOMICS On pages 168–179 of Lament, Wootton sets out five “startling results” that appear to her to be entailed by a “whole-hearted endorsement of the normative significance of the market” (her stress has been removed throughout): (1) “Those who engage in such activities as the burning of wheat or coffee, or who throw back a catch of fish into the sea, must not be said to be responsible for destruction of wealth.” Wealth is not a material substance but an intangible property deriving from a commodity’s ability to give satisfaction, and this ability can only be established in the market. Thus, unsaleable fish do not constitute wealth. “The fish have been black-balled by Professor von Mises’s ‘ballot of the market-place.’ Conversely, the so-called paradox of poverty in plenty” is an illusion (see Wootton, 1935). [Comment: the argument would have been strengthened by some reference to plural voting, a point already made, very forcibly, by Maurice Dobb (1933, pp. 591–592)]. (2) “The provision of an income for persons who are unemployed diminishes the total satisfaction-giving power of our resources.” Taxing employed people to support the unemployed diverts resources from areas where they do give satisfaction (that is, consumer goods freely chosen by the taxpayers) to areas in which they give the taxpayers none at all. Since no-one is willing to pay for

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the labour of the unemployed, they, like the fish, should be thrown overboard. [Comment: this is a rather crude approach to the ethics of income redistribution]. (3) “In a social group the decisions which are consciously and deliberately taken are the decisions which are most certain to be wrong.” If the “market norm” is accepted, it follows that “nobody should stand outside the matter and view the situation as a whole, and that no collective decision should be taken in the light of any considered evaluation of the public interest; but that the collective result should be left to emerge as the objectively determined by-product of innumerable individual decisions, from which all social considerations are, by definition, excluded.” “This,” Wootton comments, “is a pretty severe commentary upon man’s ability to apply his intelligence to the problems of social living.” [Comment: this is the age-old complaint of socialism against individualism]. (4) “If the market norm is reliable in the field in which it now operates, there is no reason to suppose that it would not be equally reliable in spheres such as the provision of fire-brigades, health services or education, from which it has in practice been ousted, in favour of some method of conscious collective decision . . . [thus] defence of the market norm ought to be accompanied by much more vigorous attacks than are usually made upon those existing public services that are operated on non-commercial principles.” [Comment: if only she had known!]. (5) “Strict adherence to the market norm implies that the funds now devoted to the maintenance of economists whose studies lead them to endorse this norm (as also, of course, of those who hold other opinions on this point) are wastefully employed. “Few if any of their activities would be self-supporting if subjected to the market test; but surely those professors who uphold the ballot of the market-place should accept the verdict which it records against themselves?” [Comment: yes, indeed].

MARXIST THEORY: FROM CLASS STRUGGLE TO POLITICAL ECONOMY Clark Everling INTRODUCTION This paper traces the path of Marxism in the 20th century with special focus upon its place within political economy. It argues that the emphasis upon Marxism as a political economy has been directly connected to movement away from Marxism as a theory of class struggle. It begins by establishing how and why, in Marx’s view, all history is a history of class struggles and integrates this perspective with his work in Capital. It is argued that political economy was one of the things Marx was critiquing and that he was attempting to show political economy to be a product of capitalism rather than seeking to establish a Marxist political economy. The conversion of Marxism into a political economy commenced at the beginning of the 20th century when economists so interpreted and critiqued it and Marxists responded to these criticisms from those same perspectives. These responses initially concerned primarily the accuracy of Marx’s calculations and the validity of his various theories, such as the tendency of the rate of profit to fall. It is argued here, however, that developments in the 1930s and after, as well as the evolution of Social Democracy, Stalinism, and Keynesianism, led to an increasing conflation of Marxism with bourgeois economics. This conflation deepened and was interpreted as self-evident in the capitalist economies after 1945. Continued emphasis within the work of Marxist political economists upon exchange and consumption, rather than class relations, brought this conversion to its present

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development. It is argued that this confusion has obscured the class character of the global economy and its development over the last century. Marx says in Volume III of Capital that once capitalism has reached the finance stage, labor, as active human subjectivity in social production, disappears from view. What appears to capitalists through the financial relation is return on investment. Capitalists then take profits to be the result of their own activities, as those activities appear to them as categories of economic relations (Marx, 1986, pp. 167–168). Developed social production within capitalism thus appears as positive social categories, according to their place and purpose within capitalist production. Within capitalist political economy, these categories are seen objectively, but not subjectively. Labor, for example, appears only as it exists objectively within capitalist production as a cost of production, as wage labor, or as activities around wages such as those of trade unions. Labor appears positively and objectively as it is created through the capital-wage relation, but not subjectively, not as a general social condition of human subjects created by the dependence of the working class upon commodities and wages. By the late 19th and early 20th centuries, capitalism was a developed social system, both within nations and, through imperialism, as an international system. This meant that the working class in any given nation was connected to the working classes and other classes in other nations through a global system of production that took the form of competition among imperialist nations and the division of the world among the great powers. The labor aristocracies in the leading imperialist states depended upon the benefits of empire and had become a real force within the working class and class relations in these states. During the late 19th, and increasingly throughout the 20th century, politicaleconomic conceptions of Marxist theory developed. These concepts, as politicaleconomic categories within ever more developed social production, reflected the class struggles of that time. As an intellectual defense of bourgeois society, the neo-Kantian movement of the late 19th century had considerable success in reformulating social theory, including Marxist theory, into positivistic categories, whose existence required no further investigation. The discipline of sociology, for example, was built upon such positivistic categories (Rose, 1995, pp. 1–47). Meanwhile, as will be discussed below, the class struggle went on outside the vision of these political-economic theorists. These theories themselves were products of, and reflected developments within, the class struggle. These struggles included the increasing role of the state in the mediation of capitalist social production, the centering of capitalist production within monopolies, focusing upon underconsumption as the source of capitalist instability and the path to social peace between classes, and the evolution of socialism into Social Democracy and Stalinism.

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Positivist economic categories are quite different from the Marxist theory of the dialectical development of social production and human conceptions of that activity. Dialectical materialism as the Marxist theory will be discussed before considering these contrasting theories and their evolution.

DIALECTICS OF SOCIAL PRODUCTION From what we have said it will be clear that we understand thought (thinking) as the ideal component of the real activity of social people transforming both external nature and themselves by their labour. Evald Ilyenkov, Dialectical Logic (1974, Introduction)

Ilyenkov expresses here all of the essential elements of the dialectics of human social production. Human labor is their mutual production of each other in their transformation of nature. From that transformation they create their social existence in which they have certain conceptions of themselves as subjects. Those conceptions, in turn, permit humans to organize their labor and further transform themselves and nature on the basis of that labor activity. Objective and subjective as relations within human practical activities have special and important meanings within dialectical materialism. The objective is those forms which individual human beings are able to assume as a result of their social production through their relationship to other humans. For example, capitalists have their objective forms of social existence as a consequence of surplus value. Surplus value is realized in production through the difference between the values produced and the cost of the workers’ labor power. Obviously this presupposes the existence of social relations carried on as the production and exchange of commodities and the creation of exchange values. The use of money is an essential link among all of these and its circulation makes it possible to socially reproduce capitalist as capitalist and worker as worker. But capitalism is only possible because of the particular role that living labor plays in its production. Consequently, the capitalist can remain a capitalist only by reproducing those conditions of production and exchange necessary to their social existence in that form, i.e. the production of surplus value. The subjective in dialectical materialism is the human being. Capitalists and workers are both first of all human beings with all of the historically and socially developed needs of human beings. Capitalism makes possible humans’ lives as social individuals with the common needs and requirements necessary to that individual existence. But individuals realize their social existence only through their class relations. Consequently, the more socially developed human existence becomes, the more globally connected their production, the more the capitalist class

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must struggle to develop human social production and social existence in ways that reproduce their class dominance. This is why, for example, capitalist economic relations come to be mediated increasingly by the state. Classes, as humans’ objective existence, are thus the contradictions to human subjective existence and social possibilities.1 Because human mutual production is their reproduction as classes, because each class exists only through dependence upon the other, the processes of conceptual formation and the transformation of themselves and their activities go on above humans and behind their backs. Humans can reproduce themselves as subjective beings only as they were produced as subjects, that is, only as they have objects for their mutual production. The history of capitalism in its development illustrates this dialectic. Marx states that the development of capital presupposes that human beings have commodities as the objects for their social production and existence (Marx, 1986, Vol. I, pp. 91–92). On this basis, humans had already developed juridical relations to the point that they were capable of recognizing each other as the possessors of private property (pp. 129–130). The law of value means that products exchange according to their socially necessary labor time. This has the effect of organizing and reorganizing production in favor of those producers who can reduce their socially necessary labor time and accumulate money capital (pp. 68–75). Universal dependence upon commodities and money means that most individuals must sell their labor power. The extension of social production through labor power creates surplus value because the value of the labor power as commodity is less than the value of the goods produced. Absolute surplus value realizes this difference through the extension of the working day. And relative surplus value is the intensification of labor activity within the working day (pp. 181–192, 296–304). Here are seen all of the previously mentioned elements of dialectical development. Capitalists are socially produced as subjects through their reliance upon living labor power in production. This reliance develops as the essence of capital, and in fact creates capital in the first place, because of the production and exchange of commodities on the basis of the law of value. The use of labor power in the production process produces the surplus value that expands and accumulates as capital, increasingly concentrated as industrial social production. Accumulated capital then develops social production as a class relationship between capitalist and worker. The social development of this class relation provides the basis for the further expansion of human social production as capitalist social production, including the mediation of all of these relations through the state. Here is a process of spiral development. What is posited is premise. Commodity relations and the law of value posit the premises for social production. And what is premise, posits. These premises posit the development of human

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social production on the basis of living labor power and its use in production create absolute and relative surplus value as the premises for further expanding social production. Living labor power, its exchange as a commodity for wages, is the essence of capitalism that creates that spiral. Only its use in production makes possible the production of absolute and relative surplus value that is the production of capital. And only as the capitalist can create and recreate those conditions for the production of absolute and relative surplus value can the capitalist remain a capitalist. This essence creates spiral development because these classes create themselves (reproduce themselves) through ever wider, more universal connections to living labor power, ultimately as a global system of production. Consequently, social production evolves as a logical-historical relationship of classes. Capitalists achieve private appropriation through social production by developing ever more universal social production on the basis of living labor power and the realization of surplus value. The history of human social production is thus the logic of its class relationships. This evolution of human social production as essentially class production means that capitalist dominance defines social production as itself, gives its connections capital’s own purposes and particular forms and contents. This dialectical evolution happens above and behind the backs of humans because through their reproduction in classes they lead a fetishized existence. The production of things necessary to their reproduction as classes rules their lives and permits them to realize their actual social production and existence only in precarious and contingent forms that are external to themselves (Marx, 1986, Vol. I, pp. 76–88). Human subjectivity, as expressed in thinking and concepts, is always interested subjectivity because it is consciousness of how one is produced in that particular form and under what circumstances. What has meaning for humans is their social production and social existence, their ability to be social subjects in particular forms. The ideal reflects existence outside of the human, but the ideal itself exists only within the human (Ilyenkov, 1977). Humans create the phenomenal, and ultimately ideal, conceptual forms of themselves and their products of social production through their relations to each other. As humans share certain universal forms of material production, they form classes. The logical-historical development of human social production and social existence posits their phenomenal forms as a relationship between them. It does this positing according to the logical-historical presuppositions within that social production and social existence and as necessary to the class contradictions within that form of production. These points will be illustrated first by considering Marx’s example of the coat and then by looking more closely at the laws of capitalism and their operation.

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Marx points out that coats are human use values and are always products of human social production (Marx, 1986, Vol. I, pp. 48–70). But capitalism creates coats as exchange values through a division of labor in which the coat has use value to the tailor only as an object of exchange. Consequently, the properties of the coat, its actual characteristics and capacity to give warmth, are transformed into its phenomenal form. The production of the coat, its bodily form, appears to humans under capitalism not as itself, but only as it is given its characteristics by its production for exchange value. The phenomenal forms of humans themselves in this relation include capitalist, tailor, and coat consumer. Humans are able to realize their own bodily forms and physical existence only in these phenomenal forms. Unlike all pre-capitalist forms of production, the capitalist is forced by competition through the law of value to accumulate more and more capital. But this process is made more difficult by two complementary and contradictory factors. Both of these arise as a result of the dominance of capitalists as a class and their essential opposition to social production. As Marx states, the limited ends of capitalism (capital accumulation) become increasingly too narrow for its means (social production) (Marx, 1986, Vol. III, p. 250). One of these two factors is that the rate of profit tends to decline. The more developed social production becomes and the more technology replaces living labor power, the more the rate of profit (as the ratio of surplus value to the total capital invested) tends to decline. This results from capitalists’ necessity for maintaining living labor in production as the source of absolute and relative surplus value. The more social production expands, the more difficult it is for capitalists to find or create the sources for their capital accumulation (pp. 211–231). The other factor is that production increases beyond the absorptive capacity of the market. This underconsumption of commodities thus results from the class nature of production: the fact that humans have commodities only as they exist within their respective class forms (pp. 247–259). As Tony Cliff states: “If it were not for the first contradiction [i.e. the tendency of the rate of profit to fall], the ‘underconsumptionist’ solution of the crisis – to raise the wages of the workers – would be a simple and excellent answer. If it were not for the second contradiction [i.e. underconsumption], fascism could, by continuously cutting wages, have staved off the crises for a long period at least” (Cliff, 1988, pp. 225–226). Both of these contradictions inhere within capitalism as a consequence of its conditions for the reproduction of classes. Again, these arise out of the essential opposition between the rule of the capitalist class and its dependence upon private appropriation and the expansion and development of human social production. The economic consequences of capitalism, like its economic system itself, arise from its conditions for class struggle. The dialectics of class struggle are thus the focus of the Marxist theory.

