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From Carl Menger to John R. Commons: Human Volition and Value Theory in Institutional Economics

Part of the Evolutionary Economics and Social Complexity Science book series (EESCS,volume 5)

Abstract

In the 1927 manuscript of Institutional Economics, John R. Commons explicitly referenced Menger’s functional analysis of the human–goods relationship developed in Grundsätze der Volkswirtschaftslehre. By chronologically scrutinizing the Menger–Commons link in the writing of Institutional Economics, this chapter aims to show the methodological inheritance that influenced the value theory of Commons. Commons had been inspired by Austrian value theory during his youth via interpretations of Clark and Smart, especially with regard to the ideas of human volition and social power. After obtaining rich working experiences in the legal and political fields, but encountering setbacks in his attempts to theorize those experiences, Commons began to scrutinize Menger’s functional analysis in Grundsätze, and this scrutiny informed the construction of his volitional theory of “reasonable value.” Menger’s functional analysis was important for Commons because it proposed the conditional logic that drives the value determination process in a power relationship between human subjective evaluation and the objective conditions of goods. Additionally, Commons was inspired by the revised portions of the second edition of Grundsätze, especially the distinction between the “economizing” and “technological” directions within the economy, and the explanation of the process through which institutions emerge from the resolution of “conflicts of interest.” Criticizing the value theory of Menger for being restricted to the field of scarcity, Commons attempted to develop it by introducing other social powers in production, bargaining and legislation. Commons’ theory of reasonable value can be understood as an extension of Menger’s subjectivist value theory based on conditional logic, because it describes human volitional actions under social situations that involve collective action.

Keywords

  • Subjectivism
  • Power
  • Volition
  • Functional analysis
  • Conditional logic
  • Reasonable value

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Notes

  1. 1.

    More interesting is that Wieser and Böhm-Bawerk, the second generation of Austrians, and Clark, the introducer of Austrian theory to the USA, also participated in the seminars of Knies at Heidelberg. In that sense, one can say that Commons, Elly, and early Austrians shared the “habitus” of the economics of the German-speaking world.

  2. 2.

    Commons refers to Menger 65 times in the draft manuscript of 1927 and 57 times in the final book published in 1934; he refers to Wieser 36 times in the 1927 draft and 24 times in the 1934 book; he refers to Böhm-Bawerk six times in the 1927 draft and 64 times in the 1934 book.

  3. 3.

    In The Distribution of Wealth (1893), Commons made no reference to Menger. Meanwhile, in Legal Foundations of Capitalism (1924), Commons referred to Menger only twice, when describing the marginal revolution that followed from the work of other economists such as Jevons, Walras, and Gossen (Commons 1924, pp.4, 40). By developing the idea of marginal utility, Menger, Jevons, and Walras were considered to have overcome the classical value theory that explains value as deriving from certain sources such as labor or usefulness. Marginal explanations explain a paradox of Smith—why diamonds are highly valued despite having no use value, while water is not valued despite being essential to human survival. Marginal theory was introduced to the USA quite early, and marginal utility is explained in the chapter titled “Consumption” in Elly’s textbook from 1893. Undoubtedly, the young Commons had evaluated Menger as one of the greatest economists in history, but he showed no special interest in the Grundsätze until the 1924 draft of Institutional Economics.

  4. 4.

    The preoccupation of the Austrian school with an individualistic approach methodology was first expanded by Schumpeter (1908) and then confirmed by Mises, from the third generation of the Austrian school, whose epistemological book declares social science should start from “human behaviors to achieve their ends” (Mises 1933/1960, 1962). The neo-Austrians who followed Mises can be called methodological individualists, but this label should not be applied to the first and second generations of the Austrian school. Some evidence exists that these neo-Austrians did not regard individuals as absolute final factors; when Menger (1871) discusses public or national wealth (Volksvermögen) and wants, he regards states, provinces, and associations as having needs as collective independent economic agents (p.112): in Book 6 of Natural Value, Wieser regards states from the perspective of independent evaluation (pp.217–243).

  5. 5.

    Commons (1934a) evaluated Wieser and proposed a bidirectional theory of power. Referring to two books by Wieser—Natural Value (1889) and Law of Power (1926)—Commons states, “[it] turns out that first book was individualistic, the second collectivistic. The first was a relation of man to nature, the second a relation of man to man. The unit of the first was a commodity that satisfies wants, the unit of the second was a moral, monopolistic, or violent force that collectively subdues the individual… In the law of value Wieser sought what is permanent and enduring under all historical and institutional changes… he finds that history is the history of collective suppression of individuals” (p. 677–678).

  6. 6.

