CARL MENGER’S EVOLUTIONARY AND JOHN R COMMONS’ COLLECTIVE ACTION APPROACH TO INSTITUTIONS

‘ Institutions are the unintended result of innumerable efforts of economic subjects pursuing individual interests.’

Institutions may come into existence as a:

• result of common will (pragmatic origin)
• unintended result of human efforts aimed at attaining individual goals (organic origin)

Institutions of organic origin ‘…to a high degree serve the welfare of society…’

How they come into existence without common will directed toward establishing them?

Compositive method includes:

• methodological individualism
• invisible – hand (organic) explanation (take into account the process by which institution is brought about ‘ as the unintended result of individual separate efforts…in pursuit of individual interests.’)

Organic explanation exemplified in Menger’s well-known explanation of the origin of money. (Evolutionary theory of money)

Steps:

1. Pure barter economy in which no common medium of exchange is used/
2. Individuals try to improve their position through trade.
3. They exchange less marketable for more marketable goods.
4. Some innovative individuals discover this particular behavior and its advantageous consequences.
5. This behavior spreads out and becomes common social practice. Eventually, it will result in the institution.

‘…origin of number of other social institutions can be explained in similar way as the origin of money.’

Invisible-hand explanation is limited in two ways:

• Many institutions have been deliberately established and organic explanation cannot be considered to be descriptive of actual process of their origin.
• Some institutions in principle cannot be explained as the outcome of a pure invisible-hand process, because they evolve from organized collective action.

Institution – ‘collective action in control, liberation, and expansion of individual action.’

Commons’ declared purpose was to widen the scope of economics by giving ‘ to the collective action its due place in economic theory.’

‘…collective action is the general and dominating fact in social life.’

Two interpretations:

1. Commons’ economics of property rights.

Deals with framework of rules within which individuals operate and interact with each other.

2. Commons’ economics of organization or corporate actor theory.

• Spontaneously evolve and informally enforced
• Deliberately established and enforced in formal way

Three things should be separated:

1. As a member of private organization the individual is subject to certain organizational rules.
2. As a citizen the individual is subject to state rules and have rights and obligations as a citizen.
3. Living within society the individual is subject to a set of rules which in part are enforced and defined by special organization the state (general rules of conduct).