Chapter 26 : THE INSTITUTIONALIST SCHOOL

THE INSTITUTIONALIST SCHOOL

Introduction

• Institutional Economics is essentially an American product and a twentieth-century phenomenon.
• Thorstein Veblen (1857-1929) was the leader of the Institutionalist school.
• Other important members included John R. Commons (1862-1945) and Wesley Clair Mitchell (1874-1948).
• The school heavily influenced government policies in the United States, particularly during the "New Deal" period.

Key Terms

📌 Exam Tidbits

• Thorstein Veblen: Leader and founder of the Institutionalist school.
• Origin: 20th-century American economic thought.
• Policy Impact: Highly influential during the US "New Deal" period.

Social Background of the School

• In the 19th century, American capitalism built a powerful industrial system and generated a large increase in national income.
• However, the working classes faced severe hardships:
• Their standard of living did not rise proportionately with national income.
• Working conditions featured long hours of work, housing shortages, and a complete lack of job security.
• Towards the end of the 19th century, monopolies emerged as powerful institutions, concentrating economic and political power in the hands of big business.
• Laissez-faire policy was hypocritically applied: it was used to suit influential sections of society, yet the government readily passed legislation granting tariff protection whenever it advantaged the business community.
• Political corruption was common, and society was dominated by big business and absentee ownership.
• This capitalist industrial foundation led to the growth of an American leisure class.
• Reaction of Economists: Dissatisfied with the existing doctrines of the classical and marginal schools, economists split into two camps:

• The Institutionalists were notably attracted to some ideas of the German historical school.

Key Terms

📌 Exam Tidbits

• 19th Century US Capitalism: Characterized by rising national income but stagnant working-class living standards, long hours, housing shortages, and no job security.
• Laissez-faire hypocrisy: Used for convenience by the elite, while businesses actively sought and received government tariff protection.
• Institutionalist Motivation : Sought social control over institutions to reform society, rejecting…