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THE EVOLUTION OF CLASS RELATIONS AND THE REVISION OF MARXIST THEORY From a dialectical perspective, the emergence of neo-Kantian, positivist categories for the understanding of productive and social activities reflected the universal positing of social production as monopoly and imperialist production and of universal dependence upon the consumption of commodities and their production in the leading capitalist states and, increasingly, throughout the world. The positivist categories reflected social relations as private and corporate relations among social individuals. Social production through these relations involved class struggles in the form of underconsumption and the necessity for capitalists to offset this contradiction through the state and social forms of worker and political organization compatible with its class rule. This increased both the political and social importance of the labor aristocracy, as that section of the working class benefiting from imperialism, and the importance of Socialist revisionism made compatible with the bourgeois state in the regulation of economic and class relations. Once these developments were fully underway within the leading capitalist countries, especially in Germany after World War I, it became essential to imperialism that the international class struggle blunt the challenge posed by the Soviet Union. The rise of Stalinism represented an international joining of the bourgeois bureaucracy in the Soviet Union with the politics of imperialism. Taken together, these developments masked social relations and class struggles within their bourgeois determinations and presented themselves to Marxist theorists as essentially commodity relations. These developments determined that social production would turn upon commodity relations, including within the Soviet Union. The practical suppression of workers and of labor as theoretical category within these relations made political economy appear more and more a relation of commodities. These developments created Marxist political economy as its opposite: from an opposition to commodity relations, it came to have commodity relations as its main content. As it did so, Marxist political economists either embraced commodity relations theoretically and/or sought refuge in theories of capitalist stability centering upon the monopoly corporation. In general, this transformation meant the evolution of Marxist economics in reflecting relations of classes and state as these relations evolved through revisionism and Social Democracy, defining the problems of this system as those of commodity production, distribution, exchange, and consumption. This development meant, again, reflecting Marxist theory through the prism of developments within capitalism itself: the development of capitalism as a system of social production carried on as classes and the inverted subjectivity of having access to that social production only through its commodity forms. Marxist economists

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frequently imagined the monopoly corporation, and labor activity within it, to be symbols of capitalist dominance, and stability and crisis within the economic system to be a crisis of theory. Ultimately, Marxist economists imagined the economy only in terms of what it most essentially appeared to be: commodity relations. This was true not only of Piero Sraffa but also of Maurice Dobb, inasmuch as the latter’s theory of economic development corresponded to neo-classical theory as developed through Stalin’s version of socialism. All of the above developments followed from the reduction of the working class, first to the category of labor and, then, to the disregard of even labor as the subjective element in social production. All of the predominant Marxist economic theories of the 20th and 21st centuries are essentially those of commodity relations. In their real elements these are essentially those relations discovered by neo-classical, Austrian, and Keynesian economists. In their unreal elements, they are imagined relations of state and monopoly in revisionism, imagined solutions to production and consumption through commodity relations, imagined monopoly stability as imagined social stability, and, finally, Marxism imagined as simply commodity relations. And both the real and the unreal sides form a unity and an opposition in the evolution of class relations through state-imperialist relations. Part of the confusion arises from the failure to see social production as the actual production of use values and the premise for socialism rather than socialism as the entirely speculative conception of some unknown form of production based somehow upon need. Added to this is the absence in these theories of classes and their dynamics on an international scale, except in the narrowest and most positive categorical appearances. The development of Marxist theory as a political economy relied upon positivist categories. These categories, as is discussed below, reflected the course of class struggle, but in ways that masked those struggles in concepts that were concerned primarily with the survival of capitalism. These various theories of Marxist political economy involved primarily three premises. First, the acceptance of positive economic categories derived from capitalism itself as the categories of human social production. This had the effect of understanding human social production only in terms of capitalism, rather than, as Marx intended, to understand capitalism as a system of class exploitation. This meant understanding the economy and classes themselves objectively, and not as a relation of human subjects to one another through classes. Second, these political-economic theories were focused upon concern with the stability of the capitalist system. This took the form of theories of reproductive crises within capitalism and had the effect of reducing Marxism to a prediction of capitalist cycles and the presence or absence of economic decline. These narrow interpretations obscured Marx’s central argument of capitalism as a system in which humans were at war with themselves in the contradiction between social

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production and private appropriation. This had the further effect of suppressing the profound costs of capitalism to human subjects, as if, for example, the causes of two world wars and numerous others, human degradation, and environmental destruction were not to be sought in capitalism as an international class relation through imperialism. Third, these theories of Marxist political economy suppressed recognition of the working class and its international development by reducing workers to the category of labor and taking only activities of employment and the wage relation as evidence of working-class practical activities. Ultimately, this resulted in the dismissal of the working class from these theories until even the category of labor itself faded from view. Surplus value, as human exploitation, was, in this way, transformed into a theory of a social surplus based upon commodities and money.

EARLY DEBATES ON VALUE THEORY The movement of Marxism from class struggle to political economy is seen in its embryonic form in the early debates on value theory. Following discussion of this, revisionism within Social Democracy is considered as the second embryonic source of Marxian economic categories. Finally, in this connection, the evolution of class-state relations within imperialism and of Soviet socialism into Stalinism will be considered as the sources which provided the premises for reflection by Marxist economists for most of the rest of the 20th century. Throughout all of this, the increasing instability, decline, and class oppositions of capitalism within increasingly global social production will be shown to have created the premises for these developments and theories. At the beginning of the 20th century, critics sought to shift Marx’s theory of value in favor of subjective, utilitarian concepts. In insisting that value be understood subjectively, Eugen B¨ohm-Bawerk actually made value only objective, since it no longer appeared as a product of a class relation between human subjects engaged in their mutual social production. The subjective in this case, then, is taken as only contemplative. Confined to contemplation, seen apart from its class determinations, what value is or how it is determined becomes entirely speculative. This is the point of B¨ohm-Bawerk stating that subjective value can have many measures such as scarcity, relation to supply and demand, or as a natural product (Howard & King, 1989, Vol. I, p. 51). In this connection, use is transformed into contemplation of utility as opposed to actual use by human subjects in their practical activities. Using this approach, labor is then eliminated from value determination and thus from forming the basis for any theory of labor exploitation. In these same ways, value, price, and profit appear positively, as

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neo-Kantian categories, as they appear within capitalism. With the subjective confined to contemplation, what goes unobserved are the dialectics of value, price, and profit as definite class relations between human subjects in social production.2 The critique of value was part of the challenge to Marx’s theory of the transformation of values into prices and profits. It is suggested that what is being transformed here is the transformation process itself: the substitution of Kantian for dialectical reasoning. Rudolf Hilferding recognized this in stating the contradiction between use and exchange value. Theories of utility which begin from use values as the natural properties of things ignore how those natural properties are transformed through productive social relations between individuals (Howard & King, 1989, Vol. I, p. 53). The transformation process is historical from two perspectives. First, it is historical in terms of the transition from personal to social labor, the movement from small-scale commodity production and exchange to social production. Second, it is historical as a temporal relation within production. This accompanies and complements the long-term process. What appears immediately as profit was first value and what appears as value was first labor power.

SOCIALIST REVISIONISM Revision of Marxism emerged in embryo from the conversion of economic categories from their mutual production by classes into their positive, objective capitalist appearances. Karl Kautsky was especially influential in this conversion: classes became simply positivistic categories as did economic relations such as credit or overproduction (Howard & King, 1989, Vol. I, pp. 69–70). Seen without regard to their class determinations, these categories took on lives of their own, independent of the social relations that created them. This meant that Marxism as revised lost both its dialectical qualities and the ability to recognize the evolution of class relations in their mutually creative connections. Monopoly and the state became neo-Kantian categories for revisionist Marxists. Beginning with Eduard Bernstein, these categories emerged in revisionist theory as making possible new economic and social relations. This meant that capitalism’s own evolution was in the process of overcoming its own social contradictions and that socialism was evolving through capitalist institutions (Bernstein, 1993). This testimony to the growing rationality of economic and social relations within capitalism represented a decisive break from Marx’s identification of the contradiction between private appropriation and the socialization of production as most profound within capitalism. Consequently, revisionist socialism ceased to be Marxist in fact and became a version of capitalist relations.

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THE STATE IN COORDINATING CLASS RELATIONS But the transition of revisionist socialism into a phenomenon essential to capitalism, like economists’ identification of Marxist concepts and capitalist institutions in objective, positivist forms, was possible only because of the expanded socialization of production within capitalism and the increasing necessity for the state in the coordination of those relations. This coordination included the increased recognition of the importance of the labor aristocracy in the forms of trade unions, social welfare programs (which first emerged under Bismarck as an opposition to socialism), and regulation of monopolies and finance capital, especially through the control of credit. Above all, the state was essential for the furtherance of imperialism which was itself essential to all of these social connections. All of these measures concerning the state reflected its increasing involvement in social relations within the leading capitalist states. Imperialist rivalries furthered the image of each of these states as separate and essential to preserving their ostensibly distinct nationalities. The international character of social production in fact appeared only in its imperialist forms and as the division of the world among these states. Throughout the first half of the 20th century the essence of this imperialist state emerged within capitalism and took two principal forms: the liberal state which sought to preserve commodity relations by defining the state through its monetary and fiscal connections and the authoritarian state which took the forms of fascism and Stalinism. The fact that Stalinism had much in common with revisionist Social Democracy reflected the growing essentiality of Social Democracy as a political and social organization of the labor aristocracy and the use of the state in the suppression of the working class, nationally and internationally. This essentiality of Social Democracy for capitalist social and political development emerged in the debates of the Second International about imperialism and war (Riddell, 1984, pp. 54–110). Although supporters of imperialism were a minority in the Second International prior to World War I, they were a substantial and ever growing minority. And their arguments made the necessity for their respective nations’ reliance upon imperialism ever more clear. Most of them did not even project an end to imperialism once socialism was achieved. This reflected both their racism toward colonial peoples and the importance of colonial production to those sections of the working class to whom these socialists looked. Finally, with the onset of war, these socialists simply retreated into the support of their own nations and ruling classes. World War I represented the further emergence of the capitalist class-state connections because it brought together the support of the Social Democrats, the suppression and militarization of the working class, and the regulation of production and the economy. Social Democrats then emerged as

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both important political leaders within bourgeois governments and the enemies of non-revisionist socialists.

STALINISM AND IMPERIALISM Social Democrats opposed the Bolshevik Revolution and helped crush movement toward revolution in Germany following World War I. The ability of the Bolsheviks to create socialism depended upon essentially two things. One was that economic development toward socialism in the USSR had to be understood as a relation between classes in their mutual social development. Lenin and Trotsky both expressed this with regard to the relation between industry and the development of the middle and poor peasants. Second was the internationalization of working-class revolution to the imperialist states. Germany offered prospects for this in the early and late 1920s and again prior to the rise of Hitler. The fact that the regime headed by Stalin, after Lenin’s death, chose to suppress these prospects was a major contributor to the undermining of the Revolution. Lenin and Trotsky, in the case of the Russian Revolution, understood that industry could be developed by an alliance between the workers and peasants (Lenin, 1967, Vol. III, pp. 758–769). As Trotsky outlines this, the expansion of industry to produce low cost products needed for peasant production would enable increased agricultural production (Trotsky, 1997, Vol. II, pp. 322–344). The efficient use of agricultural equipment would be encouraged by policies that developed agricultural cooperatives with poor and middle peasants. The alliance of these peasants with the working class would be strengthened and offset and diminish the influence and efficiency of the wealthy peasants. The point is that, in all of these connections, the classes involved are considered in terms of logical-historical relationships. Production is understood as posited by given connections among classes, the use of those connections as premises for the social reproduction of all those involved, and the further positing of new and still more socially developed connections among classes. Greater efficiency and expanded production in agriculture through the expansion of industry would, in turn, make possible still further industrial and urban expansion and social cooperation.3 Moreover, because the dialectical social relations of these classes is predominant in these development policies, the political character of these classes is predominant and determinative of their relations. In other words, they can understand their economic activity as their mutually creative human activity rather than understanding economics through abstract and isolated categories as a consequence of their relationship to private appropriation.

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The success of this revolution, or any other, depended upon revolution in the leading capitalist countries. This became increasingly possible because of the instabilities in international exchange that followed in the decades after the First World War. Germany evidenced several times a revolutionary potential because of its inability to control international exchange in ways that could satisfy domestic requirements for class stability. This concerned especially the ability to acquire raw materials internationally at sufficiently low prices, the need to hold down domestic wages, and monetary crises. Improvements in the German capitalist economy in the late 1920s were cut short by the collapse of the world into depression. There were profound and prolonged class struggles between the German bourgeoisie and the working class prior to the triumph of Nazism. Had a workers’ revolution succeeded in Germany, the USSR could have combined its own development needs with those of Germany’s highly developed industry (Trotsky, 1971, pp. 55–88). The potential for revolution in any state was created by the international configuration of capitalism, its class formations on a world scale. Capitalism is inherently international and the development of monopoly and imperialism meant combined international development among a hierarchy of nations. This drew nations more closely together and into deeper contradiction as they were positioned with respect to international exchange. For the capitalist classes in the most developed states, favorable international exchange determined their ability to satisfy the domestic demands of the petty bourgeoisie and the working class. For the capitalist classes and landed aristocrats in the dependent states, international exchange imposed requirements upon them which deepened their dependence upon the imperialist powers and intensified their struggles with the peasantry and the working class. The point is that these class relationships were determined through their international connections and that international exchange as the essential link among these states, created shifting and volatile class relationships within these countries. Economic crises quickly passed into political crises and raised the potential for workers’ control of the state. Stalin denied these possibilities and developments, and, instead, absolutized the state and monopoly forms of production as “socialism in one country”. This maintained and strengthened the bureaucracy and made possible a capitalist class that ruled industry in the name of the state. The fact that value relations were poorly managed within this relation is, in fact, typical of monopoly that is designed, in part, to bureaucratically protect its owners from the consequences of direct competition. Most important internationally were the consequences of the Stalinist state for the maintenance of imperialist relations. The Stalinist state emerged upon the world as another capitalist state with its own imperialist goals. Stalin allied first with Hitler and then with the latter’s enemies, following Hitler’s betrayal. Above

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all, Popular Front politics, in both the leading imperialist states and globally, represented an alliance between the Communist Party and the bourgeoisie of each nation. In reaching out for this alliance, Stalinists preached the virtues of the “progressive” elements of the bourgeoisie and joined revisionism in the notions that capitalism was essentially national and only secondarily global and that as these bourgeoisies “matured” in their various states they had less interest in military aggression and exploitation of the working class. By the 1960s, this had become known as a version of “convergence” theory, that, as they developed, capitalism and socialism became more like each other and complementary as systems. Trotsky, by contrast, always kept the international character of capitalist production central to his theories. He made this clear, for example, in his rejection of the Kondratiev theory of long waves of development (Day, 1981, pp. 51–57). Trotsky recognized that the development of capitalism is essentially the reproduction of the capitalist classes in their various forms. Capitalists maintain themselves by recreating the conditions for the exploitation of wage labor and production on a world scale. They do so ultimately through imperialism and thus only as competing classes and competing nations. As Lenin put it, if capitalists could actually develop their own nations, they would not export capital (Lenin, 1967, pp. 62–63). Imperialist competition, and the limits to national development and social stability that are determined by it, make the capitalist classes in the imperialist states vulnerable. The fact that Stalin chose a very different policy meant that Stalin and his circle were very much responsible for the rise of the Nazism that they are so frequently credited with defeating in a war that they helped make inevitable.

