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Design for Values in Economics

  • Aad CorreljéEmail author
  • John Groenewegen
  • Rolf Künneke
  • Daniel Scholten
Living reference work entry

Abstract

We distinguish the subjectivist value theory, providing the basis for neoclassical economics (NCE) and new institutional economics (NIE), and the social theory of value, underscoring original institutional economics (OIE). In NCE design involves a comparison of the structural characteristics and conduct in a real world market with the theoretically ideal competitive market. If any problems are identified, corrective action should (re)establish competition. NIE would additionally examine the characteristics of the transactions and potential external effects and evaluate the adequacy of the prevailing market institutions. The focus is on designing the right institutions for markets to reveal the subjective values of actors. OIE looks at design in a dynamic, holistic, and systemic way and considers “the market” as one of the possible tools out of many to realize social (moral) values. Individual and common values emerge and are constituted in interaction, being judged and deliberated in their specific context of time and place regarding their consequences for society.

Keywords

Subjectivist value theory Social theory of value Neoclassical economics New institutional economics Original institutional economics 

Introduction

In this chapter we will address the notion of design for values in economics. We will discuss how the notion of value is conceptualized in two different paradigms in economics, with different implications regarding the activity of design. Value has been central in economics from the early days onward. In the early history of economic thought, value was supposed to be inherent to the object. Either God had given the object value or man had given it value through its labor, the labor theory of value.1 The value of goods or services and the exchange rate between them were supposed to be objectively determined. With the Marginalist Revolution in the 1870s, the subjectivist theory of value was introduced into economics, according to which individual human preferences give value to objects. Individual actors know how they value the goods they want to purchase or produce and express their preferences via their offerings in the market. Value became equated with price. A contrasting approach toward values is advanced in the so-called social theory of value that explains how values are constituted in society and why the individual preferences of the “homo economicus” should be replaced by the socially constructed values of the “homo socialis.” In the social theory of value, a clear distinction is made between the underlying fundamental convictions actors hold (sometimes addressed as Values with a capital “V”) and the economic exchange value of goods and services. Underlying Values are

(……) enduring convictions about what is good, [V]alues can pertain to a good life, to a good or just society, but also to what constitutes a good work of art. (Vermaas et al. 2011, p. 39; see also Dolfsma 2004, p. 48)

This chapter is organized as follows. In the second section, we discuss the subjectivist theory of value. This theory is endorsed in neoclassical economics (NCE) and new institutional economics (NIE), and we explain how these two schools in economics put the individual preferences of the “homo economicus” on center stage. We explain how the related ethics of utilitarianism together with the so-called deontological ethical rules determine the “free market” as the arena where the individual subjective values can and should be revealed and where they (should) coordinate transactions. In this section we also address the implications of the subjectivist value theory for the issue of design. The section closes with a discussion on how economists design, to realize general values like welfare and specific values like, for instance, privacy and safety. We will use the process of the EU energy market development to illustrate how these subjectivist notions of design are applied in real world economic policy making. The third section addresses the social theory of value, associated with the school of original institutional economics (OIE). We discuss how values are constituted and how values are emerging and designed in an evolutionary, social process. It will be shown that not only deontological ethical rules are of importance but also the more contextualized virtue ethics. This turns out to have large implications for the design issue and likewise for the question how to design for values, as will be shown in our examination of the development of a common energy market in Europe.

The Subjectivist Theory of Value2

Neoclassical Economics

In the models of standard neoclassical economics (NCE), individual consumers are assumed to decide on the basis of their utility function, the subjective value. The utility of a good or service is the capability to satisfy individual wants, and the value of an object is what the individual ascribes to it because of his/her preferences. Given their preferences, the individual consumers are assumed to maximize their utility through their demand in the market.3 Individual producers determine what they offer in the market, taking into consideration the profits they collect at a given market price. The aggregate demand of all individual consumers, in confrontation with the aggregate supply, results in a certain amount of goods traded at the equilibrium price, i.e., the price that consumers are willing to pay and that producers accept.

So the individual with exogenously given preferences is the starting point for the economist. This approach, based on individual utility functions, allows for individuals having moral preferences, like acting in the interests of others (Becker 1996). Yet that is outside the domain of economic inquiry. In that sense, according to NCE, economics is a “value-free” science: it does not study and evaluate the subjective values as such, but takes the “revealed” preferences as a given.

These preferences are to be revealed in the offerings of the actors as buyers and sellers in the market. The actors in NCE are modeled with specific rules of behavior; they maximize utility and profit and minimize costs. They also have characteristics of full rationality, which makes an ex ante calculation of optimal combinations possible. So the homo economicus is a fully informed actor, who is positioned in a well-defined environment of a specific market structure, like a perfectly competitive market, or a monopoly.

This environment is analytically considered a static given, exogenous to the model. In applying the Methodology of the Scientific Research Program on NCE, Latsis (1976) identified the hard core, protective belt, and heuristics of neoclassical economics. He concluded that the core models are all of a “single-exit structure.” Given the characteristics of the actors and their situation, logically they have no other option than to calculate and to “choose” the one optimal solution, which is the one theory predicts. This does not only hold for the model of pure and perfect competition but also for the monopolistic and oligopolistic models with well-defined price or quantity reactions.

Neoclassical Economics and Value

Economists present their discipline as a value-free science in the sense that they do not normatively appraise the subjective values of the actors and in the sense that in their scientific investigation they have objectively access to the facts. The neoclassical theory adheres to the positive-normative dichotomy that separates fact (“what is”) from value (“what ought to be”). The wants and subjective valuation of actors are exogenously given objective facts for the scientific researcher. A normative analysis of those facts cannot and should not be part of the economists’ scientific inquiry. The positive and the normative should be carefully separated and then, it is claimed, economics is a value-free science. A related tenet to this separation is the claim that the facts are objectively accessible through our senses. The facts economics is studying are “brute facts,” i.e., they are in no way constructed by the theoretical concepts applied (see section “Original Institutional Economics (OIE)” below for explanation).

It is on this basis that NCE claims to embody the principle of so-called “ethical relativism” (Tool 1986); all values, criteria, and preferences are relative to individuals. It is considered inappropriate to judge the values and criteria on the basis of which the rational individuals choose. Such wants are given and “utility” is taken to be a proxy for Values. “Thus utility is the meaning of value in orthodox neoclassicism and price is its measure” (Tool 1986, p. 9).

In NCE the original Benthamite utilitarian principle of comparing individual utility is considered impossible. It is replaced by the Paretian principle, stating that one can only identify situations in which society as a whole is better off. Because comparing the utility of individuals is impossible, a redistribution between individuals is rejected. The Pareto optimum states that the situation is improved when at least one person is made better off without making anyone else worse off “(…..) thus removing the moral basis of utilitarianism from welfare economics (….). By so absorbing morality into subjective and incomparable individual preferences, neoclassical economics has effectively removed ethical evaluation from welfare analysis” (van Staveren 2007, p. 22).