    Commons described his motivations in writing the volume as stemming from his working experiences, particularly in relation to “labor problems and problems connected with regulation and valuation of public utility,” after his first attempts in The Distribution of Wealth to combine Böhm-Bawek’s hedonic psychology with legal rights (Commons 1924, p.vii).

  7. 7.

    Commons (1924) repeatedly uses the term “power” (this term appears in the work 1045 times) to explain the importance of political and legal process in economic value.

  8. 8.

    One exception was Commons’ teacher Mitchell (1924), who wrote an admiring review that presented Commons as a reformer of conventional economics, developing original ideas based on his experiences of taxation, labor reforms, and legislation. Mitchell’s review even observed that innovative ideas are sometimes difficult to understand.

  9. 9.

    Most of these paragraphs appear in the 1934 manuscript with some revisions. İn the 1934 manuscript, “physical economists, from Locke to Marx” is revised to read “from Locke to the end of the nineteenth Century” (Commons 1934a, p.16).

  10. 10.

    Yagi (2004) also discusses that in the process of writing Grundsätze, Menger found in relational analysis focused on humans and goods the “teleological relationship of human action and existential causality of humans and the external world at the same time” (p. 62).

  11. 11.

    Interestingly, the German term “Verfügung,” which Commons translates as “control,” comes from verb “verfügen”—a combination of the emphatic marker “ver” and the verb “combine.” Dingwall and Hoselitz (1871) translate the same sentence as “command of the thing” in the English translation of Principles of Economics. Commons interpreted the derivative word “Verfügbar qualitäten” as meaning “quantity available.”

  12. 12.

    The title “Scarcity and Efficiency” was proposed in the 1927 draft. The title was changed to “Efficiency and Scarcity” in the 1934 published version.

  13. 13.

    Grundsätze was structured to reformulate the methods of the German historicists, especially Roscher, who attempted to establish “Volkswirtschaftlehre” (the theory of the national economy) through integrative social science, including the national legal system and transaction customs, to be more “scientific” by separating economic aspects from others.

  14. 14.

    As Yagi (2004) discusses, Menger introduced relational analysis of humans and goods based on the economic traditions of the contemporary German-speaking world. For instance, Roscher and Knies wrote landmark works on economics in the German-speaking world of the day, starting with the theory of goods, which analyzes the relationships between humans and goods, and involved philosophical thoughts on humans and their relationships with the external world (p.62).

  15. 15.

    Although neither the terms “internal power” nor “external power” are used by Menger, I have introduced them for clarity. Menger uses the terms “subjective” and “objective” to mean almost the same thing.

  16. 16.

    For comparison of the revisions and additions in the second edition of Grundsätze relative to the first edition, see the editor’s preface in Menger (1923), written by his son Karl Menger Jr.

  17. 17.

    Menger (1923) criticizes Smith and Ricardo for not distinguishing the technological and economic aspects of goods, and for concentrating on the technological aspect in their economic inquiry, which should have been directed mainly at the allocation of scarce goods. Both the 1927 draft and the final published version of Institutional Economics contain similar lines of criticism: Commons (1927, 1934a) criticizes “physical” economists such as Ricardo, Marx, and Malthus for focusing only on the “economy of engineering” and confusing economic aspects with technological ones.

  18. 18.

    Commons had already referred to both topics in Legal Foundations of Capitalism (1924), but he conveyed clear distinctions in Institutional Economics.

  19. 19.

    The direction of this discussion resembles arguments put forward by Commons. However, Menger went no further than the legal origins of property rights, whereas Commons made the concept of institutions being created by the resolution of conflicts of interest central to his analysis. This may partly reflect a difference between the continental system of statute law and the Anglo-American common law system: Menger had in mind the legal system of central Europe, where laws were relatively static once enacted, whereas Commons was exposed to the American common law system, wherein dynamic processes emerge from custom. Thus Menger observed a process by which legal order emerges from custom or a historical situation, but he regarded the legal order as rather fixed.

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Acknowledgments

This work was supported by the Japan Society for the Promotion of Science (JSPS) and the KAKENHI Grant-in-Aid for Scientific Research (B) (grant number 26285048). I sincerely thank Dr. Ryuichiro Terakawa, Dr. Taizo Yamamoto, and Professor Hiroshi Osaka for providing fruitful comments and criticisms, according to which I have considerably revised this chapter. Naturally, all mistakes are mine.

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Tokumaru, N. (2017). From Carl Menger to John R. Commons: Human Volition and Value Theory in Institutional Economics. In: Uni, H. (eds) Contemporary Meanings of John R. Commons’s Institutional Economics. Evolutionary Economics and Social Complexity Science, vol 5. Springer, Singapore. https://doi.org/10.1007/978-981-10-3202-8_2

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