THEORIES OF CAPITALIST REPRODUCTION In contrast to Trotsky, Social Democrats viewed the Great Depression as part of a routine business cycle and hardly worthy of notice as a crisis of capitalism. But the depression forced increasing recognition by both government officials and economists that capitalism in its highly socialized form required increased government activities to stimulate production and consumption. Keynes broke with neo-classical economics to the extent of repudiating Say’s Law and took the depression as proof that supply did not create its own demand. Keynes recognized also that the economy was social in character. But he recognized this sociality only in terms of capitalist relations and how these could be reproduced and regulated in the avoidance of crisis. Central to Keynes’s theory was the notion that the problems of capitalism were primarily those of its economic reproduction (Keynes, 1953).

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Significantly, it was the revisionist Mikhail Tugan-Baranovsky who first extracted Marx’s model of capitalist reproduction from Volume II of Capital (Howard & King, 1989, Vol. I, pp. 168–171). This had the effect of reducing Marx’s whole critique of capitalism to a theory of capitalist reproduction. Tugan-Baranovsky used this reproductive model to argue that capitalist crises were the result of disproportional production between sectors and that its problems were primarily those of maintaining proportionality. So long as this was maintained, in his view, the realization of surplus value was unproblematic. From this he concluded that capitalism’s main problem was its lack of institutions to maintain proper proportions. Disproportional production was also central to Paul Sweezy’s political economy in his The Theory of Capitalist Development. Sweezy’s critique of capitalism centered upon its tendencies toward reproductive crises (Sweezy, 1970, Chap. 1). Joan Robinson brought Keynes more directly into Marxism. She did this through her critique of Marx and her denial of both the labor theory of value and the falling tendency of the rate of profit. In place of these, Robinson identified underconsumption as the key element in Marx’s theory and inferred that the basic problems of the capitalist economy were those of disproportionality between investment and consumption. She argued that, with proper modifications, Marx’s theory could be understood as a theory of underconsumption perfectly consistent with that of Keynes (Robinson, 1966, pp. 34, 62, 80–81). Sweezy carried forward this conflation of Marxian and Keynesian theories in the 1940s and after (Sweezy, 1953, pp. 253–262). Marxist political economy now appeared as essentially a focus upon capitalist commodities and their regulation. The significance of these developments was that Marxist political economy had moved to the point that it was not so much engaged in a dialogue with bourgeois economists as it was replicating their concepts as those of Marxism. Marxist political economy then became revisionist versions of overproduction/underconsumption theories and shared the same foci as those of bourgeois economists: the relative stability of capitalist economic relations and crisis theory. The notion of the capitalist economy as a more or less steady-state relation of commodities, the acceptance of capitalist organization of production and sociality, and the regulation of the capitalist economy through the liberal state, were reflections of historical developments in capitalist production. Revisionist theory and its unity with imperialism made possible not only the objectification of certain Marxist concepts. The emergence of Social Democrats into capitalist governments – the echoes of Social Democratic revisionism and capitalism in the Stalinist regime and the Popular Front – created premises for viewing the Great Depression not as a social crisis, but only as an economic one. The conception of economics as positive, objective categories, shared in the same forms by both Marxist and bourgeois political economy, reflected, above all, class-state relations

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centered around the bourgeoisie. From these perspectives, it was possible for Marxist and bourgeois theorists alike to see the problems of the capitalist economy as those of maintaining the proper proportions among objective categories of production, distribution, exchange, and consumption, devoid of their class determinations. Underlying all of these relations was their imperialist essence. The rivalries among imperialist states that resulted again in world war brought about the triumph of the U.S. as the leading imperialist state. Given the devastation of other states and the dominance of the US, the U.S. was able to advance its international appropriation after the war on several essential bases. These included: fiscal policies to expand production and consumption, export-led growth as the basis for national development, the creation of middle income consumption, acquiescence of workers and trade unions in export-led growth, and other essential features, including the imposition of the U.S. labor-management relations model abroad, an international dollar equivalent to gold, and an international relation of wages to productivity centered around U.S. international investment and production (Everling, 1997). Once again, Marxist political economists constructed their theories on the basis of social formations within these imperialist relations. This was also true of Marxist political formations. The dominance of the U.S. in the postwar, the Cold War as a rivalry between capitalist states, especially the U.S. and the Stalinist regime, the collapse of much of the Trotskyist movement into the conceptions of Michel Pablo and Ernest Mandel, who saw no alternatives to present relations including Cold War, all reinforced the images of the postwar world as a relation of politicaleconomic categories, rather than a dialectical opposition of classes (Mandel, 1979; Pablo, 1953). In other words, the transformation of these Marxist theories into neo-Kantianism was now complete in both politics and political economy. This was reflected in Ernest Mandel’s Marxist Economic Theory whose two volumes expanded upon the disportionality theories expressed by Sweezy (Mandel, 1968, Vol. I, pp. 345–371; Vol. II, pp. 529–536). Paul Baran and Sweezy’s Monopoly Capital found capitalism essentially stable within its monopoly relations, argued that monopoly had repealed the law of the tendency of the rate of profit to fall, and wrote off the revolutionary potential of the industrial working class (Baran & Sweezy, 1970, pp. 324–351). It was left for Piero Sraffa to reduce Marxist political economy and social production and relations to simply commodity relations (1960, pp. 20–48). His work and Maurice Dobb’s defense of Sraffa’s position, as well as Dobb’s own work, demonstrate the essential submersion of Marxism beneath categories of political economy drawn from bourgeois economic theories (Dobb, 1955, pp. 34–54, 239–246; Howard & King, 1992, Vol. II, pp. 293–294).

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MARX’S METHOD AND THE TRANSFORMATION QUESTION To reach the essential connection between Sraffa and Dobb, it is necessary to return to the question of the transformation of value into price that has dominated Marxist political economy over the last half century. Discussion can begin with Andras Brody’s answer to Paul Sweezy’s question “why not start from price?” as discussed in Howard and King’s history of Marxian economics. To this question, Brody responded with a dialectical answer that is highly instructive of Marx’s method: “For Hegel, ‘the history of a thing is the thing itself’. Hence ‘our ideas and categories are reflections of real processes and there is advantage in developing them in the same order as they appeared in history’. Since values are, in Marx’s words, ‘not only theoretically but also historically prius [sic] to the prices of production’, it was necessary to begin with the analysis of value, and surplus value, if anything sensible was to be said about prices and profits” (Howard & King, 1992, Vol. II, p. 274). In this statement, one sees the unity and opposition involved in the logicalhistorical development of human social production as created through the contradiction of private appropriation. This dialectical unity and opposition of classes is the Marxist method and that which breaks that unity is not the Marxist method. One can prefer other methods over Marx’s, but that preference does not reach to a criticism of his method. It is because Marx’s method has, over the last century, become conflated in important and historically developed ways with the methods of bourgeois economics that these relationships have become confused. Value expresses a class relationship within human social production. It arises from the necessity for humans to alienate their labor activity in order to provide for themselves. Labor as the source of value, therefore, corresponds to the developed capacities of humans for their social production. As Marx points out, Aristotle lacked a concept of value (Marx, 1986, Vol. I, p. 65). Because of the underdevelopment of human social production, Aristotle was unable to imagine fully developed exchange relations because these did not yet exist in human practical activity. The history of human beings is the history of the logic of their ability to be subjects in particular forms. Again, the dialectics of this logical-historical development is the core of Marx’s method. The production of value in various forms presupposes the existence of social individuals who can create it in those forms. What is called “simple commodity production” does not so much correspond to a particular stage of human history as it does to the ability of human individuals to produce commodities for exchange. In ancient slavery, commodity production by individuals was very limited; so too during much of the Middle Ages. But in all cases,

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it became increasingly possible as divisions of labor developed within towns and cities. By the late Middle Ages, divisions of labor within cities included not only particular districts and streets associated with individual trades, but increasingly trades as identified with the work of individual craftspersons, their individual labor activity. Prices became socially general only as capitalism developed and required them for the translation of labor, which was increasingly social in its forms, back into the forms of individual labor power and commodity relations. Surplus value arose and developed with the social appropriation of the bourgeois class, and prices and profits are the social manifestation of the historical development of that ruling class. Criticisms of Marx’s method have most usually involved the substitution, in fact, of different methods that break its dialectical unity and opposition by separating theory from practice. This, as indicated above, is a reversion to the Kantian perspective. This substitution is achieved, for example, by hypostatizing historical categories like feudalism or merchant capital and counterposing these to phenomena like simple commodity production when these categories actually tells us nothing about the unities and oppositions involved in the historical production of human social individuals. It is also possible to suggest, as do Morishima and Catephores, that Marx’s transformation of value into price is only “an ideal type or ‘logical simulation’,” a fiction made necessary because commodities never sold at their labor values (Howard & King, 1992, Vol. II, p. 275). But this is a complete separation of theory from practice. Above all, in these formulations values and labor become only theoretical priorities, without regard to class relationships. That is, they become only theoretical categories in contemplation that one can use or dismiss. Labor values are then only magnitudes derived from prices and consideration of labor power in the creation of value becomes an unnecessary detour, as Sraffa argues (Howard & King, 1992; Sraffa, 1960, Vol. II, Chap. 13). The calculation of values and surplus value become unnecessary and these then disappear as Sraffa moves from conditions of production and real wages directly to the prices of production and the rate of profit. Surplus value becomes in the Sraffian theory, as for Sweezy and Robinson, from their own perspectives, simply a surplus: a sum of wealth in the form of commodities and money over and above the costs of social reproduction. One can still argue that this is an exploitative society because of capitalists’ control of the surplus and the unequal distribution of production and incomes. But this is a very different, and opposed, theory to Marx’s theory of exploitation and probably has more in common with Proudhon’s project. The notion of a social surplus as the essential product of a society and the source of exploitation could appear reasonable and consistent with Marxist political economy, in part, because Stalinism had followed a similar road. The development

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of industrialization in the USSR following Stalin’s approach depended upon the generation of such a surplus. And Maurice Dobb developed this concept in his own work (Dobb, 1963). His work concerning underdevelopment is instructive because it reveals the conflation of Marxist theory with what is really neo-classical economics. Dobb expresses here social development as an objective relation among economic categories rather than those of social classes. In this, Dobb’s view of economics is similar to those of Bukharian and Preobrazhensky (discussed in Note 3). Dobb sees development primarily as a relation between the production of a surplus product through divisions of labor and the marginal utility of labor: Again, it would be an absurd exaggeration of such a policy to suggest that the most advanced techniques which scientists and engineers can devise should always be adopted, irrespective of cost. To do so would not maximize surplus product but reduce it; since so few machines of this highly expensive type could be made with investible resources available that their higher productivity would be more than offset by the fewness of them. It would be the opposite extreme of absurdity from adopting spade-husbandry because so many could be employed thereby. More costly “capital intensive” techniques should be adopted up to the point where the higher labour productivity balances (so far as surplus product is concerned) the higher cost in labour of making the necessary machines, but no further than this. What is involved is the distribution of labour between making machines and operating them in such proportions as to yield the maximum effect (from the standpoint of growth) (Dobb, 1963, pp. 55–56).

In the last generation, Marxist political economy has focused upon the transformation process and other essentially theoretical questions in narrow ways, largely confined to commodity relations.4 This paper argues that the development of Marxist political economy has been a consequence of historical developments that moved Marxism away from an emphasis upon class struggle, a movement that was itself a product of class struggles, increasingly on a global scale. Changed circumstances, including the economic globalization, the fall of the Soviet Union, and the dominance of the U.S. as the single superpower, as well as the project of Marxist political economy, seemingly having reached the limits to its further development. Perhaps attention will now shift back to the recognition of classes, their struggles, and the meaning of these for human beings.