New Institutional Economics

Since the mid-1970s, the school of new institutional economics (NIE) developed strongly with Nobel laureates like Ronald Coase (1991), Douglass North (1993), Elinor Ostrom, and Oliver Williamson (2009). The earlier Nobel laureates Friedrich von Hayek, Kenneth Arrow, and Herbert Simon are often considered to be institutionally oriented economists (Williamson 1975).

The NIE addresses questions that were no part of NCE, such as why do institutions like property rights and firms exist? What is the role of values and norms in society? What is the impact of differences in the institutional environment of economies, markets, or sectors on the allocation of goods and services? In short, why do institutions exist and why do they matter? In addressing such questions, NIE introduced two additional attributes to the economic actor: bounded rationality and opportunistic behavior. The first is about the limited capacity of actors to capture all relevant information and to calculate their individual optimal outcome or to make a complete contract in which all eventualities are taken care for. The second is about the possibility that actors abuse asymmetry of information, by providing misleading information to others or even by cheating them.

Hence, NIE positions the actors in complex and uncertain environments implying that they are not able, as in NCE, to eliminate all uncertainties through complete contracting. So, as is argued, to govern their transactions in an efficient way, the actors create institutional arrangements like vertically integrated firms, a variety of (long-term) contracts, forms of cooperation, and branch associations. Maintaining the value-free philosophical and methodological characteristics of NCE,4 NIE explains that institutional arrangements exist because they are efficient in minimizing transaction costs. Therewith, the actors are able to reduce their overall cost of supplying and purchasing the particular good or service in the market. Hence, the transactions take place at lower prices enhancing overall societal welfare.

Williamson (1998) presents his view on values and how different schools of economics deal with value in Fig. 1. At level 1 NIE explicitly recognizes the existence of values reflected in informal institutions as exogenous variables of importance. These informal institutions include attitudes, norms, customs, and religion.5 Informal institutions are not explicitly formulated and written down but are internalized in the hearts and souls of the members of a community. Informal institutions change slowly and are not subject to economic calculative behavior. Individual economic actors, and even groups of actors in collective action, are rarely in the position to purposefully (re)design informal institutions. Informal institutions emerge “spontaneously” out of the interactions of millions of actors (see below the discussion of Aoki 2001, 2007). Informal institutions are in the domain of “social theory” and considered a given for the economist. Yet whereas they are no object of economic analysis, it is important for an NIE economist to be well informed about the informal institutions in a country, market, industry, or firm, because they have a strong influence on the formal institutions at level 2.6
Fig. 1

The Economics of Institutions, from Williamson (1998, p. 26)

The formal institutions, the “rules of the game,” like laws and regulations belong to the domain of NIE and are subject to so-called “first order economizing.” The central theory at level 2 is the theory of property rights. Different configurations of property rights (private, public, collective, and common) influence the behavior of actors differently and produce different outcomes. Societies that aim for efficient allocation of their scarce resources better “get their formal institutions right,” including the agencies that monitor behavior and enforce rights. Clear, enforceable property rights, an independent judiciary, and an objective bureaucracy should be designed to provide individual actors with the right incentives to maximize their profit and utility or to minimize costs.

Level 3 refers to the next step on the path of “economizing,” the governance. The purpose of transaction cost economics (TCE) is to understand why different modes of governance exist to coordinate economic transactions. TCE explains the existence of different types of contracts of hierarchical organizations like firms, multidivisional firms, and multinational corporation, of regulatory agencies, and of state-owned enterprises.

Williamson became a Nobel laureate (together with Elinor Ostrom) for his work on governance. He showed how specific governance structures could be matched, “aligned,” with specific types of transactions so that transaction costs are minimized. Transactions in a market can be distinguished by particular characteristics. A chief aspect here is the degree to which the assets involved are specific to a transaction, locking in the economic actor, or whether they can be (re)employed easily in other uses (see below). Other important issues are the frequency of the transactions taking place, uncertainty in the market, and the nature of surrounding informal and formal institutions and of the actors involved. These are the independent variables indicating a greater or lesser need for the actors to make safeguards against their potential opportunistic behavior. The dependent variable is the governance structure; the larger the possibility of opportunism, the more complex the contract will be, the higher the transaction costs involved, and the more efficient a more hierarchical arrangement may be. Eventually, above a certain threshold of transaction costs, private actors may withdraw from the market, and it may even be necessary to invoke public oversight or state-owned enterprise to carry out certain economic activities.

In new institutional economics, the line of reasoning of neoclassical economics is maintained: the actors maximize profits and utility and minimize costs. They do so in the prevailing environment of formal and informal institutions. An important underlying assumption is about the selecting role of competition. The competitive market is supposed to force actors to select the most efficient governance structure; otherwise they will not survive the rivalry with their competitors. The economic allocation and prices and quantities transacted by the actors at level 4 then are an issue for NCE and principal-agent theory7.

From Comparative Static to Dynamic

The TCE approach à la Williamson is in essence a comparative static approach, in which alternative governance structures are evaluated against each other on the basis of their efficiency (Groenewegen and Vromen 1996, Groenewegen and de Jong 2008). Within NIE, Masahito Aoki has developed a dynamic approach of institutional change that fits well with the NIE characteristics of efficiency and equilibrium. In his “comparative institutional analysis,” the emergence and evolution of institutions are not explained as the result of a purposeful collective decision but as the unintended result of a sequence of micro decisions. To understand the spontaneous emergence of institutions, the so-called coordinated game is relevant. When the domain of the game is specified in economic, political, judicial, or social terms, while the choices the agents can make are specified as well, then it can be shown that boundedly rational actors will create stable institutions over time. According to Aoki (2007, p. 7), “An institution is a self-sustaining, salient pattern of social interactions, as represented by meaningful rules that every agent knows and are incorporated as agents’ shared beliefs about how the game is played and to be played.” Aoki conceptualizes institutions as equilibria, which emerge out of the unintended actions of the actors at a decentralized level in the system. Accordingly, he calls his approach the “institutions-as-an-equilibrium approach.” How do these social rules come about?

“Institutions are the result of human action, but not of human design” is a well-known saying that captures the essence of the evolutionary approach. This refers to actors behaving in a specific way because it is in their own interest to do so and as an unintended outcome an institution like a norm or convention emerges. That behavior at individual level of the actors can be intentional (they aim, for instance, at minimizing costs) or routinized (not being aware, actors follow a specific rule). The point in the evolutionary approach is that institutions can come about without individual or collective action intended to create the institution or to change the existing one. The outcome of all the individuals’ behavior can be the emergence of an institution that, once in existence, is durable and structures individual preferences, behavior, and social interaction (see also Greif 2006). The explanation of the emergence of such durable institutions is efficiency based. All actors consider behavior in line with the emerging norm to be in their own interest and would like to see others to behave likewise. The actors discover that it is costly to ignore the emerging institution and that it is beneficial to follow suit, therewith reducing uncertainty and information costs. This insight is growing over time when the institution develops and actors increasingly share the same knowledge, establishing the institution and creating an equilibrium.

