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7. Institutional Economics - 23 American Institutional...

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23. American Institutional Economics in the Interwar Period Malcolm Rutherford Subject Economics » History of Thought Place Northern America » United States of America DOI: 10.1111/b.9780631225737.2003.00024.x 23.1 The Formation of Institutionalism as a Movement The explicit identification of something called the “institutional approach” to economics, or “institutional economics,” goes back only to 1918. In 1916, Walton Hamilton mentioned that Robert Hoxie had called himself an institutional economist, so the term was in verbal use by then ( Hamilton, 1974 [1916] ), but its first prominent use in the literature of economics occurred in 1918 with Hamilton's American Economic Association conference paper titled “The Institutional Approach to Economic Theory,” published in the AEA proceedings in 1919 ( Hamilton, 1919 ). Hamilton's paper was clearly intended as a call for the economics profession at large to adopt what he called the “institutional approach.” Hamilton argued that anything that “aspired to the name of economic theory” had to be (i) capable of giving unity to economic investigations of many different areas, (ii) relevant to the problem of control, (iii) relate to institutions as both the “changeable elements of economic life and the agencies through which they are to be directed,” (iv) concerned with “process” in the form of institutional change and development, and (v) based on an acceptable theory of human behavior, one in harmony with the “conclusions of modern social psychology.” According to Hamilton, only institutional economics could meet these tests. The “leaders” of this move to develop an institutional economic theory he identified as H. C. Adams and Charles Horton Cooley – both his own teachers at Michigan – and Thorstein Veblen and Wesley Mitchell. At the same session, J. M. Clark spoke on “Economic theory in an era of social readjustment” ( Clark, 1919 ), and argued for an economics both “actively relevant to the issues of its time” and based on an “ideal of scientific impartiality.” Walter Stewart (Hamilton's friend and colleague) chaired this session, and in his remarks commented on need to utilize the “most competent thought in the related sciences of psychology and sociology” and to build an economics “organized around the central problem of control.” He also stated his belief that “an adequate analysis of many of our problems can be made only by a union of the statistical method and the institutional approach” ( Stewart, 1919 , p. 319), a reference to his own and Wesley Mitchell's quantitative work. The exact timing of this effort to promote “institutional economics” as a distinctive approach likely had much to do with the end of World War I. The war had impressed upon many the great importance of improved economic data and policy analysis, and of the potential role of government in the economy. The period of reconstruction seemed to offer significant
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opportunities to bring changes to the conduct of economic research, education, and policy. In
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