NOTES 1. Marx’s methodology concerning objectivity and subjectivity is best understood through his “Theses on Feuerbach”. By way of illustration: Commenting on the first thesis, Marx (1991, p. 28) says: “The chief defect of all materialism . . . is that the object, reality, what we apprehend through our senses is understood only in the form of the object or contemplation . . . ” The object is outside of us as identity in thought because it is an external object e.g., the commodity: it is a product of human labor and has a use value, but it can

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be attained only as an exchange value, only through external mediation, not subjectively. It becomes subjective only as exchange value, only through one’s dependence as a subject. The object is not understood “as sensuous human activity, as practice, not subjectively.” The object is practice, practical activity in all of the forms in which humans can be subject: thought and activity, theory and practice are not separate and divided from each other. Each is the condition for the other. I know the commodity in theory (both in capitalist political economy and Marxist theory) because it is practical. Its practical activity produces me as a subject, determines my identity, and the form of my idea of it, my theory of the commodity. The active side of the object was developed by idealism “which does not know sensuous activity as such.” i.e. idealism is idea separated from practice. It is idea as external subjectivity, as object in contemplation; e.g. my idea of the commodity and its isolation and externality in practice as a consequence of my dependent subjectivity. It is necessary to “understand human activity itself as objective activity.” Humans are produced in certain objective forms as determined by their social production. Taking the theoretical attitude as the only human attitude leaves us with practice only in its “‘dirty Jew’ appearance”. That is, as object in contemplation separated from practice, its’ social determinations. This gives us white, pristine Christians and “dirty Jews”. Both of these are practical relations. They are products of social production, practices within their respective, and essentially tautological, spheres. Their theologies consist of what it means (practice) to be Jews and Christians. In both cases, their subjectivity is external to themselves. Jews are produced in both feudalism and capitalism at the intersection of money and social degradation. The objective form of their social existence is then invested with anti-Semitism as among its social meanings. 2. The failure to grasp the dialectical unity and opposition of objectivity and subjectivity in Marxist theory has been a major problem for Marxists since the beginning of the 20th century. For example, Nikolai Bukharin in his Economic Theory of the Leisure Class (1972) accepts B¨ohm-Bawerk’s claim that Marx was an “extreme objectivist”. In supporting this, however, he relies upon quotations from Werner Sombart rather than Marx. But in the course of his discussion, Bukharin makes it clear that both he and Sombart mean objective in the sense of objectively existent and that for them the subjective means only contemplation. In the course of his discussion, Bukharin says: “Marx’s theory is accordingly an objective theory of labour value, based by no means on any individual evaluation, but expressing only the connection between the given social productive forces and the prices of commodities as the latter are determined by the market” (Bukharin, 1972, pp. 36–37). 3. Eugene Preobrazhensky put forward a law of “primitive socialist accumulation” in which accumulation in the hands of the state would take place through resources outside the state sector, i.e. agriculture (Preobrazhensky, 1965, pp. 77–146). He answered Bukharin’s challenge that this would mean ‘devouring the peasantry’ by saying that he agreed with Lenin’s paper “On Cooperation”. But Preobrazhensky treats this paper as a speculation on cooperation at some unspecified time and not as a proposal for actual social development (pp. 231–241). As Tony Cliff points out, to have followed Preobrazhensky’s proposal would have resulted in peasants responding to this “squeeze” by reducing production. Cliff recognizes that this could have been met by one of two methods. First, making the development of industry through the state dependent upon private accumulation in agriculture which rewarded the rich peasants. Second, primitive accumulation through the state through the expropriation

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of the peasantry. Both of these approaches were, in fact, followed. The first as the New Economic Policy (NEP) following the civil war. And the second as Stalin’s forced collectivization. Cliff makes these points in discussing that it is exactly the disproportion between production and consumption in the process of accumulation within capitalism reduces its relations among subjects to a relation to capital (Cliff, 1988, 149–153). That is exactly what was underway in the Soviet historical experience. Humans are subjects as they have relation to each other, as they identify themselves through their experience of other subjects. Socialism depends upon the development of relationships among subjects. This is why that, even under capitalism, relation of subjects to capital and commodities is never sufficient to mediate their relations as classes. There must also be the ability to discipline the workforce, to deny important legal rights and freedoms, and to socially subordinate people to property in ways that isolate and atomize their existence. So too in the case of the rise of Stalinism. All of these relations were reestablished in forms previously abolished by the Revolution and workers were denied the most basic workplace, social, and political participation. 4. Fred Moseley (Ed.), Marx’s Method in Capital: A Re-examination and A. Freeman and G. Carchedi (Eds), Marx and Non-Equilibrium Economics reflect the two sides of a debate on value theory that grew out of the responses to Sraffa. Both books take the approach that Marx’s theory of value identifies the exploitation of workers and the extraction of surplus value as the source of profit. The debate centers around how and in what sense this is true. Models drawn from equilibrium theories of non-Marxian economics, like that of Moseley, take prices and values of inputs as determined simultaneously with the prices and values of outputs. In this case, surplus value is not necessary to show a positive profit (Moseley, 1993). Using such models, in which all inputs are taken as positive, makes it possible to imagine a totally automated economy where positive profit is produced without the use of labor. Freeman and Carchedi are among those who challenge the equilibrium assumption. At bottom, this assumption is that all markets clear, which is a cornerstone of mainstream economics, and presupposes a static system. This is contrasted to the capitalism that Marx discussed. Proponents of the equilibrium model argue that without models built upon the unchanging exchange of equivalents, there is no basis for theory. Proponents of non-equilibrium economics argue that the insistence on equilibrium is derived from maintstream economics, not Marxism (Freeman & Carchedi, 1996). Also involved here is the so-called question of Marxist “fundamentalism,” which holds, in part, that the non-equilibrium of capitalism is derived from the categories of the capitalist economy itself, as a fundamentally contradicted social system. While those favoring equilibrium models reject fundamentalism and vigorously distinguish themselves for so doing, non-equilibrium advocates tend to avoid direct consideration of this question. Rather, non-equilibriumists derive their categories from the critique of the equilibrium model. For example, as I state above, they point out that labor exploitation in production is unnecessary to positive profit in the equilibrium model. But demonstrating this is still not saying that labor itself, labor power as category within capitalist political economy, is itself a fundamental social contradiction which dooms capitalism as an economic system. In the so-called “fundamentalist” perspective, as I am arguing here, labor as category is exploited within production where value and surplus value are outcomes of that exploitation and money is a means to that end. The non-equilibrium theorists make use of time in production to distinguish inputs and outputs in indicating the role of labor in the production of value. But neither side in this debate develops fully a theory of exploitation. For example,

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David Laibman, in Value, Technical Change, and Crisis: Explorations in Marxist Economic Theory. Certainly an equilibrium theorist, argues that what is decisive is the rate of exploitation, the ratio of paid to unpaid labor, that expresses the balance of class forces at any given time. Laibman argues for the importance of this over the failing tendency of the rate of profit. Theories, like that of Laibman, emphasize more general, social deprivation theories of exploitation, as in emphasizing the struggle over paid and unpaid labor (Laibman, 1992). But this effectively reduces and confines interpretation of the class struggle to wages, trade unions, and the exchange relation between labor and capital. This is opposed to understanding the production process itself as central to the production of human subjects as capitalist and worker. In the former case, like Laibman, the technical composition of capital may or may not be an impediment to the production of value and surplus value. In the latter case, the rising technical composition of capital threatens capitalists because it undercuts their ability to use labor in the most exploitive ways and threatens capitalists’ ability to restrict production to the limits of the production of value and surplus value. In a word, in this latter view, value and surplus value not only produce profits for the capitalist. They produce, above all, capitalists’ control over human labor.

REFERENCES Baran, P., & Sweezy, P. (1970). Monopoly capital. Harmondsworth: Penguin. Bernstein, E. (1993). Preconditions of socialism. Cambridge: Cambridge University Press. Bukharin, N. (1972). Economic theory of the leisure class. New York: Monthly Review Press. Cliff, T. (1988). State capitalism in Russia. London: Bookmarks. Day, R. (1981). The crisis and the ‘crash’. London: New Left Books. Dobb, M. (1955). On economic theory and socialism. London: Routledge & Kegan Paul. Dobb, M. (1963). Economic growth and underdeveloped countries. New York: International. Everling, C. (1997). Social economy: The logic of capitalist development. London: Routledge. Freeman, A., & Carchedi, G. (Eds) (1996). Marx and non-equilibrium economics. Cheltenham: Edward Elgar. Howard, M. C., & King, J. E. (1989). A history of Marxian economics, Volume I: 1883–1929. Princeton: Princeton University Press. Howard, M. C., & King, J. E. (1992). A history of Marxian economics, Volume II: 1929–1990. Princeton: Princeton University Press. Ilyenkov, E. V. (1974). Dialectical logic. Moscow: Progress. http://www.marxists.org Ilyenkov, E. V. (1977). The concept of the ideal. In: R. Daglish (Ed.), Philosophy in the USSR: Problems of Dialectical Materialism. Moscow: Progress. http://www.marxists.org Keynes, J. M. (1953). The general theory of employment, interest, and money. New York: Harcourt, Brace, Jovanovich. Laibman, D. (1992). Value, technical change, and crisis: Explorations in Marxist economic theory. Armonk: Sharpe. Lenin, V. I. (1967). Selected works. New York: International. Mandel, E. (1968). Marxist economic theory. London: Merlin. Mandel, E. (1979). Why the Soviet bureaucracy is not a ruling class. Monthly Review, 31, 63–86. http://www.marxists.org Marx, K. (1986). Capital. Moscow: Progress.

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Marx, K. (1991). Theses on Feuerbach. In: Karl Marx and Frederick Engels: Selected Works in One Volume. London: Lawrence and Wishart. Moseley, F. (Ed.) (1993). Marx’s method in capital: A re-examination. Atlantic Highlands: Humanities Press. Pablo, M. (March-April 1953). The post Stalin ‘New Course’. Quatrieme Internationale, 14.2. http://www.marxists.org Preobrazhensky, E. (1965). The new economics. Oxford: Oxford University Press. Riddell, J. (Ed.) (1984). Lenin’s struggle for a revolutionary international: Documents 1907–1916, The Preparatory Years. New York: Pathfinder. Robinson, J. (1966). An essay on Marxian economics. London: Macmillan. Rose, G. (1995). Hegel Contra sociology. London: Athlone. Sraffa, P. (1960). The production of commodities by means of commodities. Cambridge: Cambridge University Press. Sweezy, P. (1953). The present as history. New York: Monthly Review Press. Sweezy, P. (1970). The theory of capitalist development. New York: Monthly Review Press. Trotsky, L. (1971). The struggle against fascism in Germany. New York: Pathfinder. Trotsky, L. (1997). The challenge of the left opposition: Volume II. New York: Pathfinder.

THE URBAN LAND ECONOMICS TRADITION: HOW HETERODOX ECONOMIC THEORY SURVIVES IN THE REAL ESTATE APPRAISAL PROFESSION Ranney Ramsey ABSTRACT This article identifies the concept of market value as a standardizing concept that coordinates the actions of market participants in relatively inefficient real estate markets. The paper also identifies different levels of discourse that reflect the organizational/institutional complexity of the real estate appraisal profession. The standardizing effect of market value includes a cognitive and fiduciary component. Using this framework, the paper traces the influence of Richard T. Ely’s institutional economics – and its legacy in the form of the research program of Urban Land Economics at the University of Wisconsin – on the formation and development of the standards of appraisal and ethical practice. This complexity is traced historically from the early part of the 19th century to the formation of the professional organizations and the establishment of their standards, and also through a series of reform efforts in the 1960s and 1980s that were articulated in the academic community. The paper illustrates the manner in which Institutional Economics has

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been influential in the continuing development of the real estate appraisal profession and suggests reasons for its continuing relevance.

INTRODUCTION Marc Tool (2002) has recently argued that the research program of institutional economics does imply a microeconomic price theory and this article adopts some of his suggestions. Tool emphasized the importance of uncertainty but other limitations – including the high degree of specificity of real estate assets, the development of intermediaries in the investment process and the relative infrequency of transactions in many real estate markets – also prove to limit the ability of market participants to estimate prices and are significant enough to have led to a specific economic role for the real estate appraiser. The definition of this role gradually emerged as real estate appraising became a distinct function performed by members of a network that standardized the production of “opinions of value” in accordance with both cognitive and fiduciary standards. The influence of Richard T. Ely’s legacy in urban land studies was significant in organizing this network in several subsequent periods of reform associated with periods of economic crises in the real estate industry. A framework introducing the concept of “market value” as a cognitive and fiduciary standard is established. It provides a mechanism for the coordination of market participants operating in imperfect real estate markets. This framework draws on models (Langlois & Savage) already applied to explaining the economics and organization of the healthcare professions. This framework proves useful in explaining how the real estate appraisal industry has evolved into a public/private network form of organization. Again, following Tool’s suggestions, I distinguish several levels of organizational and institutional complexity that are necessary to understand the role of the real estate appraiser and the specific types of knowledge claims that characterize this field of enterprise (Toulmin, 1958, 1972). The balance of the paper focuses on how this organizational and institutional complexity is evidenced in the historical record and how Richard T. Ely’s legacy of institutional real estate economics has been uniquely suited to influencing real estate appraising professionals. Thus, during a period when the influence of Institutional economics was becoming increasingly limited within the broader fields of economics, the Wisconsin school of urban land use studies offered influential criticisms that related both to the content and to the organization of the profession. These insights arose from a perspective that was sensitive to the market conditions and processes that real estate appraising evolved to meet.

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MARKET VALUE AS A COGNITIVE AND FIDUCIARY STANDARD Real estate appraisers normally provide opinions of value in the form of narrative reports varying in their detail and complexity depending on the rights and interests, and the purpose and function of the report. Clients normally obtain and rely on the appraiser’s opinions of value in transactions involving the extension of credit (such as commercial mortgage loans by life insurance companies, banks and investors), the acquisition of assets (by a third party funds manager), and a wide range of legal proceedings in the settlement and partition of assets, and the calculation of damages. Appraisers are often involved in the assessment of assets for ad valorem taxation. The real estate appraiser’s role in this economic situation is to provide an estimate of market value. In effect, the appraiser applies a standard (Langlois & Savage, 2001) concept specifying the value (in cash or equivalent terms) of a specific real estate interest (fee, leased fee, air rights, transferable development rights) at a specific time.1 Langlois and Savage cite the role of standards in reducing the “costs of monitoring by providing a benchmark against which quality or performance can be judged” (p. 151). They relate standards more generally to the existence of complexity in economic organizations and the resulting need for economic coordination. The application of the standard is designed to deal with situations in which the normal price signals of the market do not provide sufficient information or guidance to market participants. The need for the appraisers’ estimate of market value arises from the limited knowledge that the price system provides to the parties normally involved in many forms of real estate transactions and the resulting difficulty in aligning their interests thru conventional price signals. These limitations come from a variety of sources: (1) the infrequent rate – or total absence – of sales transactions; (2) the asset specificity of real estate interests; (3) principal-agent problems arising from the division of property interests; and (4) uncertainty about the future benefits of ownership that constitutes the basis of value. Jaffe (1986) also identified the “information-processing” role of the appraiser and linked it to the type of limitations here noted. However, his notion was limited to the concept of “information.” The appraiser, I contend, adds value not only by supplying “information” but by making “judgments” about “reasonability” and “similarity” that are essentially “cognitive.” The notion of a fiduciary component appears because of potential and actual conflicts of interest arising from distinct property interests (buyer and seller, lender and borrower, condemnor and owner) and serves to differentiate this account of market value from Jaffe’s emphasis on “information.”