According to the “institutions-as-an-equilibrium” approach, the regularity has become an institution, a norm, or a convention, when a large majority of the actors in the community have internalized the regularity. In the literature this approach is also called “spontaneous” (see level 1 in Fig. 1), because it is a matter of self-enforcement. No external authority forces the actors to behave according to a specific institution. The process emerges spontaneously purely based on the self-interests of the individuals.

The Design Issue in the Subjectivist Theory of Value

According to the subjectivist theory of value in neoclassical and new institutional economics (both in the Williamsonian and the Aokian version), individual actors should be able to reveal their subjective values or preferences in an efficient market. Consequently, the design issue is about the shape of markets or more broadly the design of market economies, which include the political and social institutions that support the market. When the market is designed well, automatically the best possible outcome will result.

The Design Issue in Neoclassical Economics

The design issue in NCE focuses on the value of efficiency in market structures, as a means to let individual consumers fulfill their subjective values. NCE adherents are convinced of one thing: competition will bring the best outcome possible for society, whatever that may be. A well-functioning market will reveal the outcomes over time, and prices will reflect the aggregated preferences of the consumers and the optimal combinations of the production factors.

When the specific conditions concerning the market structure and formal competition law are fulfilled, competition will put the individual suppliers in the market under pressure, resulting in a search for the most efficient combinations of scarce resources, to offer the individual consumers products and services at the lowest price possible, fulfilling their subjective values. Moreover, the market will push participants to innovate, in products, production processes, and governance structures, to stay ahead of competitors. So subjective values are central and the market is the most effective and efficient means to realize society’s welfare. Note that in NCE the introduction of the market and its competitive nature does not tell us anything about the specific outcomes the market will bring us. Which services will be offered, at what prices, and which values of whom will be fulfilled are unknown, ex ante.

In NCE this conviction has led to a description of the ideal type of a competitive market with many independently operating suppliers and many consumers as the reference model and to a corresponding competition policy. All market actors should have equal access rights to input and output markets and to the relevant objective information. All private institutional arrangements, like vertically integrated firms, strategic alliances or acquisitions, and public interventions other than based on competition law, are considered “anticompetitive.” This is because they reduce the number of market participants, their independent behavior, and the private choices of the trading actors. Firms are production functions and the market is a “signaling device,” in which prices objectively signal consumers and producers what the scarcities are and when these have changed due to exogenous shocks. Also the consumers in the mainstream market economy are assumed to serve the functioning of the market economy, and the right consumer behavior is to switch to another product, or supplier, when price and quality differences indicate so.

The universal (moral) rules of the (competitive) game described above and the corresponding rights and norms of consumers and producers in the market are part of the so-called deontological ethical rules that embed the neoclassical market and that should be enforced by legal measures to make the market function properly (Van Staveren 2007).

An illustrative application of this perspective on a process of market design is provided by the development of the Internal Energy Market in Europe, post-1988 (CEC 1988). This policy was enacted by the European Commission with the predominant objective to establish a single market for energy within the area covered by its member states. To this end the Commission has launched a variety of initiatives to reduce the barriers to trade within and between the member states for coal and oil products as well as for grid-bound electricity and natural gas. Main objectives were the dismantlement of the large variety of national regulatory structures and public and private monopolies through which the trade in fuels and power was coordinated traditionally. Open, EU-wide markets should be created to allow consumers to select the best offers from competing suppliers. The main tools available to the Commission were, on the one hand, the traditional instruments of competition policy and, on the other, instruments of sector specific regulation, formulated in Electricity and Gas Directives and to be implemented by the member states in their legal frameworks (CEC 1996).

In essence, the idea was that the energy industries would require price and access regulation over a transitional period, limited in time, after which a competitive market would have been established, taking care of an efficient coordination of the transactions between buyers and sellers. Consumers would follow their preferences and select the most adequate suppliers, taking into consideration prices and quality. Governments would withdraw from intervening in the markets, the overall costs of energy supply would fall, quality and services would improve, and excessive monopoly rents would disappear. Energy would become a normal commodity, it was argued.

The Design Issue in New Institutional Economics

Expanding the world of NCE, Williamson (1975) showed how all kinds of private governance structures were not only meant to create market power but also aimed to reduce the transaction costs. Hence, they should not always be forbidden by competition law; the subtitle of his book was “implications for antitrust policy.” Private ordering of markets serves efficiency according to NIE, not only to be calculated as a minimization of production costs as in neoclassical economics but also as the minimization of transaction costs.

NIE introduced another economic vision on private and public institutional arrangements, and Williamson (1979) discussed a range of efficient governance structures. Each of these structures can be efficient to coordinate specific types of transactions, depending on the degree of asset specificity of the good or service transacted. As stated above, when the investments are very specific then the asset is worthless when the transaction is ended. The degree of asset specificity has implications for the possibility of opportunistic behavior and therefore for the need of safeguards.

When transactions have a low asset specificity, then the “ideal” traditional (spot) market contract is most efficient. Such transactions involve either (low) capital investments that can be made productive in other applications without costly adjustments, or they provide more or less standardized goods and services that can be traded easily. Hence, the investor or producers are not locked into a transaction with a specific purpose, at a specific location, or with a specific partner. An illustrative example is the trade in oil products, with a large market for more or less standardized fuels, like gasoline, diesel, and kerosene, being produced in refineries that accept a wide variety of crude oil inputs, from many producing countries all over the world, being delivered by ships that can go anywhere. Indeed, the danger of potential opportunism is largely absent, because of the high substitutability of the good and the high level of competition in the market, both among the suppliers and the customers.

When investments (assets) are tied up to particular uses, locations, and customers, their asset specificity is said to increase. For example, gas and electricity supply systems involve gas and power production from gas fields and power plants, cables and pipelines transporting the gas and power from A to B and C, and the gas and power distribution networks, connecting the customers, with their specific customized gas and power appliances. But the required hardware assets of the producers, the transporters, and the users are highly “specific” to their function in the system, their location, and often their use in combination with other assets. A windmill without access to a connecting cable is worthless and vice versa. The profitability of huge investments in underground gas storage facilities is jeopardized when the contractors of the capacity are free to shop around among such facilities, driving down the storage tariff to rock bottom levels. So nobody will invest, facing this risk.

Functioning systems require all components to be in place and to be used, at a sufficient level of supply and demand to justify the cost of the installed assets. Certainty of supply and of delivery at an acceptable price, covering the cost and an adequate remuneration, is then to be assured through long-term contracting or so-called “hybrid” governance structures that limit the autonomy of the actors in behaving opportunistically. So when high risk is at stake because of asset specificity, the efficient governance structure shifts from market to the hierarchy of the (contractually) vertically integrated firm.

Williamson moved from there into the public sphere of regulation and state-owned enterprises (“public bureau”), arguing that at even higher levels of asset specificity and uncertainty, public governance of regulation and state-owned enterprises are required to facilitate such transactions, a prime example being flood defenses in which no one would invest in as a private undertaking. But also the transport infrastructure in power and gas systems is often publicly owned, for the reason of “security of supply.”

Hence, the design issue in NIE is about “getting the institutions right” at level 2 and “getting the governance structures right” at level 3 of Fig. 1. Although Williamson directed most of his attention to level 3, many other NIE economists also apply transaction cost insights to design issues at level 2. Spiller (2013), for instance, has demonstrated how the cost of regulation in “public-private contracting,” as contrasted with Williamson’s private-private contracting, brings in situations of governmental and third party opportunism and shows how institutions can be analyzed and designed to minimize such public and politically inspired opportunistic behavior.

The notions of uncertainty, asset specificity, and opportunistic behavior may explain the evolution of the design process of EU energy market policy post-1990. In contrast to the initial expectations, the process of market restructuring turned out to be highly complex and politically sensitive. Most member states were hesitant in dismantling their prevailing national industry structures. They saw the creation of a competitive industry primarily from the perspective of preparing their own public and private firms, to withstand competition at home while expanding into neighboring markets (Thomas 2003). Moreover, the interests of national energy industries, like the production of coal and natural gas or the nuclear technology complex, were defended both economically and strategically under the banner of “national interest.” Interestingly, under the banner of “consumer protection,” end-use prices became regulated explicitly in quite a few countries (Haaland Matláry 1997).

In response, in 2003 and 2009, the Commission strengthened its sector regulation efforts by issuing new Directives with increasingly far-reaching requirements, taking into consideration the character of the transactions at stake and the environment of the system in which that took place. These involved, firstly, the vertical unbundling of the national or regional supply monopolies in the electricity and gas industry. Gas and electricity transport networks were separated from the potentially competitive gas and power production companies and from commercial trade and retail activities. The networks, as “natural monopolies,” were to be regulated on a cost-plus basis as regards their access conditions, tariffs, and investments, to provide “third party access” to all of the trading parties. It, secondly, involved the horizontal unbundling of formerly monopolist firms to create competition in trading, i.e., the national monopolies had to be divided up into a number of firms that were expected to compete with each other. Moreover, the EU Directorate General for Competition began to actually intervene in the market, by prosecuting large, dominant energy firms on the ground of abuse of market power and hindering competition. Thirdly, the European Commission sought to establish trading platforms in wholesale markets, arrangements for the cross border transport of power and gas, and an EU-wide Agency for the Cooperation of National Energy Regulators (ACER), aiming at the further interconnection of the national markets (CEC 2003, 2009a, b).

Essentially, all such institutions were part of the design of a “well-functioning European energy market version 2.0,” taking into account – and correcting – the variations in asset specificity and uncertainty in production, transport, and (retail) trading, as outlined in the NIE theory (see Joskow 2008; Spanjer 2009; Correljé et al. 2012, 2014).

Step by step, the new contours began to appear of a different European energy industry, consisting of a relatively small number of large internationally operating multi-utilities, producing and trading both power and gas, surrounded by a large amount of asset-light firms that traded on the national exchanges. These suppliers and traders were facilitated by national or regional transport and distribution systems that were regulated by newly established national regulatory authorities (NRAs), in respect of their operation, their income, their tariffs, and their investments. Hence, until halfway the first decade of twenty-first century, the priority of the restructuring process had been with NCE- and NIE-inspired market design, to enhance societal welfare and economic efficiency, however, against vested interests in industries, national resource sectors, sustainable energy beliefs, and (unionized) labor (Thomas 2003; see Correljé and De Vries 2008).

Design for (Moral) Values

In applying the subjectivist theory of value to the design of institutions, implicitly two central assumptions are made, namely, that individual subjectivist value judgments count first and foremost and, secondly, that the market is the institution that offers the most efficient way for individuals to reveal and realize their values (Van Staveren 2007, p. 1). Consequently the design of an effective and efficient market comes first, with deontological ethical rules that allow and facilitate (many) actors to enter the market on an equal basis, that secure that these actors have access to the relevant information, and that take care of fair competition. These rules are for NCE exogenous to the economic analysis, as given constraints that delineate the arena of the so-called free market where actors can make choices according their subjective values. For NIE these rules are part of the economic analysis and, as such, they are subject to “design.”

Next to constraints concerning the proper functioning of the market, societies can design additional constraints concerning requirements regarding production, distribution, and consumption, based on moral values. Examples are found in biological engineering (genetic manipulated food), the ban on child labor, environmental care, and the like. According to the subjectivist theory of value, the arena of the free market is then further restricted to the benefit of those collective values a society explicitly wants to realize.

Within the subjectivist perspective, a main argument for publicly intervening in the workings of the “free” market involves the so-called externalities. Externalities are costs and benefits for individual actors that are not reflected in the prices they pay for goods and services. So actors bear costs or enjoy benefits they are not compensated for or for which they do not pay a price. The well-known examples are negative externalities of power plants that pollute the environment. The price of electricity does not reflect the societal cost of air pollution, as long as there is no market that registers the cost of pollution of clean air. The costs of irritating eyes or, even more serious, the costs of health damage to the people living in the neighborhood of the plant are not internalized in the price of electricity.

In subjectivist economics two ways are suggested to “internalize” such externalities. One way is suggested by the work of Pigou and the other is based on the work of Coase. Both the Coasean and Pigovian perspectives internalize the externality via cost-benefit analysis, by objectively calculating the corrections that should inform actors about the “right” prices, resulting in technical and allocative efficient allocation of the scarce resources. In the Coasean world, the individual actors know the price of either the external costs or the benefits they are willing to pay or accept. This forms the basis for their negotiations about changes in the property rights. Hence, design is geared toward creating institutions that allow the individual actors to freely negotiate about private contracts that internalize these external costs and profits (Coase 1960). In the Pigovian world, a higher level of collective decision-making, like a regulatory agency, is established to correct the outcome of the free market by calculating the required corrections of the prices by means of taxes and subsidies. So the externality is objectively internalized in the market price (Pigou 1932).

In both worlds the arena of the market for individual actors to buy and sell is preserved and analytically (and policy wise) extended into the domain of the externality. In the European energy sector, prevailing sustainability issues involved local pollution externalities, like sulfur, lead, NOX, and particles emissions, to be solved by neoclassical instruments as product and process specifications (property rights) and taxation (externality pricing). Specifications, as the outcome of negotiations between “producers” and “victims” under guidance of an authority, determine the acceptability of a specific level of pollution, i.e., the right to pollute or to accept pollution, as the balance between the costs incurred by avoiding this pollution by the producers or the cost of the harm inflicted upon the victims. Taxation may add the assumed societal cost of pollution to the free-market price for a good, therewith adjusting the supply/demand equilibrium and reducing the amount of pollution.