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The standard setting role of “market value” is exhibited in the routine list of items considered when assessing whether a recent sales transaction involving asset A implies the “market” rate of exchange for another asset B. These adjustments include: (1) (2) (3) (4)

adjustment for non-standard rights and interests involved in the transaction; adjustment for seller financing at below or above-market terms; adjustment for any non-real estate concessions or enticements; adjustment for deferred maintenance or capital items immediately required after the transaction date; (5) adjustment for changing market conditions (Appraisal Institute, 2001, pp. 430–435). In much the same fashion, the real estate appraiser will apply similar adjustments to form estimates of the market rental rate applicable to a defined property interest (such as an apartment, an office suite or an industrial warehouse) and the market discount or capitalization rate that can be applied to a forecast of future of operating income to estimate present value. Market value, in its role as a standard, provides a benchmark that market participants can use to compare various property interests, calculate rates of return/risk and evaluate relative investment strategies. When so applied, the real estate appraiser forms a judgment about market value that is based on the application of routine methods that are used to estimate value. These routines include the proper application of the income, sales comparison and cost approaches to value. Borrowing from Stinchcombe, the real estate appraiser provides cognitive expertise based on disciplinary knowledge but requiring experience for its application to specific problems. However, the appraiser’s services also include a fiduciary element that is distinguishable from their role as a cognitive expert. Due to the inherent uncertainty of estimates of future incomes and the normal limitations on transactional data, the appraiser’s estimates normally presume a sequence of operations involving the collection and interpretation of data in order to reach a final judgment of value. The potential for bias, either conscious or unconscious, and/or gain at the expense of those who lack detailed knowledge of local markets is sufficient to create the need, in many cases, for an independent opinion of value – without regard to the purely cognitive issues. This type of analysis has been applied by Savage and Robertson (1999) to the medical profession in an article outlying the difference between technological standards and behavioral standards. Extending their analysis, I argue that market value provides market participants with a cognitive and fiduciary standard.

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Langlois and Savage (1997) note that physicians and surgeons are subject to behavioral rather than technological standards. A fortiori, commercial real estate appraisers are subject to the standard of creating a knowledge claim as well as the fiduciary responsibilities of being an independent source of knowledge. While physicians and surgeons also provide opinions in the course of their diagnostic functions and are subject to professional responsibility for these judgments, the commercial real estate appraiser is unique in that the provision of an opinion of value is normally the exclusive service provided to the client. Likewise, the appraiser’s role in a real estate transaction is not only related to problems of knowing value – a cognitive role – but also to the problem of providing an independent opinion of value – a fiduciary role.

LEVELS OF DISCOURSE – THE INSTITUTIONAL ORGANIZATION OF THE APPRAISAL PROFESSION Understanding the provision of appraisal services requires being aware of the layered structure of the industry’s discourse. The history and development of the provision of appraisal services involves at least four levels of discourse embedded in different economic institutions and/or organizations and whose inter-relations create the complexity of professional practice. Discourse includes the ideas, concepts, methods and the arguments advanced by participants about the importance and place of these terms in the course of their economic activities: Level 1: Individuals or agents of a firm are directly involved in the acquisition, sales, ownership and/or investment of real estate interest and must, in the normal course of their business, make estimates of the market value of real estate assets as part of the financial investment process. Typical participants: Agents of banks, life insurance companies, real estate development firms, and individual investors. Level 2: Individual or agents of firms provide independent opinions of value concerning the real estate interests that are the object of interest in Level 1; thus, the issuance of commercial mortgage backed securities requires independent appraisals of the underlying commercial real estate assets; commercial banks whose deposits are guaranteed by the Federal government must – in many circumstances – obtain independent estimates of value; public investment managers routinely have portfolios of real estate appraised by independent firms. Even within the same

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firm or organization, formal review of the valuations used to document investments is performed by “review” appraisers. Typical participants: Real estate appraisal firms, appraisal reviewers. Level 3: Individuals and firms providing independent opinions of value are linked into a network form of organization involving adherence to a common set of standards and ethics governing the provision of appraisal services (e.g. the Appraisal Institute); developing in the mid-twentieth century out of private practice, current standards of professional practice are set by a quasi-public agency, the Appraisal Foundation. Thus, a review appraiser within an investment firm is simultaneously responsible for the soundness of the company’s internal valuations of property interests and also responsible to a network’s standards of practice and ethical conduct. Typical participants: Members of the professional societies including Appraisal Institute, American Society of Farm and Rural Appraisers, state licensed and/or certified appraisers subject to the Uniform Standards of Appraisal Practice (USPAP). Level 4: The academic disciplines of science are involved in the criticism of these standards as to their adequacy to meet both public and professional needs and their consistency with broader standards of science. Typical participant: Members of the business and real estate academic communities. At Level 1, the primary concern is with the cognitive aspects of the market value standard. At this level individuals who may not even describe themselves as “appraisers” are involved in estimating market value as the basis for investment decisions. These individuals include private investors, acquisition officers, mortgage loan officers and underwriters, and public assessors. Professor James Graaskamp’s definition (Graaskamp) of feasibility addressed Level 1 concerns when he defined feasibility in terms of investor’s objectives. Philip Kniskern (1933) referred to Level 1 concerns when he spoke of a correct valuation: The correct valuation of real estate, deduced from a thorough understanding of the many and varied fundamental principles; should form the basis of every transfer of any interest in real property, whether an estate in fee simple, leasehold, life or other interest; it is of prime importance to the lender on notes secured by mortgage; it should control the assessed values for tax and other purposes; and finds further application in condemnations, other

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court proceedings, the settlement and distribution of estates, and finally in the many involve questions in the determination of income tax (p. 177).

At this level of analysis, market participants judge the “correctness” of their estimations of value against subsequent economic outcomes. The variability of these results – especially in the period following 1929 – caused many observers to deplore the adequacy of appraisal methods and procedures (Babcock, 1932; Rabinowitz, 1978). Level 2 includes individuals who often describe themselves as “fee appraisers” and who contract for a fee to provide an opinion of value. In these cases, the parties who engage the services of the appraiser may possess cognitive competence equal to or greater than the “fee appraiser” because of their familiarity with specific commercial market conditions, but because of conflicts of interest must obtain an independent opinion to validate their judgments. At Level 2, because of the multiple interests of parties involved in a transaction, fiduciary responsibilities most directly arise. The appraiser provides an opinion of value that is expected to be both “expert” and “independent.” Thus, an early account (McMichael, 1937) of appraiser compensation issues noted, “real estate boards maintain valuation committees, to whom are delegated the work of making appraisals, mostly for public service organizations such as city councils, school boards, boards of county supervisors, and so forth” (p. 453). In a similar fashion, local real estate boards provided services to local assessors for the purpose of property tax assessment. However, as mentioned before, even within the legal boundaries of an economic organization, this same division of economic functions is apparent. Most mortgage lenders and commercial banks differentiate between the field appraiser who originates a Level 1 opinion of value and review personnel who review the work according to internal and external standards of adequacy. Babcock (1924) provides one of the clearest expositions of the principle that guides the appraiser’s selection of method in solving an appraisal problem – adopting the point of view of the Level 2 participant. This principle is the distinguishing cognitive characteristic of Level 2 concerns: . . . the appraisal processes outlined do not have inherent merits which warrant their use in different cases, but rather the appraiser bases his selection of a principal process upon the motives of the majority of the potential buyers in the immediate market of the particular property. This does not mean that the valuation method is made to correspond to the purpose of the appraisal, but that the process chosen will be one which involves, in the analysis, the same reasoning as that which buyers in general would probably go through in deciding whether to buy or not. In other words, that appraisal process is selected as the correct one in each case which most closely corresponds to the market in which the property would be sold (p. 21, italics added).

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Historically, the provision of real estate appraisal services often originated as a business that took place adjunct to brokerage, management or investment operations. However, the need to accommodate higher levels of uncertainty and high degrees of specificity suggests that a network form of organization was likely to evolve. Savage (1997) analyzed the provision of professional health care services for pharmacists and physicians calling attention to the role of a network form of organization in this industry distinct from either a market or a firm. The network was a form of organization that solved production problems otherwise handled by firms or markets. In this account, a profession is a network of strategic alliances across ownership boundaries among practitioners who share a core competence. The fiduciary demands of Level 2 gave rise to a need for a common standard of professional practice and ethical conduct. The network provided recourse for users who believed they may have been subject to moral opportunism. Beyond the ordinary mechanism of discontinuing repeat business, the network provided an enforcement agency that maintained members’ adherence to standards. Likewise, members of the network were protected against the ability of rival providers to “cheat” against the standards and provide opinions of value that were “made as instructed” for the interests of a specific client. Savage has noted that networks also served the purpose of enhancing the ability of members to maintain and create rent-enhancing competences. At Level 3, a network differentiated the services provided by designated members by standardizing the members’ reputations. Professional standards offered the advantage of making the market more efficient for users operating with unfamiliar properties, in unfamiliar locations and eliminated the need to check for typically prohibited conflicts of interest. Sharing of information and new routines also created additional opportunities for rent seeking. This was an important motive in the creation of the American Institute of Real Estate Appraisers during the depression era. Professional standards involved not only the articulation of common standards of practice and ethics but also the use of “market value” as a constitutive definition of appraisal practice. These standards embodied an implicit judgment of what real estate appraising was supposed to mean. Historically, debates about what appeared to be issues on other levels of discourse were actually the expression of rival views of what role the appraiser should play in the broader context of the economy. Level 4 primarily represents the academic disciplines whose cognitive principles are the scientific basis for the routines that are used to estimate value; in addition, these disciplines are in the position of being independent, in a general fashion, from the demands of the marketplace with respect to the fiduciary role of the real estate appraiser. As a result, the academic community may be better

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situated to provide critiques of the cognitive methods and routines as well as the professional integrity of the real estate profession. Stephen Toulmin’s Human Understanding (1972) provides an explanation of this relationship between disciplinary science and what he terms the “rational enterprises.” Using an evolutionary model of conceptual change in science, Toulmin calls attention to the principles of understanding that provide the standard of assessment for evaluating the merits of rival concepts, theories and methods. In Toulmin’s view, scientific problems arise from the divergence between the explanatory powers of current concepts, theories and methods and those ideals of understanding that – at a given point in time – form the constitutive boundaries of a scientific discipline. Rational enterprises, such as engineering, arise from the application of scientific principles to problems that are non-disciplinary (e.g. the 18th century attempt to create a timepiece that would work in a ship at sea). In a much more recent extension of his basic argument, Return to Reason, Toulmin (2001) argues that the basic problems of the social sciences are practical in nature. Current economic theory has tended to borrow models of reasoning and intellectual procedures that are purely theoretical. However, the basic problems of the social sciences arise in situations that are defined by concepts that are rooted in human forms of life. Toulmin does not consider these human forms of life to be reducible to more primitive, abstract variables associated with formal theory. In this respect, Richard Ely’s institutional legacy for the real estate appraising profession was consistent with Toulmin’s account of intellectual progress. Rather than attempting to develop general theoretical models that would predict the values that Level 1 participants seek, the institutional legacy in real estate appraising has focused on criticizing the adequacy of Level 2 routines. It has also attempted to improve the performance of market processes by analyzing and reforming the fiduciary role of the appraisal at Level 3. By contrast, traditional neoclassical economists have viewed the legitimate intellectual objectives as being concerned with Level 1 issues. They also focused the professional economists concerns toward economic theory and methodological rigor (Clapp & Dow). Insofar as these concerns bypassed Level 2 and Level 3 problems, they often offered solutions that were irrelevant to the concerns of professional real estate appraisers. Level 4 discourse has appeared in the historical record when advocates of appraisal methods, standards of practice and definitions of market value have warranted their arguments by reference to broader conceptions of what constitutes “science” or a “scientific approach to the subject.” At various times, “science” is conceptualized as reflecting the “engineer,” “the mathematician,” or “the unbiased seeker of truth.” Overall, the appearance of this discourse reflected the undefined

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relationship between appraising as a cognitive effort and its relationship with the changing standards of disciplinary science.

HISTORICAL DEVELOPMENT OF THE PROFESSIONAL NETWORKS (LEVEL 3) The role of providing opinions of value on real estate arose from broad-based changes in the division of labor in the development, management and financing of real estate assets in the early part of the twentieth century. Income producing properties became a significant type of commercial investment and as well as a significant source of local revenue for property taxes. At the same time, a pattern of recurrent and significant conflicts of interest and abuses required that the source of market value estimates be independent. The impetus for the organization of the industry into a network has usually been the result of significant economic crisis in the real estate markets. A system for standardizing reputations arose in the early 1930s. Private networks of real estate appraisers were created to establish competency and ethical standards. In the period from 1932 to 1935, the American Institute of Real Estate Appraisers (AIREA), the American Society of Farm Managers and Rural Appraisers, and the Society of Residential Appraisers (later changed to the Society of Real Estate Appraisers) all appeared. Early efforts toward the formation of a professional organization for appraisers had begun within the National Association of Real Estate Boards (NAREB). In 1922, NAREB identified separate divisions of interest but appraising was considered at that time to be too small to justify a separate specialty. Persistent problems with appraisals appeared in the mid-1920s, leading to protests by the New York and Kansas City boards over ethical problems in mortgage financing, NAREB’s Board of Directors in 1924 recommended state laws to license mortgage brokers and companies and later, in January 1928, created a separate division for real estate appraising. Each organization initially focused on a specific specialty within real estate appraising. They adopted standards and practices, codes of ethics and admission rules peculiar to their specialty. AIREA and the Society of Real Estate Appraisers considered joint membership for several decades before voting to merge in 1989 forming the largest appraisal organization, the Appraisal Institute. The Savings and Loan crisis in the 1980s (Seas, 1994) created the basis of a significant change in the real estate appraisal industry. Following the criticisms of incompetence and fraud, both the regulation of appraisal services for Federal transactions involving Federally-insured lenders and other agencies

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were significantly altered. In addition, a system of state-enforced certification was established and mandated for federally related transactions. As a further move toward affecting the independence of standards, Federal regulation also created an Appraisal Foundation composed of representatives of the professional appraisal organizations that included an Appraisal Standards Board as well as an Appraiser Qualifications Board. The creation of the Appraisal Foundation and the Uniform Standards of Professional Appraisal Practice (USPAP) met the criticism (Dorsey, 1993) that no single set of standards governed the practice of appraisers. Reform legislation also created the Federal Interagency Appraisal Council to set real estate appraisal standards and qualifications for transactions in which the federal government has substantial financial or public policy interests. Professional organizations, such as the Appraisal Institute, remain involved in continually developing their own standards and ethics of practice, education programs for new and existing members, and providing forums for the exchange and development of appraisal ideas through trade journals such as the Appraisal Journal and educational programs and textbooks such as the successive editions of the Appraisal of Real Estate. Members of the Appraisal Institute, are also subject to peer review. Likewise, the professional designations of the private networks remain recognized by many participants within the real estate markets as signs of specialized competence and independence.