To summarize, in the subjective theory of value the arena of the free market, revealing and implementing subjective values, is constrained by: first, rules that make the free market function properly; secondly, interventions that correct prices in order to internalize externalities; and, thirdly, rules that constrain actors and that oblige and forbid, in order to realize societal (moral) values. Hence, the market is conceptualized as a free arena, yet constrained by a set of rationally set rules that belong to the institutional environment of that market.

The Social Theory of Value

Original Institutional Economics (OIE)

In the USA, by the end of the nineteenth century, Thorstein Veblen was a well-known institutional economist, highly critical of neoclassical economics (Veblen 1899, 1904). In his opinion NCE was too formal and abstract and too static and wrongly based on the theoretical assumption of individual actors that are disconnected from their institutional environment. Until around 1945 an influential group of American institutional economists dominated the further development of institutional economics. Wesley Mitchell (1927), John R. Commons (1931, 1934), and Clarence Ayres (1944) joined Veblen in his criticism of NCE and underlined the importance of including institutions in the economic explanation (see Gruchy 1972).

The work of those institutional economists is called original institutional economics (OIE). With respect to values, the OIE developed the so-called social theory of value. Values are not considered to be exogenous to the economy and based on the individual preferences, but they are constituted in a process of interaction between individuals where preexisting values play a structuring role. This is a fundamental contrast between the subjective (NCE and NIE) and the social theory of value (OIE),8 which incorporates a number of other crucial differences, like the attributes and motivations of actors, the structures that embed actors, and the interaction between actors and structures.

According to OIE, the economy, first of all, is an evolving system, in which actors of a different nature (political, economic, social) with different interests and capabilities and with different amounts of power take decisions. They act, react, follow, initiate, and choose. In doing so, these actors are constrained and enabled by structures such as technology and formal and informal institutions and also by their own “mental maps” (Denzau and North 1994). In the evolving economy actors, structures and values are mutually constituted. The nature of economic reality is one of change, and the core research question economics should pose is first of all about understanding that change.

A second important difference between NCE and NIE on the one hand and OIE on the other is in the nature and role of markets as allocation mechanisms. Above we explained how markets are conceptualized according to the subjectivist theory of value: markets are neutral and prices should reflect subjective values. Intervention from “outside” is allowed to make either markets function properly or when constraints are needed for exogenous (moral) reasons. In line with the social theory of value, OIE approaches markets and nonmarket allocation mechanisms differently. Firstly, the question about societies’ collective values is asked: what ought to be and what is the end. Then the actual situation is characterized and analyzed, the is. If there is a gap between the ought and the is, the question how the gap should be repaired arises. When (intrinsic) values (and their related instrumental values and policy objectives) do not match with the actual performance of the economy, how then to intervene? An important starting point of OIE analysis is normative: what are the values of societies to design for (the “ought,” the “end”) and when these are compared with the “is,” what then to do about the gap? That is what OIE economists mean when they claim OIE is problem solving and policy oriented.

In order to comprehend the role of individual and collective actors in the process of change, OIE considers a deep understanding of the drivers and motivations of actors of utmost importance. Institutionalists want to know about the “why,” so in case another outcome is desired, they have to know how behavior could be changed, by means of what kind of interventions. Instincts, habits, and customs are seen as important drivers and motivations for human decisions. Habits, for instance, are dispositions of actors that have evolved over long periods of time and form the basis of many of the actor’s decisions. It would be a misunderstanding, however, to consider habits as mechanically repeated behavior: “habits of thought” form the foundation of much of our behavior and contain past beliefs and experiences, but at the same time human actors have more or less capacity to deliberate and to choose, depending on their environment. They are also “volitional” (Commons 1934; Bromley 2006). Moreover, actors are able to identify habits, to analyze how these influence behavior, and to evaluate whether the habits contribute in realizing the desired consequences of actions or not. If this is not the case, then actors can make existing habits and their consequences explicit and start a process of deliberation in an attempt to change habits (Bromley 2006; Hodgson 2004).9

In the OIE framework, actors are positioned, with evolving “cognitive structures,” in an evolving institutional context; actors and structures are mutually constituted. Economic actors are social actors operating in specific institutional environments, while markets are institutionalized structures, in which power is equally important as efficiency to understand their performance. It is, according to OIE, a fundamental misconception to present markets as neutral anonymous selection mechanisms, in which individuals independently decide, as if they were atoms. Markets are political constructs, strongly regulated by informal and formal institutions, the rules of the game. In part, these rules evolve spontaneously, especially the informal ones, but they also result from purposeful design.

Moreover, the political process of institutional design and redesign is heavily influenced by societal interest groups. It is characterized by struggle and conflict, because a change of rules almost always implies an adjustment of the distribution of costs and benefits. Consequently markets are best perceived as evolving systems, in which individual and collective action results in both intended and unintended consequences. As a consequence, markets are never in equilibrium but always in a process of adaptation, transition, and evolution.

OIE and the Social Theory of Value

The existence and constitution of collective values are explicitly taken on board in the social value theory. On the one hand, values underlie the formal and informal institutions of society, and through that “filter” they determine the (economic) values as terms of exchange (Dolfsma 2004, p. 49). On the other hand, the analysis undertaken by the economist is not value-free; facts are always theory laden and on top of that theories are value laden. In contrast to the subjective theory of value, facts and values are not separate categories. Reality is not considered to be composed of objects or “brute” facts, to which the researcher has direct access and which would allow for having objective knowledge about. On the contrary, in order to understand the complex reality, people in daily life and researchers in scientific inquiry make use of “ordering ideas,” like concepts, categories, and frameworks that allow for abstraction and that structure the “brute” facts.10 The world of facts is complex and continuously data have to be sorted out, applying specific standards of relevance (Bush 2009). In selecting the proper standards, inevitably choices are to be made and then unavoidably values and value judgments are involved.11 Facts speak as far as they are considered relevant from a specific value point of view, generally embedded in a specific theory.

Consider the example of a price hike for crude oil (Tool 1995). Such an increase in the price can be caused by an increase in demand or a reduction of supply. And then the price change reflects the new scarcity, stimulating actors to consume less oil and to look for substitutes. Yet, alternatively, the price increase can also be seen as a reflection of the use of dominant positions in the market; powerful actors or their cartels manipulate the supply in order to increase the price. A third theory might link the price hike to an increase in forward prices, reflecting the higher exploitation cost in the future. Hence, the brute fact of the price hike does not speak for itself. It requires a theory, and consequently facts will be investigated and interpreted from that specific theoretical perspective, involving a particular belief about how such markets function and which forces cause the changes observed.

An analysis from a neoclassical perspective addresses other questions and collects other data than an investigation driven by an institutionalist perspective. In OIE the facts are sorted out based on the theories, concepts, and categories that the analytical framework provides. In addition, the social theory of value never claims that the choice of theory is value-free, as it is always guided by underlying intrinsic (moral) values. The value of egalitarianism will lead the researcher to, for instance, the capability theory, whereas the value of efficiency will lead the theorist to the theory of marginal productivity. Boulding (1969) explains that scientific communities like “schools of economics,” similar to all other communities in society, adhere (often implicitly) to specific values and apply specific value judgments, guiding the selection of what they consider “appropriate” theories. As a consequence, facts are theory laden and theory is value laden.

In sum, OIE works with a framework that addresses institutional issues in a dynamic, holistic, and systemic way (Wilber and Harrison 1978). In doing so, actors in theories and models are not one-dimensionally efficiency driven, but their preferences are endogenously constituted in the process of interacting and acting.12 Correspondingly the environment is not only complex as in NIE, but the structures in the environment are constituted mutually with the individuals and collectivities. In contrast to the methodological individualistic approach of the subjective theory of value, the social theory of value is characterized by so-called methodological interactionism, including both the interaction between actors and structures and the interaction among actors.

To put it differently: all values, both individual and common, are constituted in interaction and values both emerge and are designed. Values can be right or wrong, they are subject to (e)valuation, and they are judged and deliberated in a specific context of time and place. The social theory of value is about the social construction of values and about the social processes of judging values. To judge, values are investigated on their consequences for the well-being of the members of the society: what are the consequences of implementing specific values for realizing other more fundamental values?

The Design Issue in the Social Theory of Value

Because values are contextual and dynamic, the social theory of value designs institutions that make a “social construction” of values possible, in such a way that individuals in the process of deliberation a) have access to the necessary information, b) have access to the arenas where the deliberation and decision-making takes place, and c) can participate and also have the capabilities to do so in a responsible way. Indeed, actors should be informed, knowledgeable, and aware of their responsibilities.

In design for values, both markets and nonmarket institutions enable individuals to reveal their endogenous preferences and values and offer ways to decide about collective values. It is not only about “free markets” where individuals express their subjective values but also about rules of the game on how collective values ought to be “revealed and implemented.” Moreover, the so-called virtue ethics is part of the social theory of values. Local, contextual virtues of actors should be made explicit and are also subject to judgment; some virtues are more “right” than others. Moreover, this judgment may shift over time.

The Value of Sustainability in EU Energy Supply

Going back to our example of European energy policy making, it is evident that the NCE/NIE-based perspective of efficiency-driven market creation and facilitation was predominant until halfway through the first decade of the twenty-first century. Creating a well-functioning market appeared highly sensible and “right” in a period of a seemingly abundant energy supply and low oil prices of about 20 US dollar per barrel. In the course of that decade, however, European and national policy makers were confronted with new challenges, as regards the shape of the sustainability issues when the origins and threats of global warming were gaining credibility, as well as concerns for the security of energy supply and, more recently, the societal acceptability of new ways of energy production, like wind and solar power and shale gas. In the meantime, the traditional issue of economic efficiency – operationalized as low-cost energy supply as a precondition for economic growth – did not disappear from the policy agendas. Moreover, it also became apparent that the potential solutions to any one of these challenges often would jeopardize the achievement of the other objectives (Pérez-Arriaga 2013; Glachant et al. 2013).

Apparently, the efficiency driven aims to establish a competitive energy market of the 1990s up until 2005 only covered part of the values considered important by European publics and policy makers. The response to global warming involved a call for the reduction of carbon emissions by moving away from fossil energy use, as a new objective for EU energy policy. The value of decarbonization was to be internalized in the economy, alongside the instrumental values of efficiency and competition. The solution created was the EU ETS, introducing a market for trading a capped amount of carbon emission rights among the main groups of users of fossil energy. For reasons of transaction costs, i.e., the measurement of their scattered emissions, residential consumers were kept out of the scheme. For reasons of international competitiveness, i.e., political power and influence, large energy intensive industry was exempted. So far, however, the ETS malfunctions as its budget of emission rights was established and allocated rigidly in the expectation of continuous economic growth. The economic downturn post-2008 created an overhang of emission rights, driving the price of the certificates down to a quantité négligeable and reducing the effects of the scheme in stimulating green energy to zero.

To a number of EU member states, the disappointing achievements of the ETS provided the “right” reason to implement other instruments to achieve their sustainability objectives. Hence, a variety of support schemes for (de)central wind and solar power generation was implemented in the EU countries. Often such national schemes were calibrated to serve the interests of the industries, local communities, and actors involved in countries, like Germany, Spain, Denmark, the UK, etc. Yet, in most of the countries that were really effective in expanding the supply of green energy, the schemes are now being revised or even withdrawn. The main reason is the fact that funding is becoming prohibitively expensive for the subsidizing states and/or for the energy consumers that have to foot the bill. Nevertheless, (process) innovation and economies of scale have made solar panels and windmills increasingly affordable. So they will continue to be installed.

The obvious success of solar and wind energy is also threatening other important social values. Reliability of energy supply is jeopardized by the impact on power grid stability and balancing. The locations of power generation are generally not very close to the centers of consumption. So additional high-tension power lines have to be constructed throughout countries or to connect offshore wind farms. Lack of societal acceptability, for the sake of landscapes, ecology, and plain NIMBY arguments, is endangering the development of both the wind farms and the necessary power lines.

Also a distributive element becomes important; who is going to pay for the power lines and for the necessary backup by fossil-fueled generation capacity? Indeed, the wind is not always blowing and the sun does not always shine either. The reliability on weather dependent sources of electrical energy on a substantial scale brings in the need for backup capacity, either fossil fuel driven or by means of storage facilities. This requires the development of new market arrangements, as these essentially fixed cost assets will be used only irregularly, while market prices will be unpredictable.

It is obvious that a variety of “right” societal values is being touched upon by green energy developments. The “efficient” market is not providing much of a solution, particularly if the (transaction) costs of observing, measuring, and monetarizing such external and “value dependent” effects are taken into account. Other processes of deliberation may seem more appropriate, but which? And how to achieve such solutions that dynamic efficiency and innovativeness are stimulated, so that “appropriate” technical and institutional solutions will be developed to solve reliability issues over the longer term?

The Value of Security of Energy Supply

Sustainability, however, was not the only “right” value to be incorporated newly into the established practices of EU market design. From the turn of the century, the economic expansion and the surging energy consumption of the so-called Brasilia, Russia, India, China, South Africa (BRICS) countries began to put pressure on the supply of petroleum and natural gas, which had seen little new investment in exploration and production as expectations of low prices were prevailing. So when post-2000 energy prices began to rise, the question how to expand energy production arose. There were many areas where the international oil and gas industry had no access, like the Middle East and Latin America, where resources were controlled by national state-owned companies. New energy resources could be tapped in technically difficult environments, like the deep sea or the Arctic regions. But the cost and the risk would be huge (see Correljé and van Geuns 2011).