THE HISTORICAL DEVELOPMENT OF THE APPRAISAL FUNCTION (LEVEL 1) Other sources of changes in the economy also created the need for estimates of market value: the traditional reliance of local government upon the property tax as a central source of revenue led to the creation of new and sometimes sophisticated techniques for handling market value in the large urban markets early in the 20th century (Glenn Fisher, 1996). Real estate brokers, active in the sale and financing of commercial real estate properties, often were involved in providing opinions of value. In many cases, a board of realtors active in the local market would provide assistance to local government in assessing the value of commercial property. In major metropolitan areas across the country, the so-called Somers method applied quantitative techniques to the problem of parceling value among city blocks based on frontage and depth in a way designed to produce uniformity in assessment. Subsequent advocates of his method argued specifically that the use of a standard unit of value was necessary to provide for a fair and equitable system of assessment.

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Legal disputes arising from bankruptcies, mergers and acquisitions also created the need for estimates of “market value” or “fair market value.” By the end of the 1920s a substantial literature on value and a long history of court precedents existed on the concepts and techniques of estimating market value. Real estate appraising began as a sidelight to an enterprise that might typically involve real estate ownership, property management and brokerage. Early textbooks and handbooks on real estate appraising appear prior to World War I. By 1920, an early commentator (Zangerle, 1927) was surprised that such a widespread practice had not already been more formalized. Following the notable collapse of real estate investments in the 1930s, the American Institute of Real Estate Appraisers (AIREA) becomes a separate division of the National Association of Real Estate Boards (NAREB) and the professionalization of the practice accelerated.

REVIEW OF THE ACADEMIC LITERATURE ON APPRAISAL STANDARDS AND PROCEDURES (LEVEL 4) The earliest accounts of the appraisal industry often focused primarily upon the development of value theory in the context of economic theory – a Level 4 concern – leaving the professional without a great deal of immediate guidance (Ross, 1938; Weimer, 1960). However, Paul Wendt (Wendt, 1974) offered a much more extensive review of appraisal theory in the mid-1970s by updating his original, pioneering work in 1956. He focused on providing an account of the contribution of economists as well as works in investment, finance and accounting. He also summarized academic efforts directed toward real estate appraising and noted the impact of many institutions that had influenced appraisal practice including brokerage, lending and governmental agencies. However, his approach still focuses primarily on contributions to theory in the sense of Level 1 as opposed to either the historical development of the practice in any institutional context (an aspect of Level 1) or the development of standards and procedures (Level 3). In 1982, the American Institute of Real Estate Appraisers (Burton, 1982) published Professor James H. Burton’s history of the income approach. Although the title refers to the evolution of the income approach to value, the work is actually an exceptionally thorough summary of opinions of many appraisers, general economists and real estate academicians. Yet, it often fails to discuss the basis for the advocacy or the eventual adoption of differing points of view. The limitation of these efforts was a failure to recognize the complexity of the economic organization and the institutional context of the real estate appraising

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profession. As a result, there is a tendency to evaluate prior works as merely anticipations of the current state of the field – falling short of the mark insofar as there views are not the same as currently accepted theory.

THE DEVELOPMENT OF APPRAISAL STANDARDS AND PROCEDURES (LEVELS 1 AND 2) The following accounts have been extracted from the historical record in order to provide a sense of what both the Level 1 and the Level 2 appraiser thought about their tasks and how they conceptualized it. The accounts were chosen to cover different historical periods, illustrate typical positions and provide evidence of the development of appraising as a function, as well as theory. In most cases, the individual and their work were actively engaged in either Level 1 or Level 2 work.

Richard Hurd Richard Hurd, a mortgage banker, assumed the management of the Mortgage Department of U.S. Mortgage and Trust Company in 1895. Hurd (1924) recalled that his search of the “economic books” for some guidance in attempting to analyze the problem of city land value yielded only “brief references to city land and elsewhere only fragmentary articles.” With reference to the problem of value Hurd distinguished between “intrinsic” value and “exchange” value. He considered that the capitalization of ground rent was the correct method to estimate intrinsic value. This is the comment of someone typically involved in a Level 1 activity such as direct investment in mortgage debt. Although Hurd emphasized that “average sales” were the “best test” of exchange value and even though he considered that “estimated future prospects form the mastering factor of all exchange values”(preface, i); nonetheless, he believed that exchange values could so significantly depart from “income, or supply and demand” that they became “simply a condition of the public mind . . .” (p. 11). In this regard, Hurd introduced a recurring problem of differentiating between a Level 1 concern – the accuracy of value estimation – and a Level 3 concern with the purpose or role of the appraiser. The difference lies in whether the appraiser is reporting how Level 1 participants currently view the market or whether the appraiser is trying to estimate the long-term investment potential of a specific asset. The former concern is a Level 2 activity; the latter concern is classically a Level 1 activity.

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W. A. Somers et al. By contrast with Hurd’s background in real estate investments, a distinct school of thought developed out of the need to estimate real estate values for property tax assessment. W. A. Somers (1913) emphasized a scientific approach to the determination of value. In 1891 Somers became deputy assessor of St. Paul and Ramsey County, Minnesota. In 1896 the City of St. Paul adopted the Somers method of assessment. Later the cities of Cleveland, Minneapolis, Chicago and New York engaged Somers in examination and assessment revisions. The simplicity of Somers indictment of current practice follows: Now when we realize that the value of everything, even the most common article, is only an individual opinion, and that the only guide to a community opinion as to the value of these common things is market prices, and that city land is not subject to market prices, we have discovered the cause of the difficulty in obtaining satisfactory assessments of city land, and it seems to me that this makes it plain why the assessments of city land for taxation is almost universally condemned as unequal and unjust (p. 231).

Procedurally, Somers rejected both the collection of sales data and the use of income data as a basis for estimating value. He recommended that the assessor must “obtain a community expression of some common knowledge so related to land values that this community expression can be used as the basis for calculating the value of each lot” (p. 232). Somers reported that if the assessment procedure started with the support of “competent authority” that “owners and occupants of city property enter into the work with enthusiasm . . .” (p. 233). The Somers method entailed “comparing the streets one with another on the basis of their frontage values” (p. 233). He started by identifying a unit of comparison equal to the “frontage value per foot of an inside lot 100 feet deep, then starting with the best street . . . it will prove surprisingly easy to obtain an agreement or consensus of opinion as to the comparative frontage value of these blocks and streets” (p. 233). Somers then plotted the data on to maps. Between 1911 and 1913, Somers reported that maps had been made for more than a dozen cities. He reported that the conditions affecting value for 95% of city lots “can be expressed in street value units in connection with the size, shape and position as shown on the map” (p. 234). Somers’s influence was quite significant for assessment practice and future literature on appraisal practice. Although heavily criticized for relying on rules unrelated to market activity, nonetheless, his method was a rare and original application of both quantitative and qualitative methods of research. Somers’s concerns reflected the need for uniformity in assessment and acceptance by taxpayers and relates primarily to both Level 2 and Level 3 concerns. Enduring debates about these methods reflect disagreement over the purposes of the market value standard and often fail to see the different institutional context of tax assessment.

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Walter William Pollock – a self-described Appraisal Engineer – worked with Somers (Pollock & Scholz, 1926) from 1909 to 1916 installing the method in over seventy communities. In 1927 Pollock collaborated with Karl Scholz, assistant Professor of Economics at the Wharton School, University of Pennsylvania to explain the Somers system in much greater detail; comparing its results with a variety of alternative methods. In addition, the Somers systems method was evident in a variety of other works in this time period (Cleminshaw, 1932; Glover, 1925; Knox, 1924; Polis, 1933).

John A. Zangerle John A. Zangerle (1927) published a series of appraisal textbooks dating from 1917 to 1927. His work reflected the growing complexity of the field. As a lawyer, Zangerle extensively cited case precedents governing the types of evidence of value accepted by the courts. Zangerle devoted a substantial portion of his text to the application of such methods as: unit foot appraisal method-long and short rule, corner lot appraisals, appraising irregular lots, and graded units. He cited a series of depth rules that date from 1866 including references to the Hoffman-Neill rule in New York, Lindsey-Bernard rule in Baltimore, the Newark rule formulated by A. C. Pleydell, Davies’ research on New York lot depths, the Somers rule, the King curve developed in Milwaukee and the Martin depth rule used in Chicago. Zangerle also discussed the applicability of “appraisals based on earnings” in the context of both land and improved property. He identified the influence of gross sales upon the retail merchants’ ability to pay rent. He cited comparisons of rental rates based on variations in the population of different metropolitan areas. In Zangerle’s discussion of leasehold estates, he struggled with questions about selecting the property-holding period, appropriate discount rate, and recognized the theoretical equivalence of the capital value of a lease at market terms with the cash value of the fee interest. By 1927, Zangerle’s text incorporated a chapter on “Unscientific Bond Issue Appraisals.” His criticisms revealed the extent of the appraisal industry’s involvement in this developing industry. He noted that this type of investment presumed the “retaining of expert appraisers upon whose favorable report bonds may become marketable” (p. 240). He noted the National Association of Real Estate Boards at Detroit in 1925 had resolved “that steps be taken to discipline members using, permitting or making appraisals which can not be fairly sustained by the fact and which tend to deceive the public as to the values of the properties involved” (p. 240). Another abuse identified at this time was the practice of reporting the value of speculative buildings prior to completion of construction and leasing of the new space.

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Frederick M. Babcock As part of a series of publications on real estate, the National Association of Real Estate Boards (NAREB), United YMCA Schools, and the Institute for Research in Land Economics and Public Utilities co-sponsored a volume on real estate appraising. The author, Frederick M. Babcock acknowledged his brother, Henry Babcock, and the editor of the series Richard T. Ely as well as Herbert Nelson and Earnest Fisher with NAREB. F. M. Babcock’s The Appraisal of Real Estate (1924) provided some passing comments on common appraisal practice at this time. He mentioned that in those areas of the country where there are real estate boards, then “these associations have created valuation committees, each consisting of three or more members selected because of their qualifications as appraisers. These committees sell their services to the public to make valuations” (p. 13). In major cities, some real estate brokers would prepare opinions of value “but rarely are there public real estate appraisers who confine themselves exclusively to appraising” (p. 13). Babcock also recognized that the form of appraisal reports would probably change and briefly noted the format of the typical report: “In most cases the contents of the report consist of a legal description of the property, a brief general description of the premises, a statement indicating the appraiser’s opinion of the value of the property, and a certificate, signature and notary’s seal” (p. 15). Babcock noted both the cognitive capabilities that an appraiser needed (research capacity, analytical ability, brokerage experience) as well as the fiduciary (discretion and judgment, reputation). Babcock, like Hurd, emphasized the importance of income in establishing value. He even went so far as to ignore the possible absence of buyers concluding that it would be incorrect “to conclude that the property has a fair cash market value only equal to the low price necessary to bring out bargain-hunting buyers . . .” (p. 19). In this situation, the appraiser should use the income approach and this value is “assumed to be a fair cash market value” (p. 19). F. M. Babcock’s subsequent publication of the Valuation of Real Estate (1932) represents perhaps the most influential work on real estate appraising in the first half of the twentieth century. Babcock’s work is certainly the most thoroughly developed work in this era. The controlling idea of his work is that value is determined solely by income. Babcock defines market value as a “competitively established price but it is not necessarily equal to the present worth of the benefits of ownership” (p. 15). However, capital value arises from the anticipation of future productivity of property ownership whether for use, investment or speculation. Babcock emphasized that land has value because of the expectation of future productivity after investments of capital and labor.

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This emphasis on income, as will be seen, is a concern with Level 3 and the definition of what constitutes the appraiser’s role rather than a purely methodological point about how income constitutes the only valid method of measuring value. Although Babcock’s theoretical method of valuation is based on income as follows: The theoretical method of valuation: (1) commences by studying the future utility of the property – that is; (2) by forecasting; (3) the returns to be expected from the entire productive unit; (4) the returns to land being residual under the highest and best use; and (5) the building returns, if the building is not the highest and best use, being made residual after the land return. The method proceeds; (6) by discounting, to a calculation of the present value of the net returns; (7) the building returns being for finite building lives; and (8) land returns being extend to perpetuity. In the method (9), the building value is so determined that the predicted building return provides both interest and a return of the capital value over the building life. (10) Rates are determined in the market (p. 139).

He later admits that in the case of non-investment properties – such as residences and in the case of many industrial properties – the only practical methods of valuation were the evidence of market sales transactions and the use of the cost of construction less depreciation. So that at Level 1 and Level 2; Babcock abandons the measurement of income as a method in establishing value. James Bonbright James Bonbright’s The Valuation of Property (1937) recognized the influence of both Ely and Commons on the concept of value most relevant to practical problems. Bonbright noted that Babcock was the leading exponent of the income school but he also noted the influence – especially in court cases – of the replacement cost theory. Bonbright indicated that it was the “principle of substitution, and not the economists’ law of normal value, which has led the courts so generally to accept replacement cost as a measure of recoverable damages” (p. 157). In general, Bonbright noted that the “most strikingly distinctive feature of judicial valuations . . . is to be found in the proneness of the courts to single out the estimated replacement cost of replaceable property, minus certain allowances for depreciation, as the most reliable index or measure of value” (p. 150). Bonbright’s assessment of the law’s influence upon the development of appraisal theory and practice also included an assessment of the then-current academic attitude toward the valuation process: For the most part, their interest (academic economists) has centered in the forces that are supposed to determine the prices actually fixed by the process of “haggling and bargaining” on the market place. Only a few of them have been concerned with the way in which professional appraisers determine a “fair selling price” in a business negotiation, in the way in which

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accountants value assets for balance sheets and income statements, or in the way in which courts and commissions value property for legal purposes (p. 8).

Philip Kniskern Another influential – but now rarely cited – voice in the 1930s real estate community was Philip Kniskern, an early founder of the American Institute of Real Estate Appraiser, and also an appraiser for Chicago Trust. Kniskern (1933) was also the author of an early work on real estate valuation. Kniskern adopted a position quite similar in spirit to Frederick Babcock although perhaps more uncompromising in his belief that the appraiser was ultimately concerned with Level 1. Accordingly, he emphasized the importance of “justified market value” rather than an assessment of what prices would be obtainable in the market – the sense of Level 2. He identified “justified market value” with a capital sum equal to the future benefits of ownership. His “justified market value” was not what a single or even a group of misled investors would pay for a property at any given time but rather the “true, stable investment value.” Kniskern is unequivocal that market price is distinct from market value and that “lacking special instructions to the contrary the appraiser should seek to determine the justified market value of a property” (p. 4). In this respect, Kniskern also believed that “justified market value” was relevant to what constituted the appraiser’s role (a Level 3 concern). His treatment of the cost approach is also interesting. He recognized clearly that more than a single concept of cost was involved in valuation. He expressed it this way: “There is a very definite distinction between justified physical value, replacement cost, and that which any given property may have cost” (p. 242). Reworking his language, Kniskern had distinguished between the historical cost of a particular property’s construction, the cost of developing a substitute property of equal utility (“justified physical value”) and the cost of developing an exact replica of an existing property at current price levels. Moreover, Kniskern also recognized that costs could impact the future benefits of ownership: There is another relationship between the reproduction cost and the income. Let us assume that a completed property has been acquired for $420,000. A competitor builds an equivalent building next door for $350,000 and to provide an adequate return he need ask rents only sufficient to give him a $35,000 net income, while the rents of the first building must net $42,000. Except only in times of extreme shortage the inevitable will happen, that is, the rental value of both buildings will tend toward $35,000 (p. 261).

Kniskern’s work also presented a detailed analysis of why transactions within the market are not reliable indications of the value of the property. Allowing

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that transactions may be guides, he strongly rejected them as determinative of value. His list of faults include: wide fluctuations in pricing, the limitations of isolated transactions, sales from financial necessity, sales in transitional locations, sales in transitional locations where not all properties benefit, an analysis of sales in a urban city location that anticipates the concept of path dependence providing a detailed analysis of the constraints of plottage, frontage and corner influences on possible developments, terms of sales, trades or property exchanges, temporary and artificial economic conditions including especially land bubbles, and the faulty worth of preliminary sales information such as bids, offers, and refusals. Particularly significant in light of Kniskern’s later role in the creation of the American Institute of Real Estate Appraiser, was his testimony that there “is developing among the leaders of the industry a uniformity of thought as well as procedure in this work and certain principles and methods are now generally recognized and accepted” (p. 182). He was particularly clear that an appraisal – contrary to oft quoted principles of common law – was a “carefully prepared analytical estimate of the value of the property which is much more than an opinion. It is a provable fact” (pp. 182–183). In this regard, Kniskern combined a concern with Level 3 standards and Level 1 criteria of successful outcome. He identified a Level 3 description of the valuation process that included the collection of facts, processing the facts into a conclusion of value, and a written or oral report expressing the resulting opinion of value. In this regard, Kniskern ultimately contributed more to the current form of the appraisal process than Babcock whose insistence that the entire appraisal process was governed by the principle of the income approach was eventually sidetracked.

Arthur Mertzke Mertzke’s Real Estate Appraising (1927) is a widely cited and influential work by the director of the NAREB’s division of education and research and a collaborator of Richard T. Ely. Mertzke’s work is a compilation of educational materials for members of the appraisal division. Mertzke emphasized that costs are not synonymous with market values. He indicated that prices can exceed costs when demand is increasing and fail to equal cost when peculiar features are added to a property that do not add equal utility. He believed that cost was an indication of value generally when properties were new. When examining residential properties, he thought that costs were helpful when construction costs were stable, the dwellings were well suited to the site and the neighborhood, and sufficiently standardized in style and design to satisfy

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typical home buyers. He later indicated that to him cost meant the “actual amount spent,” his criteria for using cost data included considerations of utility. Mertzke also agreed with Babcock and Kniskern that the appraiser was seeking a longer-term trend that underlies the short-term fluctuations in the market. In a classic statement of this point of view he says: When we follow the movement of value of a commodity for a number of years or decades we find a trend representing the long-time average value of the commodity. The movement is not always in the same direction but it does not fluctuate quickly like the current market price of the commodity. The significant feature of the short-time market price fluctuations, however, lies in the fact that market prices never remain very long either above or below the long time trend of the value of the commodity (p. 14).

Here again, Mertzke’s comments reflect an attempt to create at Level 3 a statement of the purpose of real estate appraising rather than a methodological rule describing how properties are to be analyzed. Mertzke however is clear that “all who have long-time interest in property, like owners and lending institutions, are interested primarily in normal value” (p. 16). However, Mertzke, unlike many other sources, also noted that “buyers, sellers and brokers, on the other hand, are interested not only in the long time trend but also in the temporary market fluctuations which in the sale of a house may make a difference of hundreds of dollars” (p. 16). Here clearly is an indication that the real estate community was not speaking with one voice in creating a standard of market value. Mertzke’s work reflected the influence of NAREB in establishing fiduciary standards. Unlike the other works cited in this series, Mertzke referenced specific and “generally accepted” standards of ethical conduct in appraising. He noted that these rules included prohibition of appraising properties that the appraiser has an interest in, the abusive practice of hiring one appraiser to estimate the value of the land and another appraiser to estimate the value of the improvements and then adding the two values together; as well as the inclusion within appraisal reports of detailed statements of conditions under which the valuation might hypothetically obtain; and advocated producing “accurate” rather than “conservative” or “excessive” estimates of value.

George L. Schmutz George L. Schmutz, another influential founder of the AIREA elaborated on the principle of substitution as fundamental to the valuation process. In so doing emphasized the importance of market prices in estimating market value. Schmutz (1941) identified two dominant schools of appraisal thought – the income and cost – as commonly employed in the valuation of income-producing properties. He mentioned that the income approach had been developed within the last twenty years.

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However, Schmutz contended the principle of substitution was still a primary consideration in valuation and expanded the concept well beyond its traditional link with the cost of replacement: The substitution that may be made refers: (1) to a new but otherwise identical replica property; or (2) to an equally depreciated replica; or (3) to the most advantageous substitute; or (4) to some other substitute capable of performing the same function; or (5) to the substitution of income. Thus, the substitution may be the replacement of the physical property, or of its function, or of its income (p. 9).

Schmutz contended, that the importance of the marketplace was paramount for determinations of value. Recognizing the longstanding debate about the meaning of value he concluded, “the essence of the concept lies in the exchangeability of property as the test of value” (p. 14). When Schmutz refers to the “essence” of market value he was arguing at Level 3 about the appropriate standards and purposes of the appraisal profession. As a result of his emphasis on substitution, Schmutz developed a nuanced view of the importance of cost. He agreed with the growing consensus that the cost of substitution set an upper limit of value but also emphasized that a “premium must be added to the cost of acquiring the substitute property” in the cases where there was an “absence of immediate availability” (p. 10).

American Institute of Real Estate Appraisers In 1951, the American Institute of Real Estate Appraisers published the 1st edition of the Valuation of Real Estate – a work that is now in its 12th edition and has traditionally been recognized as the educational text that reflects current concepts of real estate appraising. The first edition summarized the initial consensus within the organization about the standards and practices as well as the ethical standards that the organization would recognize. It recognized the applicability of the three dominant approaches to value that had been argued by various appraisers since the early 1920s and argued, “the relative importance of each approach varies with the type of property and with the purpose of the appraisal” (p. 75). As a result, the burden of determining this applicability was shifted to the judgment of the appraiser. Rather than attempting a Level 1 decision, that value was in theory a function of a specific factor (income, market equilibrium of demand and supply, long term replacement cost, etc.) it took a Level 3 approach and created a procedure for handling the problem: In any event, the appraiser does not make three estimates of value and average them by dividing their sum by three. Instead he makes three preliminary value estimates and relates each one

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of them to the spread between the minimum and maximum figures that bracket his zone of reasonable estimates. He places the most weight on that approach, which appears to have the greatest reliability as an answer to the problem to which the appraiser is seeking the answer (pp. 84–85).

RICHARD ELY’S RESEARCH PROGRAM THE REAL ESTATE APPRAISING PROFESSION As an institutional economist, Richard T. Ely’s contribution to the development of the real estate profession consists partly of refinements in the methods of valuation that are used at Level 1 in the course of buying, selling and financing real estate interests. Indirectly, through his involvement in publications and educations efforts, Ely’s spread the awareness of these methods to appraisers – a Level 2 concern. Thus, Ely’s work on Land Economics and later the publication of the initial work on urban land economics (Dorau & Hinman, 1928) focused on the importance of income and sales evidence in determining value. However, his influence is relatively indirect and the topic of real estate appraising is not a direct or significant concern of either work. Given the preliminary development of the profession at the time of their publication, this cannot be too surprising. Nevertheless, the general line of Ely’s research and his significant efforts at supporting the development of research proved to be very influential both in terms of the individuals who were responsible for forming the AIREA (Level 3), and later in terms of a legacy of research carried on by significant scholars in the area of urban land economics including Richard Ratcliff and James Graaskamp (Level 4).

The Beginnings Ely’s research program (Ely, 1917) from the beginning adopted a general approach that would guide its influence. Rejecting a central concern with theory development, Ely believed that the complexity of economic life was greater than a single comprehensive theory of distribution or rent could be made to handle. Rather than attempting to use “simple deductive processes” that can provide “easy and adequate theoretical explanations,” Ely passed over an account of “land as land” in favor of creating a sufficient “classification of land.” This classification was necessary because “the more intensive the utilization of land, the more highly developed must be the classification of land, if it is to be a sufficient classification” (pp. 23–24). As a result, Ely’s approach focused: (1) on more of a “look and see” approach based less on the application of quantitatively rigorous methodologies than on a

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naturalistic description and analysis of the actual environment including the legal and financial institutions that make it possible; and (2) his research program is more oriented toward public problems and policies rather than the advancement of pure theory. In this latter respect, his motivations were not purely intellectual and scholars have noted that Ely’s involvement in the Social Gospel movement framed his approach to public issues and was partly responsible for his strong influence on students (Gonce, 1996; Vaughn, 1995). Ely was quite specific that research was “an agency for human advancement.”

Institute for Research on Land Economics and Public Utilities With particular reference to the development of a national housing policy, prior studies of Ely’s work have identified the importance of the Institute for Research in Land Economics and Public Utilities (Weiss, 1989). It fostered a web of professional relationships, creating a series of publications and supporting research efforts that were significant for the professional careers of many individuals who influenced the formation of the real estate profession. Weiss indicates that the staff studied seven aspects of urban development: production, utilization, valuation, financing, marketing, taxation, and control. The research emphasis focused on the dynamic interplay of economic forces within land markets within the context of the changing institutions of property, contract law, and the contemporary financial instruments. The institute sponsored research by Arthur Mertzke, later Director of Research at NAREB and Frederick Babcock as part of the Land Economics Series. The primary concern of this line of work appeared to have been an attempt to improve the Level 1 capabilities of participants within the marketplace as a reaction to both the land speculation booms of the 1920s (Fisher, 1933; Simpson, 1933) and the subsequent Depression. Weiss (2000) also concluded, “Richard Ely and the faculty and researchers at his Institute, such as Arthur J. Mertzke and Horace F. Clark, were critical of appraisal ideas and methods of the 1920s” (p. 122). Weiss also cites Babcock’s concept of long-term warranted value as a reaction to these events. In addition, several of Ely’s students would greatly impact the provision of mortgage credit to the residential housing industry. Earnest Fisher, former staff member of Ely’s Institute left as Director of Research at the NAREB to become chief economist of the Federal Housing Administration (FHA) joining Frederick Babcock who became chief underwriter. Together, they created the FHA’s risk rating system that evaluated the local housing market, borrower’s income, and the physical quality of the improvements and the character of the surrounding neighborhood as a basis for evaluating lending risk.

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In the field of tax assessment, Herbert D. Simpson (Rader, 1966) worked for the Cook County Joint Commission of Real Estate Valuation and the Chicago Association of Commerce in formulating a technique for measuring real estate tax inequities. His study led to a reassessment of real estate in Cook County.