But it was particularly in Russia and the republics of the former Soviet Union that the chances were promising. Indeed, it was in these newly created countries that economic liberalization and the transition away from the communist system provided access to the international energy companies. Creating economic relationships via investments and trade would allow both the EU and these countries to benefit from opening up their economies and industries. The export of the well-known “market design” nicely fitted the EU’s internal market paradigm.

In retrospect, this process did not evolve as anticipated. After a decade of radical reform, experiments with privatization, and economic, political, and social turmoil, Russia and other former Soviet Union republics returned from the path of unbridled liberalization. They shifted toward a pattern of resource exploitation, in which foreign involvement would be much more limited and bound by their own national public (and private and elite) interests. Therewith, the prospect of unlimited European access to a huge resource base at highly favorable conditions vanished, as was experienced by a number of European oil and gas companies (Gustafson 2012).

Thereafter, EU-Russia relations began to cool down. They were put under even more pressure post-2006 when conflicts between Russia and Belorussia and Ukraine, as important transit countries for Russian gas and oil, got out of hand and turned into actual supply distortions for parts of central and Southeast Europe. These events were highly effective in putting the notion of security of supply and geopolitics onto the agenda of EU energy policy. Particularly the central European countries that fell victim to the disruptions had just gotten away from their previous political and economic dependence on the Soviet system. The recent developments around the Crimean peninsula and the Ukraine only added to the perception that energy dependence on Russia is a huge problem.

This shows that both the evolution of the global energy markets and the relationship with its eastern neighbors made the European Commission increasingly sensitive for the “value” of security of supply (Zeniewski and Brancucci 2013). Interestingly, the main issue here is not only the exchange value of traded energy as such. The tensions regarding security of supply/demand are created by the compound impact upon the energy system of: a) the strategic values of geopolitical and international relations as high-level policy, b) the economic exchange values of international trade in energy in both importing and exporting countries, and c) magnified by the strategic and commercial interdependencies, created by rigid, asset-specific, energy transport and production infrastructures.

The consequences of safeguarding the value of “security of supply” for the instrumental values of energy system governance are enormous, however. Specific EU rules were created to provide new pipelines, reverse flow compressors, liquefied natural gas (LNG) import terminals, and strategic storages, to alleviate future supply distortions, and to create a larger diversity of suppliers (CEC 2010). Moreover, to reduce the potential strategic power of Russia, the requirement of unbundling between supply and transport was extended toward the long distance supply pipelines, thus effectively limiting a dominant downstream role for the Russian gas company Gazprom as a seller in the EU market. This approach aims at achieving strategic security of supply, by the creation of regional gas markets of a sufficient size, with a sufficient number of different sellers, even in parts of Europe where such alternative supply routes would be highly expensive (Glachant et al. 2013). Interestingly, the manner in which the European Commission and the regulatory authorities incorporate the value of security of supply in the existing supply system is presented as the creation of a well-functioning pan European gas market, with all theoretical requirements thereof: many suppliers, alternative transport routes, and unbundled vertical trade relationships. Hence, conceptually and rhetorically, it fits with the structural perspective of the subjectivist notion of value and thus with the EU common market paradigm.

Moreover, for many societal interest groups, sustainable entrepreneurs, and public authorities, the measures to secure supply align nicely with those to create a future sustainable energy system. Their argument is that wind, solar, and biofuels would solve both problems at once, if developed on a sufficient scale. The need to achieve supply security, the future high costs of (depleting) fossil energy supply, and the social cost of global warming are invoked to neutralize the argument that sustainable energy is still too expensive; it is an insurance!

However, the infrastructural and organizational pre-requirements for creating such regional markets for green electricity and natural gas are highly dependent on socialized national and EU investments and imply a large reduction of the freedom of contracting and transacting of the actors in these markets. Moreover, the security of supply arrangements strongly draws on the notion of solidarity between the EU member states.

Such developments take place in the context of considerable shifts in the relative prices for the main sources of energy. High oil prices are keeping gas prices relatively high in Europe and Asia. In the USA, oversupply of unconventional gas is driving US gas prices down to the bottom end of the market while pushing coal toward Europe because the EU ETS is dysfunctional. Hence, in the EU gas is priced out of the power sector, and it remains to be seen how a sufficient gas fired backup capacity will be maintained, on the basis of prices generated by the current European power markets.

As a consequence, new forms of financing and tariffs as well as new coordinative institutions will be required to support backup capacity and transport storage facilities. Therewith, a new phase of market creation is to be expected, in which substantial distributional shifts in costs, revenues, and risk are to be “deliberated” between countries, between groups of consumers, and between producers and infrastructure owners and operators. This, most probably, will involve a redistribution of rights of ownership, technical and economic control, and economic exploitation, which will involve a fundamental revision of the current structures and mental maps of the parties involved (see Correljé 2005; Correljé et al. 2014).

Design for (Moral) Values

In the perspective of the social theory of value, markets are seen as one among the many potential instruments to realize societal values. A well-designed market can be a tool to realize specific (instrumental) values, like an efficient use of assets, under specific prespecified conditions. But if such conditions do not apply, other tools can be considered to be more appropriate to realize other values, like a more equal distribution of income, a sustainable energy production, or more attention for the cultural heritage in the community. Moreover, designing and implementing markets to allocate goods and services are not “value-free” as the subjectivist theory of value suggests. Not only are markets, as discussed, always institutionalized, reflecting specific property and power distributions. Also, as, for instance, Sandel (2012) points out, the use of markets in particular segments or sectors influences the prevailing norms in such parts of society. Therefore, markets are not value-free and cannot be properly analyzed and evaluated within an isolated “subjective” economic discipline.

This also holds for nonmarket institutions. Democratic, participatory coordination mechanisms that have an impact on the norms in society are value-free neither. In other words: which allocation mechanisms are preferable not only depends on their efficiency attributes. It should also depend on the positive or negative impact on the values and norms a society wants to endorse.

From the OIE perspective, it becomes clear that NCE is and cannot be value-free in the sense that NCE would not strive for any other values than safeguarding the individual subjective values of the economic actors.

Mainstream theory, that is mainly neoclassical theory, is not so value-neutral as its proponents claim. In fact, neoclassical economics (and Austrian economics) is quite outspoken about one important human value operating in economic life, which is eagerly taken up in economic assumptions, concepts and policy advise: the value of freedom, or liberty. (Van Staveren 1999, p. 17)

The conceptualization of the process of institutional change as one in which reality is constituted through action is grounded in the philosophy of American pragmatism, which forms the foundation of OIE (Bush and Tool 2003; Groenewegen 2011). Design for values in the social theory of values is not about utopian engineering and blueprint thinking. On the contrary, it is about piecemeal engineering and process thinking.

Conclusion

In this chapter we addressed the question of the “design for values in economics.” For that purpose we made a distinction between the subjectivist value theory (NCE and NIE) and the social theory of value (OIE). We argued how design for values in the former schools of economics focuses on designing the right institutions for markets to reveal subjective values, while the latter considers the design of markets as one of the possible tools out of many other nonmarket and hybrid tools to realize social (moral) values.