Formation of the American Institute of Real Estate Appraisers Although the documentary record of Ely’s influence is indirect, recollections by many of the most influential members of the founding groups of this institution cite their debt to him. Two examples of students – one from Chicago, the other from New York – illustrate the range of his personal influence. Harry Grant Atkinson (Atkinson, 1972; Barnard, 1972) became interested in real estate and later developed courses of study for the Central YMCA in Chicago during the 1920s. Ely was the Dean of Real Estate for this program of study and formed a friendship with Atkinson later inviting him to an educational conference at the University of Wisconsin. Atkinson met another admirer and prot´eg´e of Ely, Herbert U. Nelson, Secretary of NAREB. Atkinson eventually became Director of Divisional Activities and Assistant Treasurer of NAREB in 1925. In the course of his responsibilities, Atkinson was editor of the Annals of Real Estate Practice that summarized the annual meetings of the NAREB divisions. In January 1928, the NAREB’s Board of Directors – as noted above – created an appraisal division. Atkinson recalled later in the early 1930s that Chicago Title & Trust was daily announcing the hiring of appraisers to estimate the value of properties that had been placed in receivership. However, none of the appraisers were Realtors because – Atkinson discovered – there was no confidence that the members possessed any special competence comparable to that of other professions. Atkinson conferred with Nelson suggesting the formation of a special American College of Real Estate Appraising. Eventually, in large part due to Atkinson’s efforts, the NAREB approved the formation of the American Institute of Real Estate Appraisers. Founding members included Henry Babcock and Philip Kniskern then with Chicago Trust. Another example of particularly influential figures is Robert Armstrong’s work for the Appraisal Journal. In a testimonial forty years after the date, L. W. Ellwood (Ellwood, 1972) recalled that Armstrong was a student of Ely and that he had been significantly influenced by his teachings. Armstrong later co-authored a study of New York City decentralization with Homer Hoyt (Hoyt & Armstrong, 1941) published by the Urban Land Institute. Armstrong developed a professional practice that focused on site location studies for branch banks.

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Most importantly, Armstrong was a long-time editor of the Appraiser Journal and is credited with “taking it from a ‘how-to-do-it’ periodical for appraisers to a truly professional magazine encompassing the entire field of real estate, land economics and valuation” (p. 507). Not insignificantly, Robert Armstrong convinced L. W. Ellwood to join the AIREA. Later, the Ellwood method would significantly contribute to appraisers’ methods in calculating the effects of financial leverage on real estate value.

Ely’s Tradition – Richard Ratcliff Having worked with Earnest Fisher at the FHA, Richard Ratcliff early absorbed the institutional tradition. His dissertation studied the factors determining the location of retail enterprises. Ratcliff’s Urban Land Economics (1949) was the definitive textbook for many years in this field. Most importantly his research efforts in real estate appraising were continuing and highly influential. In addition to academic credentials, Ratcliff was a designated member of the AIREA as well as the American Society of Counselors of Real Estate and thus spoke with practical credentials. Ratcliff was also on the advisory board of the Appraisal Journal. He published one of his more important works on appraisal theory in a serial format in the January and July, 1964 issues of the Appraisal Journal. In these articles, Ratcliff attempted a restatement of appraisal theory. He argued that appraisal theory had seen little advance since the formulation of its basic positions in the 1920s. Further, appraisal practice had deteriorated. Appraisers were applying routines without understanding the assumptions and the underlying dynamics of the real estate markets. Drawing from his own studies in urban land economics, Ratcliff emphasized the importance of understanding market fundamentals as well as understanding market processes in the context of making an investment decision as the key to realistic appraisal practice. In perhaps his most trenchant statement (Ratcliff, 1964), Ratcliff said: This preoccupation with methodology has resulted in textbooks which emphasize procedures of processing information and say little about the basic economics of real estate value; in appraisal training courses which typically spend more time on the arithmetic of the income approach than on the factors which create real estate productivity in the first place; the badge of the professional appraiser has become his ability to distinguish between Inwood and Hoskold (p. 53).

Admitting that colleges and universities had lagged in their provision of quality programs of instruction in real estate, Ratcliff was still critical of the unthinking adoption of the dogma of the three approaches. At the same time, he was also sensitive to the institutional context of appraisal practice, noting that the majority

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of appraisers still worked in smaller brokerage businesses where appraising was a secondary form of income. Ratcliff’s critique emphasized the appraiser’s role in assisting decision-makers and the importance of estimating market value in a Level 1 sense. He recognized that the appraiser did not usually make the decisions but was “closely associated as an expert in a great many of the important real estate decisions and the ensuing transactions which comprise real estate market activity and which result in real estate capital formation” (p. 58). Placing a renewed emphasis on the priority of the definition of market value as a transaction providing the only objective measurement of value. He argued that the appraiser must assume the role of a forecaster who assumes the cognitive role of the most probable purchaser. The inclusion of cash equivalency and the rewording of the basic definition of value to include “most probable sales price” have been widely recognized as responses to Ratcliff’s criticisms. In his discussion of the definition of market value, Ratcliff’s institutional background is perhaps most evident as he indicated the unreality of the standard definition: For example, the legal definition of value, echoed by the AIREA, requires that the appraiser assume unreal conditions – that the buyers and sellers are all-wise and that the market is in balance; in fact, the assumed market conditions are virtually those of the perfect market of classical economics which was known never to actually exist but which provided useful parameters for analytical examination of basic market tendencies (Ratcliff, 1964, p. 275).

Ratcliff emphasized that there are several value definitions that fit different client needs – a Level 3 concern – and that appraisers must adapt their routines to the specific problems that clients present rather than the provisions of a single type of estimate for all situations. His concerns in this respect have been recognized by a continuing attempt to refine the Uniform Standards to reflect client needs concerning the type of opinion, type of report, and the ability of appraisers to customize their services to specific needs. Recent changes that recognize the ability of the appraisers – in certain situations – to act as advocates of a client reflect a further extension of Ratcliff’s critique of 1960s appraisal practice. Ratcliff also addressed the re-conceptualization of the standard routines for estimating value. He completely changed the importance of the cost approach arguing that the data must be construed in light of the most probable buyer’s motivations and the appraiser’s estimations of what the cost data implies for expected future productivity. As a result, the appraiser should normally be concerned with alternative replacement properties that are available to the buyer and only in situations where the properties are relatively similar. The sales comparison method became the paramount approach because it was based on

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evidence of market sales transactions; by contrast, he considered the income approach an indirect approach. “The record of past transactions is, broadly speaking, our major reliance as a basis for prediction” (Ratcliff, 1964, p. 288).

Ely’s Tradition – James Graaskamp As a student and successor to Richard Ratcliff in the Department of Real Estate and Urban Land Economics at Wisconsin, James Graaskamp embraced a similar but also unique perspective on real estate valuation issues. Graaskamp also emphasized the need for real estate appraisers to estimate market value in a larger context than just the provision of a single value. The emphasis of his contributions were toward developing the concept of feasibility, most probable or most fitting use, the applications of computerized techniques for discounted cash flow analysis, and a widely influential critique of the real estate appraisal profession based on an institutional analysis of the demand and supply of appraisal services. Continuing with Ratcliff’s emphasis on the importance of seeing valuation within the context of investment decision making, Graaskamp’s developed what became a classic definition of feasibility as a total concept: A real estate project is ‘feasible’ when the real estate analyst determines that there is a reasonable likelihood of satisfying explicit objectives when a selected course of action is tested for fit to a context of specific constraints and limited resources (Graaskamp, 1972, p. 515).

Recognizing the importance of marketing trends and segmentation, Graaskamp expanded the concept of feasibility to include studies identifying new market opportunities and merchandising targets. The study of the client’s objectives as well as legal/political constraints, aesthetic/ethical constraints, physical/technical constraints, and the financial analysis of the proposed investment became the object of concern. In this respect, Graaskamp (Clapp & Myers, 2000) anticipated the importance of later “no-growth” and “environmental” movements that would affect real estate development and valuation. As a result of using a broader concept of feasibility, Graaskamp also argued for a change in the principle of highest and best use. Rather than seeing a single use as being normally warranted for a property, a range of possible uses was assessed. Instead of seeking optimization, the appraiser or analyst should seek satisfaction of objectives and include ethical responsibilities. Current standards and practice of appraising have placed more emphasis on the inclusion of feasibility tests as a standard routine for appraisals. This change in the standard of practice since Graaskamp’s work in the mid-1970s reflects his influence.

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As a further extension of the feasibility concept, Graaskamp (1972) also pushed for a greater sophistication in financial analysis including the use of cash flow rather than stabilized net operating income, the inclusion of the effect of debt and taxes in the cash flow model, the inclusion of future reversionary interests, varying holding periods, and discount rates appropriate to the characteristics of the cash flow stream. The use of computers was a technical innovation that coincided with the greater demands of dealing with more variables in the context of multi-tenant properties. Graaskamp was in the forefront of experimentation in using these techniques and anticipated the movement of the commercial real estate market where such techniques are commonly employed by major institutional investors. Perhaps his most significant contribution to the appraisal profession was a thorough critique of the state of professional practice amid the Savings and Loan crisis in the mid-1980s. Grasskamp (1986) saw the low quality of appraisal reports as a reflection of the institutional characteristics of the marketplace. In agency terms, Grasskamp believed the lender and appraiser implicitly were colluding to create transactions that shifted the risk of future negative outcomes in loan defaults or losses to the Federal government and the public insofar as deposit insurance guaranteed consumer deposits. Graaskamp – interesting enough in the context of contemporary events – argued that the accounting process with its independent review of accounting practice and the established role of the Financial Accounting Standards Board represented a superior model for the appraisal industry. By contrast, he criticized the inactivity and apathy of the appraisal community in not addressing the mounting criticisms connected with the collapse of the Savings and Loan industry. Grasskamp also noted the widespread problem of conflicts of interest in the banking and investment banking sectors related to real estate interests. The institutional factors impeding reform included: the burden of financial cost in changing standards of competence and possibly negative effects on reputation fell on the existing professionals, changes in competence favored the earning capacity of only a portion of the profession (young, systematic, recently trained), possible difficulties in marketing new specialties, costs of malfeasance may increase with more explicit standards, and administrative inertia (regional conflicts, short term leadership, vested interests). However, Graaskamp also identified institutional factors that favored change. These forces included the unification of the various appraisal organizations, the interests of large investors such as the pension funds as well as regulatory agencies charged with their supervision (IRS and ERISA administration), and secondary market agencies (GNMA, FNMA, FHLMC, and FSLIC at that time). The subsequent change in Federal regulation of the appraisal industry produced significant reforms in the organization of the appraisal profession with a strong movement toward unification of the major appraisal organizations under a

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common standard of practice and ethics. In some measure, these changes are a reaction to Graaskamp’s closing remarks on how to initiate reform: We believe the route to significant updating of the appraisal process and broadening of the official metaphysical base will occur if academics and public regulators educate and coerce the users and consumers of appraisal services to demand more of appraisers (Grasskamp, 1986, p. 317).

CONCLUSIONS CONCERNING THE PROSPECTS FOR INSTITUTIONAL STUDY First, Richard Ely’s legacy has been particularly significant for the long-term evolution of the profession. Historically, the movement for the creation of a network form of organization arose from the potentially new membership. However, if Ratcliff and Graaskamp’s critiques were correct, both inertia and changes in the institutional structure of the industry at different times diminished the capacity of this private network to maintain the integrity of its own standards. In both cases, external criticisms from a relatively independent source – the academic community – were fruitful in producing meaningful change. In each case, the concerns with the appraisal profession were based on an institutional approach to real estate economics. In terms of my original framework, external critics have been most successful in advocating reforms that relate to Level 2 and Level 3 concerns. By contrast, much academic research and theoretical work is now conducted under paradigms that are exclusively concerned with Level 1 issues. This is due to: (1) the assumption of market levels of efficiency that are not characteristic of most real estate markets; (2) a commitment to quantitative rigor that is inapplicable to most real estate problems; and (3) the definition of research problems in terms of context-free, theoretical variables that do not translate into context-laden, practical problems of real estate valuation. The historical evidence suggests a continuing role for a real estate program oriented toward a sympathetic understanding of the organizational complexity of the real estate industry and the diversity of the goals and needs of the users of appraisals. Second, the foregoing analysis of the appraisal industry also suggests an approach to appraisal problems (at Level 1) that is basically institutional. Hodgson (1998) has emphasized that the legacy of the institutional approach involves the specific and historical analysis of market-based rules, norms and institutions. In the institutionalist rejection of a research program that attempts to obtain a general theory of all prices and its emphasis on a bottom-up approach to the construction of theory, the innovative potential of real estate appraising can be defended. In contemporary practice, the real estate appraiser faces a paradox that is not fully explicable outside such an institutional framework. On the one hand, the appraiser is responsible for estimating the price that market participants are

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most likely to place upon a specific real estate interest at a specific time. In this effort, the appraiser attempts – per Ratcliff – to simulate the buyers’ calculations and the appraiser is not rewarded for suggesting an answer that is more sophisticated than typical market practice. The professional adage is “don’t be smarter than the market.” This is a rule that encourages close observation and contact with the market but is not suited to reward innovation. On the other hand, the real estate appraiser is also challenged by problems where there is simply no typical market practice. In these latter cases, the legitimate role of the appraiser is to innovate in terms of methods and principles. In this type of problem situation, the appraiser has the opportunity to lead the market but often encounters constraints in the form of the objection that there are no market transactions that support their inferences. Moreover, the introduction of many contemporary analytical tools is frequently opposed on the grounds that many market participants do not use them. These two sets of cases are often separated by differences in the respective real estate markets. The appraiser’s innovative techniques are most necessary in those cases where there are no market transactions, where the assets are highly specific, and the future benefits are very difficult to estimate or parse. Adopting the institutionalist perspective implies that the real estate appraiser understands the point of view or perspective of potential buyers by extracting a rule or procedure that describes the contingent behavior of market participants but can be extended to contexts where the markets normally operate. Quite unlike the context free variables of neoclassical theory, the market rules, norms and customs are originally embedded in a context and the burden of proof rests upon the analyst to support their transference to a new situation. The methodology of this approach appears to be similar to the problem Hodgson identifies as the identification of “ideal types.” In this respect, the basic role and method of the appraiser is close to that of a participant-observer (Kummerow, 2000). As participant, the appraiser identifies and uses the techniques of the market applying them to “normal” situations using standard routines. But, in the “abnormal” situation, the appraiser critically examines these routines to discover the limitations of their applicability and any changes in the current market situation that conflict with the original array of purposes and functions that gave rise to the routines.

NOTES 1. “The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair

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sale, with the buyer and seller each acting prudently, knowledgeably; and for self-interest, and assuming that neither is under undue duress” (Appraisal Institute, 2001, p. 22).

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