Essentially, in NCE, the design issue involves the economist in an analysis of the “distance” between the structural characteristics and actors’ conduct in a given real world market, like the EU energy market in our example, and the characteristics of the ideal type of any competitive market. This ideal comprises many independently operating suppliers and many active consumers, plentiful information on transactions taking place, free entry and exit for actors, no abuses of market power and market foreclosure by dominant firms, etc. If any problems are identified and the distance is considered too large, the so-called deontological ethical rules of the market are not respected. In that case the economist would have to advise relevant (competition) authorities to take appropriate (legal) action, like reestablishing the right structural characteristics, providing information to market participants, or by correcting firms’ anticompetitive behavior, for example, by fines.

An economist working in the NIE paradigm has a more complex job. He/she would be examining the characteristics of relevant transactions in terms of their asset specificity and the prevailing market circumstances in terms of frequency and uncertainty. Taking notice of such insights, he would then evaluate the adequacy of the prevailing market institutions and governance structures. He also would be looking at the occurrence of positive and negative externalities, judging whether a Coasean solution, creating property rights and a market, or a Pigovian tax or subsidy would be preferable, in terms of efficiency.

Thereupon, the NIE economist would advise firms and public authorities how to create the right institutional embedment for that particular market. Difficult questions may arise. Are observed restrictive arrangements between firms really necessary because of the specific characteristics of the transactions? Or do they actually constitute an (illegal) strategy to create market power? And, when certain expected and socially valuable transactions are not taking place, is this a consequence of the preferences of buyers and sellers in the market? Or are there any externalities involved? Or is it legally impossible to establish the right transactional arrangements, including appropriate contracts, forms of oversight, or even public provision? As regards the answers to such questions, the underlying arguments will be based on norms or conventions that have surfaced in an evolutionary process, in which actors and analysts internalized them as regularities, driven by their efficient self-interest.

The OIE economist looks at design in a dynamic, holistic, and systemic way. The structures in a specific environment are constituted in the interaction among more or less powerful individuals and collectivities and between the actors and structures. Hence, individual and common values emerge and are constituted and designed in interaction. They can be considered right or wrong and are subject to (e)valuation, being judged and deliberated in their specific context of time and place, regarding their consequences for the well-being of the members of society.

A main design issue is about the institutions that facilitate this process of “social construction,” in such a way that individuals have access to the necessary information and the relevant arenas for deliberation and decision-making. To participate, actors should be informed, knowledgeable, and aware of their responsibilities. Both markets and nonmarket institutions may enable individuals to reveal their endogenous preferences and values and offer ways to decide about collective values.

In OIE some virtues are more “right” than others. The preference for any mechanism not only depends on its efficiency but also on its positive or negative impact on other values and norms supported by a society. As stated already, design for values according to the social theory of values is not about utopian engineering or blueprint thinking. On the contrary, it is about understanding sociotechnical processes and piecemeal institutional and technical engineering, in a specific context with politically and economically interested stakeholders, among which processes of learning take place that may alter their “belief systems” over time. Interventions may have consequences that are neither sought nor anticipated: two steps forward, one step back.

Cross-References

Footnotes

  1. 1.

    Adam Smith and Karl Marx are known because of their labor theories of value. For the differences between them and the problems of the theory in general, see Heilbroner (1988).

  2. 2.

    This section draws extensively on Groenewegen (2011, 2013).

  3. 3.

    The consumer continues to demand units of a good or service until all marginal utilities are equal and she is not able to improve his/her total utility anymore.

  4. 4.

    A distinction is made between the so-called Williamsonian and the Northian branch of NIE (Groenewegen 2011). In our interpretation we conclude that the former stays in the philosophical and methodological tradition of NCE, whereas the latter departs from it and adopted many characteristics of the original economic institutionalists (see below).

  5. 5.

    Williamson (1998) locates those informal institutions at level 1. He does not explicitly distinguish values. We consider values to be at level 1.

  6. 6.

    The arrows in Fig. 1 indicate a causal relationship between institutional environment and governance structure; the dotted feedback arrows indicate that “Although, in the fullness time the system is fully interconnected, for my purposes here, these feed backs are largely neglected” (Williamson 1998, p. 26).

  7. 7.

    The positioning of agency theory (AT) only at level 4 is confusing: Elsewhere (Groenewegen et al. 2010) is explained that the positive AT can be best located at level 3 and the normative one at level 4.

  8. 8.

    Original institutional economics (OIE) was after the emergence of NIE often called old institutional economics. We prefer the terminology of original. The label of neo-institutionalism is also used for the postwar institutionalists like John K. Galbraith, Gunnar Myrdal, and others that followed the approach of Veblen and Commons (see Gruchy 1972). In this contribution we call the pre- and postwar institutionalists both OIE.

  9. 9.

    Interesting is the question what room is left for volition, for rational purposeful action. In this respect the distinction between habits and routines becomes important. Dewey (1922, p. 28) explains that habits also can be inquired and tested by man, i.e., man can take distance from the specific habits that cause an action and reflect on the consequences of that action. When such reflections raise doubts about the rightfulness (is the “is” well analyzed?) or desirability of the belief (do the habits contribute to the realization of the “ought”?), then man is in the position to inquire what is wrong about the habits causing the undesirable action and to intervene by altering the institutions (the rules of the game) to change the “habit of thought.” In the case of routines, man acts mechanically, without thought about the consequences and without valuation of the consequences of the routinized actions in the light of the societal goals. The real opposition is not between reason and habits, but between reasonable habits and unintelligently routinized habit (Costa and Castro 2011).

  10. 10.

    “Structuring reality” should not be interpreted as “creating reality.”

  11. 11.

    Bush (2009) makes a distinction between values (standards of judgment), valuation (the application of those standards), and value judgment (the evaluation of values in relation to (other) intrinsic values).

  12. 12.

    This is the core of philosophical pragmatism. In the words of Nooteboom (2013, p. 2), pragmatism “(…) holds that cognition, in a wide sense that includes normative judgments and goals, occurs on the basis of mental dispositions and categories that are developed in interaction with the physical and especially the social environment.” The crux of the argument is that action, practice, constitutes the actor: “Intelligence is internalised practice.” This connects well with the framework of North (2005) about institutional change.

Notes

Acknowledgment

This research has been financed by a grant of the Energy Delta Gas Research (EDGaR) program. EDGaR is cofinanced by the Northern Netherlands Provinces, the European Fund for Regional Development, the Ministry of Economic Affairs, and the Province of Groningen.

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Copyright information

© Springer Science+Business Media Dordrecht 2014

Authors and Affiliations

  • Aad Correljé
    • 1
    Email author
  • John Groenewegen
    • 1
  • Rolf Künneke
    • 1
  • Daniel Scholten
    • 1
  1. 1.Delft University of TechnologyDelftNetherlands

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